Registration No. 33-12911
As filed on June 26, 1997 Registration No. 811-5075
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Post-Effective Amendment No. 23
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY
ACT OF 1940
Amendment No. 25
(Check appropriate box or boxes)
THE AAL MUTUAL FUNDS
(Exact name of registrant as specified in charter)
222 West College Ave.
Appleton, Wisconsin 54919-0007
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code (414)734-5721
Robert G. Same
Secretary
The AAL Mutual Funds
222 West College Avenue
Appleton, WI 54919-0007
(Name and Address of Agent for Service)
Approximate date of proposed public offering: As soon as practicable after the
effective date of the registration statement.
It is proposed that this filing will become effective (check appropriate box):
o immediately upon filing pursuant to paragraph (b) of Rule 485
o on_____________, pursuant to paragraph (b) of Rule 485
o 60 days after filing pursuant to paragraph (a)(1) of Rule 485
o on September 1, 1997, pursuant to paragraph (a)(1) of Rule 485
o 75 days after filing pursuant to paragraph (a)(2) of Rule 485
o on _____________, pursuant to paragraph (a)(2) of Rule 485
<PAGE>
==========================================
Registrant has previously registered an indefinite number of its shares of
beneficial interest pursuant to Rule 24f-2 under the Investment Company Act of
1940. Registrant filed a notice under Rule 24f-2 on June 24, 1997.
==========================================
Page 1 of pages___.
Exhibit index is located at Page
<PAGE>
The AAL Mutual Funds
Prospectus
September 1, 1997
The AAL Mutual Funds (the "Funds") are a series of separate mutual fund
portfolios within a single Trust, each with a specific investment
objective. The Funds offer investment opportunities to eligible
Lutherans (including their families and their enterprises) and to
members and employees of the Aid Association for Lutherans ("AAL").
This prospectus describes the following Funds:
Equity-Oriented Funds
THE AAL CAPITAL GROWTH FUND: Investing in Large Company Stocks
THE AAL MID CAP STOCK FUND: Investing in Mid-Sized Company Stocks
THE AAL SMALL CAP STOCK FUND: Investing in Small Company Stocks
THE AAL INTERNATIONAL FUND: Investing in Foreign Securities
THE AAL EQUITY INCOME FUND (formerly known as The AAL Utilities Fund):Investing
in Income-Producing Equity Securities
Income-Oriented Funds
THE AAL BOND FUND: Investing in Investment Grade Bonds
THE AAL MUNICIPAL BOND FUND: Investing in Tax-Exempt Municipal Securities
THE AAL HIGH YIELD BOND FUND: Investing in Below Investment Grade Securities
The AAL High Yield Bond Fund invests primarily in lower-rated bonds, commonly
known as "junk bonds." Junk bonds are subject to greater loss of principal and
interest. You should carefully assess the risks associated with an investment in
this Fund. See "The AAL High Yield Bond Fund - Investment Factors and the Risks
Involved."
THE AAL MONEY MARKET FUND: Investing in Money Market Instruments
The U.S. government neither insures nor guarantees your investment in The AAL
Money Market Fund. Also, we (The AAL Mutual Funds) do not give you any assurance
that we will be able to maintain a net asset value of $1.00 per share for the
Fund.
The prospectus sets forth concisely the information about the Funds that you
ought to know before investing. Read it carefully and keep it for future
reference. You can find more detailed information, including investment
policies, techniques, restrictions and the risks associated with them, in the
Statement of Additional Information ("SAI"), dated September 1, 1997. The SAI
has been filed with the Securities and Exchange Commission ("SEC"). The SAI,
along with the most recent Annual Report of The AAL Mutual Funds are
incorporated in this prospectus by reference (which means that it is legally
considered part of this prospectus even though you will not find it printed
here). You can
<PAGE>
obtain a copy of the SAI and a copy of the annual report free by calling
800-553-6319 or writing The AAL Mutual Funds at 222 West College Avenue,
Appleton, Wisconsin 54919-0007. The Telecommunications Device for the Deaf
("TDD") number is 800-684-3416. The AAL U.S. Government Zero Coupon Target
Funds, Series 2001 and 2006 are described in a separate prospectus and are
closed to additional investments.
LIKE ALL MUTUAL FUND SHARES, NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR
ANY STATE SECURITIES COMMISSION HAVE APPROVED OR DISAPPROVED THESE SECURITIES OR
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
TABLE OF CONTENTS
Prospectus Summary
Reading the Prospectus
The AAL Capital Growth Fund
Investment Objective
Investment Policies
Annual Advisory Fee
Portfolio Manager
Investment Factors and Risks Involved
Summary of Expenses
Financial Highlights
The AAL Mid Cap Stock Fund
Investment Objective
Investment Policies
Annual Advisory Fee
Portfolio Manager
Investment Factors and Risks Involved
Summary of Expenses
Financial Highlights
The AAL Small Cap Stock Fund
Investment Objective
Investment Policies
Annual Advisory Fee
Portfolio Manager
Investment Factors and Risks Involved
Summary of Expenses
Financial Highlights
The AAL International Fund
Investment Objective
Investment Policies
Annual Advisory Fee
Portfolio Manager
Investment Factors and Risks Involved
Summary of Expenses
Financial Highlights
The AAL Equity Income Fund
(f/k/a The AAL Utilities Fund)
Investment Objective
Investment Policies
Annual Advisory Fee
Portfolio Manager
Investment Factors and Risks Involved
Summary of Expenses
Financial Highlights
<PAGE>
The AAL Bond Fund
Investment Objective
Investment Policies
Annual Advisory Fee
Portfolio Manager
Investment Factors and Risks Involved
Summary of Expenses
Financial Highlights
The AAL Municipal Bond Fund
Investment Objective
Investment Policies
Annual Advisory Fee
Portfolio Manager
Investment Factors and Risks Involved
Summary of Expenses
Financial Highlights
The AAL High Yield Bond Fund
Investment Objective
Investment Policies
Annual Advisory Fee
Portfolio Manager
Investment Factors and Risks Involved
Summary of Expenses
Financial Highlights
The AAL Money Market Fund
Investment Objective
Investment Policies
Annual Advisory Fee
Portfolio Manager
Investment Factors and Risks Involved
Summary of Expenses
Financial Highlights
Additional Investment Factors and Risks Regarding the Funds Risks of Investing
in Foreign Securities Investment Restrictions Board of Trustees Management of
the Trust Buying Shares in the Funds Additional Information about Buying Shares
Selling (Redeeming) Your Shares Closing Small Accounts Reinstatement Privilege
Exchange Privilege Net Asset Value (NAV) Dividends, Distributions and Taxes
Shareholder Maintenance Agreement Yield and Performance Information Transfer
Agent, Custodians and Independent Accountants Organization and Description of
Shares Asset Allocation Questions Glossary of Important Terms
<PAGE>
PROSPECTUS SUMMARY
Organization of The AAL Mutual Funds
AAL Capital Management Corporation ("AAL CMC"), which is a Delaware corporation
organized in 1986, is the investment adviser ("Adviser") and Distributor
("Distributor") for the Funds. As the Adviser, AAL CMC makes the investment
decisions for the Funds. As the Distributor, AAL CMC sells the Funds' shares to
investors. As of June 1, 1997, AAL CMC managed over $3.99 billion for the Funds.
AAL owns the outstanding stock in AAL CMC. AAL is a non-profit, non-stock
membership organization, licensed to do business as a fraternal benefit society.
AAL has a mission of bringing Lutherans and their families together to pursue
quality living through financial security, volunteer action and help for others.
AAL has about 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 U.S. in terms of ordinary life
insurance (nearly $78 billion in force). AAL offers life, health and disability
income insurance and fixed and variable annuities to its members. Members belong
to one of over 9,500 local AAL branches throughout the U.S.
Reading the Prospectus
References to "you" and "your" in the prospectus refer to prospective investors
or shareholders. References to "we," "us" or "our" refer to the Trust or the
Funds and Fund management (the Adviser (and/or Sub-Adviser for The AAL
International Fund), Distributor, Administrator, Transfer Agent and Custodians)
generally.
We have placed a glossary defining important terms at the end of this
prospectus. If you are unsure of the meaning of any term in the prospectus,
please check the glossary.
<PAGE>
The Funds
In the prospectus, we provide you with information on: the investment
objectives, policies and risks of investing in the Funds, how to buy and sell
shares, management and services provided to the Funds and other information. The
following table summarizes the Funds available for your investment.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
The AAL Mutual Funds Primary Objective Primary Investments Primary Risks
- ----------------------------------------------------------------------------=------------
The AAL Capital Growth Long-Term Capital Large Company Stocks Financial and
Fund Growth Market
The AAL Mid Cap Stock Long-Term Capital Mid-sized Company Financial and
Fund Growth Stocks Market
The AAL Small Cap Long-Term Capital Small Company Stocks Financial and
Stock Fund Growth Market
The AAL International Long-Term Capital Foreign Stocks Financial,
Fund Growth Market and
Foreign Investment
The AAL Equity Current Income, Long- Financial,
Income Fund (formerly Term Income Growth Income- Market and
known as The AAL and Capital Growth Producing Equity Interest Rate
Utilities Fund) Securities
The AAL Bond Fund High Current Income Investment Grade Interest Rate and
Consistent with Bonds Credit
Capital Preservation
The AAL Municipal Bond High Current Income Investment Grade Interest Rate and
Fund Exempt from Federal Municipal Bonds Credit
Taxes Consistent with
Capital Preservation
The AAL High Yield High Current Income Below Investment Interest Rate,
Bond Fund and Secondarily Grade Bonds Credit and
Capital Growth Market
The AAL Money Market High Current Income Money Market Interest rate
Fund Consistent with Instruments
Liquidity and Capital
Preservation
</TABLE>
<PAGE>
This prospectus describes two share classes, Class A shares and Class B shares.
You pay a sales charge immediately when you purchase Class A shares (front-end
sales charge). You pay a sales charge when you redeem Class B shares held for
less than five years (contingent deferred sales charge). In addition, you pay
higher "12b-1 fees" for Class B shares than Class A shares. 12b-1 fees are
ongoing asset based fees that we charge pursuant to a plan to cover the costs of
certain activities related to the distribution and service of the Funds' shares.
Whether you should purchase Class A shares or Class B shares depends on how long
you intend to own the shares and the size of your investment. If you intend to
own shares for more than five years and plan to invest less than $100,000, you
should consider Class B shares. If you may redeem shares in less than five years
or invest $100,000 or more, you should consider Class A shares.
The following table shows some of the differences:
Class A shares Class B shares
Maximum 4% Front-End Sales Charge No Front-End Sales Charge
No Contingent Deferred Sales Charge Maximum 5% Contingent Deferred Sales Charge
Lower Annual Expenses, which includes 12b-1 fees, than Higher Annual Expenses,
which includes 12b-1 fees, than Class B shares Class A shares No Conversion to
Class B Shares Automatic Conversion to Class A Shares After 5 Years
<PAGE>
THE AAL CAPITAL GROWTH FUND
Investment Objective
The AAL Capital Growth Fund seeks long-term capital growth by investing
primarily in common stocks and securities convertible into common stocks. .
Investment Policies
Under normal circumstances, we invest at least 65% of the Fund'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 higher
than earnings growth per share of the S&P 500(R). In selecting stocks, we look
for quality, operating growth predictability and financial strength.
We may invest the remaining 35% of the Fund's total assets in additional common
stocks, preferred stocks and bonds. The Fund 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 Fund's net assets.
Annual Advisory Fee
o 0.70 of 1% on the first $250 million
o 0.65 of 1% on the next $250 million
o 0.575 of 1% on the next $500 million
o 0.50 of 1% on average daily net assets over $1 billion.
Portfolio Manager
Frederick L. Plautz has managed the day-to-day Fund investments since November
1, 1995. Prior to managing the Fund, Mr. Plautz served as vice president and
portfolio manager for Federated Investors from 1990 through October 1995.
Investment Factors and Risks Involved
Financial Risk: Many factors affect an individual company's performance, such as
management or the demand for a company's products or services and company
performance affects the value of stocks in the Fund's 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 Fund's investments may increase and decrease more
than the stock market in general, as measured by the S&P 500(R). You could lose
money investing in the Fund .
<PAGE>
For more information on risks see Additional Investment Factors and Risks
Regarding the Funds on page __.
Expense Summaries and Example
The following expense summaries and example should assist you in understanding
the various recurring and non-recurring costs and expenses you may directly or
indirectly incur with your investment in The AAL Capital Growth Fund.
Shareholder Transaction Expenses
Shareholder transaction expenses are charges you pay when you buy or sell shares
of the Fund. For Class A shares, we based expenses on the maximum 4% sales
charge, which is reduced on purchases of $25,000 or more. For Class B shares, we
based expenses on the maximum 5% contingent deferred sales charge, which is
reduce by 1% for each year owned.
Shareholder Transaction Expenses Class A Class B
Maximum sales charge imposed on 4% None
purchases (as a percentage of offering
price)
Maximum sales charge imposed on None None
reinvested dividends
Maximum deferred sales charge None 5%
Redemption fee (The Funds currently None None
charge $12.00 for each wire
redemption.)
Exchange fee None None
Total 4% 5%
Annual Fund Operating Expenses
The following table, reflects annual operating expenses paid by the Fund. The
annual operating expenses include a management fee paid to the Adviser, 12b-1
distribution and service fees and other expenses for maintaining shareholder
records and furnishing shareholder services, statements and financial reports.
Operating expenses are expressed as a percentage of average net assets for the
fiscal year ended April 30, 1997. We used the maximum investment management and
12b-1 distribution fees permitted under The AAL Mutual Funds Investment Advisory
Agreement and 12b-1 Distribution Plan.
Annual Fund Operating Expenses (as a Class A Class B
percentage of average net assets)
Management fee .70% .70%
12b-1 distribution and service fees .25% 1.00%
Other expenses .11% .19%
Total Fund Operating Expenses 1.06% 1.89%
<PAGE>
Expense Example
The expense example shows the cumulative expenses attributable to a hypothetical
$1,000 investment with an annual return of 5% compounded annually, in each
class, for the years shown.
Expense Example Class A Class B Class B No Redemption
After 1 year $51 $69 $19
After 3 years $73 $90 $60
After 5 years $97 $104 $104
After 10 years $167 N/A* N/A*
*Class B shares convert into Class A shares after five years.
You should use the expense example for comparison purposes only. It does not
represent the Fund's actual expenses and returns, either past or future.
Financial Highlights
The Financial Highlights Table covers The AAL Capital Growth Fund for the
periods shown. We based the information presented on a share of beneficial
interest outstanding throughout the applicable period. You should read the table
in conjunction with the Funds' financial statements and related notes, all of
which have been audited by the Funds' independent accountants, Price Waterhouse
LLP. At your request, we will provide you, without charge, a copy of The AAL
Mutual Funds Annual Report, dated April 30, 1997, containing these financial
statements and a more detailed discussion and analysis of the Fund's
performance.
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME FROM INVESTMENT LESS DISTRIBUTIONS
OPERATIONS
NAV: Net Net Total from Dividends Distribution Total NAV: Total Net Assets
Start Investment Realized Investment from Net from Net Dividends End of Return at End of
of Income and Un- Operations Investment Realized and Period for Period
Period (Loss) realized Income Gain on Distributions Period
Gain(Loss) Investments (1)
Class A shares
16-Jul-87 to
30-Apr-88 $10.00 $0.112 $(1.709) $(1.597) $(0.043) $0.000 $(0.043) $8.36 (15.95) $23,672,346
30-Apr-89 8.36 0.218 1.466 1.684 (0.204) 0.000 (0.204) 9.84 20.46 48,915,003
30-Apr-90 9.84 0.233 0.889 1.122 (0.242) 0.000 (0.242) 10.72 11.45 119,731,099
30-Apr-91 10.72 0.271 1.726 1.997 (0.269) (0.028) (0.297) 12.42 18.93 209,055,868
30-Apr-92 12.42 0.276 1.659 1.935 (0.280) (0.015) (0.295) 14.06 15.77 423,231,713
30-Apr-93 14.06 0.284 0.761 1.045 (0.274) (0.001) (0.275) 14.83 7.52 714,184,330
30-Apr-94 14.83 0.296 (0.287) 0.009 (0.286) (0.063) (0.349) 14.49 0.00 868,850,190
30-Apr-95 14.49 0.274 1.699 1.973 (0.298) (0.605) (0.903) 15.56 14.37 1,032,168,121
30-Apr-96 15.56 0.201 3.756 3.957 (0.217) (0.510) (0.727) 18.79 25.85 1,381,352,222
30-Apr-97 18.79 0.125 3.682 3.807 (0.150) (0.947) (1.097) 21.50 20.55 1,794,422,211
Class B shares
08-Jan-97 to
30-Apr-97 $20.66 ($0.011) $0.801 $0.790 $0.000 $0.00 $0.00 $21.45 3.82% $11,025,073
<PAGE>
SUPPLEMENTAL DATA
AND RATIOS
Ratio of Ratio of Portfolio Average
Net Net Turnover Commission
Operating Investment Rate Paid per
Expenses Income(Loss) Share
to Average to Average
Net Assets Net Assets*
(2) (2)
Class A shares
16-Jul-87 to
30-Apr-88 1.50% 2.61% 1.36% $___
30-Apr-89 1.50 2.80 2.78 ___
30-Apr-90 1.44 2.56 1.43 ___
30-Apr-91 1.41 2.59 2.26 ___
30-Apr-92 1.28 2.27 1.11 ___
30-Apr-93 1.20 2.15 2.99 ___
30-Apr-94 1.18 2.07 40.60 ___
30-Apr-95 1.17 1.89 33.34 ___
30-Apr-96 1.12 1.16 44.26 0.053
30-Apr-97 1.06 0.62 24.30 0.057
Class B shares
08-Jan-97 to
30-Apr-97 1.89% (0.39)% 24.30% $0.057
</TABLE>
<PAGE>
*If the Fund had paid all of its expenses for Class A and Class B shares, the
ratios would be as follows:
Class A shares - Ratio of net operating expenses to average net assets(2):
1.91%, 1.77%, 1.49%, 1.41%, 1.28%, 1.20%, 1.18%, 1.17%, 1.12% and 1.06%.
Class B shares - Ratio of net operating expenses to average net assets
(2):1.89%.
Class A shares - Ratio of net investment income (loss) to average net assets(2):
2.21%, 2.54%, 2.51%, 2.59%, 2.27%, 2.15%, 2.07%, 1.89%, 1.16% and 0.62%.
Class B shares - Ratio of net investment income (loss) to average net assets
(2): (0.39)%.
(1) Total return assumes reinvestment of all dividends and distributions but
does not reflect any deductions for sales charges. The aggregate (not
annualized) total return is shown for periods less than one year.
(2) For periods less than one year, both the ratio of net operating expenses to
average net assets and the ratio of net investment income (loss) to average net
assets are calculated on an annualized basis.
THE AAL MID CAP STOCK FUND
Investment Objective
The AAL Mid Cap Stock Fund seeks long-term capital growth by investing primarily
in a diversified portfolio of common stocks, and securities convertible into
common stocks, of mid-sized companies. By mid-sized companies, we mean those
with market capitalizations ranging from $100 million to $5 billion.
Investment Policies
Under normal circumstances, we invest at least 65% of the Fund's total assets in
stocks, not including convertible securities, of mid-sized companies. Generally,
we focus on companies with market capitalizations ranging from $400 million to
$3.5 billion. Mid-sized companies tend to be smaller and less-seasoned than
companies listed in the S&P 500(R). These companies may trade in the
over-the-counter market as well as on U.S. national securities exchanges.
We may invest the remaining 35% of the Fund's total assets in any combination of
additional mid cap stocks, larger capitalization stocks and securities
convertible into such stocks.
We look for mid-sized companies (including companies initially offering their
stocks to the public) that, in our opinion: 1) have prospects for growth in
their sales and earnings; 2) are in an industry with a good economic outlook; 3)
have higher quality management and more management depth than small companies;
and 4) have a strong financial position. 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 Fund may from time to time have
short-term gains or losses.
<PAGE>
Annual Advisory Fee
o 0.75 of 1% on the first $200 million
o 0.65 of 1% on average daily net assets over $200 million
Portfolio Manager
Effective March 17, 1997, Michael R. Hochholzer, CFA, manages the day-to-day
Fund investments. From 1989 through March 1997, Mr. Hochholzer served as a
securities analyst and portfolio manager for Aid Association for Lutherans, the
parent company of AAL Capital Management Corporation.
Investment Factors and Risks Involved
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 Fund's investments might
increase and decrease more than the stock market in general, as measured by the
S&P 500(R). You could lose money investing in the Fund .
For more information on risks see Additional Investment Factors and Risks
Regarding the Funds on page --.
Expense Summaries and Example
The following expense summaries and example should assist you in understanding
the various recurring and non-recurring costs and expenses you may directly or
indirectly incur with your investment in The AAL Mid Cap Stock Fund.
Shareholder Transaction Expenses
Shareholder transaction expenses are charges you pay when you buy or sell shares
of the Fund. For Class A shares, we based expenses on the maximum 4% sales
charge, which is reduced on purchases of $25,000 or more. For Class B Shares, we
based expenses on the maximum 5% contingent deferred sales charge, which is
reduced by 1% for each year owned.
<PAGE>
Shareholder Transaction Expenses Class A Class B
Maximum sales charge imposed on 4% None
purchases (as a percentage of offering
price)
Maximum sales charge imposed on None None
reinvested dividends
Maximum deferred sales charge None 5%
Redemption fee (The Funds currently None None
charge $12.00 for each wire
redemption.)
Exchange fee None None
Total 4% 5%
Annual Fund Operating Expenses
The following table, reflects annual operating expenses paid by the Fund. The
annual operating expenses include a management fee paid to the Adviser, 12b-1
distribution and service fees and other expenses for maintaining shareholder
records and furnishing shareholder services, statements and financial reports.
Operating expenses are expressed as a percentage of average net assets for the
fiscal year ended April 30, 1997. We used the maximum investment management and
12b-1 distribution fees permitted under The AAL Mutual Funds Investment Advisory
Agreement and 12b-1 Distribution Plan.
Annual Fund Operating Expenses (as a Class A Class B
percentage of average net assets)
Management fee .75% .75%
12b-1 distribution and service fees .25% 1.00%
Other expenses .35% .55%
Total Fund Operating Expenses 1.35% 2.29%
Expense Example
The following expense example shows the cumulative expenses attributable to a
hypothetical $1,000 investment with an annual return of 5% compounded annually,
in each class, for the years shown.
Expense Example Class A Class B Class B No Redemption
After 1 year $53 $74 $24
After 3 years $82 $103 $73
After 5 years $112 $125 $125
After 10 years $199 N/A* N/A*
*Class B shares convert into Class A shares after five years.
You should use the expense example for comparison purposes only. It does not
represent the Fund's actual expenses and returns, either past or future.
Financial Highlights
The Financial Highlights Table covers The AAL Mid Cap Stock Fund for the periods
shown. We based the information presented on a share of beneficial interest
outstanding throughout the applicable period. You should read the table in
conjunction with the Funds' financial statements and related notes, all of which
have been audited by the Funds' independent accountants, Price Waterhouse LLP.
At your request, we will provide you, without charge, a copy of The AAL Mutual
Funds Annual Report, dated April 30, 1997, containing these financial statements
and a more detailed discussion and analysis of the Fund's performance.
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME FROM INVESTMENT LESS DISTRIBUTIONS
OPERATIONS
NAV: Net Net Total from Dividends Distribution Total NAV: Total Net Assets
Start Investment Realized Investment from Net from Net Dividends End of Return at End of
of Income and Un- Operations Investment Realized and Period for Period
Period (Loss) realized Income Gain on Distributions Period
Gain(Loss) on Investments (1)
Class A shares
30-Jun-93 to
30-Apr-94 $10.00 $(.044) $0.424 $0.380 $0.000 $0.000 $0.000 $10.38 3.80% $142,529,469
30-Apr-95 10.38 (0.054) 0.594 0.540 0.000 0.000 0.000 10.92 5.20 220,792,070
30-Apr-96 10.92 (0.100) 6.290 6.190 0.000 0.000 0.000 17.11 56.59 424,974,828
30-Apr-97 17.11 (0.119) (1.628) (1.747) 0.000 (2.653) (2.653) 12.71 (11.08) 461,732,660
Class B shares
08-Jan-97 to
30-Apr-97 $13.67 $(0.026) $(0.954) $(0.980) $0.000 $0.000 $0.000 $12.69 (7.17)% $3,270,870
SUPPLEMENTAL DATA
AND RATIOS
Ratio of Ratio of Portfolio Average
Net Net Turnover Commission
Operating Investment rate per Share
Expenses Income(Loss)
to Average to Average
Net Assets Net Assets*
(2) (2)
Class A shares
30-Jun-93 to
30-Apr-94 1.72% (1.14) 55.49 $__
30-Apr-95 1.54 (0.77) 88.18 __
30-Apr-96 1.39 (0.82) 90.14 0.055
30-Apr-97 1.35 (0.94) 112.06 0.060
Class B shares
08-Jan-97 to
30-Apr-97 2.29% (1.41)% 112.60% $0.060
</TABLE>
*If the Fund had paid all of its expenses for Class A shares and Class B shares,
the ratios would be as follows:
Class A shares - Ratio of net operating expenses to average net assets(2):
1.73%, 1.54%, 1.39% and 1.35%.
Class B shares - Ratio of net operating expenses to average net assets (2):
2.29%.
Class A shares - Ratio of net investment income (Loss) to average net assets
(2): (1.14)%, (0.77)%, (0.82)% and (0.94)%.
Class B shares - Ratio of net investment income (loss) to average net assets
(2): (1.41)%.
(1) Total return assumes reinvestment of all dividends and distributions but
does not reflect any deductions for sales charges. The aggregate (not
annualized) total return is shown for periods less than one year.
(2) For periods less than one year, both the ratio of net operating expenses to
average net assets and the ratio of net investment income (loss) to average net
assets are calculated on an annualized basis.
<PAGE>
THE AAL SMALL CAP STOCK FUND
Investment Objective
The AAL Small Cap Stock Fund seeks long-term capital growth by investing
primarily in a diversified portfolio of common stocks, and securities
convertible into common stocks of small companies. By small companies, we mean
those with market capitalizations of less than $1 billion.
Investment Policies
Under normal circumstances, we invest at least 65% of the Fund's total assets in
stocks, not including convertible securities, of small companies. Generally, we
focus on companies with market capitalizations ranging from $30 million to $600
million. Small companies tend to be substantially less-seasoned than companies
listed in the S&P 500(R) or the S&P Mid Cap 400 Index. Small cap companies trade
in the over-the-counter market as well as on U.S. securities exchanges such as
the New York Stock Exchange ("NYSE").
We may invest the remaining 35% of the Fund's total assets in any combination of
additional small cap stocks, larger capitalization stocks and securities
convertible into such stocks. We look for small companies (including companies
initially offering their stocks to the public) that, in our opinion: 1) are in
their early stages of development or positioned in new and emerging industries;
2) have an opportunity for rapid growth; 3) have capable management; and 4) are
financially sound. Generally, the investing public does not know as much about
or follow the stocks of small companies as compared to stocks of larger
companies. As a result, small company stocks may provide greater opportunities
for long-term capital growth as a result of the relative inefficiencies in the
marketplace.
We tend to sell the stocks of companies when we think that other investments
offer better opportunities. This tendency may, from time to time, cause the Fund
to have short-term gains or losses.
Annual Advisory Fee
o 0.75 of 1% on the first $200 million
o 0.65 of 1% on the average daily net assets over $200 million
Portfolio Manager
Kevin Schmitting, CFA, has managed the day-to-day Fund investments since its
inception on July 1, 1996. Mr. Schmitting also 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 beginning in 1984 through October
1995.
Investment Factors and Risks Involved
Financial Risk: Small, less-established companies may have relatively lower
revenues, limited product lines, lack of management depth and a lower share of
the market for their products or services than larger companies. Stocks of these
companies present a greater risk of losing value than stocks of larger, more
established companies.
<PAGE>
Market Risk: Over time, the stock market tends to move in cycles, with periods
when stock prices rise generally and periods when stock prices decline
generally. Historically, small capitalization stocks have experienced more price
volatility than mid-size and large capitalization stocks. Some of the reasons
they have greater volatility include: 1) less certain growth prospects of small
firms; 2) lower degree of liquidity in the markets for such stocks; and 3)
greater sensitivity of small companies to changing economic conditions. As a
result, the value of the Fund's investments tends to increase and decrease
substantially more than the stock market in general, as measured by the S&P
500(R). You have a greater risk of losing your money invested in the Fund .
For more information on risks see Additional Investment Factors and Risks
Regarding the Funds on page --.
Expense Summaries and Example
The following expense summaries and example should assist you in understanding
the various recurring and non-recurring costs and expenses you may directly or
indirectly incur with your investment in this Fund.
Shareholder Transaction Expenses
Shareholder transaction expenses are charges you pay when you buy or sell shares
of the Fund. For Class A shares, we based expenses on the maximum 4% sales
charge, which is reduced on purchases of $25,000 or more. For Class B shares, we
based expenses on the maximum 5% contingent deferred sales charge, which is
reduced by 1% for each year owned.
Shareholder Transaction Expenses Class A Class B
Maximum sales charge imposed on 4% None
purchases (as a percentage of offering
price)
Maximum sales charge imposed on None None
reinvested dividends
Maximum deferred sales charge None 5%
Redemption fee (The Funds currently None None
charge $12.00 for each wire
redemption.)
Exchange fee None None
Total 4% 5%
<PAGE>
Annual Fund Operating Expenses
The following table, reflects annual operating expenses paid by the Fund. The
annual operating expenses include a management fee paid to the Adviser, 12b-1
distribution and service fees and other expenses for maintaining shareholder
records and furnishing shareholder services, statements and financial reports.
Operating expenses are expressed as a percentage of average net assets for the
fiscal year ended April 30, 1997. We used the maximum investment management and
12b-1 distribution fees permitted under The AAL Mutual Funds Investment Advisory
Agreement and 12b-1 Distribution Plan.
Annual Fund Operating Expenses (as a Class A Class B
percentage of average net assets)
Management fee .75% .75%
12b-1 distribution and service fees .25% 1.00%
Other expenses 1.06% 1.45%
Total Fund Operating Expenses 2.06% 3.20%
Expense Example
The following expense example shows the cumulative expenses attributable to a
hypothetical $1,000 investment with an annual return of 5% compounded annually,
in each class, for the years shown.
Expense Example Class A Class B Class B No Redemption
After 1 year $60 $83 $33
After 3 years $103 $129 $99
After 5 years $148 $169 $169
After 10 years $273 N/A* N/A*
*Class B shares convert into Class A shares after five years.
You should use the expense example for comparison purposes only. It does not
represent the Fund's actual expenses and returns, either past or future.
Financial Highlights
The Financial Highlights Table covers The AAL Small Cap Stock Fund for the
periods shown. We based the information presented on a share of beneficial
interest outstanding throughout the applicable period. You should read the table
in conjunction with the Funds' financial statements and related notes, all of
which have been audited by the Fund's independent accountants, Price Waterhouse
LLP. At your request, we will provide you, without charge, a copy of The AAL
Mutual Funds Annual Report, dated April 30, 1997, containing these financial
statements and a more detailed discussion and analysis of the Fund's
performance.
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME FROM INVESTMENT LESS DISTRIBUTIONS
OPERATIONS
NAV: Net Net Total from Dividends Distribution Total NAV: Total Net Assets
Start Investment Realized Investment from Net from Net Dividends End of Return at End of
of Income and Un- Operations Investmen Realized and Period for Period
Period (Loss) realized Income Gain on Distributions Period
Gain(Loss) Investments (1)
Class A shares
01-Jul-96 to
30-Apr-97 $10.0$ (0.055) $0.162 $0.107 $0.000 $(0.267) $(0.267) $9.84 (0.78)% $44,487,852
Class B shares
08-Jan-97 to
30-Apr-97 $11.1 $(0.032) $(1.328) $(1.360) $0.000 $0.000 $0.000 $9.81 (12.18)% $3,394,082
SUPPLEMENTAL DATA
AND RATIOS
Ratio of Ratio of Portfolio Average
Net Net Turnover Commission
Operating InvestmentRate Per Share
Expenses Income(Loss)
to Average to Average
Net Assets Net Assets*
(2) (2)
Class A shares
01-Jul-96 to
30-Apr-97 2.06% (1.20)% 138.50% $0.059
Class B shares
08-Jan-97 to
30-Apr-97 3.20% (2.39)% 138.50% $0.059
</TABLE>
*If the Fund had paid all of its expenses for Class A shares and Class B shares,
the ratios would be as follows:
Class A shares - Ratio of net operating expenses to average net assets (2):
2.06%.
Class B shares - Ratio of net operating expenses to average net assets (2):
3.21%.
Class A shares - Ratio of net investment income (loss) to average net assets
(2): (1.20)%.
Class B shares - Ratio of net investment income (loss) to average net assets
(2): (2.40)%
(1) Total return assumes reinvestment of all dividends and distributions but
does not reflect any deductions for sales charges. The aggregate (not
annualized) total return is shown for periods less than one year.
(2) For periods less than one year, both the ratio of net operating expenses to
average net assets and the ratio of net investment income (loss) to average net
assets are calculated on an annualized basis.
<PAGE>
THE AAL INTERNATIONAL FUND
Investment Objective
The Fund seeks long-term capital growth by investing primarily in a diversified
portfolio of foreign stocks.
Investment Policies
Under normal circumstances, we invest at least 65% of the Fund's total assets in
foreign stocks primarily traded in at least three countries, not including the
United States. We may not invest more than 25% of the Fund's assets in any one
country. We do not have any other limitations on how much of its assets it may
invest in securities primarily traded in any one country.
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 the Fund's total assets in emerging
markets. We have listed the countries and their classifications as mature or
emerging in the Statement of Additional Information. From time to time, we may
invest in securities trading in other countries not listed here or in the
Statement of Additional Information.
Typically, we consider an issuer as domiciled in a particular country if it:
(1) is incorporated under the laws of that country;
(2) has at least 50% of the value of its assets located in that country; and
(3) derives at least 50% of its income from operations or sales in that country.
For issuers that do not meet the above domicile criterion, we make a good-faith
determination based on such factors as the location of issuer's assets,
personnel, sales and earnings.
We may invest the remaining 35% of the Fund's total assets in: additional
foreign stocks; U.S. stocks; structured notes and/or preferred stocks; and up to
20% of the Fund's total assets in U.S. and foreign bonds and other debt
obligations, including lower-rated debt, commonly referred to as "junk bonds"
(i.e., securities rated BB or lower by Standard & Poor's Corporation or Ba or
lower by Moody's Investor Services, Inc.) and unrated securities. Structured
notes and/or preferred stocks involve additional risk, including structures that
may reduce the coupons and/or dividend amounts to zero or the redemption amounts
payable at maturity as a result of a decline in the value of the underlying
instrument. Structured securities may have more volatility than the price of the
underlying instrument.
We do not place any restrictions on the debt ratings of securities acquired or
the portion of the Fund's assets we may invest in a particular rating category
for the Fund. You can find a description of ratings assigned by D&P, Moody's and
S&P in the Appendix to this prospectus. For more information on structured
securities, please see the Statement of Additional Information, and on high
yield bonds, please see "The AAL High Yield Bond Fund" and the Statement of
Additional Information.
<PAGE>
Pending the investment of cash from new sales or to meet ordinary daily cash
needs, we may hold cash temporarily (U.S. dollars, foreign currencies or
multinational foreign currency units) for the Fund. We may invest any portion of
the Fund's total assets in money market instruments.
Annual Advisory Fee
o 1% on the average daily net assets
Annual Sub-Advisory Fee
o 0.75 of 1% on the average daily net assets (payable from the 1% Annual
Advisory Fee paid to the Adviser)
Sub-Adviser
We have hired a sub-adviser ("Sub-Adviser"), Societe Generale Asset Management
Corp. ("SoGen"), who, under our direction and control, makes the day-to-day
investment decisions for the Fund. Societe Generale Asset Management Corp., 1221
Avenue of the Americas, New York, New York 10020 is a registered investment
adviser that is indirectly owned by Societe Generale, one of France's largest
banks. Under the Sub-Advisory Agreement, the Sub-Adviser for the Fund, subject
to our (the Adviser and Board of Trustees for the Fund) direction and control
determines which securities to purchase and sell for the Fund, arranges the
purchases and sales for the Fund, and renders other assistance to us in
formulating and implementing the investment program for the Fund.
Portfolio Manager
Jean-Marie Eveillard has managed the day-to-day Fund investments since its
inception on August 1, 1995. Mr. Eveillard has served as SoGen's President and
Director since April, 1990.
Other Investment Factors and Risks Involved
Foreign Investment Risk: In addition to the risks of investing in stocks of
different sized companies, as highlighted in our other stock fund offerings
(financial and market risks), investors face 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 nonuniform corporate disclosure standards. In
addition, we may invest from 0% to 100% of the Fund's net assets in emerging
growth countries. Investing in emerging growth countries may entail more risk
than investing in mature countries. The greater the percentage of net assets the
Fund invests in emerging countries, the greater the investment risks.
For more information on risks, see Additional Investment Factors and Risks
Regarding the Funds on page __.
<PAGE>
Foreign Investing Expenses
Investing in foreign securities costs more than investing in U.S. securities.
Although you may find purchasing shares in the Fund as a more efficient way to
invest in foreign securities than investing in individual foreign securities,
the Fund has higher expenses (i.e., advisory and custodial fees, and commissions
paid per share) than those of a typical domestic fund. The higher expenses
involved in managing a foreign fund, however, do not mean that the Fund has
higher expenses than other foreign mutual funds with similar investment
policies. The Fund may or may not have higher expenses than other foreign funds
with similar investment policies.
Expense Summaries and Example
The following expense summaries and example should assist you in understanding
the various recurring and non-recurring costs and expenses you may directly or
indirectly incur with your investment in The AAL International Fund.
Shareholder Transaction Expenses
Shareholder transaction expenses are charges you pay when you buy, sell or hold
shares of the Fund. For Class A shares, we based expenses on the maximum 4%
sales charge, which is reduced on purchases of $25,000 or more. For Class B
shares, we based expenses on the maximum 5% contingent deferred sales charge,
which is reduced by 1% for each year owned.
Shareholder Transaction Expenses Class A Class B
Maximum sales charge imposed on 4% None
purchases (as a percentage of offering
price)
Maximum sales charge imposed on None None
reinvested dividends
Maximum deferred sales charge None 5%
Redemption fee (The Funds currently None None
charge $12.00 for each wire
redemption.)
Exchange fee None None
Total 4% 5%
Annual Fund Operating Expenses
The following table, reflects annual operating expenses paid by the Fund. The
annual operating expenses include a management fee paid to the Adviser, 12b-1
distribution and service fees and other expenses for maintaining shareholder
records and furnishing shareholder services, statements and financial reports.
Operating expenses are expressed as a percentage of average net assets for the
fiscal year ended April 30, 1997. We used the maximum investment management and
12b-1 distribution fees permitted under The AAL Mutual Funds Investment Advisory
Agreement and 12b-1 Distribution Plan.
<PAGE>
Annual Fund Operating Expenses (as a Class A Class B
percentage of average net assets)
Management fee 1.00% 1.00%
12b-1 distribution and service fees .25% 1.00%
Other expenses .85% .94%
Total Fund Operating Expenses 2.10% 2.94%
Expense Example
The following expense example shows the cumulative expenses attributable to a
hypothetical $1,000 investment with an annual return of 5% compounded annually,
in each class, for the years shown.
Expense Example Class A Class B Class B No Redemption
After 1 year $61 $80 $30
After 3 years $104 $122 $92
After 5 years $150 $156 $156
After 10 years $277 N/A* N/A*
*Class B shares convert into Class A shares after five years.
You should use the expense example for comparison purposes only. It does not
represent the Fund's actual expenses and returns, either past or future.
Financial Highlights
The Financial Highlights Table covers The AAL International Fund for the periods
shown. We based the information presented on a share of beneficial interest
outstanding throughout the applicable period. You should read the table in
conjunction with the Funds' financial statements and related notes, all of which
have been audited by the Funds' independent accountants, Price Waterhouse LLP.
At your request, we will provide you, without charge, a copy of The AAL Mutual
Funds Annual Report, dated April 30, 1997, containing these financial statements
and a more detailed discussion and analysis of the Fund's performance.
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME FROM INVESTMENT LESS DISTRIBUTIONS
OPERATIONS
NAV: Net Net Total from Dividends Distribution Total NAV: Total Net Assets
Start Investment Realized Investment from Net from Net Dividends End of Return at End of
of Income and Un- Operations Investment Realized and Period for Period
Period (Loss) realized Income Gain on Distributions Period
Gain(Loss) Investments (1)
Class A shares
01-Aug-95 to
30-Apr-96 $10.00 $0.046 $1.058 $1.104 $(0.024) $0.000 $(0.024) 11.08 11.07% $57,117,185
30-Apr-97 11.08 0.005 0.680 0.685 (0.335) (0.060) (0.395) 11.37 6.32 116,153,782
Class B shares
08-Jan-97 to
30-April-97 $10.98 $0.000 $0.360 $0.360 $0.000 $0.000 $0.000 $11.34 3.28% $2,599,958
SUPPLEMENTAL DATA
AND RATIOS
Ratio of Ratio of Portfolio Average
Net Net Turnover Commission
Operating Investment Rate per Share
Expenses Income(Loss)
to Average to Average
Net Assets Net Assets*
(2) (2)
Class A shares
01-Aug-95 to
30-Apr-96 2.15% 0.94% 1.30% $0.018
30-Apr-97 2.10 0.88 12.95 0.013
Class B shares
08-Jan-97 to
30-April-97 2.94% (0.03)% 12.95% $0.013
</TABLE>
*If the Fund had paid all of its expenses for Class A shares and Class B shares,
the ratios would be as follows:
Class A shares - Ratio of net operating expenses to average net assets (2):
2.32% and 2.10%.
Class B shares - Ration of net operating expenses to average net assets (2):
2.94%.
Class A shares - Ratio of net investment income (loss) to average net assets(2):
0.77% and 0.88%.
Class B shares - Ratio of net investment income (loss) to average net assets
(2): (0.03)%.
(1) Total return assumes reinvestment of all dividends and distributions but
does not reflect any deductions for sales charges. The aggregate (not
annualized) total return is shown for periods less than one year.
(2) For periods less than one year, both the ratio of net operating expenses to
average net assets and the ratio of net investment income (loss) to average net
assets are calculated on an annualized basis.
<PAGE>
THE AAL EQUITY INCOME FUND (formerly known as The AAL Utilities Fund)
Investment Objective
The AAL Equity Income Fund seeks current income, long-term income growth and
capital growth by investing primarily in a diversified portfolio of
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 which exceed the average dividend
yields on stocks comprising the S&P 500 (R).
Investment Policies
Under normal circumstances, we invest at least 65% of the Fund's total assets in
income-producing equity securities.
We may invest the remainder of the Fund's total assets, in whole or in part, in
additional income-producing equity securities, bonds and commercial paper.
In selecting equity securities for the Fund, we look for companies that:
(1) have a good growth rate and return on capital;(2) have favorable
aspects for future growth and dividends; (3) are financially sound;
(4) have high-quality management; and (5) are in a favorable
competitive environment.
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
investment grade. We may invest up to 5% of the Fund's total assets in such
securities rated below investment grade. We buy commercial paper rated in the
top two categories by an NRSRO. We may buy unrated commercial paper, if we
determine the commercial paper is investment grade.
We expect to realize income from dividends earned on equity investments and
interest earned on debt securities. We seek capital appreciation by attempting
to select income-producing equity securities that we believe are under-priced
relative to the securities of companies with comparable fundamentals.
Foreign Securities
Although we do not intend to do so at this time, we may invest up to 15% of the
Fund's net assets in securities located outside the United States. Without
regard to the 15% limitation, we may invest in foreign securities domestically
through depository receipts (i.e. American Depository Receipts ("ADRs")) and
securities of foreign issuers traded on a U.S. national securities exchange or
the NASDAQ National Market System.
<PAGE>
Annual Advisory Fee
o 0.50 of 1% on the first $250 million
o 0.45 of 1% on average daily net assets over $250 million
Portfolio Manager
Lewis Alexander Bohannon, CFA, has managed the day-to-day Fund investments since
November 1, 1995. From 1980 through 1994, Mr. Bohannon was at Cigna Corporation,
serving as managing director and portfolio manager from 1990 to 1994.
Investment Factors and Risks Involved
We will attempt to diversify the Fund's investments in income producing equity
securities across many different industries. However, income-producing equity
securities tend to be more concentrated in some industries than others. For
example, high dividend yielding securities included in the S&P 500(R) are found
primarily in the services (communications and retail), energy, utilities,
financial services and consumer noncyclical and cyclical industries. Equity
securities in the technology and health related industries, on the other hand,
tend to pay below average dividends. Accordingly, our investments for the Fund
may tend to be more concentrated in certain industries.
Financial Risk: The industries in which income-producing equity securities
customarily are found tend to have high operating, interest and other regulatory
expenses, such as some companies in the public utilities industry. Also, some of
these industries are mature, meaning that industry growth has often peaked.
Companies in these industries tend to use their profits for paying higher
dividends rather than reinvesting for company growth. As a result, the level of
capital growth associated with income-producing equity securities typically is
lower than capital growth of equity securities issued by companies in other
industries. Capital growth of equity securities in mature industries typically
corresponds to the company's competitive position, in particular its capability
to capture market share from its competitors.
Interest Rate Risk: Changes in the level of interest rates affect the value of
income-producing equity securities, the bonds held in the portfolio and the
value of the Fund as a whole. Like bonds, a decline in the prevailing levels of
interest rates generally will increase the value of income-producing equity
securities and an increase in interest rates generally will reduce the value of
these securities.
Market Risk: Market cycles affect all equity securities over time, with periods
when stock prices rise generally and periods when stock prices decline
generally. These movements in prices affect the net asset value of the Fund,
although income-producing equity securities may tend to rise less and fall less
than the market as a whole. You could lose money investing in the Fund .
<PAGE>
Transitional Restructuring of Investment Portfolio
Prior to September 1, 1997, the Fund sought to achieve its objective by
investing primarily in the public utilities industry. The Fund's shareholders,
on recommendation of the Board of Trustees, voted to eliminate this
concentration policy effective September 1, 1997. Over the next six months to
one year, we plan to identify securities outside of the utilities industry that
meet the Fund's investment criteria, and will draw from those selections to meet
the Fund's needs for new and additional investments. We will sell some utilities
positions in favor of non-utilities positions that we feel will enable us to
better achieve the Fund's fundamental objective. Over time, our strategy will
reduce the Fund's concentration in, and exposure to, the utilities industry. At
the same time, we will attempt to minimize the recognition of capital gains that
potentially could result from an immediate shift in the Fund's investments.
Although dividend yields in the public utilities industry have declined over the
past several years due to changes within the industry, such as deregulation,
companies in the utilities industry still tend to offer higher dividends on
their equity securities than companies in other industries. As a result,
reducing our concentration in this industry may reduce the dividend yield on the
Fund, and therefore current income in the short-term. However, this reduced
concentration should help us to better achieve long-term income and capital
growth.
For more information on risks see Additional Investment Factors and Risks
Regarding the Funds on page --.
Expense Summaries and Example
The following expense summaries and example should assist you in understanding
the various recurring and non-recurring costs and expenses you may directly or
indirectly incur with your investment in The AAL Equity Income Fund.
Shareholder Transaction Expenses
Shareholder transaction expenses are charges you pay when you buy or sell shares
of the Fund. For Class A shares, we based expenses on the maximum 4% sales
charge, which is reduced on purchases of $25,000 or more. For Class B shares, we
based expenses on the maximum 5% contingent deferred sales charge, which is
reduced by 1% for each year owned.
<PAGE>
Shareholder Transaction Expenses Class A Class B
Maximum sales charge imposed on 4% None
purchases (as a percentage of offering
price)
Maximum sales charge imposed on None None
reinvested dividends
Maximum deferred sales charge None 5%
Redemption fee (The Funds currently None None
charge $12.00 for each wire
redemption.)
Exchange fee None None
Total 4% 5%
Annual Fund Operating Expenses
The following table, reflects annual operating expenses paid by the Fund. The
annual operating expenses include a management fee paid to the Adviser, 12b-1
distribution and service fees and other expenses for maintaining shareholder
records and furnishing shareholder services, statements and financial reports.
Operating expenses are expressed as a percentage of average net assets for the
fiscal year ended April 30, 1997. We used the maximum investment management and
12b-1 distribution fees permitted under The AAL Mutual Funds Investment Advisory
Agreement and 12b-1 Distribution Plan.
Annual Fund Operating Expenses (as a Class A Class B
percentage of average net assets)
Management fee .50% .50%
12b-1 distribution and service fees .25% 1.00%
Other expenses .40% .48%
Total Fund Operating Expenses 1.15% 1.99%
Expense Example
The following expense example shows the cumulative expenses attributable to a
hypothetical $1,000 investment with an annual return of 5% compounded annually,
in each class, for the years shown.
Expense Example Class A Class B Class B No Redemption
After 1 year $51 $70 $20
After 3 years $76 $93 $63
After 5 years $102 $108 $108
After 10 years $177 N/A* N/A*
*Class B shares convert into Class A shares after five years.
<PAGE>
You should use the expense example for comparison purposes only. It does not
represent the Fund's actual expenses and returns, either past or future.
Financial Highlights
The Financial Highlights Table covers The AAL Equity Income Fund for the periods
shown. The Fund based the information presented on a share of beneficial
interest outstanding throughout the applicable period. You should read the table
in conjunction with the Funds' financial statements and related notes, all of
which have been audited by the Funds' independent accountants, Price Waterhouse
LLP. At your request, we will provide you, without charge, a copy of The AAL
Mutual Funds Annual Report, dated April 30, 1997, containing these financial
statements and a more detailed discussion and analysis of the Fund's
performance.
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME FROM INVESTMENT LESS DISTRIBUTIONS
OPERATIONS
NAV: Net Net Total from Dividends Distribution Total NAV: Total Net Assets
Start Investment Realized Investment from Net from Net Dividends End of Return at End or
of Income and Un- Operations Investment Realized and Period for Period
Period (Loss) realized Income Gain on Distributions Period
Gain (Loss) Investments (1)
Class A shares
18-Mar-94 to
30-Apr-94 $10.00 $0.022 $(0.072$ (0.050) $0.000 $0.000 $0.000 $9.95 (0.50)% $15,423,861
30 Apr-95 9.95 0.338 (0.498) (0.160) (0.320) 0.000 (0.320) 9.47 (1.51) 70,861,404
30-Apr-96 9.47 0.360 1.420 1.780 (0.350) 0.000 (0.350) 10.90 18.90 114,460,386
30-Apr-97 10.90 0.390 0.455 0.845 (0.405) 0.000 (0.405) 11.34 7.88 134,196,399
Class B shares
08-Jan-97 to
30-Apr-97 $11.40 $0.051 $(0.056) $(0.005) $(0.025) $0.000 $(0.025) 11.37 (0.04)% $494,969
SUPPLEMENTAL DATA
AND RATIOS
Ratio of Ratio of Portfolio Average
Net Net Turnover Commission
Operating Investment rate Per Share
Expenses Income(Loss)
to Average to Average
Net Assets Net Assets*
(2) (2)
Class A shares
18-Mar-94 to
30-Apr-94 1.60% 5.12% 0.00% $___
30 Apr-95 1.19 4.08 24.65 ___
30-Apr-96 1.20 3.58 21.79 0.056
30-Apr-97 1.15 3.57 5.14 0.060
Class B shares
08-Jan-97 to
30-Apr-97 1.99% 2.36% 5.14% $0.060
</TABLE>
*If the Fund had paid all of its expenses for Class A shares and Class B shares,
the ratios would be as follows:
Class A shares - Ratio of net operating expenses to average net assets (2):
2.91%, 1.19%, 1.20% and 1.15%.
Class B shares - Ratio of net operating expenses to average net assets (2):
1.99%.
Class A shares - Ratio of net investment income (loss) to average net assets
(2): 3.81%, 4.08%, 3.58% and 3.57%.
Class B shares - Ratio of net investment income (loss) to average net assets
(2): 2.36%.
(1) Total return assumes reinvestment of all dividends and distributions but
does not reflect any deductions for sales charges. The aggregate (not
annualized) total return is shown for periods less than one year.
(2) For periods less than one year, both the ratio of net operating expenses to
average net assets and the ratio of net investment income (loss) to average net
assets are calculated on an annualized basis.
<PAGE>
THE AAL BOND FUND
Investment Objective
The AAL Bond Fund seeks a high level of current income, consistent with capital
preservation by investing primarily in investment grade bonds.
Investment Policies
Under normal circumstances, we invest at least 65% of the Fund's total assets
in: (1) the debt securities of U.S. issuers and foreign issuers payable in U.S.
dollars rated within the four highest rating categories by at least two
Nationally Recognized Statistical Rating Organizations ("NRSROs") at the time of
purchase; and (2) securities issued or guaranteed by the U.S. government, its
agencies or instrumentalities, primarily those securities supported by the full
faith and credit of the U.S. Treasury.
We may invest the remaining 35% of the Fund's total assets in:
1) privately issued or guaranteed mortgage-related securities rated
within the four highest categories by at least two NRSROs or unrated
mortgage-related securities, if we determine at the time of purchase
these securities have credit equal to these ratings;
2) commercial paper in the highest rating category by an NRSRO, or
commercial paper issued or guaranteed by a corporation who has
outstanding debt rated in the two highest categories by an NRSRO at
the time of purchase;
3) bank obligations, including repurchase agreements, of banks having
total assets in excess of $1 billion; and
4) corporate obligations, including variable rate master notes, rated in
the two highest categories by an NRSRO, or issued by a corporation
whose outstanding debt has an equal or better rating at the time of
purchase.
Although we have no restrictions on the maturity of the debt securities in the
portfolio, generally we maintain a weighted average effective maturity of
between 5 and 10 years. We use the effective maturity of a debt security in
calculating weighted average effective maturity, which takes into account
projected prepayments, call dates, put dates and sinking funds, if any, that
reduce the stated maturity date on the bond.
We anticipate that during normal market conditions the average portfolio
maturity of the Fund will not exceed 20 years. We use the stated final maturity
date of a security in calculating average maturity, notwithstanding earlier call
dates and possible prepayments.
Annual Advisory Fee
o 0.55 of 1% on the first $250 million
o 0.50 of 1% on the next $250 million
o 0.45 of 1% on average daily net assets over $500 million
<PAGE>
Portfolio Manager
Michael R. Hilt, CFA, has managed the day-to-day Fund investments since November
1, 1995. From April 1994 through August 1995, Mr. Hilt served as portfolio
manager and quantitative analyst for Conseco Capital Management, Inc. From
August 1992 through April 1994, he served as a portfolio manager and
quantitative analyst for PPM America, Inc.
Mr. Hilt also manages The AAL Money Market Fund.
Investment Factors and Risks Involved
Interest Rate Risk: Changes in interest rate levels affect the value of the
bonds in the portfolio and the value of the Fund as a whole.
Credit Risk: The creditworthiness of bond issuers will affect the value of their
bond, which may decline during the fund's holding periods and affect the value
of the Fund as a whole.
For more information on risks see Additional Investment Factors and Risks
Regarding the Funds on page --.
Expense Summaries and Example
The following expense summaries and example should assist you in understanding
the various recurring and non-recurring costs and expenses you may directly or
indirectly incur with your investment in The AAL Bond Fund.
Shareholder Transaction Expenses
Shareholder transaction expenses are charges you pay when you buy or sell shares
of the Fund. For Class A shares, we based expenses on the maximum 4% sales
charge, which is reduced on purchases of $25,000 or more. For Class B shares, we
based expenses on the maximum 5% contingent deferred sales charge, which is
reduced by 1% for each year owned.
Shareholder Transaction Expenses Class A Class B
Maximum sales charge imposed on 4% None
purchases (as a percentage of offering
price)
Maximum sales charge imposed on None None
reinvested dividends
Maximum deferred sales charge None 5%
Redemption fee (The Funds currently None None
charge $12.00 for each wire
redemption.)
Exchange fee None None
Total 4% 5%
<PAGE>
Annual Fund Operating Expenses
The following table, reflects annual operating expenses paid by the Fund. The
annual operating expenses include a management fee paid to the Adviser, 12b-1
distribution and service fees and other expenses for maintaining shareholder
records and furnishing shareholder services, statements and financial reports.
Operating expenses are expressed as a percentage of average net assets for the
fiscal year ended April 30, 1997. We used the maximum investment management and
12b-1 distribution fees permitted under The AAL Mutual Funds Investment Advisory
Agreement and 12b-1 Distribution Plan.
Annual Fund Operating Expenses (as a Class A Class B
percentage of average net assets)
Management fee .55% .55%
12b-1 distribution and service fees .25% 1.00%
Other expenses .18% .31%
Total Fund Operating Expenses .98% 1.86%
Expense Example
The following expense example shows the cumulative expenses attributable to a
hypothetical $1,000 investment with an annual return of 5% compounded annually,
in each class, for the years shown.
Expense Example Class A Class B Class B No Redemption
After 1 year $50 $69 $19
After 3 years $71 $89 $59
After 5 years $93 $102 $102
After 10 years $158 N/A* N/A*
You should use the expense example for comparison purposes only. It does not
represent the Fund's actual expenses and returns, either past or future.
Financial Highlights
The Financial Highlights Table covers The AAL Bond Fund for the periods shown.
We based the information presented on a share of beneficial interest outstanding
throughout the applicable period. You should read the table in conjunction with
the Funds' financial statements and related notes, all of which have been
audited by the Funds' independent accountants, Price Waterhouse LLP. At your
request, we will provide you, without charge, a copy of The AAL Mutual Funds
Annual Report, dated April 30, 1997, containing these financial statements and a
more detailed discussion and analysis of the Fund's performance.
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME FROM INVESTMENT LESS DISTRIBUTIONS
OPERATIONS
NAV: Net Net Total from Dividends Distribution Total NAV: Total Net Assets
Start Investment Realized Investment from Net from Net Dividends End of Return at End of
of Income and Un- Operations Investment Realized and Period for Period
Period (Loss) realized Income Gain on Distributions Period
Gain(Loss) Investments (1)
Class A shares
16-Jul-87 to
30-Apr-88 $10.00 $0.602 $(0.360) $0.242 $(0.602) $0.000 $(0.602) $9.64 2.56% $20,938,863
30-Apr-89 9.64 0.826 (0.255) 0.571 (0.826) (0.055) (0.881) 9.33 6.21 54,006,123
30-Apr-90 9.33 0.806 (0.080) 0.726 (0.806) 0.000 (0.806) 9.25 7.84 94,937,997
30-Apr-91 9.25 0.772 0.510 1.282 (0.772) 0.000 (0.772) 9.76 14.34 139,228,954
30-Apr-92 9.76 0.721 0.273 0.994 (0.721) (0.013) (0.734) 10.02 10.47 229,309,955
30-Apr-93 10.02 0.661 0.627 1.288 (0.661) (0.037) (0.698) 10.61 13.22 370,219,492
30-Apr-94 10.61 0.584 (0.660) (0.076) (0.584) (0.260) (0.844) 9.69 (0.99) 442,962,543
30-Apr-95 9.69 0.580 (0.078) 0.502 (0.580) (0.002) (0.582) 9.61 5.47 429,355,163
30-Apr-96 9.61 0.584 0.010 0.594 (0.584) 0.000 (0.584) 9.62 6.18 430,846,686
30-Apr-97 9.62 0.595 0.010 0.605 (0.595) 0.000 (0.595) 9.63 6.43 389,342,652
Class B shares
08-Jan-97 to
30-Apr-97 $9.71 $0.175 $(0.070) $0.105 $(0.175) $0.000 $(0.175) 9.64 0.96% $390,959
SUPPLEMENTAL DATA
AND RATIOS
Ratio of Ratio of Portfolio
Net Net Turnover
Operating Investment rate
Expenses Income(Loss)
to Average to Average
Net Assets Net Assets*
(2) (2)
Class A shares
16-Jul-87 to
30-Apr-88 0.75% 8.67% 85.88%
30-Apr-89 0.83 8.86 54.49
30-Apr-90 0.98 8.38 38.00
30-Apr-91 1.00 8.06 6.39
30-Apr-92 1.03 7.19 12.18
30-Apr-93 1.03 6.35 26.12
30-Apr-94 1.02 5.61 27.75
30-Apr-95 1.03 6.12 44.57
30-Apr-96 1.01 5.89 125.77
30-Apr-97 0.98 6.10 212.49
Class B shares
08-Jan-97 to
30-Apr-97 1.86% 5.51% 212.49%
</TABLE>
*If the Fund had paid all of its expenses for its Class A shares and Class B
shares, the ratios would be as follows:
Class A shares - Ratio of net operating expenses to average net assets (2):
1.83%, 1.37%, 1.22%, 1.17%, 1.08%, 1.03%, 1.02%, 1.03%, 1.01% and .98%.
Class B shares - Ratio of net operating expenses to average net assets (2):
1.86%.
Class A shares - Ratio of net investment income (loss) to average net assets
(2): 7.59%, 8.32%, 8.13%, 7.89%, 7.14%, 6.35%, 5.61%, 6.12%, 5.89% and 6.10%.
Class B shares - Ratio of net investment income (loss) to average net assets
(2): 5.51%.
(1) Total return assumes reinvestment of all dividends and distributions but
does not reflect any deductions for sales charges. The aggregate (not
annualized) total return is shown for periods less than one year.
(2) For periods less than one year, both the ratio of net operating expenses to
average net assets and the ratio of net investment income (loss) to average net
assets are calculated on an annualized basis.
<PAGE>
THE AAL MUNICIPAL BOND FUND
Investment Objective
The AAL Municipal Bond Fund seeks a high level of current income exempt from
federal income taxes, consistent with capital preservation by investing
primarily in a diversified portfolio of municipal securities.
Investment Policies
Under normal circumstances, we invest at least 80% of the Fund's net assets in
municipal bonds where the income is exempt from federal income tax. Of the 80%
invested in municipal bonds, we
<PAGE>
invest at least 75% of them in bonds rated within the three highest rating
categories assigned by at least one NRSRO at the time of purchase.
State and local governments and municipalities issue municipal bonds to raise
money for a variety of public purposes, including general financing for state
and local governments or financing for specific projects or public facilities. A
municipality may issue municipal bonds in anticipation of future revenues from a
specific municipal project (revenue bonds), or backed by the full taxing power
of a municipality (general obligation bonds), or from the revenues of a specific
project on the credit of a private organization (industrial development bonds).
Federal law generally exempts the interest paid on municipal bonds from federal
income taxes.
We may invest 25% or more of the Fund's total assets in industrial development
bonds. The Fund tries not to invest more than 25% of its total assets in
municipal bonds that are so closely related that an economic, business or
political development affecting one bond could also affect the others. For more
information on municipal securities, refer to the SAI.
We can purchase certain tax-exempt bonds that involve a private purpose. The
interest paid on these private activity bonds are subject to the alternative
minimum tax ("AMT paper"). We limit our purchases of AMT paper to 25% of the
Fund's total assets.
Annual Advisory Fee
o 0.55 of 1% on the first $250 million
o 0.50 of 1% on the next $250 million
o 0.45 of 1% on average daily net assets over $500 million.
Portfolio Manager
Duane A. McAllister, CFA, has managed the day-to-day Fund investments since
April 1994. Prior to joining AAL Capital Management Corporation on November 1,
1995, he managed the Fund while serving as vice president of Duff & Phelps
Investment Management Co. For the five-year period before managing the Fund, Mr.
McAllister managed portfolios for the Northern Trust Company and First National
Bank and Trust in Rockford, Illinois.
Investment Factors and Risks Involved
<PAGE>
Interest Rate Risk: Changes in interest rate levels affect the value of the
bonds in the portfolio and the value of the Fund as a whole.
Credit Risk: The creditworthiness of bond issuers will affect the value of their
bond, which may decline during the Fund's holding periods and affect the value
of the Fund as a whole.
Tax Rates
Changes in federal income tax rates may affect both the net asset value and the
Fund's taxable equivalent interest.
For more information on risks see Additional Investment Factors and Risks
Regarding the Funds on page --.
Expense Summaries and Example
The following expense summaries and example should assist you in understanding
the various recurring and non-recurring costs and expenses you may directly or
indirectly incur with your investment in The AAL Municipal Bond Fund.
Shareholder Transaction Expenses
Shareholder transaction expenses are charges you pay when you buy, sell or hold
shares of the Fund. For Class A shares, we based expenses on the maximum 4%
sales charge, which is reduced on purchases of $25,000 or more. For Class B
shares, we based expenses on the maximum 5% contingent deferred sales charge,
which is reduced by 1% for each year owned.
Shareholder Transaction Expenses Class A Class B
Maximum sales charge imposed on 4% None
purchases (as a percentage of offering
price)
Maximum sales charge imposed on None None
reinvested dividends
Maximum deferred sales charge None 5%
Redemption fee (The Funds currently None None
charge $12.00 for each wire
redemption.)
Exchange fee None None
Total 4% 5%
<PAGE>
Annual Fund Operating Expenses
The following table, reflects annual operating expenses paid by the Fund. The
annual operating expenses include a management fee paid to the Adviser, 12b-1
distribution and service fees and other expenses for maintaining shareholder
records and furnishing shareholder services, statements and financial reports.
Operating expenses are expressed as a percentage of average net assets for the
fiscal year ended April 30, 1997. We used the maximum investment management and
12b-1 distribution fees permitted under The AAL Mutual Funds Investment Advisory
Agreement and 12b-1 Distribution Plan.
Annual Fund Operating Expenses (as a Class A Class B
percentage of average net assets)
Management fee .55% .55%
12b-1 distribution and service fees .25% 1.00%
Other expenses .09% .14%
Total Fund Operating Expenses .89% 1.69%
Expense Example
The following expense example shows the cumulative expenses attributable to a
hypothetical $1,000 investment with an annual return of 5% compounded annually,
in each class, for the years shown.
Expense Example Class A Class B Class B No Redemption
After 1 year $49 $67 $17
After 3 years $68 $84 $54
After 5 years $88 $93 $93
After 10 years $147 N/A* N/A*
*Class B shares convert into Class A shares after five years.
You should use the expense example for comparison purposes only. It does not
represent the Fund's actual expenses and returns, either past or future.
Financial Highlights
The Financial Highlights Table covers The AAL Municipal Bond Fund for the
periods shown. We based the information presented on a share of beneficial
interest outstanding throughout the applicable period. You should read the table
in conjunction with the Funds' financial statements and related notes, all of
which have been audited by the Fund's independent accountants, Price Waterhouse
LLP. At your request, we will provide you, without charge, a copy of The AAL
Mutual Funds Annual Report, dated April 30, 1997, containing these financial
statements and a more detailed discussion and analysis of the Fund's
performance.
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME FROM INVESTMENT LESS DISTRIBUTIONS
OPERATIONS
NAV: Net Net Total from Dividends Distribution Total NAV: Total Net Assets
Start Investment Realized Investmentf from Net from Net Dividends End of Return at End of
of Income and Un- Operations Investment Realized and Period for Period
Period (Loss) Realized Income Gain on Distributions Period
Gain (Loss) Investments (1)
Class A shares
16-Jul-87 to
30-Apr-88 $10.00 $0.398 $(0.280) $0.118 $(0.398) $0.000 $(0.398) $9.72 1.29% $10,031,478
30-Apr-89 9.72 0.599 0.020 0.619 (0.599) 0.000 (0.599) 9.74 6.53 41,217,475
30-Apr-90 9.74 0.608 (0.035) 0.573 (0.608) (0.005) (0.613) 9.70 5.93 78,844,594
30-Apr-91 9.70 0.616 0.434 1.050 (0.616) (0.004) (0.620) 10.13 11.12 114,953,939
30-Apr-92 10.13 0.598 0.234 0.832 (0.598) (0.004) (0.602) 10.36 8.39 172,494,589
30-Apr-93 10.36 0.571 0.631 1.202 (0.571) (0.001) (0.572) 10.99 11.84 271,319,546
30-Apr-94 10.99 0.539 (0.410) 0.129 (0.539) (0.020) (0.559) 10.56 1.04 370,568,847
30-Apr-95 10.56 0.523 0.186 0.709 (0.523) (0.056) (0.579) 10.69 7.01 377,765,861
30-Apr-96 10.69 0.521 0.300 0.821 (0.521) (0.080) (0.601) 10.91 7.74 412,777,320
30-Apr-97 10.91 0.521 0.194 0.715 (0.521) (0.184) (0.705) 10.92 6.64 421,668,316
Class B shares
08-Jan-97 to
30-Apr-97 $11.02 $0.147 $(0.010) $0.137 $(0.147) $0.000 $(0.147) $10.92 0.34% $764,783
SUPPLEMENTAL DATA
AND RATIOS
Ratio of Ratio of Portfolio
Net Net Turnover
Operating Investment rate
Expenses Income (Loss)
to Average to Average
Net Assets Net Assets*
(2) (2)
Class A shares
16-Jul-87 to
30-Apr-88 1.50% 5.72% 20.83%
30-Apr-89 0.94 6.30 29.24
30-Apr-90 0.90 6.13 30.83
30-Apr-91 0.90 6.21 13.63
30-Apr-92 0.95 5.81 0.74
30-Apr-93 1.00 5.32 3.41
30-Apr-94 0.99 4.87 10.15
30-Apr-95 0.98 5.01 172.49
30-Apr-96 0.95 4.69 130.52
30-Apr-97 0.89 4.69 119.79
Class B shares
08-Jan-97 to
30-Apr-97 1.69% 4.09% 119.79%
</TABLE>
*If the Fund had paid all of its expenses for its Class A shares and Class B
shares, the ratios would be as follows:
Class A shares - Ratio of net operating expenses to average net assets (2):
2.28%, 1.46%, 1.14%, 1.10%, 1.04%, 1.00%, 0.99%, 0.98%, 0.95% and 0.89%.
Class B shares - Ratio of net operating expenses to average net assets (2):
1.69%.
Class A shares - Ratio of net investment income (loss) to average net assets
(2): 4.95%, 5.79%, 5.89%, 6.01%, 5.72%, 5.32%, 4.87%, 5.01%, 4.69% and 4.69%.
Class B shares - Ratio of net investment expenses to average net assets (2):
4.09%.
(1) Total return assumes reinvestment of all dividends and distributions but
does not reflect any deductions for sales charges. The aggregate (not
annualized) total return is shown for periods less than one year.
(2) For periods less than one year, both the ratio of net operating expenses to
average net assets and the ratio of net investment income (loss) to average net
assets are calculated on an annualized basis.
<PAGE>
THE AAL HIGH YIELD BOND FUND
Investment Objective
The AAL High Yield Bond Fund seeks high current income and secondarily capital
growth by investing primarily in high risk, high yield bonds commonly referred
to as "junk bonds." The Fund actively seeks to achieve the secondary objective
of capital growth to the extent it is consistent with the primary objective of
high current income.
Investment Policies
Under normal circumstances, we invest at least 65% of the Fund's assets in a
diversified portfolio of high yield bonds. By high yield bonds, we mean debt
securities rated below investment grade by a Nationally Recognized Statistical
Rating Organization ("NRSRO"), such as Ba or lower by Moody's Investors
Services, Inc. ("Moody's") or BB or lower by Standard & Poor's Ratings Group
("S&P"), or, if unrated, of comparable quality as we determine. Please refer to
the Appendix for information on NRSROs and their credit ratings. We define high
yield bonds to include: fixed, variable, floating rate and deferred interest
debt obligations; zero coupon bonds; pay-in-kind bonds; asset and
mortgage-backed debt obligations; structured debt obligations; and convertible
bonds.
We invest the remaining 35% of the Fund's total assets in any combination of:
(1) additional high yield bonds; (2) investment grade bonds; (3) common and
preferred stocks (including structured preferred stocks); and (4) securities
issued or guaranteed by the U.S. government, its agencies or instrumentalities
("U.S. Government Obligations").
We may invest up to 20% of the Fund's net assets in bonds of foreign issuers.
In evaluating the quality of a particular high yield bond for investment in the
Fund, we do not rely exclusively on ratings assigned by the NRSROs. In
appropriate circumstances, we perform our own credit analysis. We consider the
issuer's: (1) financial resources; (2) operating history; (3) sensitivity to
economic conditions and trends; (4) management's abilities; (5) debt maturity
schedules; (6) borrowing requirements; and (7) relative values based on
anticipated cash flow, interest and asset coverages and earnings prospects. We
attempt to identify those issuers of high yield bonds whose financial condition
is adequate to meet future obligations, has improved or is expected to improve
in the future. However, we do not have restrictions on the rating level of the
securities in the Fund's portfolio and may purchase and hold securities in
default.
Annual Advisory Fee
o 0.60 of 1% on average daily net assets.
Portfolio Manager
Dave Carroll, CFA, has managed the day-to-day Fund investments since its
inception on January 8, 1997. Prior to managing the Fund, he served as an
analyst and trader for Cargill Financial Services from January through September
1996. From 1986 to August of 1995 he was a second vice president and portfolio
manager for Fortis Advisers, Inc.
<PAGE>
Investment Factors and Risks Involved
Interest Rate Risk: Changes in interest rate levels affect the value of the
bonds in the portfolio and the value of the Fund as a whole.
Credit Risk: The primary risk of investing in the high yield sector is the
credit risk. Bonds rated below investment grade have greater risks of default
than investment grade bonds 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 have less
sensitivity to interest rate changes on a short-term basis, but more sensitivity
to adverse economic developments or individual corporate developments because of
their lower credit quality. During an economic downturn or period of rising
interest rates, issuers of lower-rated bonds may have more difficulty meeting
their principal and interest payment obligations or obtaining additional
financing to make the interest payments on their debt. When issuers have
difficulty meeting projected goals or obtaining additional financing, the
default rate on high yield bonds will likely rise.
Market Risk: Frequently, high yield bonds 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 to meet redemption requests and/or selling or
disposing of portfolio securities on favorable terms. The securities in the
portfolio may experience large variations in price. In the event of an illiquid
market or in the absence of readily available market quotations for certain high
yield bonds in the Fund's portfolio, our judgment will play a greater role in
the valuation of the securities. Such adverse market or economic conditions
could make it difficult at times for us to sell or dispose of certain high yield
bonds. We may have to sell these bonds at a significant loss to meet
shareholders redemptions.
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 values and liquidity, especially on the
lesser traded issues. In the past, Congress has attempted restricting the
advantages of high yield bonds and similar attempts could occur in the future.
<PAGE>
The monthly weighted average composition of the Fund's portfolio for the period
from inception on January 8, 1997 through the end of the fiscal year on April
30, 1997 was:
Investment grade Percentage of Portfolio
BB 25.0%
B 73.0%
CCC 1.0%
CC 0%
C 0%
D 0%
Non-rated 1.0%
Subtotal 100%
U.S. governments, equities and others 0%
Total 100%
For more information on risks see Additional Investment Factors and Risks
Regarding the Funds on page --.
Expense Summaries and Example
The following expense summaries and example should assist you in understanding
the various recurring and non-recurring costs and expenses you may directly or
indirectly incur with your investment in the Fund.
Shareholder Transaction Expenses
Shareholder transaction expenses are charges you pay when you buy or sell shares
of the Fund. For Class A shares, we based expenses on the maximum 4% sales
charge, which is reduced on purchases of $25,000 or more. For Class B shares, we
based expenses on the maximum 5% contingent deferred sales charge, which is
reduced by 1% for each year owned.
Shareholder Transaction Expenses Class A Class B
Maximum sales charge imposed on 4% None
purchases (as a percentage of offering
price)
Maximum sales charge imposed on None None
reinvested dividends
Maximum deferred sales charge None 5%
Redemption fee (The Funds currently None None
charge $12.00 for each wire
redemption.)
Exchange fee None None
Total 4% 5%
<PAGE>
Annual Fund Operating Expenses
The following table, reflects annual operating expenses paid by the Fund. The
annual operating expenses include a management fee paid to the Adviser, 12b-1
distribution and service fees and other expenses for maintaining shareholder
records and furnishing shareholder services, statements and financial reports.
Operating expenses are expressed as a percentage of average net assets for the
fiscal year ended April 30, 1997. We used the maximum investment management and
12b-1 distribution fees permitted under The AAL Mutual Funds Investment Advisory
Agreement and 12b-1 Distribution Plan.
Annual Fund Operating Expenses (as a Class A Class B
percentage of average net assets)
Management fee .60% .60%
12b-1 distribution and service fees .25% 1.00%
Other expenses .15% .15%
Total Fund Operating Expenses 1.00% 1.75%
Expense Example
The following expense example shows the cumulative expenses attributable to a
hypothetical $1,000 investment with an annual return of 5% compounded annually,
in each class, for the years shown.
Expense Example Class A Class B Class B No Redemption
After 1 year $50 $68 $18
After 3 years $71 $86 $56
After 5 years $94 $96 $96
After 10 years $160 $N/A* N/A*
*Class B shares convert into Class A shares after five years.
You should use the expense example for comparison purposes only. It does not
represent the Fund's actual expenses and returns, either past or future.
Financial Highlights
The Financial Highlights Table covers The AAL High Yield Bond Fund for the
periods shown. We based the information presented on a share of beneficial
interest outstanding throughout the applicable period. You should read the table
in conjunction with the Funds' financial statements and related notes, all of
which have been audited by the Funds' independent accountants, Price Waterhouse
LLP. At your request, we will provide you, without charge, a copy of The AAL
Mutual Funds Annual Report, dated April 30, 1997, containing these financial
statements and a more detailed discussion and analysis of the Fund's
performance.
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FROM INVESTMENT LESS DISTRIBUTIONS
OPERATIONS
NAV: Net Net Total from Dividends Distributions Total NAV: Total Net Assets
Start Investment Realized Investment from Net from Net Dividends End of Return at End of
of Income and Un- Operations Investment Realized and Period for Period
Period (Loss) Realized Income Gain on Distributions Period
Gain (Loss) Investments (1)
Class A shares
08-Jan-97 to
30-Apr-97 $10.00$ 0.270 $(0.120) $0.150 $(0.270) $0.000 $(0.270) $9.88 1.51% $44,680,637
Class B shares
08-Jan-97 to
30-Apr-97 $10.00 $0.251 $(0.120) $0.131 $(0.251) $0.000 $(0.251) $9.88 1.31% $2,660,309
SUPPLEMENTAL DATA
AND RATIOS
Ratio of Ratio of Portfolio
Net Net Turnover
Operating Investment
Expenses Income (Loss)
to Average to Average
Net Assets Net Assets*
(2) (2)
Class A shares
08-Jan-97 to
30-Apr-97 1.00% 9.11% 36.90%
Class B shares
08-Jan-97 to
30-Apr-97 1.75% 8.66% 36.90%
</TABLE>
*If the Fund had paid all of its expenses for Class A shares and Class B shares,
the ratios would be as follows:
Class A shares - ratio of net operating expenses to average net assets (2):
1.28%.
Class B shares - ratio of net operating expenses to average net assets (2):
2.00%.
Class A shares - ratio of net investment income (loss) to average net assets
(2): 8.83%.
Class B shares - ratio of net investment income (loss) to average net assets
(2): 8.41%
(1) Total return assumes reinvestment of all dividends and distributions but
does not reflect any deductions for sales charges. The aggregate (not
annualized) total return is shown for periods less than one year.
(2) For periods less than one year, both the ratio of net operating expenses to
average net assets and the ratio of net investment income (loss) to average net
assets are calculated on an annualized basis.
<PAGE>
THE AAL MONEY MARKET FUND
Investment Objective
The AAL Money Market Fund seeks a high level of current income, consistent with
liquidity and the preservation of capital, by investing in a diversified
portfolio of high-quality, short-term money market instruments.
Investment Policies
We invest in short-term money market instruments for the Fund, such as:
1) Obligations issued or guaranteed by the U.S. government, its agencies or
instrumentalities;
2) Certificates of deposit, bankers acceptances and similar obligations of U.S.
banks, savings associations, foreign branches of U.S. banks and domestic
branches of foreign banks, which have total assets of more than $1 billion at
the time of purchase, and who are members of the Federal Deposit Insurance
Corporation ("FDIC");
3) Commercial paper that at the time of purchase is defined as "First Tier" or
"Second Tier" by the Investment Company Act of 1940, as long as we do not invest
more than 5% of the Fund's total assets in Second Tier commercial paper; and
4) Corporate obligations, including variable rate master notes that at the time
of purchase are in one of the two highest categories of a NRSRO, or, if unrated,
issued by a corporation with outstanding debt that has an equivalent or better
rating at the time of purchase.
We make investments for the Fund consistent with Rule 2a-7 under the Investment
Company Act of 1940. As such, we invest in securities maturing in 397 days or
less and maintain a dollar-weighted average portfolio maturity of not more than
90 days. By limiting the maturity of the Fund's investments, we seek to lessen
the changes in asset values caused by fluctuations in short-term interest rates.
To the extent it is practical, we try to maintain a constant net asset value per
share of $1.00 for the Fund.
We may purchase participation interests (interests in securities held by others)
in securities we are authorized to invest for the Fund as described above.
The U.S. government neither insures nor guarantees the investments in this Fund.
Annual Advisory Fee
o 0.50 of 1% on the first $500 million
o 0.45 of 1% on average daily net assets over $500 million
Portfolio Manager
Michael R. Hilt, CFA, has managed the day-to-day Fund investments since November
1, 1995. From April 1994 through August 1995, Mr. Hilt served as portfolio
manager and quantitative analyst for Conseco Capital Management, Inc. From
August 1992 through April 1994, he served as a portfolio manager and
quantitative analyst for PPM America, Inc.
<PAGE>
Investment Factors and Risks Involved
Interest Rate Risk: Changes in interest rate levels affect the value of the
money market instruments in the portfolio and the value of the Fund as a whole.
Credit Risk: The Fund carries the risk that the creditworthiness of some
securities issuers may decline during the Fund's holding period.
For more information on risks, see Additional Investment Factors and Risks
Regarding the Funds on page --.
Expense Summaries and Example
The following expense summaries and example should assist you in understanding
the various recurring and non-recurring costs and expenses you may directly or
indirectly incur with your investment in the Fund.
Shareholder Transaction Expenses
Shareholder transaction expenses are charges you pay when you buy or sell shares
of the Fund. For Class A shares, you do not pay any sales charges or redemption
fees. For Class B shares, we based expenses on the maximum 5% contingent
deferred sales charge, which is reduced by 1% for each year owned.
Shareholder Transaction Expenses Class A Class B
Maximum sales charge imposed on None None
purchases (as a percentage of offering
price)
Maximum sales charge imposed on None None
reinvested dividends
Maximum deferred sales charge None 5%
Redemption fee (The Funds currently None None
charge $12.00 for each wire
redemption.)
Exchange fee None None
Total None 5%
Annual Fund Operating Expenses
The following table, reflects annual operating expenses paid by the Fund. The
annual operating expenses include a management fee paid to the Adviser, 12b-1
distribution and service fees and other expenses for maintaining shareholder
records and furnishing shareholder services, statements and financial reports.
Operating expenses are expressed as a percentage of average net assets for the
fiscal year ended April 30, 1997. We used the maximum investment management and
12b-1 distribution fees permitted under The AAL Mutual Funds Investment Advisory
Agreement and 12b-1 Distribution Plan.
<PAGE>
Annual Fund Operating Expenses (as a Class A Class B
percentage of average net assets)
Management fee .50% .50%
12b-1 distribution and service fees .13% .88%
Other expenses (.08)%* .40%
Total Fund Operating Expenses .55% 1.78%
* Up until 1/01/97, we waived management and 12b-1 fees for the Fund and then
reinstated a .20% management fee for the Fund (we still are waiving the balance
of the management fee of .30%).
Expense Example
The following expense example shows the cumulative expenses attributable to a
hypothetical $1,000 investment with an annual return of 5% compounded annually,
in each class, for the years shown.
Expense Example Class A Class B Class B No Redemption
After 1 year $6 $68 $18
After 3 years $18 $87 $57
After 5 years $31 $98 $98
After 10 years $70 N/A* N/A*
*Class B shares convert into Class A shares after five years.
You should use the expense example for comparison purposes only. It does not
represent the Fund's actual expenses and returns, either past or future.
Financial Highlights
The audited Financial Highlights Table covers The AAL Money Market Fund for the
periods shown. The Fund based the information presented on a share of beneficial
interest outstanding throughout the applicable period. You should read the table
in conjunction with the Funds' financial statements and related notes, all of
which have been audited by the Fund's independent accountants, Price Waterhouse
LLP. At your request, we will provide you, without charge, a copy of The AAL
Mutual Funds Annual Report, dated April 30, 1997, containing these financial
statements and a more detailed discussion and analysis of the Fund's
performance.
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FROM INVESTMENT LESS DISTRIBUTIONS
OPERATIONS
NAV Net Net Total from Dividends Distribution Total NAV: Total Net Assets
Start Investment Realized Investment from Net from Net Dividends End of Return at End of
of Income and Un- Operations Investment Realized and Period for Period
Period (Loss) realized Income Gain on Distributions Period
Gain (Loss) on Investments (1)
Class A shares
1-Mar-88 to
30-Apr-88 $1.00 $0.009 $0.000 $(0.009) $(0.009) $0.000 (0.009) $1.00 0.91% $7,990,507
30-Apr-89 1.00 0.078 0.000 0.078 (0.078) 0.000 (0.078) 1.00 8.10 143,217,501
30-Apr-90 1.00 0.079 0.000 0.079 (0.079) 0.000 (0.079) 1.00 8.24 223,447,573
30-Apr-91 1.00 0.068 0.000 0.068 (0.068) 0.000 (0.068) 1.00 7.07 228,465,749
30-Apr-92 1.00 0.045 0.000 0.045 (0.045) 0.000 (0.045) 1.00 4.54 147,584,931
30-Apr-93 1.00 0.025 0.000 0.025 (0.025) 0.000 (0.025) 1.00 2.53 83,274,493
30-Apr-94 1.00 0.019 0.000 0.019 (0.019) 0.000 (0.019) 1.00 1.95 65,008,303
30-Apr-95 1.00 0.038 0.000 0.038 (0.038) 0.000 (0.038) 1.00 3.92 70,210,675
30-Apr-96 1.00 0.048 0.000 0.048 (0.048) 0.000 (0.048) 1.00 4.94 116,014,091
30-Apr-97 1.00 0.051 0.000 0.051 (0.051) 0.000 (0.051) 1.00 5.21 189,616,902
Class B shares
08-Jan-97 to
30-Apr-97 $1.00 $0.013 $0.000 $0.013 $(0.013) $0.000 $(0.013) $1.00 1.32% $569,097
SUPPLEMENTAL DATA
AND RATIOS
Ratio of Ratio of Portfolio
Net Net Turnover
Operating Investment
Expenses Income (Loss)
to Average to Average
Net Assets Net Assets*
(2) (2)
Class A shares
1-Mar-88 to
30-Apr-88 0.07% 7.06% NA
30-Apr-89 0.76 8.29 NA
30-Apr-90 1.04 7.84 NA
30-Apr-91 1.07 6.85 NA
30-Apr-92 1.11 4.56 NA
30-Apr-93 1.13 2.53 NA
30-Apr-94 1.26 2.00 NA
30-Apr-95 1.17 3.95 NA
30-Apr-96 0.83 4.89 NA
30-Apr-97 0.55 4.91 NA
Class B shares
08-Jan-97 to
30-Apr-97 1.78% 3.81% NA
</TABLE>
*If the Fund had paid all of its expenses for Class A shares and Class B shares,
the ratios would be as follows:
Class A shares - ratio of net operating expenses to average net assets (2):
1.76%, 1.18%, 1.04%, 1.07%, 1.11%, 1.27%, 1.51%, 1.42%, 1.28% and 1.10%.
Class B shares - ratio of net operating expenses to average net assets (2):
3.54%
Class A shares - ratio of net investment income (loss) to average net assets
(2): 5.37%, 7.87%, 7.84%, 6.85%, 4.56%, 2.38%, 1.75%, 3.70%, 4.46% and 4.36%.
Class B shares - ratio of net investment income (loss) to average net assets
(2): 2.05%
(1) Total return assumes reinvestment of all dividends and distributions but
does not reflect any deductions for sales charges. The aggregate (not
annualized) total return is shown for periods less than one year.
(2) For periods less than one year, both the ratio of net operating expenses to
average net assets and the ratio of net investment income (loss) to average net
assets are calculated on an annualized basis.
<PAGE>
Additional Investment Factors and Risks Regarding the Funds
Temporary Defensive Purposes
We have a temporary defensive position policy that allows us to invest up to
100% of a Fund'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:
o Securities issued or guaranteed by the U.S. government or its agencies or
instrumentalities;
o Commercial paper rated at the time of purchase in the highest rating
category by NRSROs; and
o Bank obligations, including repurchase agreements, of banks having total
assets in excess of $1 billion.
We may invest up to 100% of The AAL International Fund's total assets in U.S.
securities or in securities primarily traded in one or more foreign countries,
or in debt securities to a greater extent than 20%.
Interest Rate Risk
For The AAL Bond, Municipal Bond, High Yield Bond and Money Market Funds and, to
some extent, The AAL Equity Income Fund, you can expect that interest rate
changes will significantly impact upon the value of your Fund investments.
Interest rates are influenced by supply and demand as well as economic monetary
policies. In general, a decline in prevailing interest rate levels generally
will increase the value of the securities, particularly the bonds, held in a
Fund's portfolio and vice versa. As a result, interest rate fluctuations will
affect a Fund's net asset values but not the income received from its existing
portfolio. 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 Funds will vary over time, we cannot assure a
specific yield on a Fund's shares.
Longer-term bonds are more sensitive to interest rate changes than shorter-term
bonds, reflecting the greater risk of holding these bonds for a longer period of
time. Longer-term bond prices increase more dramatically when interest rates
fall and decrease more dramatically when interest rates rise. Prices of
short-term debt, such as money market instruments, are less price sensitive to
interest rate changes because of their short durations.
Income-producing equity securities generally pay higher than average dividends.
Due to the regular payment of higher dividends, these securities, like bonds,
are more sensitive to interest rate levels than other equity securities.
Investing in Bonds Versus Investing in a Mutual Fund
Investing in a mutual fund that owns bonds is not the same as buying an
individual bond. Both bonds and funds owning bonds offer regular income. While
individual bonds can offer a fixed amount of regular income until maturity, a
mutual fund 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 mutual fund owning bonds.
<PAGE>
Investment Grade and Medium Grade Bond Investments
The AAL International, Equity Income, Bond, Municipal Bond and High Yield Bond
Funds may purchase investment grade bonds. A debt or other fixed-income security
is considered investment grade if it is rated investment grade by a NRSRO, such
as BBB or better by Duff and Phelps Credit Rating Co. ("D&P") and Standard &
Poor's Corporation ("S&P") or Baa or better by Moody's Investors Services, Inc.
("Moody's"). Securities rated in the fourth highest category, such as BBB by D&P
or S&P or Baa by Moody's, are considered medium grade bonds and have more
sensitivity to economic changes and speculative characteristics. If a bond in a
Fund has lost its rating or has had its rating reduced, the Fund does not have
to sell the security, but the Adviser will consider the lost or reduced rating
in determining whether that Fund should continue to hold the bond.
High Yield Bond Investments
We may invest in high yield bonds for The AAL International (up to 20% of total
assets), Equity Income (up to 5% of total assets) and High Yield Bond Funds. 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.
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 and
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 Funds' portfolios, our judgment will play a greater role in valuing
the securities.
Mortgage-Backed Securities
For The AAL Bond and High Yield Bond Funds, we may invest in mortgage-backed
securities with amortizing payments consisting of both interest and principal
and prepayment privileges (the ability to prepay the principal or a portion
thereof without penalty). Mortgaged-backed securities represent interest in
pools of mortgage loans made by lenders such as savings and loan institutions,
mortgage bankers, commercial banks and others. Various government,
government-related and private organizations combine these mortgages for sale to
investors (i.e., the Government National Mortgage Association ("GNMA")
guarantees and issues mortgage-backed securities). Mortgage-backed securities
generally provide for a "pass through" of monthly payments made by individual
borrowers on their residential mortgage
<PAGE>
loans, net of any fees paid to the issuer or guarantor of the securities. The
yield on these securities applies only to the unpaid principal balance.
We reinvest the periodic payments of principal and interest and prepayments, if
any, in securities at the prevailing market interest rates. The prevailing rates
may be higher or lower than the rate on the original investment. During periods
of declining interest rates, prepayment of mortgages underlying mortgage-backed
securities tend to accelerate. Accordingly, any prepayments on mortgage-backed
securities that we hold for a Fund reduce our ability to maintain positions in
high-yielding, mortgage-backed securities and reinvest the principal at
comparable yields for the Fund. If we buy any mortgage-backed securities for a
Fund at a premium, the Fund receives prepayments, if any, at par or stated
value, which lowers the return on the Fund.
Dollar Rolls
For The AAL Bond Fund, we may enter into dollar rolls, in which we sell
mortgage-backed securities for delivery in the current month and simultaneously
contract to purchase substantially similar mortgage-backed securities on a
specified future date. Substantially similar mortgage-backed securities will be
of the same type and will have the same interest rate as the mortgage-backed
securities sold, but will be supported by different pools of mortgages. We forgo
principal and interest paid during the roll period on the securities sold in a
dollar roll, but we are compensated by the difference between the current sales
price and the lower price for the future purchase as well as by any interest
earned on the proceeds of the securities sold. We also could be compensated
through the receipt of fee income equivalent to a lower forward price. When
required by the SEC guidelines, we will set aside permissible liquid assets in a
segregated account to secure the Fund's obligation for the forward commitment to
buy back substantially similar mortgage-backed securities.
For more information on the risks associated with a dollar roll strategy, please
see the Statement of Additional Information.
Portfolio Turnover
We expect The AAL Mid Cap Stock, Small Cap Stock, Equity Income, Bond, Municipal
Bond and High Yield Bond Funds to have portfolio turnover greater than 100%, and
the other Funds to have a portfolio turnover of less than 100%. We do not
calculate a portfolio turnover rate for The AAL Money Market Fund 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 Fund and may realize more taxable gains than in portfolios
with less turnover, which may result in an increase in a Fund's expenses and
lower returns for shareholders. We may trade for a Fund at a portfolio rate
significantly exceeding 100% (i.e., 300% or more for The AAL Bond Fund), 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
<PAGE>
sections entitled "Portfolio Transactions," "Dividends, Distributions, and
Taxes," and "Yield and Performance Information."
Repurchase Agreements and Borrowing
To earn income on available cash or for temporary defensive purposes, we may
invest in repurchase agreements for the Funds. We must hold an amount of cash or
government securities at least equal to the market value of the securities held
pursuant to the agreement. In the event of a bankruptcy or other default of a
seller of a repurchase agreement, we may experience delays and expenses in
liquidating the securities, declines in the securities' value and loss of
interest for a Fund.
We may borrow money, but only from banks and only for temporary or emergency
purposes. We may not borrow more than 10% of a Fund's net assets and we must
repay any amount we borrow for a Fund before we can buy additional securities.
When-Issued and Delayed Delivery Securities
To ensure the availability of suitable securities, we may buy when-issued or
delayed delivery securities for The AAL International, Equity Income, Bond,
Municipal Bond, High Yield Bond and Money Market Funds. Generally, we will not
pay for when-issued securities or start earning interest until we have received
the underlying securities for the Funds. We do not speculate in when-issued
securities for the Funds. 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 Fund.
Lending Portfolio Securities
To generate additional income, we may from time to time lend securities from a
Fund's portfolios to brokers, dealers and financial institutions such as banks
and trust companies. You will find a full explanation of portfolio securities
lending and the restrictions thereon in the Statement of Additional Information.
Presently, we do not intend to lend portfolio securities for the Funds.
Illiquid and Restricted Securities
Except for The AAL Money Market Fund, we may hold up to 15% of a Fund's net
assets in illiquid securities. We may hold up to 10% of The AAL Money Market
Fund's net assets in restricted and other 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 Fund, 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
<PAGE>
active market may not exist for illiquid securities, we may experience delays
and additional cost when trying to sell illiquid securities. For more
information on restricted and other illiquid securities regarding The AAL Money
Market Fund, please refer to the Statement of Additional Information, "Privately
Issued Securities: The AAL Money Market Fund." The Board of Trustees has
established procedures for determining the liquidity of Fund securities and has
delegated the day-to-day liquidity determinations to the Adviser.
Subject to the limitations for illiquid investments stated above, we may
purchase liquid restricted securities eligible for resale under Rule 144A under
the Securities Act of 1933 (the "Act"), without regard to the 15% or 10%
limitation. Rule 144A permits certain qualified institutional buyers, such as
the Funds, to trade in privately placed securities not registered under the Act.
Institutional markets for restricted securities have developed as a result of
Rule 144A, providing both readily ascertainable market values for 144A
securities and the ability to liquidate these investments to satisfy redemption
orders. However, an insufficient number of qualified institutional buyers
interested in purchasing certain Rule 144A securities held by a Fund could
adversely affect their marketability, causing us to sell the securities at
unfavorable prices.
Variable Rate Demand Notes
All of the Funds may purchase variable rate securities. The AAL Money Market
Fund 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.
Futures Contracts and Options
Except for The AAL Money Market Fund, we may engage in options, futures and
options on futures transactions for the Funds, but only for bona fide hedging or
other permissible risk management purposes. Generally, we do not make these
investments if the initial margin deposits and premiums paid for unexpired
options exceed 5% of a Fund's total assets. In addition, we do not:
o Commit more than 25% of a Fund's net assets to such instruments;
o Commit more than 25% of a Fund's net assets to covered options; or
<PAGE>
o Commit more than 5% of a Fund's net assets to the premiums for put or call
options.
Our options transactions and short sale transactions only consist of techniques
to hedge an unrealized gain on portfolio securities, such as:
1) selling short against the box, which involves selling short securities a
Fund already owns for delivery at a later date;
2) purchasing covered put options on portfolio securities, which allows us to
sell a Fund's securities to the writer (seller) of the option at a set
price on or before the expiration date of the option;
3) selling covered call options, which allows the holder of the options
written by us for a Fund to purchase securities at a set price before the
expiration date; and
4) entering into closing transactions with respect to such options.
If we sell a security short against the box for a Fund, we may protect
unrealized gains, but we may lose the opportunity to profit on such securities
for the Fund if the price rises. When we purchase covered put options for a
Fund, we pay the premiums for the options. We receive options for a Fund when we
write (sell) covered call options. The premiums we receive for a Fund from
writing (selling) covered call options may be completely or partially offset by
any declines in the prices of the underlying securities.
Also, we may purchase stock index options, write covered stock index options and
enter into closing transactions on these options.
We deal only in exchange-traded or over-the-counter options on securities and
stock indexes.
Our futures transactions for the Funds may include instruments such as interest
rate and index futures contracts and options thereon. We may use futures
transactions for several reasons, including: (1) hedging unrealized portfolio
gains; (2) minimizing adverse principal fluctuations in a Fund's debt and
fixed-income securities; or (3) as a means of adjusting exposure to various
markets.
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 Fund'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 Fund than it would have had if we had not attempted the
hedging transaction. In the absence of the
<PAGE>
ability to hedge, however, we might take portfolio actions in anticipation of
the same market movements with similar investment results, but, presumably, at
greater transaction costs.
Foreign Currency Transactions
Foreign securities have currency risk, meaning the risk that changes in foreign
currency exchange rates and exchange control regulations will affect favorably
or unfavorably the U.S. dollar value of these securities (and any income
generated thereon). To manage this risk and facilitate the purchase and sale of
foreign securities for a Fund, we may engage in foreign currency transactions
involving: (1) the purchase and sale of forward foreign currency exchange
contracts (agreements to exchange one currency for another at a future date);
(2) options on foreign currencies; (3) currency futures contracts; or (4)
options on currency futures contracts. Although we use foreign currency
transactions to protect against adverse currency movements, they involve the
risk that we may not accurately predict the currency movements, which could
adversely affect a Fund's total return. We set forth further information on
foreign securities and currency transactions in the Statement of Additional
Information.
Foreign Securities
The AAL Capital Growth, Mid Cap Stock, Small Cap Stock, International and Equity
Income Funds may invest in foreign securities domestically through depository
receipts (i.e., American Depository Receipts ("ADRs")) and securities of foreign
issuers traded on a U.S. national securities exchange or the NASDAQ National
Market System. The AAL Bond and High Yield Bond Funds may invest up to 20% of
its net assets in debt securities of foreign issuers that are payable in U.S.
dollars. 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.
Risks of Investing in Foreign Securities
Currency Risk
Even though a Fund may hold securities denominated or traded in foreign
securities, we measure a Fund's performance in terms of U.S. dollars, which may
subject the Fund to foreign currency risk. Foreign currency risk is the risk
that the U.S. dollar value of foreign securities (and any income generated
therefrom) held by a Fund may be affected favorably or unfavorably by changes in
foreign currency exchange rates and exchange control regulations. Therefore, the
net asset value of a Fund may go up or down as the value of the dollar rises or
falls compared to a foreign currency.
Liquidity Risk
Foreign markets or exchanges tend to have less trading volume than the New York
Stock Exchange or other domestic stock exchanges or markets, meaning the foreign
market may
<PAGE>
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 Fund. 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 Funds do not value their portfolios.
This means that a Fund's Net Asset Value can change on days when a shareholder
cannot access his or her account. We may incur extra costs for a Fund when
involved in currency hedging. For example, restrictions on converting a foreign
currency into U.S. dollars may adversely affect the value of a Fund.
Political, Economic and Market Risks
The degree of political and economic stability varies from country to country.
If a country expropriates money from foreigners or nationalizes an industry, a
Fund 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 Fund's investment in any foreign country.
Governmental Regulation
Many foreign countries do not subject their markets to the same degree and type
of laws and regulations that cover the U.S. markets. Also, many foreign
governments impose restrictions on investments in their capital markets as well
as taxes or other restrictions on repatriation of investment income. The
regulatory differences in some foreign countries make investing or trading in
their markets more difficult and risky.
Nonuniform Corporate Disclosure Standards
Many countries have laws making information on publicly-traded companies, banks
and governments unavailable, more difficult to obtain, incomplete or
unavailable. The lack of uniform accounting standards and practices among
countries impairs the ability of investors to compare common valuation measures,
such as price/earnings ratios, as applied to securities of different countries.
Investment Restrictions
In addition to specific investment restrictions described in the SAI, only a
vote of the majority of the outstanding shares can change:
o The investment objective of a Fund;
<PAGE>
o The policies on borrowing and lending securities;
o The restriction on concentrating investments in a single industry, which
limits a Fund from investing more than 25% of its net assets (25% of the
total assets for The AAL International, Small Cap Stock and High Yield Bond
Funds) in any single industry. This restriction does not apply to
securities issued or guaranteed by the U.S. government, its agencies or
instrumentalities ; and
o The restriction requiring issuer diversification by limiting a Fund from
investing more than 5% of its net assets in a single issuer, except that up
to 25% of its net assets may be invested without regard to this limitation.
This restriction does not apply to securities issued or guaranteed by the
U.S. government, its agencies or instrumentalities.
With the exception of the fundamental investment policy requiring us to invest
at least 80% of The AAL Municipal Bond Fund's net assets in municipal
securities, the Board of Trustees may change any of the Funds' other investment
policies without shareholder approval. For example, the Board of Trustees may
change the policies regarding specific investments, discussed above (other than
the policies on borrowing and securities lending). We have included a
description of all of the investment restrictions applicable to the Funds in the
Statement of Additional Information.
Board of Trustees
Our Board of Trustees* decides matters of general policy and reviews the
activities of the Adviser and the officers who conduct and supervise the daily
business operations of the Funds.
The Trustees, their business addresses and principal occupations during the past
five years are:
John H. Pender,** P.O. Box 250 Dunbar WV 25064 DOB 5/25/30 Chairman of the Board
of Trustees and from 1987 through May 1996, President of the Funds; Prior to
1996, Senior Vice President and Chief Investment Officer, Aid Association for
Lutherans (fraternal benefit society) and prior to 1992, Treasurer
<PAGE>
F. Gregory Campbell
2001 Alford Park Drive
Kenosha, WI 53140
DOB 12/16/39
Trustee; President of Carthage College, Kenosha, WI; Director, Kenosha Hospital
and Medical Center; Chairman, WI Assoc. of Independent Colleges and
Universities; Board Member, Kenosha Area Development; and Board Member, Prarie
High School
Richard L. Gady
One Central Park Plaza
Omaha, NE 68102
DOB 2/28/43
Trustee; and Vice President, Public Affairs and Chief Economist, ConAgra, Inc.
(a food and agriculture corporation)
D.W. Russler
P.O. Box 84
Minocqua, WI 54548
DOB 10/28/28
Trustee; from 1984 through 1988, Senior Vice President, Finance and
Administration, NCR Corporation; Director, Capital Markets Assurance Corporation
(reinsurance); and Member, Advisory Board -- Saratoga Partners II and III
(corporate buy-out limited partnership)
Lawrence M. Woods
P.O. Box 1860
Worland, WY 82401
DOB 4/14/32
Trustee; and Former Executive Vice President and Director, Mobile Oil Corp.
(international oil company)
Richard L. Gunderson**
10801 E. Happy Valley Road, # 67
Scottsdale, AZ 85255
DOB 6/14/33
Trustee: Chairman of the Board of Directors and from 1985 through 1996, Chief
Executive Officer, and from 1985 through 1995, President, Aid Association for
Lutherans (fraternal benefit society); Trustee, Lawrence University; and
Director, Banta Corp. (diversified printer and publisher)
Ronald G. Anderson** 4321 North Ballard Road Appleton, WI 54919 DOB 10/2/48
Trustee and President; Senior Vice President, CFO and CIO, Aid Association for
Lutherans; President, AAL Capital Management Corporation; Director, General Re -
CKAG Reinsurance and Investment S.ar.L. (Luxembourg reinsurance corporation);
and From 1991 through 1996, Chairman, General Re Financial Products and from
1995 through 1996, Vice President Corporate Development, General Re (both
reinsurance)
<PAGE>
* All of the Trustees except for Mr. Pender and Mr. Gunderson are Directors
of the AAL Variable Product Series Fund, Inc.
** Denotes an "interested person" of the Funds as defined in the Investment
Company Act of 1940.
MANAGEMENT OF THE TRUST
The Adviser
Under an Investment Advisory Agreement with the Trust, and subject to the
supervision of the Funds' Board of Trustees, the Adviser manages the investment
and reinvestment of the Funds' assets, provides the Funds with personnel,
facilities, and administrative services, and supervises the Funds' daily
business affairs. The Adviser formulates and implements a continuous investment
program for the Funds consistent with each Fund's investment objectives,
policies and restrictions.
The Adviser provides office space as well as executive and other personnel to
the Funds. In addition to investment advisory fees, each Fund incurs the
following expenses: legal, auditing and accounting expenses; trustees' fees and
expenses; insurance premiums; brokers' commissions; taxes and governmental fees;
expenses of issuing and redeeming shares; organizational expenses; expenses of
registering or qualifying shares for sale; postage and printing for reports and
notices to shareholders; fees and disbursements of the Custodian and Transfer
Agent; certain expenses with respect to membership fees of industry
associations; and any extraordinary expenses, such as litigation expenses.
We have engaged Societe Generale Asset Management Corp., 1221 Avenue of the
Americas, New York, NY 10020, to act as Sub-Adviser for The AAL International
Fund. The Sub-Adviser has registered as an investment adviser under the
securities laws. Societe Generale, which is one of France's largest banks,
indirectly owns the Sub-Adviser. Pursuant to the Sub-Advisory Agreement, the
Sub-Adviser, subject to the direction of the Adviser and the Board of Trustees,
determines the securities that The AAL International Fund purchases or sells and
renders other assistance to the Adviser in formulating and implementing the
investment program for the Fund.
Portfolio Transactions
The Adviser directs the placement of orders for the purchase and sale of the
Funds' portfolio securities. In directing orders, the Adviser will consider a
number of factors to attain what it believes is the best combination of price
and execution for the Funds, including: when it believes that more than one
broker or dealer is capable of providing the best combination of price and
execution in a transaction. The Adviser normally will select a broker or dealer
who furnishes research services.
<PAGE>
The Adviser may have other clients for which it is making investment and order
placement decisions similar to the Funds. When making simultaneous purchases or
sales for the Funds and another client, if any, the Adviser's decisions could
have a detrimental effect on the price or volume of the securities purchased or
sold for the Funds. In other cases, simultaneous purchases or sales of
securities for the Funds and other clients could provide the Funds with the
ability to participate in volume transactions that may cost less per share or
unit traded than smaller transactions.
BUYING SHARES IN THE FUNDS
You can buy two classes of shares in the Funds, Class A and Class B through a
licensed registered representative, by mail or wire transfer. Sales charges and
ongoing asset based distribution fees mark the primary differences between Class
A and Class B shares. We describe the differences between the types of shares
below.
Class A Shares
Sales Charges
You buy Class A shares of each Fund, except for The AAL Money Market Fund, at
net asset value ("NAV") plus a maximum sales charge of 4.00% of the public
offering price ("POP") incurred at the time of purchase. As a result, we do not
impose a sales charge when an investor redeems Class A shares of a Fund. We may
reduce or waive sales charges on certain purchases. The chart below shows the
sales charge percentage for Class A shares imposed at different dollar level
purchases.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Your Investment Sales Charge as a Sales Charge as a 50% Sales Charge 50% Sales Charge
Amount % of POP % of Net Amount as a % of POP as a % of Net
Invested Amount Invested
Less than $25,000 4.00% 4.17% 2.00% 2.04%
$25,000 but less 3.75% 3.90% 1.88% 1.91%
than $50,000
$50,000 but less 3.00% 3.09% 1.50% 1.52%
than $100,000
$100,000* but less 2.00% 2.04% 1.00% 1.01%
than $250,000
$250,000 but less 1.00% 1.01% 0.50% 0.50%
than $500,000
$500,000 and up** 0.00% 0.00% 0.00% 0.00%
</TABLE>
* You should purchase Class A shares at this level of investment and above.
** Registered Representatives may receive compensation not exceeding .50 of 1%
of amounts invested at this purchase level.
<PAGE>
You buy Class A shares of The AAL Money Market Fund at net asset value without a
sales charge and you do not pay a fee upon redemption.
Reducing Your Sales Charge
We may reduce your sales charges on purchases of Class A shares under certain
circumstances, described below. If you are eligible for one of these reductions,
you must tell us or your Registered Representative at the time you purchase
Class A shares or you may or may not receive the reduction. Trustees, directors
and employees of the Funds and the Adviser and Sub-Adviser, as well as persons
licensed to receive commissions for sales of The Funds may not pay a sales
charge on their purchases or on purchases made by family members residing with
them. We reserve the right to stop or change these reductions at any time.
50% Reduction. Non-profit organizations, charitable trusts, charitable remainder
unitrusts, endowments, AAL branches and congregations pay only 50% of the normal
sales charge so long as there is a meaningful Lutheran affiliation. The
reduction does not apply to 403(b)(7) Retirement Plan Accounts.
Right of Accumulation. You can combine all your Class A and Class B share
purchases, including the purchases of family members who live with you, when
computing your current sales charge for Class A shares. Eligible shares for
combination in computing the sales charge include those contained in individual,
joint tenant, gift/transfer to minor, trust and IRA accounts. Employer sponsored
plans can link the shares in the plan for purposes of calculating a sales charge
reduction. Accumulation includes the value of all Class A shares at the public
offering price, all Class B shares, and reinvested dividends and capital gains.
Letter of Intent
If you expect to invest $25,000 or more during the next 13 months, you can
reduce your sales charge on Class A shares by signing a Letter of Intent. Class
A or Class B share purchases fulfill the Letter of Intent, but you receive a
reduced sales charge on Class A shares only. You can include purchases in
accounts you have linked for purposes of the Right of Accumulation, and you can
back date a Letter of Intent to include purchases made in the last 90 days.
However, we do not recalculate the sales charge on prior purchases.
You do not have any obligation to buy additional shares. During the Letter of
Intent period, we will escrow shares totaling 5% of the investment goal. If for
some reason you do not fulfill the Letter of Intent within the 13-month period,
we will sell escrowed shares to cover any additional sales charges due from you.
You should sign only one Letter of Intent for all accounts combined under Right
of Accumulation.
<PAGE>
Share purchases in The AAL Money Market Fund do not apply toward your Letter of
Intent, unless you paid a sales charge and exchanged them into shares of The AAL
Money Market Fund.
Class B Shares
You buy Class B shares of each Fund at net asset value with no initial sales
charge . However, you may pay a contingent deferred sales charge (expressed as a
percentage of the lesser of the current net asset value or original cost) of up
to 5% if you redeem shares within five years after purchase. We do not impose a
contingent deferred sales charge on shares you acquire through the reinvestment
of dividends and capital gains. To reduce your cost, when you redeem shares in a
Fund, you will redeem either shares that are not subject to a contingent
deferred sales charge (i.e., those bought through reinvestment of dividends and
capital gains) or shares with the lowest contingent deferred sales charge. We
waive the contingent deferred sales charge upon redemption of shares following
the death or disability of a shareholder or for mandatory or hardship
distributions from retirement plans, IRAs and 403(b) plans or to meet certain
retirement plan requirements. Also, we reduce the amount of a contingent
deferred sales charge depending on the amount of years from the purchase of
Class B shares until the sale of those shares according to the following table:
Years after Purchase Deferred Sales Charge on Shares Being Sold
1st year 5.00%
2nd year 4.00%
3rd year 3.00%
4th year 2.00%
5th year 1.00%
After 5th year 0.00%
We base the sales charge on the lesser of the net asset value of the shares at
the time of the purchase or at the time of the sale.
You should not consider buying Class B shares if you can elect the 50% reduction
for purchases of Class A shares or you are investing $100,000 or more in the
Funds. Also, because of the higher expenses, you should not consider buying
Class B shares of The AAL Money Market Fund unless you intend to exchange them
for other Class B shares or as part of The AAL Mutual Funds Capital Builder Plan
(see page ___).
<PAGE>
Conversion to Class A Shares
Your Class B shares automatically convert to Class A shares after 5 years from
the purchase date, reducing future annual expenses. Class B shares provide the
benefit of putting all of your dollars to work from the time you make your
investment. However, until your Class B shares convert to Class A shares, you
will have a higher expense ratio, receive lower dividends and may have a lower
net asset value than Class A shares due to the higher 12b-1 fees.
You should consider the amount and intended length of time of your investment
when determining which share class would benefit you the most. In general, if
you intend to make a large investment, thus qualifying for a reduced sales
charge, you might consider purchasing Class A shares. If you intend to make a
smaller investment, you might consider Class B shares because 100% of your
purchase is invested immediately.
Purchase Price
To determine the prices at which you buy shares, we calculate the net asset
value as of the business day on which we receive your order in proper form. The
share price (net asset value per share) will decline on the record dates when
The AAL Capital Growth, Mid Cap Stock, Small Cap Stock, International and Equity
Income Funds distribute dividends and capital gains by the amount of the
distributions. If you buy shares before the record date ("buying the dividend"),
you will pay the full price for shares and then receive a portion of the price
back as a taxable distribution.
<PAGE>
Minimum Purchase Amount per Account per Transaction
Minimum Purchase Amount per Initial Purchase Additional Purchase
Account per Transaction
Regular Account $1,000 $50
IRA $250 $50
Automatic Investment Plan $0 $25
Letter of Intent $25,000
(over a 13-month period)
The Funds may waive the minimum investment amount needed to open or add to an
account for certain employer-sponsored accounts.
Opening a New Account
Your AAL Capital Management Corporation Registered Representative is ready to
help you open a new account. If you do not know the name of your Registered
Representative, please call the Mutual Fund Service Center at 800-553-6319. The
Telecommunications Device for the Deaf (TDD) is 800-684-3416.
To open your account, just follow these steps:
1. After reviewing this prospectus, complete an AAL Mutual Funds
Application and New Account Form, which should be attached to the
prospectus, for every different account registration. For example, you
need separate applications for an individual account in The AAL Bond
Fund and an IRA invested in The AAL Bond Fund. Remember to designate
whether you are purchasing Class A shares or Class B shares. If you
don't complete the application properly, your purchase may be delayed
or rejected;
2. Make your check payable to the Fund you are buying, for example, "The
AAL Bond Fund." If you are buying more than one Fund, make your check
payable to "The AAL Mutual Funds." DO NOT make your check payable to
AAL or AAL Capital Management Corporation; and
3. Mail your completed application and check to:
The AAL Mutual Funds
222 West College Avenue
P.O. Box 8004
Appleton, WI 54913-8004.
Buying Shares for the First Time by Wire
If your bank is a member of or has a corresponding relationship with a member of
the Federal Reserve System, you can buy shares of the Funds by wire transfer by
following these steps:
<PAGE>
1. Call AAL Capital Management Corporation at 800-553-6319 (The AAL Mutual
Funds Service Center ("Service Center")) and provide the following
information:
o Your account registration;
o The name of the Fund(s) in which you want to invest and whether you wish to
buy Class A or Class B shares;
o Your address;
o Your Social Security or tax identification number;
o The dollar amount;
o The name of the wiring bank;
o The name and the telephone number of the person at your bank who the Funds
can contact about your purchase; and
o We must receive your wire order before the closing of the NYSE (normally
3:00 p.m. Central Time) to receive that day's price.
2. Tell your bank to wire your funds as follows:
Firstar National Bank
ABA No. 075000022
For Credit to Firstar Trust Company
Acct. No 112-952-137
For Further Credit to (name of specific AAL Mutual Fund) Account
Registration (name(s) of the shareholders(s)).
3. Call the Service Center and inform them or your incoming wire.
4. Complete The AAL Mutual Funds Application and mail it immediately to:
The AAL Mutual Funds
222 West College Ave.
P.O. Box 8004
Appleton, WI 54913-8004.
Account Registration
<PAGE>
How you register your account with the Funds can affect your legal interests as
well as the rights and interests of your family and beneficiaries. You should
always consult with your legal and/or tax adviser to determine the account
registration that best meets your needs. You must clearly identify the type of
account you want on your AAL Mutual Funds Application.
Some account registrations may require additional documents.
Accounts For Retirement Savings
AAL members, their enterprises and Lutheran organizations may establish their
own individual or business retirement plans. These accounts may offer you tax
advantages. You should consult with your legal and/or tax adviser before you
establish a retirement plan.
A third party maintenance fee may apply to some retirement accounts. Please
review plan documents for more information.
Your AAL Capital Management Corporation Registered Representative will provide
you with all the materials, documents and forms you need, and will work with you
in establishing your retirement plan from among these choices:
o Regular IRA (Individual Retirement Account);
o "Rollover" IRA;
o SEP-IRA (Simplified Employee Pension Plan);
o SARSEP-IRA (Salary Reduction Simplified Employee Pension Plan) No new plans
may start after 1996, but existing plans may continue;
o SIMPLE-IRA (Savings Incentive Match Plan for Employees);
o 403(b)(7) Retirement Plan Account (Legal restrictions apply to your ability
to withdraw funds from this account); and
o Qualified Retirement Plans.
Prestige Account
We provide investors who maintain substantial account balances in one or a
combination of The Funds with additional benefits. You will have exclusive
access to our Prestige Account Network, personalized retirement or education
planning analysis, complimentary investment information, a Prestige Account
organizer and more. Your AAL Capital Management Corporation Registered
Representative can provide you with more detailed information.
<PAGE>
Buying Additional Shares for Your Account
After you have opened an account with The AAL Mutual Funds, you can make
additional investments of $50 or more per account by mail, telephone or wire.
Please put your name and your AAL Mutual Funds Account number on the face of all
investment checks, and make sure your checks are payable to the specific Fund in
which you are investing (for example, "The AAL Bond Fund"). If you are investing
in more than one Fund, make your check payable to "The AAL Mutual Funds." DO NOT
make your check payable to AAL or AAL Capital Management Corporation. Some
retirement accounts, such as the 403(b)(7) Retirement Plan, may allow you to
make investments only by deferring part of your salary.
By Mail
Regular Mail: Express Mail/Private Delivery:
The AAL Mutual Funds The AAL Mutual Funds
c/o Firstar Trust Company c/o Firstar Trust Company
615 East Michigan Street Mutual Funds Services, Third Floor
P.O. Box 2981 615 East Michigan Street
Milwaukee, WI 53201-2981 Milwaukee, WI 53202
By Wire
Follow the directions listed under "Buying Shares for the First Time by Wire" on
page ___.
By Telephone
Before you can buy additional shares by telephone, you must have selected the
Request for Telephone Purchase option on the application. Once you have selected
this option, you can call the Mutual Fund Service Center and we will withdraw
money from your bank checking or savings account to make your investment. You
pay the next price computed after the Funds have received your investment from
your bank, which is usually three business days after you authorize the
transfer. If you need to invest sooner, you should consider making a bank wire
purchase.
Automatic Investment Plans
To make regular investing more convenient, you can open an automatic investment
plan with no initial investment and a minimum of $25 per account per transaction
after you start your plan. Your AAL Capital Management Corporation Registered
Representative is ready to help you set up one of the following plans.
The Bank Draft Plan allows you to make regular investments in The AAL Mutual
Funds directly from your checking or savings account. The following rules and/or
guidelines apply:
<PAGE>
o You can select up to two transaction dates per month (at least 10 days
apart). If you don't select the date(s), the money will automatically be
withdrawn from your bank account on the 5th of the month;
o To start the plan or change your bank account, you must notify us in
writing at least 13 business days prior to the transaction date. All bank
account owners must sign the bank draft plan card;
o To stop or change the amount of your plan, you must tell us at least 5
business days prior to the transaction date; and
o Make sure you have enough money in your bank account to make the investment
so you can avoid paying any possible fees from your bank or our Transfer
Agent.
The Capital Builder Plan allows you to transfer money every month from your AAL
Money Market Fund Account into another AAL Mutual Funds Account. The following
rules and/or guidelines apply:
o You can select the transaction date. If you don't select the date, we will
automatically transfer the money from your account on the 15th of the
month;
o To start the plan, you must notify us in writing at least 24 hours prior to
the transaction date. You must have all account owners sign the Capital
Builder Plan Card; and
o To stop or change the amount of your plan, you must tell us at least 24
hours prior to the transaction date.
The Payroll Deduction Savings and Investment Plan allows employees of AAL,
employees of Lutheran-affiliated institutions and Lutheran employees whose
employers agree to invest in The AAL Mutual Funds through direct deduction from
their paychecks or commission checks.
The Government Allotment Plan allows Lutheran Social Security recipients,
federal employees and military personnel to invest in The AAL Mutual Funds
through direct deduction from their paychecks.
Using The AAL Mutual Funds Automatic Investment Plans, you may implement a
strategy called dollar cost averaging. Dollar cost averaging involves investing
a fixed amount of money at regular intervals. When you "dollar cost average,"
you purchase more shares when the price is low and fewer shares when the price
is high. Dollar cost averaging does not ensure a profit or protect against a
loss during declining markets. Because such a program involves continuous
investment regardless of changing share prices, you should consider your ability
to continue the program through times when the share prices are low.
ADDITIONAL INFORMATION ABOUT BUYING SHARES
<PAGE>
Earning Income
You begin earning income, if any, on your shares on the business day following
the day our Transfer Agent receives your payment.
Purchases
Your purchase must be in U.S. dollars and your check must be drawn on a U.S.
bank. We do not accept cash or traveler's checks. If your check does not clear,
we will cancel your purchase and hold you liable for any losses and any
applicable fees. When you buy shares by check, electronic funds transfer or
automatic investment purchase, you may not be able the redeem the shares you
purchased for 12 days or until your check has cleared, whichever is later. This
does not limit your right to redeem shares. Rather, it operates to make sure
that payment for the shares redeemed has been received by the Transfer Agent.
Confirmation
We generally mail written confirmation of your purchases, except for The AAL
Money Market Fund, within two business days following the date of your purchase.
We mail confirmation of additional purchases in The AAL Money Market Fund
monthly. We mail confirmation of your automatic investment plan purchases at
least quarterly.
Share Certificates
We issue share certificates only upon written request, and then only for full
shares. You must make a new written request for a share certificate each time
you purchase shares. We do not charge a fee to issue share certificates. If you
have asked for or have received share certificates, you cannot use certain
shareholder services, including wire,check and telephone redemption, share
exchange and any systematic withdrawal. Before you can redeem, transfer or
exchange your shares, you must deliver the share certificates to our Transfer
Agent in negotiable form (with a signature guarantee). We may not have share
certificates available for some retirement accounts.
Other Information
The U.S. Postal Service or private delivery services are not agents of the
Funds, the Distributor, or the Transfer Agent. We do not legally receive your
purchase application or your request for redemption when you deposit them in the
mail, send them with a private delivery service or when you deposit them in our
Post Office Box. We must have physical possession of your request to consider
your request received. Current law will determine the legal effect of posting
for deadline purposes.
We reserve the right to suspend the offering of shares for a period of time and
the right to reject any specific purchase of shares.
<PAGE>
SELLING (REDEEMING) YOUR SHARES
You can sell your shares on any business day. When you sell your shares you
receive the net asset value per share. If we receive your request in good order,
which means including all the information listed below, before the close of the
NYSE (normally 3:00 p.m. Central Time) you will receive that day's price. If we
receive your redemption request in good order on a holiday, weekend or a day the
NYSE is closed, we will process your transaction on the next business day. You
can sell shares several ways. Please note that transfers via Electronic Funds
Transfer (EFT) generally take up to three business days to reach your bank
account.
By Mail
Please include the following in your redemption request:
o Name(s) of the account owner(s);
o Account number(s);
o Amount you want to receive or the number of shares you want to sell;
o Tax withholding information, if required, for retirement accounts; and
o Signatures of all account owners.
You must have your signature guaranteed if:
1. You want to sell shares with a value of more than $25,000;
2. You want the proceeds sent to an address other than the one listed for your
account;
3. You want the check payable to someone other than the account owner(s); or
4. You hold share certificates (you must return the signed certificates with
your request).
You can usually obtain a signature guarantee at commercial banks, trust
companies or broker-dealers. A SIGNATURE GUARANTEE IS NOT THE SAME THING AS A
NOTARIZED SIGNATURE. Accounts held by a corporation, trust, estate,
custodianship, guardianship, partnership or pension and profit sharing plan may
require more documentation.
Mail to:
<PAGE>
Regular Mail: Express Mail/Private Delivery:
The AAL Mutual Funds The AAL Mutual Funds
c/o Firstar Trust Company c/o Firstar Trust Company
P.O. Box 2981 Mutual Funds Services, Third Floor
615 East Michigan Street 615 East Michigan Street
Milwaukee, WI 53201-2981 Milwaukee, WI 53202
By Telephone
To make investing in the Funds more convenient, you may buy, sell or exchange
shares by telephone. We have established reasonable procedures to protect
against anyone who attempts to use the telephone service fraudulently. Please be
aware, however, that The AAL Mutual Funds, AAL Capital Management Corporation,
the Custodian, the Transfer Agent or any of their employees will not be liable
for losses suffered by you that result from following telephone instructions
reasonably believed to be authentic after verification pursuant to these
procedures. Once you have made a telephone request you cannot cancel or modify
it! During periods of extreme volume caused by dramatic economic or stock market
changes, or when the telephone system is not fully functional, you may have
difficulty reaching us by telephone and telephone transactions may be difficult
to implement at those times. We reserve the right to temporarily discontinue or
limit the telephone purchase, redemption or exchange privileges at any time
during such periods.
The following rules and/or guidelines for selling by telephone apply:
o You must call the Mutual Fund Service Center at 800-553-6319;
o You must provide a form of personal identification to confirm your
identity;
o You can sell up to $25,000 worth of shares;
o The Funds will mail a check only to the person(s) named on the account
registration and only to the address on the account;
o Retirement plan accounts are not eligible;
o You cannot sell shares in certificate form by telephone;
o You can do only one telephone redemption within any 30-day period for each
authorized account;
o Telephone redemptions are not available if the address on the account has
been changed in the preceding 60 days; and
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o If we receive your request in good order before the close of the NYSE
(normally 3:00 p.m. Central Time), you will receive that day's price.
By Wire
The following rules and/or guidelines for selling by wire apply:
o You must give us written authorization, including the signatures of all the
owners of the account, on The AAL Mutual Funds Application or Change Form;
o You can make a wire redemption for any amount;
o You pay a $12.00 fee for each wire redemption;
o We must receive your request in good order before the close of the NYSE
(normally 3:00 p.m. Central Time) for you to receive that day's price; and
o Wire redemptions may not be available to you for all retirement account
plans.
Systematic Withdrawal Plan (usually only appropriate for Class A Shares)
You can have money automatically withdrawn from your AAL Mutual Funds account(s)
on a regular basis by using our systematic withdrawal plan. The plan allows you
to receive funds or pay a bill at regular intervals. The following rules and/or
guidelines apply:
o You need a minimum of $5,000 in your account to start the plan;
o You can select the date(s) on which the money is withdrawn. If you don't
select the date(s), we will withdraw the money automatically from your
account on the 15th of the month:
o To start the plan or change the payee(s), you must notify us in writing at
least 13 business days prior to the first withdrawal and you must have all
account owner(s) sign the appropriate form;
o To stop or change your plan, you must notify us at least 5 business days
prior to the next withdrawal; and
o Because of sales charges, you must consider carefully the costs of frequent
investments in and withdrawals from your account.
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The AAL Money Market Fund Checks (Class A Shares Only)
You can write checks on your AAL Money Market Fund account, if you complete a
check writing signature card and agreement. You can request checks on your AAL
Mutual Funds Application or in writing. We do not charge a fee for supplying
your first set of checks, but charge $2.00 for each additional packet of checks.
The following rules and/or guidelines apply:
o The checks you write on The AAL Money Market Fund must be for $500 or more
(Because the Fund is not a bank, some features, such as stop payment, are
not available);
o Our Transfer Agent may impose reasonable fees for each check that is
returned;
o We do not return your canceled checks. For a fee, our Transfer Agent will
send a copy of your check to you at your request;
o Unless you purchased shares by bank wire, you must wait 12 days after you
purchase The AAL Money Market Fund shares to write checks against that
purchase; and
o You need a written request -- NOT A CHECK -- to close an AAL Money Market
Fund account. Your written request will require a signature guarantee to
close accounts over $25,000.
CLOSING SMALL ACCOUNTS
All AAL Mutual Funds account owners share the high cost of maintaining accounts
with low balances. To reduce this cost, we reserve the right, subject to state
law, to close an account when, due to a redemption, its value is less than $250.
This does not apply to retirement plan accounts. We will notify you in writing
before closing any account, and you will have 30 days to add money to bring the
balance up to $250.
REINSTATEMENT PRIVILEGE (CLASS A SHARES ONLY)
You have 60 days after you sell shares to reinvest the dollar amount you
redeemed without having to pay another sales charge. You will pay the net asset
value per share on the day when you made your reinvestment and not on the day
when you sold your investment. The following rules and/or guidelines apply:
o You may use this privilege only ONCE per account;
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o You must send a written request and a check for the amount you wish to
reinvest to the Funds' Transfer Agent:
Regular Mail: Express Mail/Private Delivery:
The AAL Mutual Funds The AAL Mutual Funds
c/o Firstar Trust Company c/o Firstar Trust Company
P.O. Box 2981 Mutual Funds Services, Third Floor
615 East Michigan Street 615 East Michigan Street
Milwaukee, WI 53201-2981 Milwaukee, WI 53202;
o The dollar amount you reinvest cannot exceed the dollar amount you sold;
and
o The sale of your shares may be a taxable event despite the reinstatement.
EXCHANGE PRIVILEGE
You may exchange shares in an AAL Mutual Fund for shares in another AAL Mutual
Fund without paying any additional sales charge, if you initially paid a sales
charge. For example, if you had purchased Class A shares of The AAL
International Fund and paid the applicable sales charge and wanted to exchange
them for Class A shares of The AAL Bond Fund, you could do so without paying an
additional sales charge. However, if you initially purchased Class A shares of
The AAL Money Market, where you would not have had to pay an initial sales
charge, you would not be able to exchange these shares for another Fund without
paying the applicable sales charge. Also, if you had exchanged Class A shares in
a Fund where you had to pay a sales charge into Class A shares of The AAL Money
Market Fund (so called "privileged shares" once exchanged for Money Market Fund
Shares), you would not have to pay an additional sales charge if you exchanged
these shares for Class A shares in another Fund. Class B shares are purchased at
net asset value without a sales charge, so the issue of paying additional sales
charges does not apply when exchanging Class B shares. The following rules
and/or guidelines apply:
o Minimum investment rules may apply when you open a new account by
exchanging shares, and you may have to submit a new application (i.e., you
must exchange at least $1,000 worth of shares to another Fund and fill out
a new account form, if you have not invested shares in the other AAL Mutual
Fund account before);
o You can exchange for the same class of shares only (for example, Class A
shares for Class A shares and Class B shares for Class B shares);
o You may only exchange into Funds that are legally available for sale in
your state;
o You may have a taxable gain or loss as a result of an exchange;
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o We reserve the right to end this privilege if you make more than 12
exchanges in a year;
o We reserve the right to change or end this privilege upon 60 days notice,
or suspend this privilege without notice when economic or market changes
make it difficult to carry out such transactions; and
o If you have share certificates, you need to sign the certificates, have
your signature guaranteed and return the certificates with your request.
By Mail
Please include the following in your request:
o Name(s) of the account owner(s);
o Account number(s);
o Amount of shares (or dollar amount) you want to exchange;
o The name of the Fund you are exchanging into; and
o Signatures of all account owners.
By Telephone
The guidelines for exchanging by telephone are:
o You can exchange shares by calling the Mutual Fund Service Center at
800-553- 6319;
o When you call us, Mutual Fund Service Representatives will ask for a form
of personal identification to confirm your identity; and
o If we receive your request, in good order, before the close of the NYSE
(normally 3:00 p.m. Central Time), you will receive that day's price.
NET ASSET VALUE (NAV)
We compute the net asset value of a Fund share by adding up the value of the
individual Fund's assets (i.e., stocks and bonds in the Fund's portfolio),
subtracting the Fund's liabilities and dividing the balance by the total number
of shares outstanding. We compute the net asset value of a Fund at the end of
the day after trading on the NYSE closes (normally 3:00
<PAGE>
p.m. Central Time). We do not calculate the net asset value for the Funds on the
days when the NYSE is not open.
We value (or price) securities owned by a Fund at current market value. For
securities with readily available market quotations, we use the quotations to
price the security. If a security does not have a readily available quotation,
we value the security as determined in good faith by or under the direction of
the Board of Trustees. The Board of Trustees may approve the use of pricing
services to assist us in the determination of net asset values.
We value all securities held by The AAL Money Market Fund and money market
instruments with a remaining maturity of 60 days or less held by the other Funds
on an amortized cost basis. We comply with SEC requirements for the use of this
valuation method. For The AAL Money Market Fund, this method of calculation
facilitates, but does not assure, maintaining a constant net asset value of
$1.00 per share.
DIVIDENDS, DISTRIBUTIONS AND TAXES
The Funds endeavor to qualify annually for, and elect tax treatment applicable
to, a regulated investment company under Subchapter M of the Internal Revenue
Code ("Code"). Pursuant to the requirements of the Code, the Funds annually
intend to distribute substantially all of their net investment income and net
realized capital gains, if any, less any available capital loss carryover, to
its shareholders annually, so as to avoid paying income tax on its net
investment income and net realized capital gains or being subject to a federal
excise tax on undistributed net investment income and net realized gains.
Annually, we intend to comply with all of the requirements to qualify as a
regulated investment company for each Fund. Annually, we provide you with full
information on dividends and capital gains distributions for each Fund.
Below, we provide you with a general description of the distribution policies
and some of the tax consequences for the Funds' shareholders. You should always
check with your tax adviser to determine whether any dividends and distributions
paid to you by a Fund are subject to any taxes, including state and local taxes.
The AAL Capital Growth, Mid Cap Stock, Small Cap Stock, International, Equity
Income, Bond, High Yield Bond and Money Market Funds
The dividends from net investment income of each of these Funds, including net
short-term capital gains, are taxable as ordinary income to shareholders whether
paid in additional shares or in cash. Any long-term capital gains distributed to
shareholders are taxable as capital gains to shareholders, whether they receive
them in cash or in additional shares, and regardless of the length of time a
shareholder has owned the shares.
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We distribute substantially all net investment income and any net realized
capital gains, if any, for the Funds as follows:
Fund Dividends (if any) Capital Gains (if any)
- --------------------------------------------------------------------------------
The AAL Capital Growth Fund semiannually annually
The AAL Mid Cap Stock Fund annually annually
The AAL Small Cap Stock Fund annually annually
The AAL International Fund annually annually
The AAL Equity Income Fund
quarterly annually
The AAL Bond Fund monthly annually
The AAL Municipal Bond Fund monthly annually
The AAL High Yield Bond Fund monthly annually
The AAL Money Market Fund monthly annually
The AAL Bond, Municipal Bond, High Yield Bond and Money Market Funds accrue
income dividends daily.
The AAL Municipal Bond Fund
Dividends derived from the interest earned on municipal securities constitute
"exempt-interest dividends" and are generally not subject to federal income tax.
We accrue dividends daily and pay these dividends monthly for The AAL Municipal
Bond Fund. We pay the capital gains for the Fund at least annually. Realized
capital gains on municipal securities are subject to federal income tax. Thus,
shareholders will be subject to taxation at ordinary rates on the dividends they
receive that are derived from net short-term capital gains. Distributions of net
long-term capital gains will be taxable as long-term capital gains regardless of
the length of time a shareholder holds them. We may, for temporary defensive
purposes, invest in short-term taxable securities for the Fund. Shareholders of
this Fund are subject to federal income tax at ordinary rates on any income
dividends they receive that are derived from interest on taxable securities.
For shareholders who are receiving Social Security benefits, the federal
government requires you to add tax-exempt income, including exempt-interest
dividends from this Fund, to your taxable income in determining whether a
portion of your Social Security benefits will be subject to federal income tax.
The Internal Revenue Code provides that every person required to file a tax
return must report, solely for informational purposes, the amount of
exempt-interest dividends received from us for the Funds during the taxable
year.
Tax Considerations
Federal law requires us to withhold 31% of a shareholder's reportable payments
(which include dividends, capital gain distributions and redemption proceeds)
for those who have not properly certified that the Social Security or other
taxpayer identification number they provided
<PAGE>
is correct and that he or she is not subject to backup withholding. We do not
provide information on state and local tax consequences of owning shares in the
Funds.
Reinvestment of Fund Distributions
You can reinvest all of your income dividends and/or capital gains distributions
into the Funds at net asset value and pay no up-front (Class A shares) or
contingent deferred (Class B shares) sales charges. You also can have your
distributions paid in cash. When you receive a distribution you may have to pay
taxes whether or not you reinvested them or had them paid out to you in cash. If
you have requested cash distributions and we cannot locate you, we will reinvest
your dividends.
Distribution Fees
In addition to the sales charge deducted at the time of purchase, the Investment
Company Act of 1940, Rule 12b-1, thereunder, authorizes us pursuant to a Rule
12b-1 Distribution Plan for the Funds ("12b-1 Distribution Plan" or "Plan")) to
use a portion of the Funds' assets to cover the costs of certain activities
relating to the distribution of its shares to investors.
The 12b-1 Distribution Plan permits us to reimburse the Distributor for expenses
incurred in distributing the Funds' shares to investors, which includes expenses
relating to: sales representative compensation (excluding the initial sales
charge); advertising; preparation and distribution of sales literature and
prospectuses to prospective investors; implementing and operating the Plan; and
performing other promotional or administrative activities on behalf of the
Funds.
Pursuant to the Plan, we may reimburse the Distributor for overhead expenses
incurred in distributing the Funds' shares. We may not reimburse the Distributor
for expenses of past fiscal years or in contemplation of expenses for future
fiscal years. We may not use distribution fees we pay for one Fund to finance
the distribution of shares for another Fund.
We charge a service fee of up to 0.25 of 1% of the average daily net assets of a
Fund for Class A and Class B shares. We use the shareholder servicing fee to
compensate the Distributor for certain shareholder services. We charge the
following 12b-1 distribution and servicing fees.
Distribution Fee
Fund Class A Class B
The AAL Capital Growth Fund None 0.75%
The AAL Mid Cap Stock Fund None 0.75%
The AAL Small Cap Stock Fund None 0.75%
<PAGE>
The AAL International Fund None 0.75%
The AAL Equity Income None 0.75%
Fund
The AAL Bond Fund None 0.75%
The AAL Municipal Bond Fund None 0.75%
The AAL High Yield Bond Fund None 0.75%
The AAL Money Market Fund None 0.75%
Service Fee
Fund Class A Class B
The AAL Capital Growth Fund 0.25% 0.25%
The AAL Mid Cap Stock Fund 0.25% 0.25%
The AAL Small Cap Stock Fund 0.25% 0.25%
The AAL International Fund 0.25% 0.25%
The AAL Equity Income 0.25% 0.25%
Fund (f/k/a The AAL Utilities Fund)
The AAL Bond Fund 0.25% 0.25%
The AAL Municipal Bond Fund 0.25% 0.25%
The AAL High Yield Bond Fund 0.25% 0.75%
The AAL Money Market Fund 0.125% 0.125%
SHAREHOLDER MAINTENANCE AGREEMENT
The Board of Trustees authorizes us to contract with AAL Capital Management
Corporation for certain shareholder maintenance services. AAL Capital Management
Corporation receives an annual fee for providing these services. This fee is
based upon, and limited by, the difference between the current account fees
charged and the normal full-service fee schedule published by our Transfer
Agent. It also includes reimbursement for out-of-pocket costs including postage
and telephone charges. This account differential, including reimbursement for
expenses, is currently $4.08 per account per year.
YIELD AND PERFORMANCE INFORMATION
From time to time, we calculate and advertise performance information for
different historical periods of time, by quoting yields or total returns
designed to inform you of the performance of a Fund. Whenever we advertise
performance, we include standardized yield and total return
<PAGE>
information calculated in accordance with methods established by the Securities
and Exchange Commission. We may include other total return calculations, if we
feel that you would find such total return calculations useful in evaluating a
Fund's investment performance. We base yields and total returns on historical
performance. You should not use such historical performance information as an
indication of future performance. Your investment return and the principal value
of your investments (except for The AAL Money Market Fund, for which we intend
to maintain at a constant $1.00 net asset value) will fluctuate. At the time you
sell (redeem) your investment, its value may be worth more or less than your
original cost.
Standardized Yield and Total Returns
Whenever we advertise performance, we include standardized yield and total
return quotations calculated in accordance with rules of the Securities and
Exchange Commission, in the manner described in the following paragraphs.
The AAL Money Market Fund -- Standardized Yield and Standardized Effective Yield
We may advertise a standardized yield and a standardized effective yield for The
AAL Money Market Fund. We base both yield figures on historical earnings and do
not intend for these figures to indicate future performance.
The standardized yield of the Fund refers to the income generated by an
investment in the Fund over the seven-day period shown in the advertisement. The
income, less expenses, is then annualized, which means that the amount of income
generated by the investment during that week is assumed to be generated each
week over a 52-week period and is shown as a percentage of the beginning
investment value.
We calculate the standardized effective yield similarly but, when annualized, we
assume that any income earned by the Fund is reinvested. The effective yield
will be slightly higher than the yield because of the compounding effect of the
assumed reinvestment.
The AAL Capital Growth, Mid Cap Stock, Small Cap Stock, International,
Equity Income, Bond, Municipal Bond and High Yield Bond Funds -- Standardized
Current Yield
Except for The AAL Money Market Fund, we may advertise a standardized current
yield based on income generated by an investment in a particular Fund over a
30-day period. We state the 30-day period in the advertisement. We determine
income earned on debt obligations by applying a calculated yield-to-maturity
percentage to the obligations held during the period. We determine income earned
from stocks by using the stated annual dividend rate applied over the
performance period. Then, we annualize the income earned. We assume that the
amount of income generated during the 30-day period is generated and reinvested
monthly to provide a six-month return which we then annualize. We show the
return as a percentage of the maximum offering price per share on the last day
of the period.
<PAGE>
The AAL Municipal Bond Fund -- Standardized Tax Equivalent Yield
For The AAL Municipal Bond Fund, we may advertise a standardized tax equivalent
yield, which illustrates the yield that would be required on a fully taxable
investment to result in the same net income to an investor in the Fund, after
payment of federal taxes at the stated rate. We compute the yield by dividing
the portion of the Fund's current yield that is tax-exempt by one minus a stated
federal income tax rate, and then adding the quotient to the value of any yield
of the Fund that is not tax exempt.
The AAL Capital Growth, Mid Cap Stock, Small Cap Stock, International,
Equity Income, Bond, Municipal Bond and High Yield Bond Funds -- Standardized
Average Annual Total Rate of Return
We may advertise for each of The AAL Mutual Funds (except The AAL Money Market
Fund) a standardized average annual total rate of return for one, five and
ten-year periods, or so much thereof as a Fund has been in existence (since
inception). The standardized average annual total rate of return is the change
in redemption value of shares purchased with an assumed initial investment of
$1,000, after giving effect to the maximum applicable sales charge for Class A
shares or the applicable contingent deferred sales charge for Class B shares,
assuming the reinvestment of dividends and capital gains distributions.
Other Total Returns
If we believe it would be useful in evaluating performance, we may advertise
total returns for a Fund in another way than the Standardized Average Annual
Total Rate of Return or the other measures of return described above. For
example, except The AAL Money Market Fund, we may advertise total returns
calculated on the basis of the net amount invested in a Fund (the dollars
invested without giving effect to the maximum applicable sales charge). Return
calculations based on the net amount invested will be higher than those
calculated by the standardized methods for the same time period.
We have provided more information on yield and performance in the Statement of
Additional Information.
TRANSFER AGENT, CUSTODIANS AND INDEPENDENT ACCOUNTANTS
Transfer Agent
Firstar Trust Company
P.O. Box 2981
615 E. Michigan Street
Milwaukee, WI 53201-2981
Custodian (except for The AAL International Fund)
Firstar Trust Company
<PAGE>
P.O. Box 2981
615 E. Michigan Street
Milwaukee, WI 53201-2981
Custodian for The AAL International Fund
The Chase Manhattan Bank, N.A.
Chase Metro Tech Center
Brooklyn, NY 11245
Independent Accountants
Price Waterhouse LLP
100 East Wisconsin Avenue, Suite 1500
Milwaukee, WI 53202
ORGANIZATION AND DESCRIPTION OF SHARES
The AAL Mutual Funds or "Trust" is a diversified open-end management investment
company registered under the Investment Company Act of 1940. Each of the Funds
is a separate series of a Massachusetts Business Trust organized under a
Declaration of Trust dated March 13, 1987. The Declaration of Trust provides
that each shareholder shall be deemed to have agreed to be bound by its terms.
The Declaration of Trust may be amended by a vote of shareholders or the Board
of Trustees. The Trust may issue an unlimited number of shares in one or more
series as the Board of Trustees may authorize. Currently, the Board has
authorized eleven series. This prospectus describes Class A and Class B shares
for nine series of the Trust.
Each Fund's classes of shares represent interests in the assets of the Fund and
have identical dividend, liquidation and other rights. The separate share
classes have the same terms and conditions, except each share class bears its
separate distribution and shareholder servicing expenses. At the Trustees'
discretion, each class may pay a different share of other expenses, not
including advisory or custodial fees or other expenses related to the management
of the Trust's assets, if each class incurs the expenses in different amounts,
or if a class receives services of a different kind or to a different degree
than the other class. The Funds allocate all other expenses to each class on the
basis of the net asset value of that class in relation to the net asset value of
the particular Fund. Class A and B shares have identical voting rights except
that each class has exclusive voting rights on any matter submitted to
shareholders relating solely to the class. In addition, Class A and Class B
shares have separate voting rights on any matter submitted to shareholders where
the interests of one class differ from the interests of the other class. Each
share class has exclusive voting rights on matters involving the 12b-1
Distribution Plan as applied to that class. Matters submitted to shareholder
vote must be approved by each Fund separately except:
1) when required otherwise by the 1940 Act; or
<PAGE>
2) when the Trustees determine that the matter does not affect all Funds:
then, only the shareholders of the affected Funds may vote.
Shares are freely transferable, entitled to dividends declared by the Trustees,
and receive the assets of their respective Fund in the event of liquidation. The
Trust generally holds annual shareholder meetings only when required by law or
at the written request of shareholders owning at least 10% of the Trust's
outstanding shares. Shareholders may remove Trustees from office by votes cast
in person or by proxy at a shareholders meeting.
Under Massachusetts law, shareholders of a business trust may, under certain
circumstances, be held personally liable for the obligations of the Trust.
However, the Declaration of Trust disclaims shareholder, Trustee and/or officer
liability for acts on behalf of the Trust or for Trust obligations that are
binding only on the assets and property of the Trust. The Funds include this
disclaimer in each agreement, obligation, or contract entered into or executed
by the Trust or the Board. The Declaration of Trust provides for indemnification
out of the Trust's assets for all losses and expenses of any shareholder held
personally liable for the obligations of the Trust. The risk of a shareholder
incurring financial loss on account of shareholder liability is remote because
it is limited to circumstances where the Trust itself is unable to meets its
obligations.
ASSET ALLOCATION (DIVERSIFICATION)
You should not consider an investment in any one Fund a complete investment
program. Like most investors, you should hold a number of different investments,
each with a different level of risk, such as common stocks, bonds and money
market certificates. You may want to meet your goal of diversifying your
investments by purchasing shares in a number of different Funds, each of which
has a different investment strategy and level of risk.
QUESTIONS
If you have questions, contact your AAL Capital Management Corporation
Registered Representative or the Mutual Fund Service Center by calling
800-553-6319 or writing us at: The AAL Mutual Funds, 222 West College Avenue,
Appleton, WI 54919-0007.
Appleton, WI 54919-0007
GLOSSARY OF IMPORTANT TERMS
American Depository Receipts (ADRs): See Depository Receipts.
Amortized: Paying the principal on a debt by installments; an accounting method
that provides for the gradual decline in the value of an asset.
Annualized: Calculated to represent a year; a statement produced by calculating
financial results for periods other than a complete year.
<PAGE>
Asset-Backed Securities: See Mortgage and Asset-Backed Securities, below.
Bond: An interest-bearing debt security, or discounted government or corporate
security, that requires the issuer to pay a specified amount of interest for a
specified time, usually a number of years, then repay the bondholder the face
amount of the bond.
Business Day: Any day both the Federal Reserve Bank of New York and the New York
Stock Exchange (NYSE) are open for business. A business day normally begins at
8:00 a.m. Central Time when the NYSE opens, and usually ends at 3:00 p.m.
Central Time when the NYSE closes.
Call Option: A contract giving the owner the right to buy 100 shares of a stock
at a predetermined price any time up to a predetermined expiration date.
Capital Gain or Loss: A capital gain or loss equals the increase or decrease in
the value of a security over the original purchase price. A gain or loss is
REALIZED when the security that has increased or decreased in value is sold. An
UNREALIZED GAIN or LOSS occurs when the value of a security increases or
decreases but the security is not sold. If a security is held for more than 12
months and then sold at a profit, that profit is a REALIZED LONG-TERM CAPITAL
GAIN. If it is sold at a profit before being held for 12 months, that profit is
a REALIZED SHORT-TERM CAPITAL GAIN.
Chartered Financial Analyst (CFA): Designation earned by financial analysts who
pass examinations in economics, financial accounting, portfolio management,
security analysis and standards of conduct.
Collateral: Something of value--such as real estate, stocks and bonds--pledged
to secure a debt.
Commercial paper: Short-term, unsecured debt obligations issued by businesses
and sold at a discount but redeemed at pay within 2 to 270 days.
Compound Interest: Interest paid upon interest; interest that is calculated and
credited daily, weekly, monthly, quarterly, semi-annually or annually on both
the principal and the already credited interest.
Convertible Bonds: Bonds that convert or exchange into stocks or carry with it
the right to acquire stocks evidenced by warrants attached to the bond or
acquired as part of the unit with the bonds.
Covered Option: Option contract where the purchase or seller of the contract
owns or has the rights to purchase the shares underlying the option.
<PAGE>
Credit Risk: The fundamental risk of investing that the issuer of a security may
not be able to meet its obligations to its investors, usually used in describing
the fundamental risk of debt securities. Nationally recognized statistical
rating organizations (NRSROs) rate debt securities on the ability of the issuer
to pay the interest and principal on the debt issued.
Debt Securities: Bonds and other debt instruments used by issuers to borrow
money from investors. The issuer pays the investor a fixed or variable rate of
interest, and must repay the amount borrowed at maturity.
Deferred Interest Bonds: Bonds that an issuer issues at a significant discount
from face value and does not begin paying interest on the bonds for a delayed
period of time. The discount approximates the total amount of interest the bonds
will accrue and compound over the period until the first interest accrual date
at a rate of interest reflecting the market rate of the security at the time of
issuance.
Delayed Delivery Securities: Refers to the delivery of securities later than the
scheduled date. A contract calling for delayed delivery, known as "seller's
option," is usually agreed to by both parties to a trade.
Depository Receipts: Depository receipts are receipts evidencing ownership in
the underlying shares of a foreign company. Generally, U.S. banks and trusts
issue American depository receipts (ADRs) and American depository shares (ADSs).
They hold the foreign company securities underlying the receipts in their
vaults. In addition to the underlying securities, the receipts entitle the
shareholder to all dividends and capital gains. The bank or trust company
issuing the receipts may have denominated the receipts in a currency other than
the currency underlying the foreign security. U.S. and European banks and trust
companies usually issue global depository receipts (GDRs), which are receipts in
the shares of a global offering of a foreign issuer who has issued two
securities simultaneously in two markets, usually publicly in a non-U.S. markets
and privately in the U.S. market. European banks and trust companies generally
issue European depository receipts (EDRs), sometimes called continental
depository receipts (CDRs) when issued in bearer form, which evidence ownership
in foreign securities.
Equity: Ownership interest in a company; stocks represents the equity or amount
of ownership you have in the company issuing the stocks.
Face Value: See Par.
FDIC: The Federal Deposit Insurance Corporation is an agency of the federal
government that guarantees individual deposits up to $100,000 at participating
banks and savings and loan associations.
<PAGE>
Financial Risk: The fundamental risk of how a company will perform after
analyzing its balance sheet and income statements to forecast its future stock
price movements. Fundamental analysts consider past records of assets, earnings,
sales, product, management and markets in predicting future trends in these
indicators of a company's success or failure. There is a risk that factors
affecting a company's performance will change, causing the company's stock to
underperform.
Floating Rate Bonds: See Variable or Floating Rate Bonds.
403(b)(7) Retirement Plan: A personal retirement savings program that lets
employees of certain tax-exempt organizations or school systems and educational
institutions contribute a portion of their earnings, usually by salary deferral
agreement, into a special mutual fund account. Contributions are made on a
pre-tax basis and benefit from tax-deferred build up of income. The right to
withdraw funds is limited by law and amounts withdrawn are subject to income
taxes.
Futures Contract: Agreement to buy or sell a specific amount of a commodity or
financial instrument at a particular price on a stipulated future date.
General Obligation Bonds: Municipal bonds secured by the issuer's pledge of its
credit and taxing power for the payment of principal and interest.
Individual Retirement Account (IRA): A personal retirement savings program that
lets individuals with earned income (and their spouses) under age 70 1/2
contribute both deductible and non-deductible contributions to the account with
the benefit of tax-deferred build up of income. When investors withdraw funds
from their IRA accounts they are subject to income taxes, and if they withdraw
funds before age 59 1/2 they may be subject to penalties.
Industrial Development Bonds: Municipal bonds (usually revenue bonds), the
credit quality of which is normally directly related to the credit standing of
the industrial user involved or of the issuer of any credit enhancement such as
an insurance policy or letter of credit.
Inflation Risk: The risk that a rise in the level of prices for goods and
services (inflation) will decrease the value of your money in terms of your
investments or the income from your investments.
Interest: The payment borrowers (i.e., bond issuers) make to lenders (i.e., bond
holders) for the use of their money, usually expressed as a percentage of the
amount borrowed (the
<PAGE>
principal). Usually interest is expressed as a rate per period of time,
typically one year, in which case it is called an annual rate of interest.
Investment Grade: A bond or other fixed-income security is considered investment
grade if it is rated investment grade by a NRSRO, such as BBB or better by D&P
or S&P or Baa or better by Moody's. See the Appendix.
Liquidity: The ease and speed at which an investor or holder of the security can
sell or otherwise convert the security into cash.
Margin: Amount a customer deposits with a broker when borrowing from the broker
to buy securities.
Market Capitalization: The value of a corporation as determined by multiplying
the current market price of a share of common stock by the number of shares held
by shareholders. Thus, if a corporation has one million shares outstanding and
the market price of a share is $10, the market capitalization of the corporation
is $10 million.
Market Risk: Refers to the tendency of security prices to move together. The
risk that a broad market downturn will affect investments in a particular field.
Market Value: The price at which an investor can buy or sell a security at a
given time in an open market.
Maturity: The date on which the principal of a debt obligation, such as a bond,
comes due and must be repaid.
Money Market Instrument: Short-term, liquid debt, such as Treasury bills and
commercial paper. The issuers sell these instruments at a discount but redeem
them at par. See Commercial Paper.
Mortgage and Asset-Backed Securities: Typically these securities consist of
interest in pools of mortgages or consumer loans that provide monthly payments
consisting both interest and principal payments. In effect, these securities
"pass through" the monthly payments that individual borrowers make on their
mortgages or consumer loans net of any fees paid to the issuers or guarantors of
such securities. Mortgage backed and/or asset-backed securities may make
additional payments due to principal prepayments made on the mortgages or loans,
refinancing or foreclosures on the underlying property. Mortgage-backed
securities also may include debt obligations collateralized by mortgage loans or
mortgage pass-through securities ("CMOs") and stripped mortgage-backed
securities, as well as other types of mortgage-backed securities. For more
information on mortgage-backed securities, please refer to the Statement of
Additional Information.
<PAGE>
Municipal Bonds: Debt obligations issued by or on behalf of state governments,
U.S. territories or possessions, the District of Columbia and their political
subdivisions, agencies and instrumentalities. Generally, the interest on
municipal bonds is exempt from federal income tax.
Mutual Fund: Also called an open-end investment company. People invest by buying
shares in the mutual fund, thereby pooling shareholders' money and allowing the
fund to invest in a number of securities. The fund distributes any profits from
these investments, after expenses, to the fund's shareholders. Although shares
in the fund are sold publicly, they are not traded on an open exchange because
the fund will buy and sell shares to meet investor demand. Since the company can
issue more shares, the company's capitalization is not fixed but open.
Nationally Recognized Statistical Rating Organization (NRSRO): A company that
assesses the quality and potential performance of bonds, commercial paper,
preferred and common stocks and municipal short-term issues, and rates the
probability that the issuer of the debt will meet the scheduled interest
payments and repay the principal. Ratings are published by such companies as
Moody's Investors Service (Moody's), Standard & Poor's Corporation (S&P), Duff &
Phelps, Inc. (D&P) and Fitch Investor Services, Inc. (Fitch).
PAR: The stated principal value of a bond or the stated value per share of
stock. The par value of stock usually is only used to calculate fees for
incorporation. Typically bonds have a principal value of $1,000.00. A security
selling at its face value is said to be selling at "par". A security selling
below its face value is said to be selling below par or at a discount. A
security selling above its face value is said to be selling above par or at a
premium.
Principal: Face value of an obligation (such as a bond or loan) that must be
repaid at maturity.
Portfolio: Combined holding of more than one stock, bond, commodity, real estate
investment, cash equivalent or other asset by an individual or institutional
investor. The purpose of a portfolio is to reduce risk by diversification.
Preferred Stocks: Stocks with a fixed dividend that must be paid before the
dividends of common stocks are paid.
Public Utilities: A privately owned company that is involved in the generation,
transmission or distribution of electricity, gas, energy, water and telephone,
telegraph, satellite, microwave and other communication facilities for the
public benefit.
Put Option: A contract giving the owner the right to sell 100 shares of stock at
a predetermined price any time up to a predetermined expiration date.
Qualified Retirement Plans: Retirement plans established and maintained by an
employer for the benefit of its employees that must comply with special federal
tax and labor laws and
<PAGE>
regulations. Some of the more common types of qualified plans are pension,
profit sharing and 401(k) plans. A 401(k) plan also permits employees to make
contributions to the plan through salary deferrals.
Record Date: Date on which a shareholder must officially own shares in order to
be entitled to a dividend.
Regulated Investment Company: Term used by Internal Revenue Code to define a
mutual fund.
Repurchase Agreement: Agreement between a seller and a buyer, usually of U.S.
government securities, whereby the seller agrees to repurchase the securities at
an agreed upon price and, usually, at a stated time.
Revenue Bonds: Municipal bonds that usually are payable only from the revenues
derived from a particular facility or class of facilities, or in some cases from
the proceeds of a special excise tax or other specific revenue source.
Risk: The possibility that you may lose all or part of your investment, that the
value of your investment will decrease, or that you will receive little or no
return on your investment. There are many kinds of risks in investing. See
Credit Risk, Financial Risk, Inflation Risk and Market Risk.
Rollover IRA: An IRA that receives its funding through a distribution from
another retirement plan, often because of the employee's termination of
employment from the retirement plan's sponsoring employer.
SARSEP-IRA: A retirement plan that permits the employees to make contributions
through salary reduction agreements. See SEP-IRA.
SEC: The U.S. Securities and Exchange Commission.
SEP-IRA: A Simplified Employee Pension Plan (SEP) is a form of
employer-sponsored retirement plan that permits employers to make tax-deductible
contributions directly into IRAs established for their employees. If the
employer permits the employees to make contributions through salary reduction
agreements, it is often called a Salary Reduction Simplified Employee Pension
Plan (SARSEP-IRA). No new plans may start after 1996, but existing plans may
continue.
Securities: Financial instruments, usually stocks, bonds, money market
instruments or mutual fund shares issued by corporations, municipalities and
state, local or national governments or investment companies to raise or borrow
money or give the public an opportunity to participate in the growth of a
company.
<PAGE>
SIMPLE-IRA: A Savings Incentive Match Plan for Employees (SIMPLE) is an
IRA-based retirement plan that permits employees to defer part of their salary
(up to $6,000) on a pre-tax basis and to which the employer is required to make
certain matching or non-elective contributions. The IRS may impose a 25% penalty
for distributions made within the first two years.
Standard & Poor's Index: Also known as the STANDARD & POOR'S 500 (S&P 500);
Standard & Poor's Corporation is a subsidiary of McGraw-Hill, Inc. that provides
a number of investor services. The S&P 500 is a measure of the changes in stock
market conditions based on the average performance of 500 widely held common
stocks. The S&P 500 is considered the benchmark for large stock investors.
S&P Small Cap 600 Index (S&P Small Cap): Introduced in October 1994 to track
small cap stocks. It contains companies chosen by a committee at Standard &
Poor's for their size, industry characteristics and liquidity. None of the
companies in the S&P Small Cap overlap with the S&P 500 or S&P Mid Cap. However,
some companies in the S&P Small Cap are larger than the S&P Mid Cap or S&P 500.
S&P Mid Cap 400 Index (S&P Mid Cap): Contains companies chosen by a committee at
Standard & Poor's for their mid cap size and industry characteristics. None of
the companies in the S&P Mid Cap overlap with the S&P 500 or S&P Small Cap. Some
companies in the S&P Mid Cap, however, are larger than those in the S&P 500 and
smaller than those in the S&P Small Cap. This is a function of the normal drift
that takes place in any index as some companies' stock prices appreciate and
those of others depreciate.
Stocks: See Equity.
Structured Securities: Securities that have a value 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.
Total Return: The combination of the price change of an investment plus any
income (or other distributions), expressed as a percentage gain or loss in the
investment's value.
Transfer Agent: An agent appointed by a mutual fund to maintain shareholder
records and issue share certificates.
Trust: An arrangement that permits one party, the Trustee, to hold legal title
of and control property for the benefit of another party, the beneficiary.
<PAGE>
Turnover: Also called the Portfolio Turnover Rate; the percentage change in the
assets held by a mutual fund due to its purchases and sales. A portfolio
turnover rate of 100% means that the Fund has purchased and sold securities
equal to 100% of the Fund's total net asset value for the year.
12b-1 Distribution Fee: The fee a mutual fund charges shareholders to cover the
expenses the fund has for shareholder service, advertising, promoting and
selling shares in the fund, also called distribution fee.
Variable or Floating Rate Bonds: Variable or floating rate debt obligations bear
variable or floating interest rates and carry rights that permit holders to
demand payment of the unpaid principal balance plus accrued interest from the
issuers or certain financial intermediaries. Floating rate instruments have
interest rates that change whenever there is a change in a designated base rate
while variable rate instruments provide for a specified periodic adjustment in
the interest rate. The interest rate formulas are designed to result in a market
value for the instruments that approximate their par values, reducing the effect
of changing market conditions on their underlying market values.
Variable Rate Master Demand Notes: Unsecured obligations, redeemable on notice,
that permit investment of varying amounts at varying interest rates according to
an agreement with the issuer.
Volatility: The measure of the rise and fall of a security's price over a stated
period of time.
When-Issued Securities: The term refers to a transaction made conditionally
because the security, although authorized, has not yet been issued. New issues
of stocks and bonds, stocks that have split and Treasury securities are all
traded on a when issued basis.
Yield: The income generated by an investment (from dividends or interest) over a
given period of time, expressed as a percentage of either cost or current price.
Zero Coupon Bonds: Bonds that the issuer issues at a significant discount from
face value. The discount approximates the total amount of interest the bonds
will accrue and compound over the period until maturity reflecting the market
rate of the security at the time of issuance.
<PAGE>
APPENDIX: SECURITY RATINGS
Ratings in General
A NRSRO's rating represents the organization's opinion on the credit quality a
particular security. The ratings are general and do not portray absolute
standards on the creditworthiness of an issuer. We continuously monitor the
ratings given by the NRSROs on the securities in a Funds' portfolios as part of
our ongoing effort to monitor the Funds' debt quality. 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. A rating
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, the
Funds' Adviser and/or the Sub-Adviser for The AAL International Fund evaluates
each rating independently. Rating organizations base their ratings on current
information furnished by the issuer or obtained from other sources they consider
reliable. Rating organizations may change, suspend or withdraw their ratings due
to changes in, unavailability of, such information or for other reasons.
The Funds have provided the following rating characteristics used by four major
nationally recognized statistical ratings organizations ("NRSROs"), Duff &
Phelps Credit Rating Co., Moody's Investors Service, Inc. Standard & Poor's
Corporation and Fitch Investors Service.
BOND RATINGS
Duff & Phelps Rating Scale Definitions
- ---------------------------------------------------
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-: 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 prudent investment. Considerable variability in
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.
<PAGE>
B+, B, B-: 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.
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.
DP: Preferred stocks with dividend arrearage.
Moody's Rating Scale Definitions
- -------------------------------------------------
Aaa: Bonds that are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are
generally referred to as "gilt edged." 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 that are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are
general known as high grade bonds. They are rated lower than the
best bonds because margins of protection may not be as large as
Aaa securities or fluctuations of protective elements may be of
greater amplitude or there may be other elements present that
make long-term risk appear somewhat larger than the Aaa
securities.
A: Bonds that 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
susceptibility to impairment some time in the future.
Baa: Bonds that are 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
have speculative characteristics as well.
<PAGE>
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.
Standard & Poor's ("S&P") Rating Scale Definitions
- -------------------------------------------------
AAA: Debt rated "AAA" has the highest rating assigned by Standard &
Poor's. Capacity to pay interest and repay principal is extremely
strong.
AA: Debt rated "AA" has very strong capacity to pay interest and
repay principal and differs from the higher-rated issues only in
small degrees.
A: Debt rated "A" has strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than
debt in higher rated categories.
BBB: Debt rated "BBB" has an adequate capacity to pay interest and
repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity to pay interest
and repay principal for debt in this category than in
higher-rated categories.
<PAGE>
BB,B,CC,C,C: Debt rated "BB", "B", "CCC", "CC" and "C" is regarded, on
balance, as predominantly speculative with respect to capacity to
pay interest and repay principal in accordance with the terms of
the obligation. "BB" indicates the lowest degree of speculation
and "C" the highest degree of speculation. While such debt will
likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to
adverse conditions.
BB: Debt rated "BB" has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing
uncertainties or exposure to adverse business, financial or
economic conditions that could lead to inadequate capacity to
meet timely interest and principal payments. The "BBB" rating
category is also used for debt subordinated to senior debt that
is assigned an actual or implied "BBB-" rating.
B: Debt rated "B" has a greater vulnerability to default but
currently has the capacity to meet interest payments and
principal repayments. Adverse business, financial or economic
conditions likely will impair capacity or willingness to pay
interest and repay principal. The "B" rating is also used for
debt subordinated to senior debt that is assigned an actual or
implied "BB" or "BB-" rating.
CCC: Debt rated "CCC" has a currently identifiable vulnerability to
default and is dependent upon favorable business, financial and
economic conditions to meet timely payment of interest and
repayment of principal. In the event of adverse business,
financial or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The "CCC" rating
category is also used for debt subordinated to senior debt that
is assigned an actual or implied "B" or "B-" rating.
CC: The rating "CC" is typically applied to debt subordinated to
senior debt that is assigned an actual or implied "CCC" rating.
C: The rating "C" is typically applied to debt subordinated to
senior debt that is assigned an actual or implied "CCC-" debt
rating. The "C" rating may be used to cover a situation in which
a bankruptcy petition has been filed, but debt service payments
are continued.
CI: The rating "CI" is reserved for income bonds on which no interest
is paid.
D: Debt rated "D" is in payment default. The "D" rating category is
used when interest payments or principal payments are not made on
the date due even if the applicable grace period has not expired,
unless S&P believes such payments will be made during such grace
period. The "D" rating also will
<PAGE>
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.
Plus (+) or Minus (-): 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.
Fitch's Investment Grade Bond Rating Definitions
- --------------------------------------------------------
AAA: Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay
interest and repay principal that is unlikely to be affected by
reasonably foreseeable events.
AA: Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay
principal is very strong, although not quite as strong as bonds
rated "AAA." Because bonds rated in the "AAA" and "AA" categories
are not significantly vulnerable to foreseeable future
developments, short-term debt of these issuers is generally rated
"F-1+."
A: Bonds considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay
principal is considered to be strong, but may be more vulnerable
to adverse changes in economic conditions and circumstances than
bonds with higher ratings.
BBB: Bonds considered to be investment grade and of satisfactory
credit quality. The obligor's ability to pay interest and repay
principal is considered to be adequate. Adverse changes in
economic conditions and circumstances, however, are more likely
to have an adverse impact on these bonds, and therefore impair
timely payment. The likelihood that the ratings of these bonds
will fall below investment grade is higher than for bonds with
higher ratings.
NR: Indicates that Fitch does not rate the specific issue.
Plus (+) or Minus (-): Plus or Minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus and
minus signs, however, are not used in the "AAA" category.
COMMERCIAL PAPER RATINGS
Duff & Phelp's Commercial Paper Ratings
...........................................
<PAGE>
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 risk-free U.S. Treasury short-term
obligations.
Duff 1: Very high certainty of timely payment. Liquidity factors are
excellent and supported by good 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 funding 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.
MOODY'S Commercial Paper Ratings
....................................................
Moody's commercial paper ratings are opinions of the ability to repay punctually
promissory obligations. Moody's employs the following three category
designations, all judged to be investment grade, to indicate the relative
repayment capacity of rated issuers:
Prime 1: Highest quality;
Prime 2: Higher quality; and
Prime 3: High quality.
S&P's Commercial Paper Ratings
.......................................................
A Standard & Poor's ("S&P") 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.
<PAGE>
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.
OTHER RATINGS
Moody's Municipal Note Ratings
.....................................................
MIG 1: This designation category denotes best quality. There is
present strong protection by established cash flows, superior
liquidity support or demonstrated broad-based access to the
market for refinancing.
MIG 2: This designation category denotes high quality. Margins of
protection are ample although not so large as in the preceding
group.
MIG 3: This designation category denotes favorable quality. All
security elements are accounted for but there is lacking the
undeniable strength of the preceding grades. Liquidity and cash
flow protection may be narrow and market access for refinancing
is likely to be less well established.
Moody's Ratings of the Demand Features on Variable Rate Demand Securities
...................................................
Moody's may assign a separate rating to the demand feature of a variable rate
demand security. Such a rating may include:
VMIG 1: This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity support
or demonstrated broad-based access to the market for refinancing.
VMIG 2: This designation denotes high quality. Margins of protection
are ample although not so large as in the preceding group.
<PAGE>
VMIG 3: This designation denotes favorable quality. All security
elements are accounted for but there is lacking the undeniable
strength of the preceding grades. Liquidity and cash flow
protection may be narrow and market access for refinancing is
likely to be less well established.
S&P Note Ratings
...................................................
SP-1: Notes rated SP-1 have very strong or strong capacity to pay
principal and interest. Those issues determined to possess
overwhelming safety characteristics are designated as SP-1+.
SP-2: Notes rated SP-2 have satisfactory capacity to pay principal and
interest. Notes due in three years or less normally receive a
note rating. Notes maturing beyond three years normally receive a
bond rating, although the following criteria are used in making
that assessment: (1) the amortization schedule (the larger the
final maturity relative to other maturities, the more likely the
issue will be rated as a note); and the source of payment (the
more dependent the issue is on the market for its refinancing,
the more likely it will be rated as a note).
S&P Ratings of the Demand Features on Variable Rate Demand Securities
........................................................
S&P assigns dual ratings to all long-term debt issues that have as part of their
provisions a demand feature. The first rating addresses the likelihood of
repayment of principal and interest as due, and the second rating addresses only
the demand feature. The long-term debt rating symbols are used for bonds to
denote the long-term maturity and the commercial paper rating symbols are
usually used to denote the put (demand) options (i.e. AAA/A-1+). Normally demand
notes receive note rating symbols combined with commercial paper symbols (i.e.,
SP-1+/A-1+).
<PAGE>
The AAL Mutual Funds
222 West College Avenue
Appleton, WI 54919-0007
Telephone (414) 734-7633, 800-553-5319
TDD 800-684-3416
STATEMENT OF ADDITIONAL INFORMATION
Dated September 1, 1997
Equity-Oriented Funds
The AAL Capital Growth Fund:
Investing In Large Company Stocks
The AAL Mid Cap Stock Fund
Investing In Mid-Sized Company Stocks
The AAL Small Cap Stock Fund:
Investing In Small Company Stocks
The AAL International Fund:
Investing In Foreign Securities
The AAL Equity Income Fund (Formerly Known as The AAL Utilities Fund):
Investing In Income-Producing Equity Securities
Income-Oriented Funds
The AAL Bond Fund:
Investing In Investment Grade Bonds
The AAL Municipal Bond Fund:
Investing In Tax-Exempt Municipal Securities
The AAL High Yield Bond Fund:
Investing in Below Investment Grade Securities
The AAL Money Market Fund:
Investing in Money Market Instruments
This Statement of Additional Information is not a prospectus, but provides
additional information that should be read in conjunction with The AAL Mutual
Funds Prospectus dated September 1, 1997 and any supplements thereto. The
prospectus may be obtained at no charge by writing or telephoning your AAL
Capital Management Corporation
<PAGE>
Registered Representative or The AAL Mutual Funds at the address and telephone
number above. Two additional series: The AAL U.S. Government Zero Coupon Target
Fund, Series 2001 and The AAL U.S. Government Zero Coupon Target Fund, Series
2006, are described in separate Prospectus and Statement of Additional
Information.
In this Statement of Additional Information, The AAL Mutual Funds may be
referred to as the "Trust," and The AAL Capital Growth, Mid Cap Stock, Small Cap
Stock, International, Equity Income, Bond, Municipal Bond, High Yield Bond and
Money Market Funds may be referred to collectively as the "Funds" or
individually as a "Fund." Terms not otherwise defined have the same meaning as
in the prospectus.
Table of Contents
Investment Objectives and Policies.............................................
Investment Techniques..........................................................
Investment Restrictions........................................................
Purchases and Redemptions; Pricing Considerations..............................
Investment Advisory Services...................................................
Compensation of The Board of Trustees..........................................
Distributor....................................................................
Distribution Plan..............................................................
Portfolio Transactions.........................................................
Dividends, Distributions and Taxes.............................................
Calculation Of Yield and Total Return..........................................
General........................................................................
Shareholder Maintenance Agreement..............................................
Independent Accountants........................................................
Financial Statements...........................................................
<PAGE>
Investment Objectives and Policies
The following information supplements the discussion of the Funds' respective
investment objectives and policies described in the prospectus. In pursuing
their respective objectives, each Fund invests as described below and employs
the investment techniques described in the prospectus and elsewhere in this
Statement of Additional Information. Each Fund'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 Fund. 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 Fund are present or represented by proxy;
or (ii) more than 50% of the outstanding voting securities of a Fund.
The AAL Capital Growth Fund: Investing In Large Company Stocks
This Fund seeks long-term capital growth by investing in a diversified portfolio
of common stocks and securities convertible into common stocks.
The AAL Mid Cap Stock Fund
): Investing In Mid-Sized Company Stocks
This Fund seeks capital growth by investing primarily in a diversified portfolio
of common stocks, and securities convertible into common stocks, of mid-sized
companies with a market capitalization of between $100 million and $5 billion,
focusing on those with a market capitalization of between $400 million and $3.5
billion.
The AAL Small Cap Stock Fund: Investing In Small Company Stocks
This Fund seeks capital growth by investing primarily in a diversified portfolio
of common stocks, and securities convertible into common stocks, of small-sized
companies with a market capitalization of less than $1 billion.
The AAL International Fund: Investing In Foreign Securities
This Fund seeks capital growth by investing primarily in a diversified portfolio
of foreign securities.
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The AAL Equity Income Fund (f/k/a The AAL Utilities Fund): Investing In
Income-Producing Equity Securities
This Fund seeks current income, long-term income growth and capital
appreciation, by investing primarily in a diversified portfolio of
Income-Producing Equity Securities. Prior to September 1, 1997, The AAL Equity
Income Fund was known as The AAL Utilities Fund.
The AAL Bond Fund: Investing In Investment Grade Bonds
This Fund seeks a high level of current income, consistent with preservation of
capital, by investing primarily in a diversified portfolio of investment grade
bonds and other debt securities.
The AAL Municipal Bond Fund: Investing In Tax-Exempt Municipal Securities
This Fund seeks a high level of current income that is exempt from federal
income taxes, consistent with preservation of capital, by investing primarily in
a diversified portfolio of municipal securities.
The AAL High Yield Bond Fund: Investing in Below-Investment Grade Securities
This Fund seeks high current income and secondarily capital growth by investing
primarily in a diversified portfolio of high yield, high risk bonds ("High Yield
Bonds").
The AAL Money Market Fund: Investing In Money Market Instruments
This Fund seeks a high level of current income consistent with preservation of
capital and liquidity by investing in a diversified portfolio of high-quality,
short-term money market instruments.
Investment Techniques
Each of the Funds may use the techniques described in the prospectus and in the
Statement of Additional Information in pursuit of its investment objective.
Lending Portfolio Securities
Subject to restriction (4) under "Investment Restrictions," below, a Fund may
lend its portfolio securities to broker-dealers and financial institutions, such
as banks and trust companies. The Adviser and/or Sub-Adviser for The AAL
International Fund will monitor the creditworthiness of
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any firm with which a Fund engages in securities lending transactions. 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 Fund. The Fund would continue to receive the
equivalent of the interest or dividends paid by the issuer on the securities
loaned, and would also receive an additional return which may be in the form of
a fixed fee or a percentage of the collateral. The Fund 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 Fund 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
and/or Sub-Adviser for The AAL International Fund'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 Fund 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 when the
Fund 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
The Funds maintain procedures for evaluating and monitoring the creditworthiness
of firms with which they enter into repurchase agreements. A Fund may not invest
more than 10% of its net assets in repurchase agreements maturing in more than
seven days.
When-Issued and Delayed Delivery Securities
A Fund may purchase securities on a when-issued or delayed-delivery basis, as
described in the prospectus. A Fund makes such commitments only with the
intention of actually acquiring the securities, but may sell the securities
before settlement date if the Adviser and/or Sub- Adviser for The AAL
International Fund deems it advisable for investment reasons.
At the time a Fund enters into a binding obligation to purchase securities on a
when-issued basis, liquid assets of the Fund having a value at least as great as
the purchase price of the securities to be purchased are identified on the books
of the Fund and held by the Funds' custodian throughout the period of the
obligation. The use of these investment strategies may increase net asset value
fluctuation.
Convertible Bonds
The Funds, except for The AAL Money Market Fund, may invest in convertible
bonds, subject to any restrictions on the quality of the bonds in which a Fund
may invest. The Funds also may retain any stocks received upon conversion that
do not fall within the Fund's investment
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parameters: (1) to permit orderly disposition; (2) to establish a long-term
holding basis for Federal income tax purposes; or (3) to seek capital growth.
Rated Securities
If the rating of a Fund security is lost or reduced, the Fund is not required to
sell the security, but the Adviser and/or the Sub-Adviser for The AAL
International Fund will consider such fact in determining whether that Fund
should continue to hold the security. The AAL Money Market Fund, however, will
sell downgraded commercial paper to the extent required to comply with Rule 2a-7
under the Investment Company Act of 1940 (the "Act").
To the extent that the ratings given by Nationally Recognized Statistical Rating
Organizations ("NRSRO") for debt securities change as a result of changes in an
NRSRO, or changes in an NRSRO's rating system, a Fund will attempt to use
comparable ratings as standards for its investments in debt securities in accord
with its investment policies.
High Yield Bond Market -- The AAL International, Equity Income and High Yield
Bond Funds
The AAL International, Equity Income and High Yield Bond Funds invest in high
yield, high risk bonds, with The AAL High Yield Bond Fund normally investing at
least 65% of its assets in such securities. While the market for high yield
bonds has existed for many years and has weathered previous economic downturns,
the 1980s brought a dramatic increase in the use of such securities to fund
highly leveraged corporate acquisitions and restructuring. Past experience may
not provide an accurate indication of the future performance of the high yield
bond market, especially during periods of economic recession. From 1989 to 1991,
the percentage of lower-quality securities that defaulted rose significantly
above prior default levels. However, the default rate decreased subsequently.
The AAL High Yield Bond Fund may invest in Iower-rated asset and mortgage-backed
securities, including interest in pools of lower-rated bonds, consumer loans or
mortgages, or complex instruments such as collateralized mortgage obligations
("CMOs") and stripped mortgage-backed securities (the separate income or
principal components). Changes in interest rates, the market's perception of the
issuers and the creditworthiness of the parties involved may significantly
affect the value of these bonds. Some of these securities may have a structure
that makes their reaction to interest rates and other factors difficult to
predict, causing their value to be highly volatile. These bonds also may be
subject to prepayment risk. During periods of declining interest rates,
prepayment of the loans and mortgages underlying these securities tend to
accelerate. Accordingly, any prepayments on these securities held by the Fund
reduces our ability to maintain positions in high-yielding, mortgage-backed
securities and reinvest the principal at comparable yields.
Certain high yield bonds carry particular market risks. Zero coupon, deferred
interest and payment-in-kind ("PIK") bonds, which are issued at deep discounts,
may experience greater
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volatility in market value. Asset and mortgage-backed securities, including
collateralized mortgage obligations, in addition to greater volatility, may
carry prepayment risks.
Collateralized Mortgage Obligations and Multi-Class Pass-Through Securities --
The AAL Bond and High Yield Bond Funds
The AAL Bond and High Yield Bond Funds may invest in mortgage-backed securities,
including CMOs and multi-class 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 sem-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 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 Fund 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
Funds to attempt to protect against a reduction in the income earned on the
Funds' investments due to decline in interest rates. The Funds 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
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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.
Dollar Rolls
The AAL Bond Fund may engage in dollar roll transactions as described in the
prospectus. Other risks of the strategy are: (1) that the mortgage-backed
securities could decline in value during the roll period and the Fund would have
to buy back the securities at a forward price greater than their value at the
time of repurchase; and (2) the foreclosed effect of prepayments
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during the roll period (however, the parties will figure anticipated prepayments
into the price of the roll).
Structured Securities -- The AAL International and High Yield Bond Funds
The AAL International and High Yield Bond Funds may invest in structured notes
and/or preferred stocks, the value of which is linked to currencies, interest
rates, other commodities, indices or other financial indicators. The securities
differ from other securities in which the Funds may invest in several ways. For
example, the coupon, dividend and/or redemption amount at maturity may be
increased or decreased depending on the value of the underlying instrument.
Investment in structured securities involves certain risks. In addition to the
credit risk of the issuer and the normal risks of changes in interest rates, the
redemption amount may increase or decrease as a result of price changes in the
underlying instrument. Further, in the case of certain structured securities,
the coupon and/or dividend may be reduced to zero, and any further declines in
the value of the underlying instrument may then reduce the redemption amount
payable at maturity. Finally, structured securities may have more volatility
than the price of the underlying instrument.
Variable Rate Demand Notes
The Funds may purchase variable rate master demand notes, which are unsecured
instruments that permit the indebtedness thereunder to vary and provide for
periodic adjustments in the interest rate. Although the notes are not normally
traded and there may be no secondary market in the notes, a Fund may demand
payment of principal at any time. Except for The AAL High Yield Bond Fund, the
notes purchased by the Fund must be rated in one of the two highest rating
categories by a Nationally Recognized Statistical Rating Organization or that
have been issued by an issuer that has received a rating from the requisite
Nationally Recognized Statistical Rating Organizations, in the top categories
with respect to a class of short-term debt obligations that is now comparable in
priority and security with the instrument. If an issuer of a variable rate
master demand note defaulted on its payment obligation, the Funds might be
unable to dispose of the note because of the absence of a secondary market and
might, for this or other reasons, suffer a loss to the extent of the default.
The Funds invest in variable rate master demand notes only when the Adviser
deems the investment to involve minimal credit risk.
In some instances, The AAL Money Market Fund 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 or more, but only
under conditions established by the Securities and Exchange Commission rules
that permit such securities to be considered to have maturities of less than 397
days. The Fund may invest in these longer-term variable rate securities only
when, in the Adviser's view, the Fund may be able to take advantage of the
higher yield that is usually paid on these securities over short-term
securities, and it appears to
<PAGE>
the Adviser that the variable rates on these securities may reduce the
fluctuations in market value typical of longer-term securities. The Fund also
may purchase variable rate securities with a put option, which may further
reduce the risk of fluctuations in market value.
Portfolio Turnover -- The AAL Bond, Municipal Bond and High Yield Bond Funds
As noted in the Prospectus, portfolio turnover rates in excess of 100% may
increase brokerage and other trading expenses incurred by a Fund. The AAL Small
Cap Stock and Mid Cap Stock Funds had portfolio turnover rates of 138.50% and
112.60%, and The AAL Bond and Municipal Bond Funds had portfolio turnover rates
of 212.49% and 119.70% for the fiscal year ended on April 30, 1997,
respectively. . The turnover rates for The AAL Mid Cap Stock and Small Cap Stock
Funds reflect the portfolio managers growth investment style, the purchase of
initial public offerings, which tend to appreciate significantly after the
offering but level off in price after a certain period and the volatility of
small cap and mid cap stock prices in general. The portfolio turnover rate for
The AAL Bond Fund reflects the portfolio manager's active selection of the
individual securities that he believes provide the best income for the portfolio
within the Fund's investment parameters at any one time. The portfolio manager
has increased buying and selling securities for The AAL Bond Fund recently. As a
result, the portfolio turnover rate for the next fiscal year may be in excess of
300%, and may be as high as 600% or more. The turnover rate for The AAL
Municipal Bond Fund reflects the portfolio manager's pursuit of total return
(growth and income) in the municipal securities market.
In seeking its objectives, The High Yield Bond Fund, which began operations on
January 8, 1997, buys or sells portfolio securities whenever the Adviser
believes it appropriate. The Adviser's decision will not generally be influenced
by how long the Fund may have owned the security. From time to time, the Fund
will buy securities intending to seek short-term trading profits. As a result,
The AAL High Yield Bond Fund's portfolio turnover rate may be higher than that
of other mutual funds. The turnover rate is not a limiting factor when
considering a change in the Fund's portfolio.
The AAL Equity Income Fund may have portfolio turnover in excess of 100% during
its transition from concentrating its assets in the securities of public
utilities companies, to investing at least 65% of its assets in income-producing
equity securities in any industry.
Options and Futures
The Funds, except for The AAL Money Market Fund, may engage in options, futures
and options on futures transactions that constitute bona fide hedging or other
permissible risk management transactions. The Funds will follow the requirements
of the SEC and the
<PAGE>
Commodities Futures Trading Commission and set aside liquid assets in a separate
account to secure a Fund's potential obligations under its futures or options
positions.
As the writer (seller) of a covered call option, a Fund may forego, during the
option's life, the opportunity to profit from increases in the market value of
the security covering the call option above the sum of the premium and the
exercise price of the call option. However, if the market value of the security
declines, writing a call option would reduce the amount of any decline sustained
to the extent of the premium income received from the sale of the covered call
option.
In periods when the market is neutral or declining, additional incremental
income can be achieved by writing options and receiving the premiums. In
addition, through the writing and purchase of options and the purchase and sale
of futures contracts and related options, a Fund may at times seek to enhance
current returns or to hedge against a decline in the value of securities owned
by it or an increase in the price of securities it plans to purchase.
If additional types of options, futures contracts, or futures options are traded
in the future, a Fund may also use those investment vehicles provided that the
Board of Trustees determines that their use is consistent with a Fund's
investment objective.
Options on Securities and Indexes
Options and futures may be purchased and sold on debt or other securities or
indexes in standardized contracts traded on national securities exchanges,
boards of trade, or similar entities, or quoted on NASDAQ. In addition,
agreements sometimes called cash puts may accompany the purchase of a new issue
of bonds from a dealer. Currently there are no publicly traded options on
tax-exempt securities.
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 the security underlying the option (or the cash value
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.)
The Funds, except for The AAL Money Market Fund, 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 a Fund owns the security underlying the call or has an
absolute and immediate right to acquire the 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
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custodian) upon conversion or exchange of other securities held in its
portfolio. For a call option on an index, the option is covered if a Fund
maintains with their custodian cash or cash equivalents equal to the contract
value. A call option also is covered if a Fund holds a call on the same security
or index as the call written where the exercise price of the call purchased is:
(i) equal to or less than the exercise price of the call; or (ii) greater than
the exercise price of the call written, provided the difference is maintained by
a Fund in cash or cash equivalents in a segregated account with its custodian. A
put option on a security or an index is covered if a Fund maintains a cash or
cash equivalents equal to the exercise price in a segregated account with their
custodian. A put option also is covered if a Fund 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 a Fund in cash or cash equivalents in a segregated account with
its custodian.
If an option written by a Fund expires, the Fund realizes a capital gain equal
to the premium received at the time the option was written. If an option
purchased by the Fund expires unexercised, the Fund realizes a capital loss
equal to the premium paid.
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 a Fund desires.
A Fund 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, a Fund will realize a capital loss. If the premium
received from a closing sale transaction is more than the premium paid to
purchase the option, a Fund will realize a capital gain or, if it is less, a
Fund will realize a capital loss. 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 Fund is an asset of the
Fund. The premium received for an option written by the Fund is recorded as a
deferred liability. The value of an option purchased or written is marked to
market daily and is valued at the closing price on the exchange on which it is
traded or, if not traded on an exchange or no closing price is available, at the
mean between the last bid and asked prices.
Risks Associated with Options on Securities and Indexes
There are several risks associated with transactions in options on securities
and on indexes. For example, there are significant differences between the
securities and options markets that could result in an imperfect correlation
between them, causing a given transaction not to achieve its objectives. A
decision as to whether, when and how to use options involves the
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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 Fund seeks to
close out an option position. If a Fund 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 Fund were unable to
close out a covered call option that it had written on security, it would not be
able to sell the underlying security unless the option expires without exercise.
As a writer of a covered call option, a Fund 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 Fund, a Fund would not be
able to close out the option. If restrictions on exercise were imposed, a Fund
might be unable to exercise an option it has purchased. Except to the extent
that a call option on an index written by a Fund is covered by an option on the
same index purchased by a Fund, movements in the index may result in a loss to a
Fund; however, such losses may be mitigated by changes in the value of a Fund's
portfolio securities during the period the option was outstanding.
Futures Contracts and Options on Futures Contracts
A Fund may enter into 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.
A public market exists in futures contracts covering a number of indexes as well
as the following financial instruments: U.S. Treasury bonds; U.S. Treasury
notes; GNMA certificates; three-month U.S. Treasury bills; 90 day commercial
paper; bank certificates of deposit; and Eurodollar certificates of deposit. It
is expected that other futures contracts will be developed and traded. A Fund
may engage in transactions involving new futures contracts (or options thereon)
if, in the opinion of the Board of Trustees, they are appropriate hedging
instruments for a Fund.
A Fund may purchase (and, if the Commodity Futures Trading Commission grants
certain regulatory relief, write) call and put futures options. Futures options
possess many of the same characteristics as options on securities and indexes. A
futures option gives the holder the right, in return for the premium paid, to
assume a long position (call) or short position (put)
<PAGE>
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.
As long as it is required by regulatory authorities having jurisdiction over a
Fund, it will limit its use of futures contracts and futures options to hedging
transactions. For example, a Fund might use futures contracts to hedge against
anticipated changes in interest rates that might adversely affect either the
value of a Fund's securities or the price of the securities that a Fund intends
to purchase. A Fund's hedging may include sales of futures contracts, as an
offset against the effect of expected increases in interest rates, and purchases
of futures contracts as an offset against the effect of expected declines in
interest rates. Although other techniques could be used to reduce a Fund's
exposure to interest rate fluctuations, a Fund may be able to hedge its exposure
more effectively and perhaps at a lower cost by using futures contracts and
futures options.
The success of any hedging technique depends on the Adviser and/or Sub-Adviser
for The AAL International Fund correctly predicting changes in the level and
direction of interest rates and other factors. Should those predictions be
incorrect, the Fund's return might have been better had it not attempted
hedging. However, in the absence of the ability to hedge, the Adviser and/or
Sub-Adviser for The AAL International Fund might have taken portfolio actions in
anticipation of the same market movements with similar investment results, but
presumably at greater transaction costs.
A Fund will only enter into futures contracts and futures options that are
standardized and traded on a U.S. exchange, board of trade, or similar entity,
or quoted on an automated quotation system.
When a purchase or sale of a futures contract is made by a Fund, a Fund 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 that is returned to a Fund upon termination of the
contract, assuming all contractual obligations have been satisfied. A Fund
expects to earn interest income on its initial margin deposits. A futures
contract held by a Fund is valued daily at the official settlement price of the
exchange on which it is traded. Each day a Fund 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 Fund, but is instead a settlement between a
Fund and the broker of the amount one would owe the other if the futures
contract expired. In computing daily net asset value, a Fund will mark to market
its open futures positions.
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A Fund also is required to deposit and maintain margin on any put and call
options on futures contracts that it has written. 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 a Fund.
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, a Fund realizes a capital
gain. If the offsetting purchase price is more, a Fund realizes a capital loss.
Conversely, if an offsetting sale price is more than the original purchase
price, a Fund realizes a capital gain. If the offsetting price is less, a Fund
realizes a capital loss. The transaction costs must also be included in these
calculations.
Risks Associated with Futures
There are several risks associated with the use of futures contracts and futures
options as hedging techniques. 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 hedging vehicle and in the portfolio securities being hedged. In addition,
there are significant differences between the securities and futures markets
that could result in an imperfect correlation between the markets, causing a
given hedge not to achieve its objectives. The degree of imperfection of
correlation depends on circumstances such as: (1) variations in the speculative
market demand for futures, futures options and debt securities, including
technical influences in futures and futures options trading; and (2) differences
between the financial instruments being hedged and the instruments underlying
the standard contracts available for trading, such as interest rate levels,
maturities, and creditworthiness of issuers. A decision as to whether, when and
how to hedge involves the exercise of skill and judgment, and even a
well-conceived hedge may be unsuccessful to some degree because of market
behavior or unexpected interest rate trends.
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 Fund
seeks to close out a futures or futures options position. In such a case, a Fund
would continue to be required
<PAGE>
to meet margin requirements until the position is closed. In addition, some of
the contracts discussed above are relatively new instruments without a
significant trading history. As a result, there can be no assurance that an
active secondary market will develop or continue to exist.
Limitations on Options and Futures
A Fund will not enter into a futures contract or purchase an option there on if:
the initial margin deposits for futures contracts held by a Fund plus premiums
paid by it for open futures options positions less the amount by which any such
positions are "in the money" exceed 5% of a Fund's net assets. A call option is
"in the money" if the value 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 value 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
Fund must maintain with its custodian (or broker, if legally permitted) cash or
cash equivalents (including any margin) equal to the market value of such
contract. When writing a call option on a futures contract, a Fund similarly
will maintain with its custodian cash or cash equivalents (including any margin)
equal to the amount such option is in the money until the option expires or is
closed out by a Fund.
A Fund may not maintain open short positions in futures contracts, call options
written on futures contracts or call options written on indexes if, in the
aggregate, the market value of all such open positions exceeds the current value
of the securities in its portfolio, plus or minus unrealized gains and losses on
the open positions, adjusted for the historical relative volatility of the
relationship between the portfolio and the positions. For this purpose, to the
extent a Fund 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.
To comply with Commodity Futures Trading Commission Rules and thereby avoid
being deemed a "commodity pool operator," a Fund will not invest in a commodity
contract where the "underlying commodity value" of each long position at any
time exceeds the sum of:
(1) The value of the Fund's short-term U.S. debt obligations or other
U.S. dollar denominated, high-quality short-term money market
instruments and cash that it has set aside in an identifiable
manner, plus any funds deposited as margin on the contract;
(2) Unrealized appreciation on the contract held by the broker; and
(3) Cash proceeds from existing investments due in not more than 30
days.
"Underlying commodity value" means the size of the contract multiplied by the
daily settlement price of the contract.
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As long as the Fund continues to sell its shares in certain states, the Fund's
options transactions will also be subject to some of the non-fundamental
restrictions set forth in this Statement of Additional Information.
Taxation of Options and Futures
If a Fund exercises a call or put option, 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 of options and futures options, the
difference between the cash received at exercise and the premium paid is a
capital gain or loss.
Entry into a closing purchase transaction will result in capital gain or 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 one year prior to the writing of the
option, any loss realized as a result of a closing purchase transaction will be
long-term for federal tax purposes. The holding period of the securities
covering an "in the money" option will not include the period of time the option
is outstanding.
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 delivery notice date or expiration
date. If a Fund delivers securities under a futures contract, a Fund also
realizes a capital gain or loss on those securities.
For Federal income tax purposes, a Fund 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, 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) that are intended to hedge
against a change in the value of securities held by a Fund may affect the
holding period of the hedged securities.
A Fund distributes to shareholders annually any net capital gains that 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 a Fund's other investments and
shareholders are advised of the nature of the payments.
Federal Tax Treatment of Options, Futures Contracts and Forward Foreign Exchange
Contracts
<PAGE>
A Fund may enter into certain option, futures and forward foreign exchange
contracts that will be treated as Section 1256 contracts or straddles under the
Internal Revenue Code.
Transactions that are considered Section 1256 contracts will be considered to
have been closed at the end of a Fund's fiscal year and any gains or losses will
be recognized for tax purposes at that time. Such gains or losses from the
normal closing or settlement of such transactions will be characterized as 60%
long-term capital gain or loss and 40% short-term capital gain or loss
regardless of the holding period of the instrument. A Fund will be required to
distribute net gains on such transactions to shareholders even though it may not
have closed the transaction and received cash to pay such distribution.
Options, futures and forward foreign exchange contracts that offset a foreign
dollar denominated bond or currency position may be considered straddles for tax
purposes in which case a loss on any position in a straddle will be subject to
deferral to the extent of unrealized gain in an offsetting position.
For a Fund 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 or
currencies). Pending tax regulations could limit the extent that net gains
realized from options, futures or foreign forward exchange contracts on
currencies are qualifying income for purposes of 90% requirement. In addition,
gains realized on the sale of other disposition of securities, including
options, futures or foreign forward exchange contracts on securities or
securities indices and, in some cases, currencies, held for less than three
months, must be limited to less than 30% of a Fund's annual gross income. To
avoid realizing excessive gains on securities or currencies held less than three
months, a Fund may be required to defer the closing out option, futures or
foreign forward exchange contracts beyond the time when it would otherwise be
advantageous to do so. It is anticipated that the unrealized gains on Section
1256 options, future and foreign forward exchange contracts, which had been open
for less than three months as of the end of a Fund's fiscal year and which are
recognized for tax purposes, will be considered gains on securities or
currencies held for three months or more for purposes of the 30% test.
Foreign Securities - The AAL Capital Growth, Mid Cap Stock, Small Cap Stock and
Bond Funds
The AAL Capital Growth, Mid Cap Stock and Small Cap Stock Funds may invest in
foreign securities, but only if such securities are listed and traded on a U.S.
national securities exchange. These Funds do not intend to invest more than 5%
of their net assets in such foreign securities. The AAL Bond Fund may invest up
to 20% of its net assets in debt securities of foreign issuers that are payable
in U.S. dollars. Foreign securities may present a greater degree of risk
(including risks relating to tax provisions or expropriation of assets) than do
securities of domestic issuers.
<PAGE>
Foreign Securities - The AAL International, Equity Income and High Yield Bond
Funds
The AAL Equity Income Fund may invest up to 15% of its net assets in foreign
securities. The Fund also may invest in foreign securities in domestic markets
through depository receipts and securities of foreign issuers that are traded on
a registered American stock exchange or the NASDAQ National Market System
without regard to the 15% limitation. The Funds consider depository receipts as
investments in the underlying stocks for purposes of diversification.
The AAL High Yield Bond Fund may invest up to 15% of its net assets in foreign
bonds. At this time, the Fund intends to limit its purchases of foreign bonds to
those trading in the U.S.
The AAL International Fund normally invests at least 65% of its total assets in
foreign securities primarily trading in at least 3 different countries, not
including the U.S.
Foreign investments may involve risks that are in addition to the risks inherent
in U.S. securities. In many countries there is less public information available
about issuers and foreign companies may not be subject to uniform accounting,
auditing and financial reporting standards. The value of foreign investments may
rise or fall because of changes in currency exchange rates, and a Fund 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 Fund's income without providing a tax
credit to shareholders. Obtaining and enforcing judgments, when necessary, in
foreign countries may be more difficult and expensive than in the U.S. Although
these Funds intend to invest in securities of issuers of stable and developed
countries, there is the possibility of expropriation, confiscatory taxation,
nationalization, currency blockage or political or social instability that could
affect investments in such countries.
The AAL International and Equity Income Funds may invest in American Depository
Receipts ("ADRs") without limit. ADD facilities may be either "sponsored" or
"unsponsored." While similar, distinctions exist relating to the rights and
duties of ADD 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 ADD.
Sponsored facilities enter into an agreement with the issuer that sets out
rights and duties of the issuer, the depository and the ADD holder. This
agreement also allocates fees among the parties. Most sponsored agreements also
provide that the depository will distribute
<PAGE>
shareholder notices, voting instructions and other communications. The AAL
International and Equity Income Funds may invest in sponsored and unsponsored
ADRS.
In addition to ADRS, The AAL International Fund may hold foreign securities in
the form of American Depository Shares ("ADSs"), Global Depository Receipts
("GDRs") and European Depository Receipts ("EDRs"), or other securities
convertible into foreign securities. These receipts may not be denominated in
the same currency as the underlying securities. Generally, American banks or
trust companies issue ADRs and ADSs, which evidence ownership of underlying
foreign securities. GDRs represent global offerings where an issuer issues two
securities simultaneously in two markets, usually publicly in a non-U.S. market
and privately in the U.S. market. EDRs (sometimes called Continental Depository
Receipts ("CDRs")) are similar to ADRs, but usually issued in Europe. Typically
issued by foreign banks or trust companies, EDRs and CDRs evidence ownership of
foreign securities. Generally, ADRs and ADSs in registered form trade in the
U.S. securities markets, GDRs in the U.S. and European markets, and EDRs and
CDRs (in bearer form) in European markets. The Adviser and Sub-Adviser for The
AAL International Fund consider investments in ADRs, ADSs, GDRs, EDRs and CDRs
as investments in the underlying stocks for purposes of diversification.
Classification of Foreign Markets -- The AAL International Fund
Foreign markets are often classified as mature or emerging. The countries in
which The AAL International Fund may invest are classified below. The Fund also
may invest in additional countries when such investments are consistent with the
Fund's objective and policies.
Mature: Australia, Austria, Belgium, China, Canada, Denmark, Finland,
France, Germany, Hong Kong, Ireland, Italy, Japan, Luxembourg,
Netherlands, New Zealand, Norway, Singapore, Spain, Sweden,
Switzerland, United Kingdom and United States.
Emerging: Argentina, Brazil, Chile, Czech Republic, Ecuador, Greece,
Hungary, India, Indonesia, Jamaica, Kenya, Israel, Jordan,
Malaysia, Mexico, Morocco, Nigeria, Pakistan, People's Republic
of China, Peru, Phillippines, Poland, South Africa, South Korea,
Sri Lanka, Taiwan, Thailand, Turkey, Uruguay, Venezuela and
Vietnam.
Foreign Currency Transactions -- The AAL International, Equity Income and
High Yield Bond Funds
To manage the currency risk accompanying investments in foreign securities and
to facilitate the purchase and sale of foreign securities, The AAL
International, Equity Income and High Yield Bond Funds may engage in foreign
currency transactions on a spot (cash) basis at the spot rate prevailing in the
foreign currency exchange market or through entering into contracts to purchase
or sell foreign currencies at a future date ("forward foreign currency"
contracts or "forward" contracts).
<PAGE>
A forward foreign currency contract involves an obligation to purchase or sell a
specific currency at a future date, which may be any fixed number of days from
the date of the contract agreed upon by the parties, at a price set at the time
of the contract. These contracts are principally traded in the inter-bank market
conducted directly between currency traders (usually large commercial banks) and
their customers. A forward contract generally has no deposit requirement and no
commissions are charged at any stage for trades.
When a Fund enters into a contract for the purchase or sale of a security
denominated in a foreign currency, it may desire to "lock in" the U.S. dollar
price of the security. By entering into a forward contract for the purchase or
sale of a fixed amount of U.S. dollars equal to the amount of foreign currency
involved in the underlying security transaction, the Fund can protect itself
against a possible loss resulting from an adverse change in the relationship
between the U.S. dollar and the subject foreign currency during the period
between the date the security is purchased or sold and the date on which the
payment is made or received.
When the Adviser and/or Sub-Adviser for The AAL International Fund believe that
a particular foreign currency may suffer a substantial decline against the U.S.
dollar, they may enter into a forward contract to sell a fixed amount of the
foreign currency approximating the value of some or all of the Fund's portfolio
securities denominated in such foreign currency. The precise matching of the
forward contract amounts and the value of the securities involved will not
generally be possible since the future value of such 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 short-term currency market movement is
extremely difficult and the successful execution of a short-term hedging
strategy is highly uncertain. A Fund will not enter into such forward contracts
or maintain a net exposure to such contracts where the consummation of the
contracts would obligate the Fund to deliver an amount of foreign currency in
excess of the value of the Fund's securities or other assets denominated in that
currency. Under normal circumstances, the Adviser and/or Sub-Adviser for The AAL
International Fund consider the long-term prospects for a particular currency
and incorporate the prospects into their overall long-term diversification
strategies. The Adviser and Sub-Adviser for The AAL International Fund believe
that it is important to have the flexibility to enter into such forward
contracts when they determine that the best interests of a Fund will be served.
At the maturity of a forward contract, a Fund may either sell the portfolio
securities and make delivery of the foreign currency, or it may retain the
securities and terminate its contractual obligation to deliver the foreign
currency by purchasing an "offsetting" contract obligating it to purchase, on
the same maturity date, the same amount of foreign currency.
If a Fund retains the portfolio securities and engages in an offsetting
transaction, the Fund will incur a gain or a loss to the extent that there has
been movement in forward contract prices. If the Fund engages in an offsetting
transaction, it may subsequently enter into a forward contract to sell the
foreign currency. Should forward prices decline during the period when the Fund
entered into the forward contract for the sale of a foreign currency and the
date it
<PAGE>
entered into an offsetting contract for the purchase of the foreign currency,
the Fund will realize a gain to the extent the price of the currency it has
agreed to sell exceeds the price of the currency it has agreed to purchase.
Should forward prices increase, the Fund will suffer a loss to the extent that
the price of the currency it has agreed to purchase exceeds the price of the
currency it has agreed to sell.
It is important to note that: (1) a foreign currency hedge transactions does not
protect against or eliminate fluctuations in the prices of particular portfolio
securities (i.e., if the price of such securities decline due to an issuer's
deteriorating credit situation); and (2) it is impossible to forecast with
precision the market value of securities at the expiration of a forward
contract. Accordingly, the Fund may have to purchase additional foreign currency
on the spot market (and bear the expense of such purchase) if: (1) the market
value of a Fund's securities are less than the amount of the foreign currency
the Fund is obligated to deliver; and (2) a decision is made to sell the foreign
securities and make delivery of the foreign currency upon expiration of the
contract. Conversely, the Fund may have to sell some of its foreign currency
received upon the sale of a portfolio security if the market value of the Fund's
securities exceed the amount of foreign currency the Fund is obligated to
deliver. A Fund's dealings in forward foreign currency exchange contracts will
be limited to the transactions described above. Also a Fund may not be able to
hedge against a currency devaluation at a price above the anticipated level
where the market itself has generally anticipated the currency's devaluation.
Although the Funds value their assets daily in terms of U.S. dollars, they do
not intend to convert their holdings of foreign currencies into U.S. dollars on
a daily basis. A Fund will do so from time to time and investors should be aware
of the costs of currency conversion. Although foreign exchange dealers do not
charge a fee for conversion, they realize a profit based on the difference (the
"spread") between the prices at which they are buying and selling various
currencies. Thus, a dealer may offer to sell a foreign currency to a Fund at one
rate, while offering a lesser rate of exchange should the Fund desire to resell
that currency to the dealer.
Options and Futures Relating to Foreign Currencies - The AAL International,
Equity Income and High Yield Bond Funds
The AAL International, Equity Income and High Yield Bond Funds may purchase and
sell currency futures and purchase and write currency options to increase or
decrease its exposure to different foreign currencies. They also may purchase
and write currency options in conjunction with the currency futures or forward
contracts of another series of the Funds. The uses and risks of currency options
and futures are similar to options and futures relating to securities or
indices, as discussed above.
Currency futures contracts are similar to forward foreign currency contracts,
except that they are traded on exchanges (and have margin requirements) and are
standardized as to contract size and delivery date. Most currency futures
contracts call for payment or delivery in U.S. dollars. The underlying
instrument of a currency option may be a foreign currency, which
<PAGE>
generally is purchased or delivered in exchange for U.S. dollars, or may be a
futures contract. The purchaser of a currency call obtains the right to purchase
the underlying currency, and the purchaser of a currency put obtains the right
to sell the underlying currency.
Currency futures and options values can be expected to correlate with exchange
rates, but may not reflect other factors that affect the value of the respective
Fund's investments. A currency hedge, for example, should protect a
Yen-denominated security from a decline in the Yen, but will not protect a
particular Fund against a price decline resulting from deterioration in the
issuer's creditworthiness. Because the value of the Fund's foreign-denominated
investments change in response to many factors other than exchange rates, it may
not be possible to match the amount of currency options and futures to the value
of the Fund's investments exactly overtime.
Privately Issued Securities: The AAL Money Market Fund
Securities in which The AAL Money Market Fund may invest include securities
issued by major corporations without registration under the Securities Act of
1933 in reliance on certain exemptions, including the "private placement"
exemption afforded by Section 4(2) of that Act. Section 4(2) paper is restricted
as to disposition under the federal securities laws in that any resale must be
made in an exempt transaction. This paper normally is resold to other
institutional investors through or with the assistance of investment dealers who
make a market in it, thus providing liquidity. In the opinion of the Adviser,
Section 4(2) paper is no less liquid or saleable than commercial paper issued
without legal restrictions on disposition. However, should a section 4(2) paper
issue be deemed illiquid by the Adviser, the Fund would purchase such security
only in accordance with its limitations on illiquid securities. See "Additional
Investment Factors and Risks Regarding the Funds -- Illiquid and Restricted
Securities" in the prospectus.
Variable Rate Demand Notes--The AAL Capital Growth, Mid Cap Stock, Small Cap
Stock, International, Bond, High Yield Bond and Money Market Funds
The AAL Capital Growth, Mid Cap Stock, Small Cap Stock, International, Bond,
High Yield Bond and Money Market Funds (subject to Rule 2a-7) may purchase
variable rate master demand notes, which are unsecured instruments that permit
the indebtedness thereunder to vary and provide for periodic adjustments in the
interest rate. Although the notes are not normally traded and there may be no
secondary market in the notes, the Funds may demand payment of principal at any
time. The notes purchased by the Funds must be rated in one of the two highest
rating categories by a Nationally Recognized Statistical Rating Organization or
that have been issued by an issuer that has received a rating from the requisite
Nationally Recognized Statistical Rating Organizations, in the top categories
with respect to a class of short-term debt obligations that is now comparable in
priority and security with the instrument. If an issuer of a variable rate
master demand note defaulted on its payment obligation, the Funds might be
unable to dispose of the note because of the absence of a secondary market and
might, for this or other reasons, suffer a loss to the extent of the default.
The Funds invest
<PAGE>
in variable rate master demand notes only when the Adviser deems the investment
to involve minimal credit risk.
Investments In Other Investment Companies
An investment by a Fund in other investment companies, which is limited by
fundamental investment restriction 14 below, may cause a Fund to increase
payments of administration and distribution expenses.
Investment Restrictions
Each Fund operates under the following investment restrictions. A Fund may not:
(1) invest more than 5% of its net assets (or 5% of The AAL International
Fund's total assets or 5% of The AAL High Yield Bond Fund's total assets),
taken at value at the time of each investment, in the securities (including
repurchase agreements) of any one issuer (for this purpose, the issuer(s)
of a debt security being deemed to be only the entity or entities whose
assets or revenues are subject to the principal and interest obligations of
the security), except that up to 25% of its net assets (or 25% of The AAL
lnternational Fund's total assets or 25% of The AAL High Yield Bond Fund's
total assets) may be invested without regard to this limitation and
provided that such restrictions shall not apply to obligations issued or
guaranteed by the U.S. government or any agency or instrumentality thereof;
(2) purchase securities on margin, except for use of short-term credit
necessary for clearance of purchases and sales of portfolio securities, but
a Fund may 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 for the described transactions in options, futures, options on
futures and short sales against the box;
(4) make loans to other persons, except that the Fund reserves freedom of
action, consistent with its other investment policies and restrictions and
as described in the prospectus and this Statement, to: (a) invest in debt
obligations, including those that 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; (b) enter into
repurchase agreements; and (c) lend portfolio securities, provided that the
Fund may not loan 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 the Fund may borrow in
amounts not in excess of 10% of its net assets, taken at current value, and
then only from banks as a
<PAGE>
temporary measure for extraordinary or emergency purposes (the Funds will
not borrow to increase income, but only to meet redemption requests that
otherwise might require untimely dispositions of portfolio securities;
interest paid on any such borrowing will reduce net income);
(6) mortgage, pledge, hypothecate or in any manner transfer, as security
for indebtedness, any securities owned or held by a Fund 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
Fund'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 Fund may be deemed an underwriter under federal securities
laws;
(8) purchase or sell real estate, or real estate limited partnership
interests provided that a Fund may invest in securities secured by real
estate or interests therein or issued by companies that invest in real
estate or interests therein;
(9) purchase or sell commodities or commodity contracts except that a Fund
may purchase or sell futures and options thereon for hedging purposes as
described this Statement;
(10) invest more than 25% of its net assets (or 25% of The AAL
International Fund's or The AAL High Yield Bond Fund's total assets), taken
at current value at the time of each investment, in securities of
nongovernmental issuers whose principal business activities are in the same
industry (or 25% or more of The AAL International Fund's or The AAL High
Yield Bond Fund's total assets) in any single industry or issuer (except
the U.S. government or any agency or instrumentality thereof);
(11) invest in oil, gas or mineral related programs or leases except as may
be included in the definition of public utilities, although a Fund may
invest in securities of enterprises engaged in oil, gas or mineral
exploration;
(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 10% of a Fund's net assets (taken at current
value at the time of such investment) would be invested in such securities;
(13) except for The AAL High Yield Bond Fund, invest in any security if as
a result a Fund would have more than 5% of its net assets invested in
securities of companies which,
<PAGE>
together with any predecessors, have been in continuous operation for less
than three years;
(14) purchase securities of other investment companies, if the purchase
would cause more than 10% of the value of a Fund's net assets (or 10% of
the value of The AAL International Fund's total assets or 10% of the value
of The AAL High Yield Bond Fund'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 Fund or more than 5% of the value of a Fund's
net assets (or 5% of the value of The AAL International Fund's total assets
or 5% of the value of The AAL High Yield Bond Fund'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
(15) purchase more than 10% of the outstanding voting securities of an
issuer or invest for the purpose of exercising control or management.
Each of the above restrictions (1) through (15), as well as each Fund's
investment objective, except for The AAL High Yield Bond Fund, is a fundamental
policy. In addition, each Fund may not, so long as it publicly offers its shares
for sale in certain states: (a) buy or sell a call option unless, (i) the option
is issued by the Options Clearing Corporation, an exchange, NASDAQ or similar
entity, and (ii) the security underlying the option is listed on an exchange or
similar entity or is a U.S. government or federal agency obligation; (b) invest
more than 5% of its net assets (valued at the time of investment) in warrants,
nor more than 2% of its net assets in warrants that are not listed on the New
York or American stock exchange; (c) write a put option except as a closing
transaction or purchase a put option if the aggregate premiums paid for all such
options exceed 2% of its net assets (less the amount by which any such positions
are in the money), excluding puts purchased as closing transactions; (d)
purchase or retain securities of any issuer if 5% of the securities of such
issuer are owned by those officers and directors of the Fund or by partners of
its Adviser who own individually more than 1/2 of 1 % of its securities; or (e)
with regard to The AAL Money Market Fund, invest in warrants or other mutual
fund shares not in connection with a merger, consolidation or reorganization.
Purchases and Redemptions; Pricing Considerations
Purchases and redemptions are discussed in the prospectus under the headings
"How to Buy Shares," "How to Sell (Redeem) Shares" and "Net Asset Value," and
that information is incorporated herein by reference.
The Funds' net asset value is determined only on the days on which the New York
Stock Exchange is open for trading. That Exchange is regularly closed on
Saturdays and Sundays and on New Years' Day, the third Monday in February, Good
Friday, the last Monday in May, Independence Day, Labor Day, Thanksgiving and
Christmas. If one of these holidays falls on
<PAGE>
a Saturday or Sunday, the Exchange will be closed on the preceding Friday or the
following Monday, respectively.
The Funds determine the net asset value by adding up the value of a Fund's
assets, subtracting the Fund's liabilities, and dividing the balance by the
total number of shares outstanding. In determining the current market value for
securities traded or listed on an exchange, the Funds use the last sale price on
the exchange where the securities primarily trade. For securities that have
readily available market quotations, the Funds use an over-the-counter or
exchange bid quotation. When a Fund holds securities or other assets that do not
have readily available market quotations or are restricted, the Fund values them
at fair market value, as determined in good faith by management under the
direction of the Board of Trustees. The Funds may use pricing services in
determining the current or fair market value of securities held in their
portfolios. The Funds value money market instruments with a remaining maturity
of 60 days or less on an amortized costs basis. The Funds comply with the SEC's
requirements for using an amortized cost valuation method.
Reliable market quotations are not considered to be readily available for many
long-term corporate bonds and notes, certain preferred stocks, tax-exempt
securities or foreign securities. The Funds may, and generally will, value debt
securities on the basis of valuations furnished through a pricing service or
services approved by the Board of Trustees. A pricing service generally will
determine valuations based upon normal, institutional-size trading units of such
securities using market transactions for comparable securities and various
relationships between securities generally recognized by institutional traders.
Management prices foreign securities in terms of U.S. dollars at the official
exchange rate. Alternatively, it may price these securities at the average of
the current bid and asked price of such currencies against the dollar last
quoted by a major bank that is a regular participant in the foreign exchange
market, or on the basis of a pricing service that takes into account the quotes
provided by a number of such major banks. If management does not have either of
these alternatives available to it or the alternatives do not provide a suitable
method for converting a foreign currency into U.S. dollars, the Board of
Trustees in good faith will establish a conversion rate for such currency.
Generally, U.S. government securities and other fixed income securities complete
trading at various times prior to the close of the New York Stock Exchange. For
purposes of computing net asset value, the Funds use the market value of such as
of the time their trading day ends. 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 Fund's net
asset value. If events materially affecting the value of a Fund's securities
occur during such a period, then these securities will be valued at their fair
value as determined in good faith by the Trustees.
Foreign securities trading may not take place on all days when the NYSE is open,
or may take place on Saturdays and other days when NYSE is not open and the
Fund's net asset value is
<PAGE>
not calculated. When determining the net asset value of the Fund, management
values foreign securities primarily listed and/or traded in foreign markets at
their market value as of the close of the last primary market where the
securities traded. Unless material, as determined by management under the
supervision of the Board of Trustees, events affecting the valuation of Fund
securities occurring between the time its net asset value is determined and the
close of the NYSE will not be reflected in such asset value. As a result, the
Fund's net asset value may be significantly affected by such trading on days
when the Fund is not accepting purchases or redemptions.
The Funds intend to pay all redemptions in cash and are obligated to redeem
shares solely in cash up to the lesser of $250,000 or one percent of the net
assets of the Fund during any 90- day period for any one shareholder. However,
redemptions in excess of such limit may be paid wholly or partly by a
distribution in kind of securities. If redemptions were made in kind, the
redeeming shareholders might incur brokerage fees in selling the securities
received in the redemptions.
Each Fund 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 the 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 Fund
not reasonably practicable.
The AAL Money Market Fund-Amortized Cost Valuation
The AAL Money Market Fund 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 Fund may have to sell portfolio
securities prior to maturity and at a price which might not be as desirable.
Although there is no assurance that it will be able to do so, the Fund will use
its best efforts to maintain a constant net asset value of $1.00 per share for
purchases and redemptions. The Board of Trustees has established procedures for
this purpose, which procedures include a review of the extent of any deviation
of net asset value 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
Fund, the Board of Trustees 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,
<PAGE>
reducing or withholding dividends, and utilizing a net asset value per share as
determined by using available market quotations. The Fund 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 Trustees determines
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
SEC for money market funds using the amortized cost method of valuation and with
certain reporting and record keeping procedures. There is no assurance that
constant net asset value can be maintained at all times. In the event amortized
cost ceases to represent fair value, the Board will take appropriate action.
Letter of Intent
Under a Letter of Intent, as described in the prospectus, shares totaling 5% of
the dollar amount indicated in the letter will be held in escrow by the Transfer
Agent in the name of the purchaser. The Letter of Intent does not obligate the
investor to purchase, nor a Fund to sell, the indicated amount. In the event the
Letter of Intent goal is not achieved within the 13- month period, the Purchaser
is required to pay the difference between the sales commission otherwise
applicable to the purchases made during this period and sales charges actually
paid. The Distributor will liquidate sufficient escrowed shares to obtain such
difference after expiration of the Letter of Intent.
Investment Advisory Services
Please refer to the description of the Adviser, Advisory Agreement and Fees
under "Management of the Trust" in the Prospectus, which is incorporated herein
by reference.
The following Executive Officers of the Trust also serve as officers or
directors of the Adviser as shown below:
President; Director and President of AAL Capital
Ronald G. Anderson Management Corporation since 2/26/97
222 West College Avenue
Appleton, WI 54919-0007
DOB 10/2/48
Robert G. Same Secretary; Director since 1987, Executive
222 West College Avenue Vice President and Chief Operating Officer since
Appleton, WI 54919-0007 2/14/97 and Secretary of AAL Capital
DOB 7/28/45 Management Corporation since 1987
Terrance P. Gallagher Treasurer; Director and Chief Financial Officer of
222 West College Avenue AAL Capital Management Corporation since 1994,
Appleton, WI 54919-0007 Senior Vice President since 1987 and Comptroller
DOB 9/20/58 since 1992
Compensation of The Board of Trustees
The Fund makes no payments to any of its officers for services. However, any of
the Trustees who are not officers or employees of the Adviser or its parent are
paid, by The AAL Mutual Funds, an annual fee of $10,000 and a fee of $1,000 per
meeting. These fees are assessed ratably to each series of The AAL Mutual Funds.
Trustees are reimbursed by The AAL Mutual Funds for any expenses they may incur
by reason of attending such meetings or in connection with services they may
perform for The AAL Mutual Funds. For the fiscal year ended April 30, 1997, The
AAL Mutual Funds paid an aggregate of $60,280.54 in Trustees' fees and expenses.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
(1) (2) (3) (4) (5) (6)
Name of Capacities in Aggregate Pension or Estimated Total
Person which Remuneration Retirement Annual Compensation
Remuneration Benefits Benefits Upon from
Received Accrued Retirement Registrant and
During Fund Complex
Registrant's Paid to
Last Fiscal Trustees*
Year
Ronald G. Trustee - - - -
Anderson,
DOB 10/2/48
John H. Trustee - - - $4,500
Pender,
DOB 5/25/30
Richard L. Trustee - - - _
Gunderson,
DOB 6/14/33
F. Gregory Trustee $14,000 - - $20,000
Campbell,
DOB 12/16/39
D. W. Russler, Trustee $14,000 - - $20,000
DOB 10/28/28
Richard L. Trustee $14,000 - - $20,000
Gady,
DOB 2/28/43
Lawrence M. Trustee $14,000 - - $20,000
Woods,
DOB 4/14/32
</TABLE>
*The Fund complex includes the AAL Variable Product Series Fund, Inc.
<PAGE>
The Adviser furnishes the Funds, at the Adviser's expense, with all office space
and facilities, equipment and clerical personnel necessary for carrying out its
duties under the Advisory Agreement. The Adviser also will pay all compensation
of Trustees, officers and employees of the Trust who are affiliated persons of
the Adviser. All costs and expenses not expressly assumed by the Adviser under
the Advisory Agreement are paid by the Funds, including, but not limited to: (a)
interest and taxes; (b) brokerage commissions; (c) insurance premiums; (d)
compensation and expenses of its Trustees other than those affiliated with the
Adviser; (e) legal and audit expenses; (f) fees and expenses of the Trust's
custodian and transfer agent; (g) expenses incident to the issuance of the
Trust's shares, including stock certificates and issuance of shares on the
payment of, or reinvestment of, dividends; (h) fees and expenses incident to the
registration under Federal or state securities laws of the Trust or its shares;
(i) expenses of preparing, printing and mailing reports and notices and proxy
material to shareholders of the Trust; (j) all other expenses incidental to
holding meetings of the Trust's shareholders; (k) dues or assessments of or
contributions to the Investment Company Institute or its successor, or other
industry organizations; (l) such nonrecurring expenses as may arise, including
litigation affecting the Trust and the legal obligations which the Trust may
have to indemnify its officers and Trustees with respect thereto; and (m) all
expenses which the Trust agrees to bear in any distribution agreement or in any
plan adopted by the Trust pursuant to Rule 12b-1 under the Act.
The Adviser has agreed to reimburse each of the Funds monthly to the extent that
total annual expenses (excluding taxes, interest and brokers' commissions and
other normal charges incident to the purchase and sale of portfolio securities,
but including fees paid to the Adviser and/or a Sub-Adviser) exceed the
applicable limits prescribed by any state in which the shares of such Fund are
being offered for sale.
The Funds believe that currently the most restrictive state limits on annual
expenses during any fiscal year are 2 1/2% of a Fund's average daily net assets
up to $30 million, 2% of the next $70 million and 1 1/2% thereafter. The Adviser
reimbursed annual expenses in excess of 1.6% for The AAL Equity Income Fund
through April 30, 1994. In addition, the Adviser voluntarily has assumed annual
expenses of The AAL Bond Fund in excess of: 0.70 of 1 % of average daily net
assets of the Fund for the period from September 19, 1987 through March 31,
1988; 0.80 of 1 % of average daily net assets for the period from April 1, 1988
through January 31, 1989; 0.90 of 1% of average daily net assets from February
1, 1989 through July 31, 1989; and 1.0% of average daily net assets from August
1, 1989 through December 31, 1991. The Adviser reimbursed The AAL Money Market
Fund for all expenses of that Fund in excess of the following percentages of
average daily net assets for the dates indicated: all expenses, March 1988; 0.10
of 1%, April 1988; 0.20 of 1%, May 1 through July 31, 1988; 0.30 of 1%, August
1, 1988; 0.50 of 1%, September 1 through October 3, 1988; 0.60 of 1%, October 4
through 16, 1988; 0.70 of 1%, October 17, 1988, through January 31, 1989; 0.80
of 1%, February 1 through 14, 1989; 0.90 of 1%, February 15 through 28, 1989;
and 1.0%, March 1, through May 30, 1989. The Adviser reimbursed The Money Market
Fund by waiving 0.10 of 1% of its Advisory fee (to 0.30 of 1%), from August 19,
1992 to November 1, 1995 and waiving the entire advisory fee from November 1,
1995 through the end of 1996. As of
<PAGE>
January 1, 1997, the Adviser is charging .20 of 1% advisory fee for The AAL
Money Market Fund. These waivers are voluntary and may be discontinued at any
time. The Adviser reimbursed The AAL Municipal Bond Fund for all expenses of
that Fund in excess of: 0.80 of 1% of average daily net assets for the period
August 1, 1988 through January 31, 1989; and 0.90 of 1% of average daily net
assets from February 1, 1989 through December 31, 1991. The assumption of
expenses may be initiated, modified or discontinued by the Adviser, for any
Fund, at any time. The Funds have paid advisory fees net of reimbursements to
the Adviser for the past three fiscal years ended April 30, 1997 as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
For the Year Ended April 30, 1995 April 30, 1996 April 30, 1997
- ------------------------------------------------------------------------------------------------
The AAL Capital $5,910,666 $7,332,620 $9,121,422
Growth Fund
The AAL Mid Cap $1,443,406 $2,207,510 $3,188,294
Stock Fund
The AAL Small Cap N/A N/A $159,016
Stock Fund
The AAL International N/A $182,656 $873,585
Fund
The AAL $260,436 $445,179 $643,863
Equity Income
Fund (f/k/a The AAL
Utilities Fund)
The AAL Bond Fund $2,448,730 $2,410,603 $2,214,486
The AAL Municipal $2,134,525 $2,215,237 $2,153,751
Bond Fund
The AAL High Yield N/A N/A $60,205
Bond Fund
The AAL Money $335,173 $448,619 $780,148
Market Fund
</TABLE>
From its advisory fees, the Adviser pays the sub-advisory fees for The AAL
International Fund in accordance with the formula set forth in the prospectus.
Prior to November 1, 1995, the Adviser paid Sub-Advisory fees from the Advisory
fees received for The AAL Mid Cap Stock (f/k/a Smaller Company Stock Fund),
Capital Growth, Equity Income, Bond, Municipal Bond and Money Market Funds.
The Advisory Agreement and Sub-Advisory Agreement for The AAL International Fund
provide that subject to Section 36 of the Act, neither the Adviser nor
Sub-Adviser shall be liable to the Trust 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 Trust and the performance of their duties under the
Agreement except for willful misfeasance, bad faith or gross negligence
<PAGE>
in the performance of their duties or by reason of reckless disregard of their
obligations and duties under the agreements.
The Trust has agreed to use its best efforts to change its name if the Adviser
ceases to act as such with respect to the Funds. The continued use of the
Trust's present name would create confusion in the context of the Adviser or its
parent's business.
The Investment Advisory Agreement was approved by the Board of Trustees,
including a majority of the Trustees who were not interested persons (as defined
in the Act) of any party to the agreement on August 21, 1990, and was approved
by the shareholders of The AAL Municipal Bond Fund on November 27, 1990, and The
AAL Capital Growth, Bond and Money Market Funds on December 20, 1990. After
December 20, 1990, the Advisory Agreement was approved for:
The AAL Mid Cap Stock Fund (f/k/a The AAL Smaller Company Stock Fund) by
the Board of Trustees on May 18, 1993, and the sole shareholder on June 30,
1993;
The AAL Equity Income Fund (f/k/a The AAL Utilities Fund) by the Board of
Trustees on February 24, 1994, and the sole shareholder on March 18, 1994;
The AAL International Fund by the Board of Trustees on May 23, 1995, and
the sole shareholder on July 31, 1995;
The AAL Small Cap Stock Fund by the Board of Trustees on February 23, 1996,
and the sole shareholder on July 1, 1996; and
The AAL High Yield Bond Fund by the Board of Trustees on May 29, 1996, and
the sole shareholder on January 8, 1997.
Class B shares for The AAL Capital Growth, Mid Cap Stock, Small Cap Stock,
International, Equity Income (f/k/a The AAL Utilities Fund), Bond, Municipal
Bond, High Yield Bond and Money Market Funds were approved by the Board of
Trustees on, November 22, 1996, and the sole shareholder on January 8, 1997.
On October 16, 1995, the Board of Trustees terminated the Sub-Advisory
Agreements (effective November 1, 1995) with, and approved the assumption of the
duties by the Adviser of, the Sub-Advisers, Duff & Phelps Investment Management
Co., and Pilgrim Baxter & Associates Ltd., for The AAL Capital Growth, Mid Cap
Stock (f/k/a The Smaller Company Stock), Equity Income (f/k/a The AAL Utilities
Fund), Bond, Municipal Bond and Money Market Funds. The Board of Trustees also
approved reductions in the advisory fees for these Funds.
On May 23, 1995, the Board of Trustees, including a majority of the Trustees who
were not interested persons (as defined in the Act) of any party to the
agreement approved the current
<PAGE>
Sub-Advisory Agreement with Societe Generale Asset Management Corp. for The AAL
International Fund.
The Advisory Agreement and Sub-Advisory Agreement will continue in effect from
year to year only so long as such continuances are specifically approved at
least annually by the Board of Trustees, including a majority of the Trustees
who are not interested persons (as defined in the Act). The Advisory Agreement
and Sub-Advisory Agreement are terminable upon assignment or at any time without
penalty by the Board of Trustees or by vote of the holders of a majority of the
outstanding voting securities of the Trust. With respect to a particular Fund,
the Advisory or Sub-Advisory Agreement, if any, is terminable by the vote of a
majority of the outstanding shares of such Fund or by the Adviser on 60 days
written notice to the Trust.
Distributor
AAL Capital Management Corporation is the exclusive underwriter for the Funds
under a written Distribution Agreement, dated June 15, 1987, as amended, with
the Funds. The underwriter offers the shares of the Funds for sale on a
continuous basis through its field sales force.
Class A Shares: The public offering price of a Fund's Class A share is the net
asset value next computed plus a sales charge that varies based on the quantity
purchased. The public offering price of a Fund's Class A share is calculated by
dividing the net asset value of the Class A share being purchased by the
difference (expressed as a decimal) between 100% and the sales charge percentage
of the offering price applicable to the purchase (See "Buying Shares In The
Funds" in the Prospectus). The sales charge scale set forth in the Prospectus
applies to purchases of Class A shares of a particular Fund alone or in
combination with shares of all classes of the other Funds (as noted under "Right
of Accumulation") by any person, including family members who live with the
purchaser (i.e., husband, wife and minor children) and bona fide trustees, and
also applies to purchases made under the Right of Accumulation or Letter of
Intent as set forth in the Prospectus. The Funds offer a reduction in the sales
charges for non-profit organizations, charitable trusts, charitable remainder
Unitrusts, endowments, AAL branches and congregations (See "50% Reduction" in
the Prospectus).
The underwriter does not, and did not, receive compensation in connection with
redemptions and repurchases or brokerage commissions for Class A shares.
The aggregate underwriting commissions received and the amount of commissions
retained by the underwriter for the past three years ended April 30, 1997 for
Class A Shares were as follows:
<PAGE>
Class A Shares
For Fiscal Year Ended Aggregate Commissions Retained Commissions
April 30, 1995 $13,705,723 $837,983
April 30,1996 $17,870,771 $5,027,588
April 30, 1997 $18,026,973 $7,289,125
Class B Shares: The public offering price of a Fund's Class B share is the net
asset value (See "Buying Shares in the Funds" in the prospectus). The Funds
began offering Class B shares on January 8, 1997. From January 8, 1997 through
April 30, 1997, the aggregate redemption fees (underwriting commissions)
received and the amount of compensation retained by the underwriter were as
follows:
Class B Shares
For Fiscal Year Ended 4/30/97 Aggregate Commissions Retained Commissions
From January 8, 1997 to the $71 $71
Fiscal Year Ended April 30,
1997
General
AAL Capital Management Corporation acts as exclusive underwriter for two
additional series of The AAL Mutual Funds: The AAL U.S. Government Zero Coupon
Target Fund, Series 2001; and The AAL U.S. Government Zero Coupon Target Fund,
Series 2006.
Distribution Plan
The Trust has adopted a distribution plan for Class A and Class B shares (the
"Distribution Plan") pursuant to Rule 12b-1 (the "Rule") under the Act.
The Plan authorizes the distributor to make certain payments (either as a "12b-1
Distribution Fee" or a "Service Fee") to any qualified recipient, as defined in
the Plan, that has rendered assistance in the distribution of the Funds' shares
(such as sale or placement of the Funds' shares, or administrative assistance,
such as maintenance of sub-accounting or other records). The Plan also
authorizes the Distributor to purchase advertising for shares of the Funds, to
pay for sales literature and other promotional material, and to make payments to
its sales personnel.
Any payments paid under the Plan to qualified recipients or expenses will be
reimbursed or paid by the Funds for Class A and Class B shares as follows:
Class A Shares -- The AAL Capital Growth, Mid Cap Stock, Small Cap Stock,
International, Equity Income, Bond, Municipal
<PAGE>
Bond, High Yield Bond and Money Market Funds -- In a given fiscal year, the
Funds, pursuant to the Plan, will pay up to a limit of 0.25 of 1% of the average
net assets (0.125 of 1% for The AAL Money Market Fund) as a Service Fee for
Class A shares. The Funds will not reimburse or pay for expenses of past fiscal
years or in contemplation of expenses for future fiscal years. Since August 19,
1992 and October 1, 1992, the Distributor has reimbursed 0.025 of 1% and the
entire 0.125 of 1%, respectively, of the service fees under the Plan for The AAL
Money Market Fund, which prior to January 8, 1997 were described as a 12b-1
Distribution Fee). This continuing reimbursement is voluntary and may be
modified or discontinued at any time.
Class B Shares -- The AAL Capital Growth, Mid Cap Stock , Small Cap Stock,
International, Equity Income, Bond, Municipal Bond, High Yield Bond and Money
Market Funds -- In a given fiscal year, the Funds, pursuant to the Plan, will
pay up to a limit of 0.75 of 1% of the average daily net assets as a 12b-1
Distribution Fee and up to a limit of 0.25 of 1% of the average daily net assets
as a Service Fee for Class B shares. Pursuant to the Plan, the Funds will not
reimburse or pay for expenses of past fiscal years or in contemplation of
expenses for future fiscal years.
The Plan states that if and to the extent that any of the payments by a Fund for
Class A and Class B shares are considered to be "primarily intended to result in
the sale of shares" issued by a Fund within the meaning of the Rule, such
payments by a Fund are authorized without limit under the Plans and shall not be
included in the limitations contained in the Plan, including: (a) the costs of
the preparation, printing and mailing of all require reports and notices to
shareholders, irrespective of whether such reports or notices contain or are
accompanied by material intended to result in the sale of shares of the Fund or
other funds or other investments; (b) the costs of preparing, printing and
mailing of all prospectuses to shareholders; (c) the costs of preparing,
printing and mailing of any proxy statements and proxies, irrespective of
whether any such proxy statement includes any item relating to, or directed
toward, the sale of the Fund's shares; (d) all legal and accounting fees
relating to the preparation of any such reports, prospectuses, proxies and proxy
statements; (e) all fees and expenses relating to the qualification of the Funds
and or their shares under the securities or "Blue Sky" laws of any jurisdiction;
(f) all fees under the Act and the Securities Act of 1933, including fees in
connection with any application for exemption relating to or directed toward the
sale of the Fund's shares; (g) all fees and assessments of the Investment
Company Institute or any successor organization or industry association
irrespective of whether some of its activities are designed to provide sales
assistance, (h) all costs of preparing and mailing confirmations of shares sold
or redeemed or share certificates and reports of share balances; and (i) all
costs of responding to telephone or mail inquiries of shareholders.
The Plan also states that the costs of distribution of the Trust's shares are
expected to exceed the sum of permitted payments, permitted expenses, and the
portion of the sales charge retained by the Distributor, and that the profits,
if any, of the Adviser are dependent primarily on the advisory fees paid by the
Funds to the Adviser. If and to the extent that any investment advisory fees
paid by the Funds might, in view of any excess distribution costs and the
<PAGE>
common ownership of the Adviser and Distributor, be considered as indirectly
financing any activity that is primarily intended to result in the sale of
shares issued by the Funds, the payment of such fees is authorized under the
Plan. The Plan states that in taking any action contemplated by Section 15 of
the Act as to any investment advisory contract to which the Trust is a party,
the Board of Trustees, including its Trustees who are not "interested persons"
as defined in the Act, and who have no direct or indirect financial interest in
the operation of the Plans or any agreements related to the Plans ("Qualified
Trustees"), shall, in acting on the terms of any such contract, apply the
"fiduciary duty" standard contained in Sections 36(a) and (b) of the Act.
The Plan requires that while it is in effect the Distributor shall report in
writing at least quarterly to the Trustees, and the Trustees shall review, the
following: (a) the amounts of all payments, the identity of recipients of each
such payment, the basis on which each such recipient was chosen and the basis on
which the amount of the payments was were made; (b) the amounts of expenses and
the purpose of each such expense; and (c) all costs of the other payments
specified in the Plans (making estimates of such costs where necessary or
desirable) in each case during the preceding calendar or fiscal quarter. The
aggregate amount paid by the Funds to the Distributor under the Plan for Class A
shares for the fiscal year ended April 30, 1997, and the manner in which this
amount was spent is as follows:
Class A Shares
Gross 12b-1 Fees Paid by the Funds for Class $7,719,753
A Shares
Expenditures
Compensation to Registered Representatives $7,567,489
Other $152,264
Class B shares first became available to investors on January 8, 1997. The
aggregate amount paid by the Funds to the Distributor under the Plan for Class B
shares from January 8, 1997 through the fiscal year ended April 30, 1997, and
the manner in which this amount was spent is as follows:
Class B Shares
Gross 12b-1 Fees Paid by the Funds for Class $18,104
B Shares
Expenditures
Compensation to Registered Representatives $4,833
Other $13,271
<PAGE>
Management and the Board of Trustees believe that the Distribution Plan and the
Service and 12b-1 fees have a positive impact on sales of the Funds and the
retention of Fund assets, both of which are beneficial to the Funds and the
Funds' shareholders.
The Plan was approved by the shareholders of the Trust at the Trust's first
meeting of shareholders held on September 13, 1988. The Plan at that time and up
until January 8, 1997 included only the shares that now are referred to as Class
A shares. As of January 8, 1997, the Plan includes Class B shares. The Plan as
Amended and Restated was approved by the sole shareholder of the Trust's Class B
shares on January 8, 1997. The Plan will continue in effect from year-to-year
only so long as such continuance is specifically approved at least annually by
the Board of Trustees and the Qualified Trustees (as defined in the Plan) cast
in person at a meeting called for the purpose of voting on such continuance. The
Plan may be terminated at any time without penalty by a vote of a majority of
the Qualified Trustees or by the vote of the holders of a majority of the
outstanding voting securities for each class of shares of the Trust, with
respect to any Fund by the vote of a majority of the outstanding shares for each
class of such Fund. The Plan may not be amended to increase materially the
amount of payments to be made for the separate class shares without shareholder
approval of the class. While the Plan is in effect, the selection and nomination
of those Trustees who are not interested persons of the Trust is committed to
the discretion of such disinterested Trustees. Nothing in the Plan will prevent
the involvement of others in such selection and nomination if the final decision
on any such selection and nomination is approved by a majority of such
disinterested Trustees.
Portfolio Transactions
The Adviser and/or Sub-Adviser for The AAL International Fund direct the
placement of orders for the purchase and sale of the Funds' portfolio
securities.
The cost of securities transactions for each Fund 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
either brokerage commissions or transfer taxes.
Occasionally, securities may be purchased directly from the issuer. For
securities traded primarily in the over-the-counter market, the sellers who make
a market in the securities will be dealt with directly unless better prices and
execution are available elsewhere. Such dealers usually act as principals for
their own account. In placing portfolio transactions, the Adviser seeks the best
combination of price and execution.
In determining which brokers provide best execution, the Adviser and/or
Sub-Adviser for The AAL International Fund look primarily to the stock price
quoted by the broker, and normally places orders with the broker 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 Fund, the Adviser and/or Sub- Adviser for
The AAL International Fund will consider all factors they deem relevant,
including the breadth or the market in the security, the price of the security,
the financial condition and execution capability of the broker or dealer and the
reasonableness of the commission, if any (for the specific transaction and on a
continuing basis). Although it is expected that sales of shares of the Funds
will be made only by the Distributor, the Adviser may in the future consider the
willingness of particular brokers to sell shares of the Funds as a factor in the
selection of brokers for the Funds' portfolio transactions, subject to the
overall best price and execution standard.
Assuming equal execution capabilities, other factors may be taken into account
in selecting brokers or dealers to execute particular transactions and in
evaluating the best net price and execution available. The Adviser and/or
Sub-Adviser for The AAL International Fund 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 Funds' net asset values, and other information
provided to the Funds, to the Adviser or Sub-Adviser (or their affiliates). The
Adviser and/or Sub-Adviser for The AAL International Fund may also cause a Fund
to pay to a broker or dealer who provides such brokerage and research services a
commission for executing a portfolio transaction which is in excess of the
amount of commission another broker or dealer would have charged for effecting
that transaction. The Adviser and/or Sub-Adviser for The AAL International Fund
must determine, in good faith, however, that such commission was reasonable in
relation to the value of the brokerage and research services provided, viewed in
terms of that particular transaction or in terms of all the accounts over which
the Adviser and/or Sub-Adviser for The AAL International Fund exercise
investment discretion. It is possible that certain of the services received by
the Adviser and/or Sub-Adviser for The AAL International Fund attributable to a
particular transaction will benefit one or more other accounts for which
investment discretion is exercised by the Adviser and/or Sub-Adviser for The AAL
International Fund. The Funds paid, $1,108,673, $1,697,844 and $4,205,263 in
brokerage commissions in each of the past 3 fiscal years.
Dividends, Distributions and Taxes
The AAL Capital Growth, Mid Cap Stock
, Small Cap Stock, International, Equity Income, Bond, High Yield Bond
and Money Market Funds
Each of the Funds' dividends, except for The AAL Municipal Bond Fund's
dividends, from net investment income together with distribution of short-term
capital gains (collectively "income dividends") are taxable as ordinary income
to shareholders whether paid in additional shares or in cash. Any long-term
capital gains ("capital gains distributions") distributed to shareholders are
treated as such by the shareholders, whether received in cash or in additional
shares, regardless of the length of time a shareholder has owned the shares.
These Funds intend to distribute substantially all their net investment income
and net realized long-term capital gains in order to avoid imposition of federal
income and excise tax liability.
<PAGE>
The AAL Mid Cap Stock, Small Cap Stock and International Funds expect to pay any
dividends annually. The AAL Capital Growth Fund expects to pay any dividends
semi-annually and The AAL come Fund expects to pay any dividends quarterly. The
AAL Bond, High Yield Bond and Money Market Funds will accrue income dividends
daily and expect to pay these dividends monthly. These Funds expect to
distribute capital gains, if any, at least annually.
The AAL Municipal Bond Fund
This Fund expects to accrue income dividends daily and to distribute to
shareholders all of its net investment income in monthly dividends and net
realized capital gains, if any, at least annually. Dividends derived from the
interest earned on municipal securities constitute "exempt-interest dividends"
and are generally not subject to federal income tax. Distributions of net
realized capital gains (whether from tax-exempt or taxable securities) are
taxable to shareholders. The federal income tax status of all distributions will
be reported to shareholders annually. Such report will allocate income dividends
between tax-exempt and taxable income (if any) in approximately the same
proportions as the Fund's total income during the year. Accordingly, income
derived from each of these sources by the Fund may vary substantially in any
particular distribution period from the allocation reported to shareholders
annually.
Interest on borrowing a shareholder incurs to purchase or carry shares of this
Fund may not be deductible for federal income tax purposes. Shareholders may be
subject to state and local taxes on dividends from this Fund, including those
which are exempt from federal income tax.
Entities or persons who are "substantial users" (or persons who are related to
"substantial users") of facilities financed by industrial revenue bonds should
consult their tax advisers before purchasing shares of The AAL Municipal Bond
Fund. For these purposes, the term "substantial user" is defined generally to
include a "nonexempt person" who regularly uses in trade or business a part of a
facility financed from the proceeds of industrial development revenue bonds.
The 1986 Tax Reform Act subjects tax-exempt interest attributable to certain
"private activity bonds" (including, in the case of a regulated investment
company receiving interest on such bonds, a proportionate part of the
exempt-interest dividends paid by that company) to the individual and corporate
alternative minimum tax. However, the Fund will not invest more than 20% of its
assets in such private activity bonds. Moreover, certain corporate shareholders
may be subject to a federal "environmental" tax with respect to their receipt of
dividends and distributions.
<PAGE>
The AAL International Fund -- Foreign Withholding Tax
The Fund may be subject to foreign withholding taxes on income and gains derived
from its investments outside the U.S. Such taxes would reduce the yield on the
Fund's investments. Tax treaties between certain countries and the U.S. may
reduce or eliminate such taxes. If more than 50% of the value of the Fund's
total assets at the close of any taxable year consist of stocks or securities of
foreign corporations, the Fund may elect, for U.S. federal income tax purposes,
to treat any foreign country income or withholding taxes paid by the Fund that
can be treated as income taxes under U.S. income tax principles, as paid by its
shareholders. For any year that the Fund makes such an election, each of its
shareholders will be required to include in his income (in addition to taxable
dividends actually received) his allocable share of such taxes paid by the Fund
and will be entitled, subject to certain limitations, to credit his portion of
these foreign taxes against his U.S. federal income tax due, if any, or to
deduct it (as an itemized deduction) from his U.S. taxable income, if any.
Generally, credit for foreign taxes is subject to the limitation that it may not
exceed the shareholder's U.S. tax attributable to his foreign source taxable
income.
If the pass through election described above is made, the source of the Fund's
income flows through to its shareholders. Certain gains from the sale of
securities and currency fluctuations will not be treated as foreign source
taxable income. In addition, this foreign tax credit limitation must be applied
separately to certain categories of foreign source income, one of which is
foreign source "passive income." For this purpose, foreign "passive income"
includes dividends, interest, capital gains and certain foreign currency gains.
As a consequence, certain shareholders may not be able to claim a foreign tax
credit for the full amount of their proportionate share of the foreign tax paid
by the Fund.
The foreign tax credit can be used to offset only 90% of the alternative minimum
tax (as computed under the Code for purposes of this limitation) imposed on
corporations and individuals. If the Fund does not make the pass through
election described above, the foreign taxes it pays will reduce its income, and
distributions by the Fund will be treated as U.S. source income.
Each shareholder will be notified within 60 days after the close of the Fund's
taxable year whether, pursuant to the election described above, the foreign
taxes paid by the Fund will be treated as paid by its shareholders for that year
and, if so, such notification will designate: (i) such shareholder's portion of
the foreign taxes paid to such country; and (ii) the portion of the Fund's
dividends and distributions that represent income derived from sources within
such country.
Investments by the Fund in stocks of certain foreign corporations that generate
largely passive investment-type income, or which hold a significant percentage
of assets that generate such
<PAGE>
income (referred to as "passive foreign investment companies" or "PFICs"), are
subject to special tax rules designed to prevent deferral of U.S. taxation of
the Fund's share of the PFIC's earnings. In the absence of certain elections to
report these earnings on a current basis, regardless of whether the Fund
actually receives any distributions from the PFIC, a Fund would be required to
report certain "excess distributions" and any gain from the disposition of
stocks of the PFIC, as ordinary income. This ordinary income would be allocated
ratably to the Fund's holding period for the stocks. Any amounts allocated to
prior taxable year will be taxable to the Fund at the highest rate of tax
applicable in that year, increased by a interest charge determined as though the
amounts were underpayment of tax. Amounts allocated to the year of the
distribution or disposition would be included in the Fund's net investment
income for that year, and to the extent distributed as a dividend to the Fund's
shareholders would not be taxable to the Fund.
Summary
The foregoing is only a summary of certain tax considerations generally
affecting the Funds and their shareholders. Investors are urged to consult their
tax advisors with specific reference to their own tax situations, including
state and local tax liability.
Calculation of Yield and Total Return
From time to time the Funds may advertise yield and total return for Class A and
Class B shares for various periods of investment. Such information will always
include uniform performance calculations based on standardized methods
established by The Securities and Exchange Commission, which reflect the
front-end sales charge on a Class A share and the contingent deferred sales
charge ("CDSC") on a Class B share, and may also include other total return
information without giving effect to the sales charges. Yield is based on
historical earnings and total return is based on historical calculated earnings;
neither is intended to indicate future performance. Performance information
should be considered in light of the particular Fund's investment objectives and
policies, characteristics and quality of its portfolio securities and the market
conditions during the applicable period 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 Fund's performance to the performance data published for
alternative investments.
Standardized Performance Information
Average Annual Total Return. For each of the Funds, except The AAL Money Market
Fund, standardized average annual total return is computed by finding the
average annual compounded rates of return for Class A and Class B shares over
the 1, 5 and 10 year periods (or the portion thereof during which the Fund has
been in existence) that would equate the initial amount invested in each class
to the ending redeemable value according to the following formula:
<PAGE>
T = (ERV/P)^(1/n) - 1
Where:
T = average annual total return for the class;
n = number of years and portion of a year;
ERV = ending redeemable value for the class (of the hypothetical
$1,000 payment) at the end of the 1, 5 and 10 year periods, or
fractional portion thereof, after deduction of all
non-recurring charges for the class (CDSC for Class B shares),
assuming redemption at the end of the period;
P = $1,000 (the hypothetical initial payment before deduction of
the maximum sales load, if any); and
^ = raised to the power of.
Annual Returns for the 1 and 5 Year and Since Inception Periods Ended April 30,
1997, for Class A Shares Based on Gross Amount Invested
<TABLE>
<CAPTION>
<S> <C> <C> <C>
The Fund and Total Return for the Average Annual Total Average Annual Total
Inception Date 1-year Period Ended Return for the 5-Year Return for the Period
4/30/97 Period Ended 4/30/97 Ended 4/30/97 Since
Inception
The AAL Capital 15.75% 12.36% 11.01%
Growth Fund (7/16/87)
The AAL Mid Cap (14.62)% N/A 10.36%
Stock Fund (6/30/93)
The AAL Small Cap N/A N/A N/A
Stock Fund (7/1/96)
The AAL International 2.08% N/A 7.42%
Fund (8/1/95)
The AAL 3.61% N/A 6.20%
Equity Income
Fund (f/k/a) The AAL
Utilities Fund)
(3/18/94)
The AAL Bond Fund 2.18% 5.09% 6.78%
(7/16/87)
The AAL Municipal 2.42% 5.92% 6.38%
Bond Fund (7/16/87)
The AAL High Yield N/A N/A N/A
Bond Fund (1/8/97)
</TABLE>
There is no standardized annual return information, which is based on gross
amount invested, available for Class B shares. Class B shares first became
available to investors on January 8, 1997.
Current Yield. Current yield quotations for the Funds, except The AAL Money
Market Fund, are based on a 30-day (or one-month) period, and are computed by
dividing the net investment income per share for each class earned during the
period by the maximum offering price per share for each class 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 by the Class during the
period;
b = expenses accrued by the Class for the period (net of
reimbursements);
c = the average daily number of shares outstanding for the Class
during the period they were entitled to receive dividends; and
d = the maximum offering price per share for the Class on the
last day of the period.
^ = to the power of.
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 pay down. Income earned on stocks is determined by
using the stated annual dividend rate applied over the performance period. The
yields for The AAL Capital Growth, Mid Cap Stock, Small Cap Stock,
International, Equity Income, Bond, Municipal Bond and High Yield Bond Funds for
the 30-day period ended April 30, 1997 for Class A shares were:
<PAGE>
Class A Share Yields
30-day period ended 4/30/97
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Capital Mid Cap Small Cap International Equity Bond Municipal High Yield
Growth Stock Stock Income Bond Bond
.82% (.36)% (1.07%) 11.71% 4.12% 5.96% 4.46% 9.01%
The yields for the AAL Capital Growth, Mid Cap Stock, Small Cap Stock,
International, Equity Income, Bond, Municipal and High Yield Bond Funds for the
30-day period ended April 30, 1997 for Class B shares were:
Class B Share Yields
30-day period ended 4/30/97
Capital Mid Cap Small International Equity Bond Municipal High Yield
Growth Stock Cap Income Bond Bond
Stock
.10% (1.19)% (1.89)% 11.38% 3.54% 5.43% 3.89% 8.64%
</TABLE>
When advertising yield, a Fund will not advertise a one-month or a 30-day period
that ends more than 45 days before the date on which the advertisement is
published.
Tax Equivalent Yield. The AAL Municipal Bond Fund will calculate a tax
equivalent yield based on a 30-day (or one-month) period for Class A and Class B
shares, computed by dividing that portion of the yield of the Fund for the share
class (computed as described above) that is tax-exempt by one minus a stated
income tax rate and adding the quotient to that portion if any, of the yield of
that share class for the Fund that is not tax exempt. The formula for
computation of the tax equivalent yield is:
X = ( N/1-F) + T
Where:
N = % of yield for the class derived from tax-exempt income;
F = federal income tax rate; and
T = % of yield for the class derived from taxable income.
The tax equivalent yield at 31% tax rate for the 30-day period ended April 30,
1997, for a Class A share and a Class B share for The AAL Municipal Bond Fund
were 6.46% and 5.64%, respectively. Class B shares first became available to
investors on January 8, 1997.
<PAGE>
Current and Effective Yield - The AAL Money Market Fund. The AAL Money Market
Fund may quote a current yield or effective yield for Class A and Class B shares
from time-to-time. The current yield is an annualized yield based on the net
change in account value for each class for a seven-day period. The effective
yield is an annualized yield based on a daily compounding of the current yield
for each share class. These yields are each computed by first determining the
"Net Change in Account Value" for each share class for a hypothetical account
having a share balance of one share at the beginning of a seven-day period
("Beginning Account Value"), excluding capital changes. The Net Change in
Account Value will always equal the total dividends declared with respect to the
account. The yields for each share class are computed as follows:
Current Yield = Net Change in Account Value Per Class 365
------------------------------------- ---
Beginning Account Value Per Class x 7
Effective Yield = [1 + Net Change in Account Value Per Class] 365/7 - 1
For the seven-day period ended April 30, 1997, the current and effective yields
of The AAL Money Market Fund for Class A shares were 5.06% and 5.19%,
respectively, and for Class B shares 4.36% and 4.46%, respectively. Class B
shares first became available to investors on January 8, 1997.
In addition to fluctuations reflecting changes in net income of the Fund
resulting from changes in income earned on its portfolio securities and in its
expenses, the Fund's yield also would be affected if the Fund were to restrict
or supplement its dividends in order to maintain its net asset value at $1.00.
(See "Net Asset Value" in the Prospectus and in this Statement.) Portfolio
changes resulting from net purchase or net redemptions of Fund shares may affect
yield. Accordingly, the Fund'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 Fund's yield is not guaranteed nor is its principal insured. Although
there is no assurance that it will be able to do so, the Fund will use its best
efforts to maintain its net asset value per share at $1.00.
Other Performance Information
All of The AAL Mutual Funds may, from time to time, include in their sales
literature and advertisements: (1) total return quotations computed for
different time periods or by a method that differs from the computations
described in the section above for Class A and B shares; (2) calculations of the
growth of an investment (or series of investments), at various assumed interest
rates and compounding, to show the effect of the length of time, interest rate
and/or tax deferral on an investment for Class A and B shares; (3) illustrate
the concepts of asset allocation by use of hypothetical case studies using
various risk levels and life cycles, as well as illustrating the effect of
various tax brackets and tax deferrals on hypothetical systematic investing for
Class A and Class B shares; and (4) performance relative to the performance of
other investments such as stocks, bonds, closed end funds, certificates of
deposit, as well as
<PAGE>
various indices such as the Consumer Price Index and indices generated by
lbbotson & Associates and Chase Global Data and Research Products for Class A
and B shares.
Average Annual Total Return. All Funds, except The AAL Money Market Fund, may
advertise an average annual total return calculation for Class A and Class B
shares for any appropriate time period, based upon the value of a net investment
in the Fund for the class, after deduction of the maximum sales charge for Class
A shares and after deducting the CDSC for Class B shares according to the
following formula:
T = n(ERV/P)^(1/n)-1
where:
T = average annual total return for the class;
n = number of years and portion of a year;
ERV = ending redeemable value for the class (of the
hypothetical $1,000 investment) at the end of
any period after deducting all non-recurring
charges (CDSC for Class B shares) assuming
redemption at the end of the period;
P = $1,000 (the hypothetical initial net
investment after deduction of the sales load, if
any).
^ = raised to the power of.
<PAGE>
Annual Returns for the 1 and 5 Year and Since Inception Periods Ended April 30,
1997, for Class A Shares Based on Net Amount Invested
<TABLE>
<CAPTION>
<S> <C> <C> <C>
The Fund and Total Return for the Average Annual Total Average Annual Total
Inception Date 1-Year Period Ended Return for the 5-Year Return for the Period
4/30/97 Period Ended 4/30/97 Ended 4/30/97 Since
Inception
The AAL Capital 20.55% 13.28% 11.48%
Growth Fund (7/16/87)
The AAL Mid Cap (11.08)% N/A 11.55%
Stock Fund (6/30/93)
The AAL Small Cap N/A N/A N/A
Stock Fund (7/1/96)
The AAL International 6.32% N/A 9.98%
Fund (8/1/95)
The AAL 7.88% N/A 7.61%
Equity Income Fund
(f/k/a The AAL
Utilities Fund)
(3/18/94)
The AAL Bond Fund 6.43% 5.96% 7.23%
(7/16/87)
The AAL Municipal 6.64% 6.78% 6.83%
Bond Fund (7/16/87)
The AAL High Yield N/A N/A N/A
Bond Fund (1/8/97)
</TABLE>
There is no annual return information based on net amount invested available for
Class B shares. Class B shares first became available to investors on January 8,
1997.
Performance information for Class A and B shares for the Funds may be compared
to various unmanaged indexes, such as Morgan Stanley's EAFE and World, Dow Jones
Industrial and Averages, the S&P 500, S&P MidCap 400, S&P Small Cap or Lehman
Brothers High Yield Index, Lehman Brothers Aggregate or other Lehman Bond
Indexes, as well as indices of similar mutual funds, and various foreign country
and currency indices. The Funds may include in their advertising rankings
published by recognized statistical services or publishers such as Morningstar,
Lipper Analytical Services, Inc., Weisenberger Investment Companies Services or
rankings shares published by other comparable national services that rank mutual
funds. They also may use information from publications such as Barron's,
Business Week, The Economist, Financial World, Forbes, Fortune, Kiplinger's
Personal Finance, Money, Smart Money, the Star, The Wall Street Journal or
Worth, and from videotapes of television shows and interviews involving
investment experts, including employees of the Adviser and/or Sub-Adviser for
The AAL International Fund. Advertisements may depict performance graphically.
General
The Trust's Declaration of Trust permits its Trustees to issue an unlimited
number of full and fractional shares of beneficial interest and to divide or
combine the shares into a greater or lesser number of shares without thereby
changing the proportionate beneficial interest in a Fund. Pursuant to this
authority, the Trustees have issued Class A and Class B shares for the Funds,
except for The AAL U.S. Government Zero Coupon Target Funds, Series 2001 and
2006. Each class share represents an interest in a Fund proportionately equal to
the interest of each other share in its class. If the Trust were to liquidate,
all shareholders of a Fund would share pro rata in its net assets for the class
available for distribution to shareholders. If they deem it advisable and in the
best interests of shareholders, the Board may create additional classes of
shares that may differ from each other only as to dividends or, as is the case
with the Funds, as to assets and liabilities (in which case any such class would
have a designation including the word "Series"). Shares of each series are
entitled to vote as a series only to the
<PAGE>
extent required by the '40 Act or as permitted by the Trustees. Income and
operating expenses are allocated fairly among the series by the Trustees.
As of June 16, 1997, the officers and Trustees of the Trust owned less than 1%
of the shares of any Funds. As of June 16, 1997, the following account holders
held in excess of 5% of the following Funds' shares:
Percentage
Shareholder Ownership
Aid Association for Lutherans (AAL)
4321 N. Ballard Road
Appleton, Wisconsin 54919
The AAL High Yield Bond Fund 37%
LCMS Foundation
The AAL Bond Fund 6%
Because AAL owns more than 25% of The AAL High Yield Bond Fund, AAL is
considered a control person of the Fund and, as such, has voting power in
connection with any matters subject to a shareholders vote for the Fund.
Except for the election of Trustees and ratification of the selection of
accountants, any matter required to be submitted to shareholder vote is not
deemed to have been effectively acted upon unless approved by the holders of a
"majority" (as defined in the Rule) of the voting securities of each Series
affected by the matter.
The AAL Capital Growth, Mid Cap Stock (f/k/a The AAL Smaller Company Stock
Fund), Small Cap Stock, Equity Income, Bond, Municipal Bond, High Yield Bond and
Money Mark t Funds' custodian is Firstar Trust Company. The AAL International
Fund's custodian is The Chase Manhattan Bank, N.A. The custodians are
responsible for holding the Funds' assets.
AAL Capital Management Corporation provides certain administrative, accounting
and pricing services to the Funds, including calculating the daily net asset
value per class share; maintaining original entry documents and books of record
and general ledgers; posting cash receipts and disbursements; reconciling bank
account balance monthly; recording purchases and sales based on Sub-Adviser
communications; and preparing monthly and annual summaries to assist in the
preparation of financial statements of, and regulatory reports for, the Funds.
These services were formerly provided by the Funds' Custodian. An Administrative
Services Agreement with the Adviser was approved by a majority of the Trustees
of the Funds, including a majority of the Trustees who are not interested
persons of the Funds or of the Adviser and was approved by the shareholders of
The AAL Municipal
<PAGE>
Bond Fund on November 27, 1990 and of The AAL Capital Growth, Bond and Money
Market Funds on December 20, 1990, The Board of Trustees approved the addition
of:
The AAL Mid Cap Stock Fund to this agreement on May 18, 1993; The AAL
Equity Income Fund on February 24, 1994; The AAL International Fund on May
23, 1995; The AAL Small Cap Stock on February 28, 1996; and The AAL High
Yield Bond Fund on May 29, 1996.
The principal motivation for having the Adviser provide these services was cost.
The Adviser has agreed to provide these services at rates that would not exceed
the rates charged by unaffiliated vendors for similar services. The initial rate
of payment for these services was $25,000 per Fund per year, plus the cost of
outside pricing services but only to the extent the Adviser is not voluntarily
absorbing any expenses of that Fund. The annual rates of payment approved by the
Trustees presently are:
The AAL Capital Growth Fund - $35,000 The AAL Mid Cap Stock Fund - $35,000
The AAL Small Cap Stock Fund - $35,000 The AAL International Fund - $40,000
The AAL Equity Income Fund - $35,000 The AAL Bond Fund - $35,000 The AAL
Municipal Bond Fund - $35,000 The AAL High Yield Bond Fund - $30,000 The
AAL Money Market Fund - $35,000
The AAL U. S. Government Zero Coupon Target Fund Series 2001 - $2,500
The AAL U. S. Government Zero Coupon Target Fund Series 2006 - $2,500
The Agreement will continue in effect from year to year, as long as it is
approved at least annually by the Funds' Board of Trustees or by a vote of the
outstanding voting securities of the Funds and in either case by a majority of
the Trustees who are not parties to the Agreement or interested persons of any
such party. The Agreement terminates automatically if assigned and may be
terminated without penalty by either party on 60-days' notice. The Agreement
provides that neither the Adviser nor its personnel shall be liable for any
error of judgment or mistake of law or for any loss arising out of any act or
omission in the execution and the discharge of its obligations under the
Agreement, except for willful misfeasance, bad faith or gross negligence in the
performance of their duties or by reason of reckless disregard of their
obligations and duties under the Agreement.
Shareholder Maintenance Agreement
The Board of Trustees authorized the Funds to contract with AAL Capital
Management Corporation for certain shareholder maintenance services, effective
April 1, 1995. These shareholder services include answering customer inquiries
regarding account status,
<PAGE>
explaining and assisting customers with the exercise of their account options
and facilitating shareholder telephone transaction requests.
The annual fee payable to AAL Capital Management Corporation for providing such
services is based upon, and limited by, the difference between the current
account fees actually charged by Firstar Trust Company, as transfer and dividend
disbursing agent, and the normal full-service fee schedule published by Firstar
Trust Company, as well as reimbursement for certain actual out-of-pocket costs
including postage and telephone charges. This account differential, including
reimbursement for expenses, is at an annualized rate of $4.08 per account,
effective June 1, 1996. The Agreement will continue in effect from year to year,
as long as it is approved at least annually by the Funds' Board of Trustees or
by a vote of the outstanding voting securities of the Funds and in either case
by a majority of the Trustees who are not parties to the Agreement or interested
persons of any such party. The Agreement terminates automatically if assigned
and may be terminated without penalty by either party on 60-days' notice. The
Agreement provides that neither the Adviser nor its personnel shall be liable
for any error of judgment or mistake of law or for any loss arising out of any
act or omission in the execution and the discharge of its obligations under the
Agreement, except for willful misfeasance, bad faith or gross negligence in the
performance of their duties or by reason of reckless disregard of their
obligations and duties under the Agreement. These fees are not currently
assessed against the Fund but may be in the future.
Independent Accountants
The Trust's independent accountants, Price Waterhouse LLP, examine the Funds'
annual financial statements, assist in the preparation of certain reports to the
Securities and Exchange Commission and review the Trust's state and Funds'
federal tax returns.
Financial Statements
The financial statements, notes to financial statements and report of
independent accountants for the Funds included in the Annual Report to
Shareholders of the Trust, for the year ended April 30, 1997 are hereby
incorporated by reference.
<PAGE>
THE AAL MUTUAL FUNDS
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements: The AAL Mutual Funds ("Trust") has filed audited
financial statements for the Trust for the fiscal year ended April 30, 1997, for
the following series: The AAL Capital Growth, Mid Cap Stock, Small Cap Stock,
International, Equity Income (f/k/a The AAL Utilities Fund), Bond, Municipal
Bond, High Yield Bond and Money Market Funds; and The AAL U.S. Government Zero
Coupon Target Funds, Series 2001 and 2006, contained in the Annual Reports for
April 30, 1997, which are incorporated by reference into this Post-Effective
Amendment to this Registration Statement. The AAL U. S. Government Zero Coupon
Target Funds, Series 2001 and 2006 are contained in a separate prospectus. The
Trust has closed The AAL U. S. Government Zero Coupon Target Funds, Series 2001
and 2006, to new investors.
(b) Exhibits: Except as noted below, all required exhibits have been previously
filed and are incorporated by reference from the Registrant's Registration
Statement on Form N-1A (File No. 33-12911), as amended;
(11) Independent Accountants' Consent;
(14) IRS Form 5305 SIMPLE Plan; and
(17) The Financial Data Schedule (included as Exhibit 27);
Item 25. Persons Controlled by or under Common Control with Registrant
AAL Capital Management Corporation (the "Adviser" and "Distributor" for The AAL
Mutual Funds ("Trust")) was organized in 1986 as a Delaware corporation, all of
the shares of which are owned by AAL Holdings Inc., a wholly-owned subsidiary of
the Aid Association for Lutherans ("AAL"). AAL is a non-profit, non-stock
membership organization, licensed to do business as a fraternal benefit society
in all states. Under an Investment Advisory Agreement and a Distribution
Agreement with the Trust, and subject to the supervision of the Funds' Board of
Trustees, AAL Capital Management Corporation provides the investment advisory,
administrative, shareholder, distribution and other services for the Funds.
Item 26. Number of Holders of Securities
On June 1, 1997, the following indicates the number of record shareholders of
each series of the Registrant:
<PAGE>
The AAL Capital Growth Fund - 171,119; The AAL Mid Cap Stock Fund - 87,166; The
AAL Small Cap Stock Fund - 17,597; The AAL International Fund - 27,363; The AAL
Equity Income Fund - 18,899; The AAL Bond Fund - 29,831; The AAL Municipal Bond
Fund - 17,388; The AAL High Yield Bond Fund - 3,471; The AAL Money Market Fund -
24,394;
The AAL U.S. Government Zero Coupon Target Funds, Series 2001 - 224; and
The AAL U.S. Government Zero Coupon Target Funds, Series 2006 - 230.
Item 27. Indemnification
Under Section 12 of Article Seven of the Registrant's Declaration of Trust, the
Trust may not indemnify any trustee, officer or employee for expenses (e.g.,
attorney's fees, judgments, fines and settlement amounts) incurred in any
threatened, pending or completed action, if there has been an adjudication of
liability against such person based on a finding of willful misfeasance, bad
faith, gross negligence or reckless disregard of such person's duties of office
("disability conduct").
The Trust shall indemnify its trustees, officers or employees for such expenses
whether or not there is an adjudication of liability, if, pursuant to Investment
Company Act Release 11330, a determination is made that such person was not
liable by reason of disabling conduct by: (i) final decision of the court before
which the proceeding was brought; or (ii) in the absence of such a decision, a
reasonable determination, based on factual review, that the person was not
liable for reasons of such conduct is made by: (a) a majority vote of
disinterested, non-party Trustees; or (b) independent legal counsel in a written
opinion.
Advancement of expenses incurred in defending such actions may be made pursuant
to Release 11330, provided that the person undertakes to repay the advance
unless it is ultimately determined that such person is entitled to
indemnification and one or more of the following conditions is met: (1) the
person provides security for the undertaking; (2) the registrant is insured
against losses arising by reason of any lawful advances; or (3) a majority of
disinterested non-party Trustees or independent legal counsel in a written
opinion determines, based on review of readily available facts, that there is
reason to believe the person ultimately will be found entitled to
indemnification.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to trustees, officers and controlling persons of
Registrant pursuant to the foregoing provision, 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 trustee,
<PAGE>
officer or controlling person of Registrant in the successful defense of any
action, suit or proceeding) is asserted by such trustees, officer or controlling
person in connection with the securities being registered, Registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
Item 28. Business and other Connections of the Investment Adviser.
AAL Capital Management Corporation is the investment adviser ("Adviser") of the
Registrant. Societe Generale Asset Management Corp is the sub-adviser for The
AAL International Fund. For information as to the business, profession, vocation
or employment of a substantial nature of the Adviser, reference is made to Parts
A and B of this Registration Statement and to Form ADV filed under the
Investment Advisers Act of 1940 by the Adviser.
Item 29. Principal Underwriters
(a) None
(b)
Name and Principal Positions and Positions and Offices
Business Offices with with Registrant
Underwriter
- --------------------------------------------------------------------------------
Ronald G. Anderson Chairman of the Trustee and President
222 W. College Ave. Board of Directors
Appleton, WI 54919
Robert G. Same Executive Vice President, Secretary and
222 W. College Ave. Chief Operating Officer, Vice President
Appleton, WI 54919 Secretary and Director
Terrance P. Gallagher Senior Vice President, Treasurer
222 W. College Ave. CFO, Treasurer
Appleton, WI 54919 and Director
Robert Roth Senior Vice None
222 W. College Ave. President
Appleton, WI 54919
James H. Abitz Director None
222 W. College Ave.
<PAGE>
Appleton, WI 54919
Woody Eno Director None
222 W. College Ave.
Appleton, WI 54919
Jerome Laubenstein Director None
4321 N. Ballard Rd.
Appleton, WI 54919
Steven Weber Director None
4321 N. Ballard Rd.
Appleton, WI 54919
Roger Johnson Director None
4321 N. Ballard Rd
Appleton, WI 54919
Anthony De Angelis Vice President None
222 West College Ave.
Appleton, WI 54919
Kenneth E. Podell Assistant None
222 West College Ave. Secretary
Appleton, WI 54919
Paul Stadler Vice President None
222 West College Ave.
Appleton, WI 54919
Lori Richardson Vice President None
222 West College Ave.
Appleton, WI 54919
Charles D. Gariboldi, Jr. Assistant Vice Assistant Treasurer
222 West College Ave. President
Appleton, WI 54919
Charles Friedman Assistant Vice None
222 West College Ave. President
Appleton, WI 5491 9
Joseph Wreschnig Assistant Vice President Assistant Secretary
222 West College Ave. and Assistant Secretary
Appleton, WI 54919
Wendy Schmidt Assistant Vice President None
222 West College Ave.
Appleton, WI 54919
<PAGE>
Item 30. Location of Accounts and Records.
The accounts, books and other documents required to be maintained by Registrant
pursuant to Section 31(a) of The Investment Company Act of 1940 and the rules
promulgated thereunder are in the possession of the Registrant and Registrant's
Custodian as follows: all documents required to be maintained by Rule 31a-1(b)
will be maintained by Registrant, except that records required to be maintained
by paragraph (2)(iv) of Rule 31a-1(b) will be maintained by the Custodian.
Item 31. Management Services
Not applicable
Item 32. Undertakings
1. The Registrant undertakes that, at the request of the shareholders
holding 10% or more of the outstanding shares of the Registrant, the Registrant
will hold a special meeting for the purpose of considering the removal of a
trustee from office, and the Registrant will cooperate with and assist
shareholders of record who notify the Registrant that they wish to communicate
with the other shareholders for the purpose of obtaining signatures to request
such a meeting, all pursuant to and in accordance with Section 16(c) of the
Investment Company Act, as amended.
2. Registrant undertakes to furnish a copy of the Registrant's latest
annual report to shareholders, upon request and without charge, to each person
to whom a prospectus is delivered.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant has duly caused this amendment to its
Registration Statement to be signed on its behalf by the undersigned, thereto
duly authorized, in the City of Appleton and State of Wisconsin, on the 24th day
of June, 1997.
THE AAL MUTUAL FUNDS
/s/ Ronald G. Anderson
- ---------------------------------------------------
Ronald G. Anderson, President
Pursuant to the requirements of the Securities Act of 1933, this amendment
to the Registration Statement has been signed below by the following persons in
the capacities and on the date indicated.
/s/ Richard L. Gunderson* Trustee June 24, 1997
- -------------------------------
Richard L Gunderson
/s/ John H. Pender* Trustee June 24, 1997
- -------------------------------
John H. Pender
/s/ Richard L. Gady* Trustee June 24, 1997
- -------------------------------
Richard L. Gady
/s/ D. W. Russler* Trustee June 24, 1997
- -------------------------------
D.W. Russler
/s/ Lawrence M. Woods* Trustee June 24, 1997
- -------------------------------
Lawrence M. Woods
/s/ F. Gregory Campbell* Trustee June 24, 1997
- -------------------------------
F. Gregory Campbell
/s/ Terrance P. Gallagher Principal June 24, 1997
- ------------------------------- Financial and
Terrance P. Gallagher Accounting Officer
/s/ Ronald G. Anderson Trustee and June 24, 1997
- ------------------------------- President
Ronald G. Anderson, Trustee
*Pursuant to Powers of Attorney
<PAGE>
Exhibit Index
Item 24 Page
Exhibit Number
24(b)(11) Independent Accountants' Consent
24(b)(14) IRS Form 5305 SIMPLE
24(b)(16) Schedule for computation of the performance quotations for The
Small Cap Stock and High Yield Bond Funds and Class B shares for
The AAL Capital Growth, Mid Cap Stock, Small Cap Stock,
International, Equity Income (Utilities), Bond, Municipal Bond,
High Yield Bond and Money Market Funds
27 Financial Data Schedule
Consent of Independent Accountants
We hereby consent to the incorporation by reference in the Prospectus and
Statement of Additional Information constituting parts of this Post-Effective
Amendment No. 23 to the registration statement on Form N-1A (the "Registration
Statement") of our report dated May 22, 1997, relating to the financial
statements and financial highlights appearing in the April 30, 1997 Annual
Report to Shareholders of The AAL Capital Growth, Mid Cap Stock, Small Cap
Stock, International, Utilities, Bond, Municipal Bond, High Yield Bond and Money
Market Funds, which is also incorporated by reference into the Registration
Statement. We also consent to the references to us under the headings "Financial
Highlights" and "Custodian, Transfer Agent and Independent Accountants" in the
Prospectus and under the heading "General" in the Statement of Additional
Information.
Price Waterhouse LLP
June 26, 1997
IRS Form 5305S
- ----------------------------------------------------------------------
Class B Ending Ending
Date NAV Shares Dollars
AAL Capital Growth
08-Jan-920.66 48.403 1,000.00
31-Jan-921.71 48.403 1,050.82
28-Feb-921.47 48.403 1,039.21
31-Mar-920.43 48.403 988.87
30-Apr-921.45 48.403 1,038.24
APRIL
3.82% Class B From Inception 1/8
-1.1762% Class B From Inception With CDSC
MARCH
-1.11% Class B From Inception 1/8
-6.0576% Class B From Inception With CDSC
AAL Mid Cap Stock Fund
- ----------------------------------------------------------------------
Date Class B Ending Ending
NAV Shares Dollars
08-Jan-97 13.67 73.153 1,000.00
31-Jan-97 14.06 73.153 1,028.53
28-Feb-97 13.58 73.153 993.42
31-Mar-97 12.57 73.153 919.53
30-Apr-97 12.69 73.153 928.31
- ----------------------------------------------------------------------
APRIL
-7.17% Class B Return From Inception
-11.8105% Class B Returns From Inception with CDSC
MARCH
-8.05% Class B Return From Inception
-12.6445% Class B Returns From Inception with CDSC
<PAGE>
The AAL Small Cap
30-Apr-97
(Assuming Reinvestment of all Dividends)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Standardized Total Return Calculation
Based Upon Initial Investment after Sales Charge
From Inception Calender Year 1997
Dividends Paid Ending Ending Ending Ending Ending
Date N.A.V P.O.P Per Share Shares Dollars Dollars Shares Dollars
01-Jul-96 $10.00 10.42 95.969 959.69 959.69
31-Jul-96 9.55 9.95 95.969 916.51 916.51
30-Aug-96 10.75 11.20 95.969 1,031.67 1,031.67
30-Sep-96 11.24 11.71 95.969 1,078.69 1,078.69
31-Oct-96 10.88 11.33 95.969 1,044.15 1,044.15
29-Nov-96 11.13 11.59 95.969 1,068.14 1,068.14
30-Dec-96 11.06 11.52 0.267029175 98.286 1,087.05 1,087.05
31-Dec-96 11.20 11.67 98.286 1,100.81 1,100.81 85.690 959.73
31-Jan-97 11.24 11.71 98.286 1,104.74 1,104.74 85.690 963.15
28-Feb-97 10.75 11.20 98.286 1,056.58 1,056.58 85.690 921.17
31-Mar-97 10.06 10.48 98.286 988.76 988.76 85.690 862.04
30-Apr-97 9.84 10.25 98.286 967.14 967.14 85.690 843.19
Total Return Based Upon Gross Amount Invested Total Return Based Upon Net Amount Invested
n = 1.20462 1.20462
Annualized From Inception -3.94524% Annualized From Inception
For Last 12 Months -3.28624% For Last 12 Months
Calender Year 1997 -15.68123% For Calender Year 1997
Gross Return From Inception -3.28624% Gross Return From Inception
Six Month Return (4/30/97)
12 month dividend distributions 0.267029175
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
Class B Ending Ending
Date NAV Shares Dollars
AAL Small Cap
08-Jan-911.17 89.526 1,000.00
31-Jan-911.23 89.526 1,005.37
28-Feb-910.73 89.526 960.61
31-Mar-910.04 89.526 898.84
30-Apr-979.81 89.526 878.25
- --------------------------------------------------------------------------------
-12.18% Class B From Inception
-16.5667% Class B From Inception with CDSC
MARCH
-10.12% Class B From Inception
-14.6106% Class B From Inception with CDSC
- ----------------------------------------------------------------------
NAV Ending Ending
Date Class B Shares Dollars
AAL International
08-Jan-97 10.98 91.075 1,000.00
31-Jan-97 $11.15 91.075 1,015.48
28-Feb-97 $11.39 91.075 1,037.34
31-Mar-97 $11.37 91.075 1,035.52
30-Apr-97 $11.34 91.075 1,032.79
- ----------------------------------------------------------------------
3.28% Class B From Inception 1/8/97
-1.72% Class B With CDSC
MARCH
3.55% Class B From Inception 1/8/97
-1.45% Class B With CDSC
<PAGE>
AAL Utility
- --------------------------------------------------------------------------------
Date Class B Ending Ending
NAV Dividend Shares Dollars
08-Jan-97 11.40 87.719 1,000.00
31-Jan-97 11.54 87.719 1,012.28
28-Feb-97 11.60 87.719 1,017.54
31-Mar-97 11.23 0.025 87.915 987.28
30-Apr-97 11.37 87.915 999.59
- --------------------------------------------------------------------------------
APRIL
-0.04113% Class B Return from Inception
-5.0411% Class B Returns From Inception with CDSC
March
-1.27193% Class B Return from Inception
-6.2083% Class B Returns From Inception with CDSC
<PAGE>
- --------------------------------------------------------------------------------
AAL Bond
Class B Dividend Ending Ending
Date N.A.V Class B Shares Dollars
08-Jan-97 $9.71 102.987 1,000.00
31-Jan-97 $9.75 0.03254849875 103.330 1,007.47
28-Feb-97 $9.73 0.04384959359 103.796 1,009.94
31-Mar-97 $9.58 0.04280413447 104.260 998.81
30-Apr-97 $9.64 0.04383320439 104.734 1,009.64
- --------------------------------------------------------------------------------
April 0.96% Class B Return from Inception
-=
April -4.0847% Class B Returns From Inception with CDSC
=
March -0.12% Class B Return from Inception
-=
March -5.1191% Class B Returns From Inception with CDSC
- -------------------------------------------------------------------------------
<PAGE>
AAL Municpal Bond
Class B Class B Ending Ending
Date NAV Dividend Shares Dollars
08-Jan-97 $11.02 90.744 1,000.00
31-Jan-97 $11.04 0.02793639221 90.974 1,004.35
28-Feb-97 $11.10 0.03700536029 91.277 1,013.17
31-Mar-97 $10.87 0.03630985920 91.582 995.50
30-Apr-97 $10.92 0.03596170009 91.884 1,003.37
- -------------------------------------------------------------------------------
<PAGE>
The AAL High Yield Bond Fund
30-Apr-97
(Assumes Reinvestment of all Dividends)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Standardized Total Return Calculation Based upon initial investment
From Inception For Last 12 Months For Calendar Year 1997
Dividends Ending Ending Ending Ending Ending Ending Ending
Date N.A.V P.O.P Per Share Shares Dollars Shares Dollars Shares Dollars Shares
09-Jan-97 10.00 10.42 95.69 959.69 95.969 959.69 95.969 959.69
31-Jan-97 10.00 10.42 0.045031029970 96.401 964.01 96.401 964.01 96.401 964.01
28-Feb-97 10.16 10.58 0.07572615 97.120 986.74 97.120 986.74 97.120 986.74
31-Mar-97 9.81 10.22 0.074449919 97.857 959.98 97.857 959.98 97.857 959.98
30-Apr-97 9.88 10.29 0.075109433 98.601 974.18 98.601 974.18 98.601 974.18
Total Return Based Upon Gross Amount Invested Total Return Based Upon Net Amount Invested
N = 3.28829
Gross Return From Inception -2.58226% Gross Return From Inception 1.510%
For Last 12 Months -2.58226% For Last 12 Months 1.510%
For Calendar Year 1997 -2.58226% For Calendar Year 1997 1.510%
Annualized For Last 3 Years Annualized For Last 3 Years
Annualized For Last 5 Years Annualized For Last 5 Years
Annualized From Inception -8.24312% Annualized From Inception 5.050%
Distributions Six Month Return (4/30/97) 1.509%
Inception 0.27031653286
5 year
3 year
12 month 0.27031653286
=============
Calendar Year 1997 0.27031653286
=============
</TABLE>
<PAGE>
- ----------------------------------------------------------------------
Class B Class B
Dividends Ending Ending
N.A.V Per Share Shares Dollars
10.00 100.000 1,000.00
10.01 0.0435 100.4350 1,005.35
10.17 0.0705 101.1320 1,028.51
9.82 0.0679 101.8310 999.98
9.88 0.0691 102.544 1,013.14
- ----------------------------------------------------------------------
April
- ----------------------------------------------------------------------
Class B Net CDSC
For Last 12 Months 1.3138% -3.686%
= =
For Calendar Year 1997 1.3138% -3.686%
= =
Annualized From Inception 0.000% 0.000%
=
- ----------------------------------------------------------------------
March Class B Share from Inception 0.00%
Class B Returns From Inception with CDSC -5.0016%
<PAGE>
The AAL Money Market Fund
- ----------------------------------------------------------------------
Class B - CDSC
Net CDSC
For Last 12 Months 4.8645% 0.86454%
= =
For Calender Year 1997 1.3226% -3.67743%
= =
Annualized For Last 3 years 4.5628% 3.94913%
= =
- ----------------------------------------------------------------------
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000811869
<NAME> THE AAL MUTUAL FUNDS
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<NUMBER> 10
<NAME> THE AAL SMALL CAP STOCK FUND CLASS A
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> APR-30-1997
<PERIOD-START> MAY-01-1996
<PERIOD-END> APR-30-1997
<INVESTMENTS-AT-COST> 52258487
<INVESTMENTS-AT-VALUE> 48971868
<RECEIVABLES> 892627
<ASSETS-OTHER> 137446
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<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> (726525)
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<NUMBER-OF-SHARES-SOLD> 4637506
<NUMBER-OF-SHARES-REDEEMED> (182675)
<SHARES-REINVESTED> 65191
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<GROSS-EXPENSE> 441413
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<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> (.055)
<PER-SHARE-GAIN-APPREC> .162
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> (.267)
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<EXPENSE-RATIO> 2.06
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<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
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<NAME> THE AAL MUTUAL FUNDS
<SERIES>
<NUMBER> 10
<NAME> THE AAL SMALL CAP STOCK FUND CLASS B
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 4-MOS
<FISCAL-YEAR-END> APR-30-1997
<PERIOD-START> JAN-08-1997
<PERIOD-END> APR-30-1997
<INVESTMENTS-AT-COST> 52258487
<INVESTMENTS-AT-VALUE> 48971868
<RECEIVABLES> 892627
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<OTHER-ITEMS-ASSETS> 0
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<TOTAL-LIABILITIES> 2120007
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<SHARES-COMMON-STOCK> 345827
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 4720
<OVERDISTRIBUTION-NII> 0
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<OVERDISTRIBUTION-GAINS> 0
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<EXPENSES-NET> 441413
<NET-INVESTMENT-INCOME> (259744)
<REALIZED-GAINS-CURRENT> 356648
<APPREC-INCREASE-CURRENT> (3286619)
<NET-CHANGE-FROM-OPS> (3189715)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 345998
<NUMBER-OF-SHARES-REDEEMED> (171)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 47881934
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 159016
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 441413
<AVERAGE-NET-ASSETS> 25698188
<PER-SHARE-NAV-BEGIN> 11.17
<PER-SHARE-NII> (.032)
<PER-SHARE-GAIN-APPREC> (1.328)
<PER-SHARE-DIVIDEND> 0
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<PER-SHARE-NAV-END> 9.81
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