Institutional Shares
Registration No. 33-12911
As filed on June 25, 1998 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. 27
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY
ACT OF 1940
Amendment No. 29
(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
X on July 1, 1998, pursuant to paragraph (b) of Rule 485
o 60 days after filing pursuant to paragraph (a)(1) of Rule 485
o on _______________, pursuant to paragraph (a)(1) of Rule 485
o 75 days after filing pursuant to paragraph (a)(2) of Rule 485
==========================================
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 under Rule 24f-2 on June 24, 1997.
==========================================
Page 1 of pages ___.
Exhibit index is located at Page
<PAGE>
Cross Reference Sheet for
The AAL Mutual Funds
Institutional Shares
<TABLE>
<CAPTION>
<S> <C> <C> <C>
N-1A Item No.
Part A Location
Item 1 Cover Page Cover Page
Item 2 Synopsis Prospectus Summary
Item 3 Financial Highlights The Funds' Financial Highlights
Item 4 General Description of Registrant Cover Page; Prospectus Summary and the Funds' Investment
Objectives and Investment Policies
Item 5 Management of the Fund Board of Trustees; and Management of the Trust
Item 5A Management's Discussion of Fund Performance Annual Report
Item 6 Capital Stock and Other Securities Organization and Description of Shares
Item 7 Purchase of Securities Being Offered Buying Institutional Shares in the Funds; Dividends,
Distributions and Taxes; and Organization and Description
of Shares
Item 8 Redemption or Repurchase Selling (Redeeming) Shares
Item 9 Pending Legal Proceedings Not Applicable
Item 10 Cover Page Cover Page
Item 11 Table of Contents Table of Contents
Item 12 General Information and History Not Applicable
Item 13 Investment Objectives and Policies Investment Objectives and Investment Policies; Additional
Investment Factors and Risks Regarding the Funds; and
Investment Restrictions
Item 14 Management of the Funds Investment Advisory Services and Distributor
Item 15 Control Persons and Principal Holders of Securities Investment Advisory Services
Item 16 Investment Advisory and Other Services Investment Advisory Services and Distributor
Item 17 Brokerage Allocation Portfolio Transactions
Item 18 Capital Stock and Other Securities General
Item 19 Purchase, Redemption and Pricing of Securities Being
Offered Purchases and Redemptions; Pricing Considerations
Item 20 Tax Status Tax Status, Dividends and
Distributions
Item 21 Underwriters Distributor
Item 22 Calculation of Performance Data Calculation of Yield and Total Return
Item 23 Financial Statements Financial Statements
Item 24 Information required to be included in Part C is set forth
under the appropriate Item, so numbered in Part C to this
Registration Statement
</TABLE>
<PAGE>
THE AAL MUTUAL FUNDS
PROSPECTUS
INSTITUTIONAL SHARES
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 Aid Association
for Lutherans ("AAL"). This prospectus describes Institutional shares for the
following Funds:
EQUITY-ORIENTED FUNDS
THE AAL SMALL CAP STOCK FUND
Investing in Small Company Stocks
THE AAL MID CAP STOCK FUND
Investing in Mid-Sized Company Stocks
THE AAL INTERNATIONAL FUND
Investing in Foreign Stocks
THE AAL CAPITAL GROWTH FUND
Investing in Large Company Stocks
THE AAL EQUITY INCOME FUND
Investing in Income-Producing Equity Securities
THE AAL BALANCED FUND
Investing in Stocks, Bonds and Money Market Instruments
INCOME-ORIENTED FUNDS
THE AAL HIGH YIELD BOND FUND
Investing in Below Investment Grade Bonds
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 MUNICIPAL BOND FUND
Investing in Investment Grade Municipal Bonds
THE AAL BOND FUND
Investing in Investment Grade Bonds
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'
Institutional shares 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 July 1,
1998. The SAI has been filed with the Securities and Exchange Commission
("SEC"). The SAI, along with the most recent AAL Mutual Funds Annual Report 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 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. Class A and Class B shares for the Funds
described in this prospectus are described in a separate prospectus. In
addition, 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.
Table of Contents/Information
PROSPECTUS SUMMARY.....................................
READING THE PROSPECTUS.................................
THE AAL SMALL CAP STOCK FUND...........................
Expense Summaries and Example........................
Financial Highlights.................................
THE AAL MID CAP STOCK FUND.............................
Expense Summaries and Example........................
Financial Highlights.................................
THE AAL INTERNATIONAL FUND.............................
Expense Summaries and Example........................
Financial Highlights.................................
THE AAL CAPITAL GROWTH FUND............................
Expense Summaries and Example........................
Financial Highlights.................................
THE AAL EQUITY INCOME FUND.............................
Expense Summaries and Example........................
Financial Highlights.................................
THE AAL BALANCED FUND..................................
Expense Summaries and Example........................
Financial Highlights ...............................
THE AAL HIGH YIELD BOND FUND...........................
Expense Summaries and Example........................
Financial Highlights.................................
THE AAL MUNICIPAL BOND FUND............................
Expense Summaries and Example........................
Financial Highlights.................................
THE AAL BOND FUND......................................
Expense Summaries and Example........................
Financial Highlights.................................
THE AAL MONEY MARKET FUND..............................
Expense Summaries and Example........................
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 INSTITUTIONAL SHARES IN THE FUNDS...............
SELLING (REDEEMING) YOUR INSTITUTIONAL SHARES..........
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............................
APPENDIX: SECURITIES RATINGS...........................
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 5, 1998, AAL CMC managed about $5.2 billion for the Funds.
AAL owns the outstanding stock in AAL CMC by holding all of the stock of AAL
Holdings, Inc., which holds all of the outsanding stock of 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 over 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 $82 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 9,750 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. We also have an Appendix to the prospectus that
describes the Nationally Recognized Statistical Rating Organizations ("NRSROs")
and their ratings for bonds and other debt and money market instruments. If you
are unsure of a rating as described in the prospectus, please refer to the
Appendix.
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
Institutional shares, management and services provided to the Funds and other
information. For more information on the Funds' risks, please remember to read
"Additional Investment Factors and Risks Involved" after reading the separate
Fund descriptions. The table on page three summarizes the Funds available for
your investment. The prospectus describes a separate class of shares for each
Fund, "Institutional" shares, for Lutheran organizations or enterprises with
minimum initial investment in the Funds of $500,000. We designed Institutional
shares to give Lutheran organizations and enterprises (non-natural persons) or
financial institutions acting in a fiduciary or agency capacity for them, a
convenient means of accumulating an interest in The AAL Mutual Funds. We did not
design Institutional shares for individuals, their individual retirement
accounts or trusts designed for the benefit of individuals. Investors in
Institutional shares purchase shares at net asset value. They neither pay
initial sales charges, redemption fees nor "12b-1 distribution or service fees."
We also offer Class A and Class B shares of the Funds. We describe Class A and
Class B shares in a separate prospectus. Investors in Class A shares of the
Funds pay a sales charge immediately upon purchase (front-end sales charge).
Investors in Class B shares pay a sales charge when they redeem Class B shares
held for less than five years (contingent deferred sales charge). In addition,
investors pay "12b-1 fees" for Class A and Class B shares. 12b-1 fees are
ongoing asset based fees that we charge for these shares pursuant to a plan to
cover the costs of certain activities related to the distribution and service of
these shares. The performance of the Funds' Class A, Class B and Institutional
shares will vary based on differences in sales charges and fees. For more
information on, and a prospectus for, the Funds' Class A and Class B shares, you
may call the Mutual Funds Service Center at 800-553-6319.
<TABLE>
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PRIMARY OBJECTIVE PRIMARY INVESTMENTS PRIMARY RISKS*
- --------------------------------------------------------------------------------------------------------------------------
THE AAL
SMALL CAP Long-Term Capital Growth Small Company Stocks Financial and Market
STOCK FUND
- --------------------------------------------------------------------------------------------------------------------------
THE AAL Long-Term Capital Growth Mid-Sized Company Stocks Financial and Market
MID CAP
STOCK FUND
- --------------------------------------------------------------------------------------------------------------------------
THE AAL Long-Term Capital Growth Foreign Stocks Financial, Market and
INTERNATIONAL Foreign Investment
FUND
- --------------------------------------------------------------------------------------------------------------------------
THE AAL Long-Term Capital Growth Large Company Stocks Financial and Market
CAPITAL
GROWTH FUND
- --------------------------------------------------------------------------------------------------------------------------
THE AAL Current Income, Income-Producing Securities Financial, Market and
EQUITY INCOME Long-Term Income Growth, Interest Rate
FUND and Capital Growth
- --------------------------------------------------------------------------------------------------------------------------
THE AAL Long-Term Total Return Stocks, Bonds and Money Financial, Market,
BALANCED Market Instruments Interest Rate, and
FUND Credit
- --------------------------------------------------------------------------------------------------------------------------
THE AAL High Current Income and Below Investment Grade Bonds Interest Rate,
HIGH YIELD Secondarily Capital Growth Credit, and Market
BOND FUND
- --------------------------------------------------------------------------------------------------------------------------
THE AAL Current Income Exempt Investment Grade Interest Rate and
MUNICIPAL from Federal Taxes Municipal Bonds Credit
BOND FUND Consistent with
Capital Preservation
- --------------------------------------------------------------------------------------------------------------------------
THE AAL Current Income Consistent Investment Grade Bonds Interest Rate and
BOND FUND with Capital Preservation Credit
- --------------------------------------------------------------------------------------------------------------------------
THE AAL Current Income Consistent Money Market Instruments Interest Rate and
MONEY with Liquidity and Credit
MARKET FUND Capital Preservation
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
*YOUR GUIDE TO RISK DISCLOSURE
- ----------------------------------------------------------------------
Credit Risk........................................................... Pages
Financial Risk........................................................ Pages
Foreign Investment Risk............................................... Page
Interest Rate Risk.................................................... Pages
Market Risk........................................................... Pages
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 Standard & Poor's ("S&P") 500 ("S&P 500(R)") or the S&P MidCap
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
- -------------------------------------------------------------------------------
0.75 of 1% on the first $200 million
0.65 of 1% on 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.
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 could lose money investing in the Fund.
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 Institutional shares for The AAL Small
Cap Stock Fund.
SHAREHOLDER TRANSACTION EXPENSES
Shareholder transaction expenses are charges you pay when you buy or sell shares
of the Fund. You do not pay any charges when you buy or sell Institutional
shares of the Fund.
SHAREHOLDER INSTITUTIONAL
TRANSACTION EXPENSES SHARES
- --------------------------------------------------------------------
Maximum sales charge None
imposed on purchases (as a
percentage of offering price)
- --------------------------------------------------------------------
Maximum sales charge None
imposed on reinvested
dividends (as a percentage of
net asset value)
- --------------------------------------------------------------------
Maximum deferred sales None
charge (as a percentage of
net asset value)
- --------------------------------------------------------------------
Redemption fee (The Funds None
currently charge $12.00
for each wire
redemption.)
- --------------------------------------------------------------------
Exchange fee None
========================================
ANNUAL FUND OPERATING EXPENSES
The following table reflects annual operating expenses for the Fund's
Institutional shares. Annual operating expenses include a management fee paid to
the Adviser and other expenses for maintaining shareholder records and
furnishing shareholder services, statements and financial reports. Operating
expenses are expressed as a percentage of the Fund's average net assets for the
fiscal year ended April 30, 1998.
ANNUAL FUND OPERATING INSTITUTIONAL
EXPENSES (AS A PERCENTAGE SHARES
OF AVERAGE NET ASSETS)
- ---------------------------------------------
Management fee 0.75%
- ---------------------------------------------
12b-1 distribution and None
service fees
- ---------------------------------------------
Other expenses 0.44%
=============================================
Total Fund Operating Expense 1.19%
=============================================
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
for the years shown.
EXPENSE INSTITUTIONAL
EXAMPLE SHARES
- ----------------------------------------------
After 1 year $12
- ----------------------------------------------
After 3 years $38
- ----------------------------------------------
After 5 years $67
- ----------------------------------------------
After 10 years $147
===================================
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. Actual
expenses may be greater or less than those shown.
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------
The financial highlights table covers The AAL Small Cap Stock Fund's
Institutional shares for the period shown. The information is based on a share
of beneficial interest outstanding throughout the applicable period. You should
read the table in conjunction with the Fund's 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, 1998, containing
these financial statements and a more detailed discussion and analysis of the
Fund's performance.
<TABLE>
<CAPTION>
INCOME FROM INVESTMENT LESS DISTRIBUTIONS
OPERATIONS
Share Class NAV: Net Net Total from Dividends Distribution Total
and Periods Start Investment Realized Investment from Net from Net Dividends
of Income and Un- Operations Investment Realized and
Period (Loss) realized Income Gain on Distributions
Gain(Loss) on Investments
Institutional
shares
<S> <C> <C> <C> <C> <C> <C> <C>
Period from
29-Dec-97 to
30-Apr-98 $12.45 -$0.006 $1.426 $1.420 $0.000 $0.000 $0.000
SUPPLEMENTAL DATA
AND RATIOS
NAV: Total Net Assets Ratio of Ratio of Portfolio Average
End of Return at End of Net Net Turnover Commission
Period for Period Operating Investment Rate Paid per
Period Expenses Income(Loss) Share
(1) to Average to Average
Net Assets* Net Assets*
(2) (2)
Period from
29-Dec-97 to
30-Apr-98 $13.87 11.41% $417,383 1.19% -0.39% 105.60% $0.0570
</TABLE>
* If the Fund had paid all of its expenses for Institutional shares, the
ratios would be as follows:
Ratio of net operating expenses to average net assets (2): 1.19%.
Ratio of net investment income (loss) to average net assets (2): -.39%.
(1) Total return assumes reinvestment of all dividends and distributions. 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.
ANNUAL ADVISORY FEE
- --------------------------------------------------------------------------------
0.75 of 1% on the first $200 million
0.65 of 1% on average daily net assets over $200 million
PORTFOLIO MANAGER
- --------------------------------------------------------------------------------
Michael R. Hochholzer, CFA, has managed the day-to-day Fund investments since
March 1997. Prior to managing the Fund, Mr. Hochholzer served as a securities
analyst and portfolio manager for Aid Association for Lutherans, the parent
company of AAL Capital Management Corporation from 1989.
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.
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 Institutional shares for 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. You do not pay any charges when you buy or sell Institutional
shares of the Fund.
SHAREHOLDER INSTITUTIONAL
TRANSACTION EXPENSES SHARES
- -------------------------------------------------------------------
Maximum sales charge None
imposed on purchases (as a
percentage of offering price)
- -------------------------------------------------------------------
Maximum sales charge None
imposed on reinvested
dividends (as a percentage of
net asset value)
- -------------------------------------------------------------------
Maximum deferred sales None
charge (as a percentage of
net asset value)
- -------------------------------------------------------------------
Redemption fee (The Funds None
currently charge $12.00
for each wire
redemption.)
- -------------------------------------------------------------------
Exchange fee None
====================================================
ANNUAL FUND OPERATING EXPENSES
The following table reflects annual operating expenses for the Fund's
Institutional shares. Annual operating expenses include a management fee paid to
the Adviser and other expenses for maintaining shareholder records and
furnishing shareholder services, statements and financial reports. Operating
expenses are expressed as a percentage of the Fund's average net assets for the
fiscal year ended April 30, 1998.
ANNUAL FUND OPERATING INSTITUTIONAL
EXPENSES (AS A PERCENTAGE SHARES
OF AVERAGE NET ASSETS)
- ---------------------------------------------------------------------
Management fee 0.68%
- ---------------------------------------------------------------------
12b-1 distribution and service fees None
- ---------------------------------------------------------------------
Other expenses 0.18%
====================================================
Total Fund Operating Expenses 0.86%
====================================================
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
for the years shown.
EXPENSE INSTITUTIONAL
EXAMPLE SHARES
- ----------------------------------------------------------------------
After 1 year $9
- ----------------------------------------------------------------------
After 3 years $28
- ----------------------------------------------------------------------
After 5 years $49
- ----------------------------------------------------------------------
After 10 years $108
=========================================
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. Actual
expenses may be greater or less than those shown.
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The financial highlights table covers The AAL Mid Cap Stock Fund's Institutional
shares for the period shown. The information is based on a share of beneficial
interest outstanding throughout the applicable period. You should read the table
in conjunction with the Fund's 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, 1998, containing these financial
statements and a more detailed discussion and analysis of the Fund's
performance.
<TABLE>
<CAPTION>
INCOME FROM INVESTMENT LESS DISTRIBUTIONS
OPERATIONS
Share Class NAV: Net Net Total from Dividends Distribution Total
and Periods Start Investment Realized Investment from Net from Net Dividends
of Income and Un- Operations Investment Realized and
Period (Loss) realized Income Gain on Distributions
Gain(Loss) on Investments
Institutional
shares
<S> <C> <C> <C> <C> <C> <C> <C>
Period from
29-Dec-97 to
30-Apr-98 $14.40 $0.002 $1.558 $1.560 $0.000 $0.000 $0.000
SUPPLEMENTAL DATA
AND RATIOS
NAV: Total Net Assets Ratio of Ratio of Portfolio Average
End of Return at End of Net Net Turnover Commission
Period for Period Operating Investment Rate Paid per
Period Expenses Income(Loss) Share
(1) to Average to Average
Net Assets* Net Assets*
(2) (2)
Period from
29-Dec-97 to
30-Apr-98 $15.96 10.83 $1,164,361 0.86% 0.18% 104.73% $0.0600
</TABLE>
*If the Fund had paid all of its expenses for Institutional shares, the ratios
would be as follows:
Ratio of net operating expenses to average net assets(2): .86%.
Ratio of net investment income (loss) to average net assets (2): .18%.
(1) Total return assumes reinvestment of all dividends and distributions. 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 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; or
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 S&P or Ba or lower by Moody's Investor
Services, Inc. ("Moody's")) and unrated securities.
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.
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
- --------------------------------------------------------------------------------
0.80 of 1% on average daily net assets
ANNUAL SUB-ADVISORY FEE
- --------------------------------------------------------------------------------
0.55 of 1% on average daily net assets (payable from the 0.80% 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. SoGen, 1221 Avenue of the Americas, New York,
NY 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.
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. We may
invest from 0% to 100% of the Fund's net assets in emerging growth countries,
which 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
risks to your investment.
You may lose money investing in this Fund.
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 Institutional shares for The AAL
International Fund.
SHAREHOLDER TRANSACTION EXPENSES
Shareholder transaction expenses are charges you pay when you buy or sell shares
of the Fund. You do not pay any charges when you buy or sell Institutional
shares of the Fund.
SHAREHOLDER INSTITUTIONAL
TRANSACTION EXPENSES SHARES
- ------------------------------------------------------------
Maximum sales charge None
imposed on purchases (as a
percentage of offering price)
- ------------------------------------------------------------
Maximum sales charge None
imposed on reinvested
dividends (as a percentage of
net asset value)
- ------------------------------------------------------------
Maximum deferred sales None
charge (as a percentage of
net asset value)
- ------------------------------------------------------------
Redemption fee (The Funds None
currently charge $12.00
for each wire
redemption.)
- ------------------------------------------------------------
Exchange fee None
===================================================
ANNUAL FUND OPERATING EXPENSES
The following table reflects annual operating expenses for the Fund's
Institutional shares. Annual operating expenses include a management fee paid to
the Adviser and other expenses for maintaining shareholder records and
furnishing shareholder services, statements and financial reports. Operating
expenses are expressed as a percentage of the Fund's average net assets for the
fiscal year ended April 30, 1998. On December 1, 1997, we reduced the advisory
fee for this Fund.
ANNUAL FUND OPERATING INSTITUTIONAL
EXPENSES (AS A PERCENTAGE SHARES
OF AVERAGE NET ASSETS)
- -----------------------------------------------------------------------
Management fee 0.80%
- -----------------------------------------------------------------------
12b-1 distribution and service fees None
- -----------------------------------------------------------------------
Other expenses 0.39%
====================================================
Total Fund Operating Expenses 1.19%
====================================================
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
for the years shown.
EXPENSE INSTITUTIONAL
EXAMPLE SHARES
- ----------------------------------------------------------
After 1 year $12
- ----------------------------------------------------------
After 3 years $38
- ----------------------------------------------------------
After 5 years $67
- ----------------------------------------------------------
After 10 years $147
- ----------------------------------------------------------
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. Actual
expenses may be greater or less than those shown.
FINANCIAL HIGHLIGHTS
The financial highlights table covers The AAL International Fund's Institutional
shares for the period shown. The information is based on a share of beneficial
interest outstanding throughout the applicable period. You should read the table
in conjunction with the Fund's 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, 1998, containing these financial
statements and a more detailed discussion and analysis of the Fund's
performance.
<TABLE>
<CAPTION>
INCOME FROM INVESTMENT LESS DISTRIBUTIONS
OPERATIONS
Share Class NAV: Net Net Total from Dividends Distribution Total
and Periods Start Investment Realized Investment from Net from Net Dividends
of Income and Un- Operations Investment Realized and
Period (Loss) realized Income Gain on Distributions
Gain(Loss) on Investments
Institutional
shares
<S> <C> <C> <C> <C> <C> <C> <C>
Period from
29-Dec-97 to
30-Apr-98 $10.11 $0.027 $1.033 $1.060 $0.000 $0.000 $0.000
SUPPLEMENTAL DATA
AND RATIOS
NAV: Total Net Assets Ratio of Ratio of Portfolio Average
End of Return at End of Net Net Turnover Commission
Period for Period Operating Investment Rate Paid per
Period Expenses Income(Loss) Share
(1) to Average to Average
Net Assets* Net Assets*
(2) (2)
Period from
29-Dec-97 to
30-Apr-98 $11.17 10.48% $460,269 1.19% 2.38% 19.90% $0.0090
</TABLE>
*If the Fund had paid all of its expenses for Institutional shares, the ratios
would be as follows:
Ratio of net operating expenses to average net assets (2): 1.19%.
Ratio of net investment income (loss) to average net assets (2): 2.38%.
(1) Total return assumes reinvestment of all dividends and distributions. 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 Capital Growth Fund
================================================================================
INVESTMENT OBJECTIVE
- --------------------------------------------------------------------------------
The AAL Capital Growth Fund seeks long-term capital growth by investing
primarily in a diversified portfolio of 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
- --------------------------------------------------------------------------------
0.70 of 1% on the first $250 million
0.65 of 1% on the next $250 million
0.575 of 1% on the next $500 million
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.
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 Institutional shares for The AAL
Capital Growth Fund.
SHAREHOLDER TRANSACTION EXPENSES
Shareholder transaction expenses are charges you pay when you buy or sell shares
of the Fund. You do not pay any charges when you buy or sell Institutional
shares of the Fund.
SHAREHOLDER INSTITUTIONAL
TRANSACTION EXPENSES SHARES
- ------------------------------------------------------------
Maximum sales charge None
imposed on purchases (as a
percentage of offering price)
- ------------------------------------------------------------
Maximum sales charge None
imposed on reinvested
dividends
- ------------------------------------------------------------
Maximum deferred sales charge None
- ------------------------------------------------------------
Redemption fee (The Funds None
currently charge $12.00
for each wire
redemption.)
- ------------------------------------------------------------
Exchange fee None
===============================================
ANNUAL FUND OPERATING EXPENSES
The following table reflects annual operating expenses for the Fund's
Institutional shares. Annual operating expenses include a management fee paid to
the Adviser and other expenses for maintaining shareholder records and
furnishing shareholder services, statements and, financial reports. Operating
expenses are expressed as a percentage of the Fund's average net assets for the
fiscal year ended April 30, 1998 .
ANNUAL FUND OPERATING INSTITUTIONAL
EXPENSES (AS A PERCENTAGE SHARES
OF AVERAGE NET ASSETS)
- ------------------------------------------------------
Management fee 0.55%
- ------------------------------------------------------
12b-1 distribution and service fees None
- ------------------------------------------------------
Other expenses 0.03%
===============================================
Total Fund Operating Expenses 0.58%
===============================================
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
for the years shown.
EXPENSE INSTITUTIONAL
EXAMPLE SHARES
- -------------------------------------------------------
After 1 year $6
- -------------------------------------------------------
After 3 years $19
- -------------------------------------------------------
After 5 years $33
- -------------------------------------------------------
After 10 years $74
=========================================
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. Actual
expenses may be greater or less than those shown.
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The financial highlights table covers The AAL Capital Growth Fund's
Institutional shares for the period shown. The information is based on a share
of beneficial interest outstanding throughout the applicable period. You should
read the table in conjunction with the Fund's 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, 1998, containing
these financial statements and a more detailed discussion and analysis of the
Fund's performance.
<TABLE>
<CAPTION>
INCOME FROM INVESTMENT LESS DISTRIBUTIONS
OPERATIONS
Share Class NAV: Net Net Total from Dividends Distribution Total
and Periods Start Investment Realized Investment from Net from Net Dividends
of Income and Un- Operations Investment Realized and
Period (Loss) realized Income Gain on Distributions
Gain(Loss) on Investments
Institutional
shares
<S> <C> <C> <C> <C> <C> <C> <C>
Period from
29-Dec-97 to
30-Apr-98 $26.05 $0.015 $3.605 $3.620 $0.000 $0.000 $0.000
SUPPLEMENTAL DATA
AND RATIOS
NAV: Total Net Assets Ratio of Ratio of Portfolio Average
End of Return at End of Net Net Turnover Commission
Period for Period Operating Investment Rate Paid per
Period Expenses Income(Loss) Share
(1) to Average to Average
Net Assets* Net Assets*
(2) (2)
Period from
29-Dec-97 to
30-Apr-98 $29.67 13.90% $2,985,982 0.58% 0.52% 17.96% $0.0540
</TABLE>
* If the Fund had paid all of its expenses for Institutional shares, the
ratios would be as follows:
Ratio of net operating expenses to average net assets(2): .58%.
Ratio of net investment income (loss) to average net assets (2): .52%.
(1) Total return assumes reinvestment of all dividends and distributions. 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.
AAL Equity Income 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 that 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 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.
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.
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.
ANNUAL ADVISORY FEE
- --------------------------------------------------------------------------------
0.50 of 1% on the first $250 million
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
- --------------------------------------------------------------------------------
Although we intend to diversify the Fund's investments in securities across many
different industries, income-producing equity securities tend to be more
prevalent in some market sectors than others. The higher 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 market sectors. Accordingly, our investments for the
Fund may tend to emphasize certain market sectors more than others.
Financial Risk: The market sectors in which companies tend to issue
income-producing equity securities usually have high operating, interest and
other regulatory expenses, such as the public utilities industry. Also, some of
these sectors are maturing, meaning that growth is peaking. Companies in these
market sectors often use their profits or paying higher dividends rather than
reinvesting for company growth. As a result, income-producing equity securities
typically have lower capital growth potential than equity securities in other
sectors. Capital growth for many income-producing equity securities typically
corresponds to the company's competitive position, in particular its capability
to capture market share from its competitors.
Interest Rate Risk: Like bonds, changes in the level of interest rates affect
the value of income-producing equity securities and the value of the Fund as a
whole.
Market Risk: Market cycles affect all equity securities over time, with periods
when stock prices rise generally and periods when stock prices decline
generally. However, income-producing equity securities may rise less and fall
less than the market as a whole because of the higher income component of these
securities. You still could lose money investing in the Fund.
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 Institutional shares for The AAL Equity
Income Fund.
SHAREHOLDER TRANSACTION EXPENSES
Shareholder transaction expenses are charges you pay when you buy or sell shares
of the Fund. You do not pay any charges when you buy or sell Institutional
shares of the Fund.
SHAREHOLDER INSTITUTIONAL
TRANSACTION EXPENSES SHARES
- -------------------------------------------------------------
Maximum sales charge None
imposed on purchases (as a
percentage of offering price)
- -------------------------------------------------------------
Maximum sales charge None
imposed on reinvested
dividends (as a percentage of
net asset value)
- -------------------------------------------------------------
Maximum deferred sales None
charge (as a percentage of
net asset value)
- -------------------------------------------------------------
Redemption fee (The Funds None
currently charge $12.00
for each wire
redemption.)
- -------------------------------------------------------------
Exchange fee None
===============================================
ANNUAL FUND OPERATING EXPENSES
The following table reflects annual operating expenses for the Fund's
Institutional shares. Annual operating expenses include a management fee paid to
the Adviser and other expenses for maintaining shareholder records and
furnishing shareholder services, statements and financial reports. Operating
expenses are expressed as a percentage of the Fund's average net assets for the
fiscal year ended April 30, 1998.
ANNUAL FUND OPERATING INSTITUTIONAL
EXPENSES (AS A PERCENTAGE SHARES
OF AVERAGE NET ASSETS)
- ---------------------------------------------------------------------
Management fee 0.51%
- ---------------------------------------------------------------------
12b-1 distribution and service fees None
- ---------------------------------------------------------------------
Other expenses 0.17%
===================================================
Total Fund Operating Expenses 0.68%
===================================================
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
for the years shown.
EXPENSE INSTITUTIONAL
EXAMPLE SHARES
- -------------------------------------------------
After 1 year $7
- -------------------------------------------------
After 3 years $22
- -------------------------------------------------
After 5 years $39
- -------------------------------------------------
After 10 years $86
===============================================
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. Actual
expenses may be greater or less than those shown.
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The financial highlights table covers The AAL Equity Income Fund's Institutional
shares for the period shown. The information is based on a share of beneficial
interest outstanding throughout the applicable period. You should read the table
in conjunction with the Fund's 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, 1998, containing these financial
statements and a more detailed discussion and analysis of the Fund's
performance.
<TABLE>
<CAPTION>
INCOME FROM INVESTMENT LESS DISTRIBUTIONS
OPERATIONS
Share Class NAV: Net Net Total from Dividends Distribution Total
and Periods Start Investment Realized Investment from Net from Net Dividends
of Income and Un- Operations Investment Realized and
Period (Loss) realized Income Gain on Distributions
Gain(Loss) on Investments
Institutional
shares
<S> <C> <C> <C> <C> <C> <C> <C>
Period from
29-Dec-97 to
30-Apr-98 $13.14 $0.077 $1.160 $1.237 -$0.057 $0.000 -$0.057
SUPPLEMENTAL DATA
AND RATIOS
NAV: Total Net Assets Ratio of Ratio of Portfolio Average
End of Return at End of Net Net Turnover Commission
Period for Period Operating Investment Rate Paid per
Period Expenses Income(Loss) Share
(1) to Average to Average
Net Assets* Net Assets*
(2) (2)
Period from
29-Dec-97 to
30-Apr-98 $14.32 9.34% $7,087,176 0.68% 2.10% 64.00% $0.0600
</TABLE>
* If the Fund had paid all of its expenses for Institutional shares, the
ratios would be as follows:
Ratio of net operating expenses to average net assets (2): .68%.
Ratio of net investment income (loss) to average net assets (2): 2.10%.
(1) Total return assumes reinvestment of all dividends and distributions. 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 Balanced Fund
================================================================================
INVESTMENT OBJECTIVE
- --------------------------------------------------------------------------------
The AAL Balanced Fund seeks long-term total return through a balance between
income and the potential for long-term capital growth by investing primarily in
a diversified portfolio of common stocks, bonds and money market instruments. We
select these investments consistent with the investment policies of The AAL
Capital Growth, Bond and Money Market Funds, respectively.
INVESTMENT POLICIES
- --------------------------------------------------------------------------------
Under normal circumstances, we invest 50 to 60% of the Fund's total assets in
common stocks, 30 to 40% in fixed-income securities and 0 to 20% in money market
instruments. We will, however, at all times maintain an investment mix within
the following ranges:
1) 35 to 75% common stocks;
2) 25 to 50% in fixed-income securities; and
3) 0 to 40% in money market instruments.
We select investments for The AAL Balanced Fund in the following three market
sectors:
1) common stocks, including the securities in which The AAL Capital Growth
Fund may invest;
2) bonds and other debt securities with maturities generally exceeding one
year, including securities in which The AAL Bond Fund may invest; and
3) money market instruments and other debt securities with maturities
generally not exceeding 397 days, including the securities in which The
AAL Money Market Fund may invest.
We periodically review and adjust the mix of investments among three market
sectors to capitalize on potential variations in returns produced by the
interaction of changing financial markets and economic conditions. Changes in
the investment mix may occur several times within a year or over several years
depending on market and economic conditions.
ANNUAL ADVISORY FEE
- --------------------------------------------------------------------------------
0.60 of 1% on average daily net assets
PORTFOLIO MANAGERS
- --------------------------------------------------------------------------------
Frederick L. Plautz, manager of The AAL Capital Growth Fund and Michael R. Hilt,
manager of The AAL Bond and Money Market Funds, serve as co-managers of the
Fund.
INVESTMENT FACTORS AND RISKS INVOLVED
- --------------------------------------------------------------------------------
STOCK INVESTMENTS
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 stocks prices rise generally and periods when stocks prices decline
generally. The value of the Fund's investments may increase or decrease more
than the stock market in general, as measured by the S&P 500(R). Because we
invest 35 to 75% of the Fund's assets in stocks, fluctuating stock prices will
have a significant impact on the Fund's value (the price of the Fund's shares).
You could lose money investing in the Fund.
BOND AND MONEY MARKET INSTRUMENT INVESTMENTS
Interest Rate Risk: Changes in interest rate levels affect the value of bonds
and money market instruments 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
bonds and money market instruments, which may decline during the Fund's holding
periods and affect the value of the Fund as a whole.
ASSET ALLOCATION
We may shift the portfolio's asset mix of stocks, bonds and money market
instruments based on existing or anticipated market conditions. The returns you
receive will depend on how we have allocated the Fund's investments across these
asset categories. As the allocation fluctuates over time your returns will
fluctuate.
The Fund seeks total return, consisting of capital appreciation, current income
and long-term income growth, by following an asset allocation strategy. The
Fund, however, may not achieve as high a level of either capital appreciation or
income as a Fund that has only one of these as a primary objective.
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 Institutional shares for The AAL
Balanced Fund.
SHAREHOLDER TRANSACTION EXPENSES
Shareholder transaction expenses are charges you pay when you buy or sell shares
of the Fund. You do not pay any charges when you buy or sell Institutional
shares of the Fund.
SHAREHOLDER INSTITUTIONAL
TRANSACTION EXPENSES SHARES
- ----------------------------------------------------------
Maximum sales charge None
imposed on purchases (as a
percentage of offering price)
- ----------------------------------------------------------
Maximum sales charge None
imposed on reinvested
dividends (as a percentage of
net asset value)
- ----------------------------------------------------------
Maximum deferred sales None
charge (as a percentage of
net asset value)
- ----------------------------------------------------------
Redemption fee (The Funds None
currently charge $12.00
for each wire
redemption.)
- ----------------------------------------------------------
Exchange fee None
===================================================
ANNUAL FUND OPERATING EXPENSES
The following table reflects annual operating expenses for the Fund's
Institutional shares. Annual operating expenses include a management fee paid to
the Adviser and other expenses for maintaining shareholder records and
furnishing shareholder services, statements and financial reports. Operating
expenses are expressed as a percentage of the Fund's average net assets for the
period ended April 30, 1998.
ANNUAL FUND OPERATING INSTITUTIONAL
EXPENSES (AS A PERCENTAGE SHARES
OF AVERAGE NET ASSETS)
- ----------------------------------------------------------------
Management fee 0.60%
- ----------------------------------------------------------------
12b-1 distribution and service fees None
- ----------------------------------------------------------------
Other expenses 1.35%
===================================================
Total Fund Operating Expenses 1.95%
===================================================
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
for the years shown.
EXPENSE INSTITUTIONAL
EXAMPLE SHARES
- ---------------------------------------------------------------------
After 1 year $20
- ---------------------------------------------------------------------
After 3 years $63
- ---------------------------------------------------------------------
After 5 years $108
- ---------------------------------------------------------------------
After 10 years $234
=========================================
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. Actual
expenses may be greater or less than those shown.
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The financial highlights table covers The AAL Balanced Fund's Institutional
shares for the period shown. The information is based on a share of beneficial
interest outstanding throughout the applicable period. You should read the table
in conjunction with the Fund's 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, 1998, containing these financial
statements and a more detailed discussion and analysis of the Fund's
performance.
<TABLE>
<CAPTION>
INCOME FROM INVESTMENT LESS DISTRIBUTIONS
OPERATIONS
Share Class NAV: Net Net Total from Dividends Distribution Total
and Periods Start Investment Realized Investment from Net from Net Dividends
of Income and Un- Operations Investment Realized and
Period (Loss) realized Income Gain on Distributions
Gain(Loss) on Investments
Institutional
shares
<S> <C> <C> <C> <C> <C> <C> <C>
Period from
29-Dec-97 to
30-Apr-98 $10.00 $0.042 $0.775 $0.817 -$0.027 $0.000 -$0.027
SUPPLEMENTAL DATA
AND RATIOS
NAV: Total Net Assets Ratio of Ratio of Portfolio Average
End of Return at End of Net Net Turnover Commission
Period for Period Operating Investment Rate Paid per
Period Expenses Income(Loss) Share
(1) to Average to Average
Net Assets* Net Assets*
(2) (2)
Period from
29-Dec-97 to
30-Apr-98 $10.79 8.17% $1,076,355 1.95% 1.73% 11.52% $0.0300
</TABLE>
* If the Fund had paid all of its expenses for Institutional shares, the
ratios would be as follows:
Ratio of net operating expenses to average net assets (2): 1.95%.
Ratio of net investment income (loss) to average net assets (2): 1.73%.
(1) Total return assumes reinvestment of all dividends and distributions 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 High Yield Bond Fund
================================================================================
INVESTMENT OBJECTIVE
- --------------------------------------------------------------------------------
The AAL High Yield Bond Fund seeks high current income and secondarily capital
growth by investing primarily in a diversified portfolio of 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 total assets in
high yield bonds. By high yield bonds, we mean debt securities rated below
investment grade by a NRSRO, such as Ba or lower by Moody's or BB or lower by
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
- --------------------------------------------------------------------------------
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 1995 he was a second vice president and portfolio
manager for Fortis Advisers, Inc.
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.
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 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.
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, 1998, was:
INVESTMENT GRADE PERCENTAGE
OF PORTFOLIO
- -----------------------------------------------------
BB 24%
- -----------------------------------------------------
B 73%
- -----------------------------------------------------
CCC 3%
- -----------------------------------------------------
CC 0%
- -----------------------------------------------------
C 0%
- -----------------------------------------------------
D 0%
- -----------------------------------------------------
Non-rated 0%
- ----------------------------------------------------
===============================
Total 100%
===============================
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 Institutional shares for The AAL High
Yield Bond Fund.
SHAREHOLDER TRANSACTION EXPENSES
Shareholder transaction expenses are charges you pay when you buy or sell shares
of the Fund. You do not pay any charges when you buy or sell Institutional
shares of the Fund.
SHAREHOLDER INSTITUTIONAL
TRANSACTION EXPENSES SHARES
- --------------------------------------------------------------
Maximum sales charge None
imposed on purchases (as a
percentage of offering price)
- --------------------------------------------------------------
Maximum sales charge None
imposed on reinvested
dividends (as a percentage of
net asset value)
- --------------------------------------------------------------
Maximum deferred sales None
charge (as a percentage of
net asset value)
- --------------------------------------------------------------
Redemption fee (The Funds None
currently charge $12.00
for each wire
redemption.)
- --------------------------------------------------------------
Exchange fee None
===============================================
ANNUAL FUND OPERATING EXPENSES
The following table reflects annual operating expenses for the Fund's
Institutional shares. Annual operating expenses include a management fee paid to
the Adviser and other expenses for maintaining shareholder records and
furnishing shareholder services, statements and financial reports. Operating
expenses are expressed as a percentage of the Fund's average net assets for the
fiscal year ended April 30, 1998.
ANNUAL FUND OPERATING INSTITUTIONAL
EXPENSES (AS A PERCENTAGE SHARES
OF AVERAGE NET ASSETS)
- -----------------------------------------------------------------
Management fee 0.60%
- -----------------------------------------------------------------
12b-1 distribution and service fees None
- -----------------------------------------------------------------
Other expenses 0.15%
==============================================
Total Fund Operating Expenses 0.75%
==============================================
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
for the years shown.
EXPENSE INSTITUTIONAL
EXAMPLE SHARES
- ---------------------------------------------------
After 1 year $8
- ---------------------------------------------------
After 3 years $24
- ---------------------------------------------------
After 5 years $43
- ---------------------------------------------------
After 10 years $95
==============================
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. Actual
expenses may be greater or less than those shown.
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The financial highlights table covers The AAL High Yield Bond Fund's
Institutional shares for the period shown. The information is based on a share
of beneficial interest outstanding throughout the applicable period. You should
read the table in conjunction with the Fund's 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, 1998, containing
these financial statements and a more detailed discussion and analysis of the
Fund's performance.
<TABLE>
<CAPTION>
INCOME FROM INVESTMENT LESS DISTRIBUTIONS
OPERATIONS
Share Class NAV: Net Net Total from Dividends Distribution Total
and Periods Start Investment Realized Investment from Net from Net Dividends
of Income and Un- Operations Investment Realized and
Period (Loss) realized Income Gain on Distributions
Gain(Loss) on Investments
Institutional
shares
<S> <C> <C> <C> <C> <C> <C> <C>
Period from
29-Dec-97 to
30-Apr-98 $10.29 $0.312 $0.020 $0.332 -$0.312 $0.000 -$0.312
SUPPLEMENTAL DATA
AND RATIOS
NAV: Total Net Assets Ratio of Ratio of Portfolio
End of Return at End of Net Net Turnover
Period for Period Operating Investment Rate
Period Expenses Income(Loss)
(1) to Average to Average
Net Assets* Net Assets*
(2) (2)
Period from
29-Dec-97 to
30-Apr-98 $10.31 3.28% $178,730 0.75% 9.53% 112.37%
</TABLE>
* If the Fund had paid all of its expenses for Institutional shares, the
ratios would be as follows:
Ratio of net operating expenses to average net assets (2): .75%.
Ratio of net investment income (loss) to average net assets (2): 9.53%.
(1) Total return assumes reinvestment of all dividends and distributions. 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 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 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.
We may 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
- --------------------------------------------------------------------------------
0.50 of 1% on the first $250 million
0.45 of 1% on average daily net assets over $250 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
- --------------------------------------------------------------------------------
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.
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 Institutional shares for The AAL
Municipal Bond Fund.
SHAREHOLDER TRANSACTION EXPENSES
Shareholder transaction expenses are charges you pay when you buy or sell shares
of the Fund. You do not pay any charges when you buy or sell Institutional
shares of the Fund.
SHAREHOLDER INSTITUTIONAL
TRANSACTION EXPENSES SHARES
- ---------------------------------------------------------------
Maximum sales charge None
imposed on purchases (as a
percentage of offering price)
- ---------------------------------------------------------------
Maximum sales charge None
imposed on reinvested
dividends (as a percentage of
net asset value)
- ---------------------------------------------------------------
Maximum deferred sales None
charge (as a percentage of
net asset value)
- ---------------------------------------------------------------
Redemption fee (The Funds None
currently charge $12.00
for each wire
redemption.)
- ---------------------------------------------------------------
Exchange fee None
===============================================
ANNUAL FUND OPERATING EXPENSES
The following table reflects annual operating expenses for the Fund's
Institutional shares. Annual operating expenses include a management fee paid to
the Adviser and other expenses for maintaining shareholder records and
furnishing shareholder services, statements and financial reports. Operating
expenses are expressed as a percentage of the Fund's average net assets for the
fiscal year ended April 30, 1998. On September 1, 1997, we reduced the advisory
fee for this Fund.
ANNUAL FUND OPERATING INSTITUTIONAL
EXPENSES (AS A PERCENTAGE SHARES
OF AVERAGE NET ASSETS)
- --------------------------------------------------------------
Management fee 0.48%
- --------------------------------------------------------------
12b-1 distribution and service fees None
- --------------------------------------------------------------
Other expenses 0.12%
===============================================
Total Fund Operating Expenses 0.60%
===============================================
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
for the years shown.
EXPENSE INSTITUTIONAL
EXAMPLE SHARES
- ---------------------------------------------------
After 1 year $6
- ---------------------------------------------------
After 3 years $20
- ---------------------------------------------------
After 5 years $34
- ---------------------------------------------------
After 10 years $77
==============================
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. Actual
expenses may be greater or less than those shown.
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The financial highlights table covers The AAL Municipal Bond Fund's
Institutional shares for the period shown. The information is based on a share
of beneficial interest outstanding throughout the applicable period. You should
read the table in conjunction with the Fund's 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, 1998, containing
these financial statements and a more detailed discussion and analysis of the
Fund's performance.
<TABLE>
<CAPTION>
INCOME FROM INVESTMENT LESS DISTRIBUTIONS
OPERATIONS
Share Class NAV: Net Net Total from Dividends Distribution Total
and Periods Start Investment Realized Investment from Net from Net Dividends
of Income and Un- Operations Investment Realized and
Period (Loss) realized Income Gain on Distributions
Gain(Loss) on Investments
Institutional
shares
<S> <C> <C> <C> <C> <C> <C> <C>
Period from
29-Dec-97 to
30-Apr-98 $11.59 $0.180 -$0.190 -$0.010 -$0.180 $0.000 -$0.180
SUPPLEMENTAL DATA
AND RATIOS
NAV: Total Net Assets Ratio of Ratio of Portfolio
End of Return at End of Net Net Turnover
Period for Period Operating Investment Rate
Period Expenses Income(Loss)
(1) to Average to Average
Net Assets* Net Assets*
(2) (2)
Period from
29-Dec-97 to
30-Apr-98 $11.40 -0.09% $50,091 0.60% 4.79% 139.18%
</TABLE>
* If the Fund had paid all of its expenses for Institutional shares, the
ratios would be as follows:
Ratio of net operating expenses to average net assets (2): .60%.
Ratio of net investment income (loss) to average net assets (2): 4.79%.
(1) Total return assumes reinvestment of all dividends and distributions. 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 Bond Fund
================================================================================
INVESTMENT OBJECTIVE
- --------------------------------------------------------------------------------
The AAL Bond Fund seeks a high level of current income, consistent with capital
preservation by investing primarily in a diversified portfolio of investment
grade bonds.
INVESTMENT POLICIES
- --------------------------------------------------------------------------------
Under normal circumstances, we invest at least 65% of the Fund's total assets
in:
1) bonds of U.S. and foreign issuers payable in U.S. dollars rated within the
four highest rating categories by at
least two NRSROs at the time of purchase.
2) bonds or other 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
- --------------------------------------------------------------------------------
0.50 of 1% on the first $250 million
0.45 of 1% on average daily net assets over $250 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. 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
bonds, which may decline during the Fund's holding periods and affect the value
of the Fund as a whole.
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 Institutional shares for The AAL Bond
Fund.
SHAREHOLDER TRANSACTION EXPENSES
Shareholder transaction expenses are charges you pay when you buy or sell shares
of the Fund. You do not pay any charges when you buy or sell Institutional
shares of the Fund.
SHAREHOLDER INSTITUTIONAL
TRANSACTION EXPENSES SHARES
- --------------------------------------------------------------
Maximum sales charge None
imposed on purchases (as a
percentage of offering price)
- --------------------------------------------------------------
Maximum sales charge None
imposed on reinvested
dividends (as a percentage of
net asset value)
- --------------------------------------------------------------
Maximum deferred sales None
charge (as a percentage of
net asset value)
- --------------------------------------------------------------
Redemption fee (The Funds None
currently charge $12.00
for each wire
redemption.)
- --------------------------------------------------------------
Exchange fee None
===============================================
ANNUAL FUND OPERATING EXPENSES
The following table reflects annual operating expenses for the Fund's
Institutional shares. Annual operating expenses include a management fee paid to
the Adviser 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 the Fund's average net
assets for the fiscal year ended April 30, 1998. On September 1, 1997, we
reduced the advisory fee for this Fund.
ANNUAL FUND OPERATING INSTITUTIONAL
EXPENSES (AS A PERCENTAGE SHARES
OF AVERAGE NET ASSETS)
- -------------------------------------------------------------
Management fee 0.48%
- -------------------------------------------------------------
12b-1 distribution None None
service fees
- -------------------------------------------------------------
Other expenses 0.08%
==============================================
Total Fund Operating Expenses 0.56%
==============================================
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
for the years shown.
EXPENSE INSTITUTIONAL
EXAMPLE SHARES
- --------------------------------------------------
After 1 year $6
- --------------------------------------------------
After 3 years $18
- --------------------------------------------------
After 5 years $32
- --------------------------------------------------
After 10 years $71
================================================================================
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. Actual
expenses may be greater or less than those shown.
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The financial highlights table covers The AAL Bond Fund's Institutional shares
for the period shown. The information is based on a share of beneficial interest
outstanding throughout the applicable period. You should read the table in
conjunction with the Fund's 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, 1998, containing these financial statements
and a more detailed discussion and analysis of the Fund's performance.
<TABLE>
<CAPTION>
INCOME FROM INVESTMENT LESS DISTRIBUTIONS
OPERATIONS
Share Class NAV: Net Net Total from Dividends Distribution Total
and Periods Start Investment Realized Investment from Net from Net Dividends
of Income and Un- Operations Investment Realized and
Period (Loss) realized Income Gain on Distributions
Gain(Loss) on Investments
Institutional
shares
<S> <C> <C> <C> <C> <C> <C> <C>
Period from
29-Dec-97 to
30-Apr-98 $10.06 $0.197 -$0.070 $0.127 -$0.197 $0.000 -$0.197
SUPPLEMENTAL DATA
AND RATIOS
NAV: Total Net Assets Ratio of Ratio of Portfolio
End of Return at End of Net Net Turnover
Period for Period Operating Investment Rate
Period Expenses Income(Loss)
(1) to Average to Average
Net Assets* Net Assets*
(2) (2)
Period from
29-Dec-97 to
30-Apr-98 $9.99 1.24% $29,249,736 0.56% 6.29% 483.76%
</TABLE>
* If the Fund had paid all of its expenses for Institutional shares, the
ratios would be as follows:
Ratio of net operating expenses to average net assets (2): .56%.
Ratio of net investment income (loss) to average net assets (2): 6.29%.
(1) Total return assumes reinvestment of all dividends and distributions. 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 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
- --------------------------------------------------------------------------------
0.50 of 1% on the first $500 million
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.
INVESTMENT FACTORS AND RISKS INVOLVED
- --------------------------------------------------------------------------------
Interest Rate Risk: Changes in interest rate levels affect the yield.
Credit Risk: The Fund carries the risk that the creditworthiness of some
securities issuers may decline during the Fund's holding period.
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 Money Market Fund.
SHAREHOLDER TRANSACTION EXPENSES
- --------------------------------------------------------------------------------
Shareholder transaction expenses are charges you pay when you buy or sell shares
of the Fund. You do not pay any charges when you buy or sell Institutional
shares of the Fund.
SHAREHOLDER INSTITUTIONAL
TRANSACTION EXPENSES SHARES
- ------------------------------------------------------------------
Maximum sales charge None
imposed on purchases (as a
percentage of offering price)
- ------------------------------------------------------------------
Maximum sales charge None
imposed on reinvested
dividends (as a percentage of
net asset value)
- ------------------------------------------------------------------
Maximum deferred sales None
charge (as a percentage of
net asset value)
- ------------------------------------------------------------------
Redemption fee (The Funds None
currently charge $12.00
for each wire
redemption.)
- ------------------------------------------------------------------
Exchange fee None
==============================================
ANNUAL FUND OPERATING EXPENSES
The following table reflects annual operating expenses for the Fund's
Institutional shares. Operating expenses are expressed as a percentage of the
Fund's average net assets for the fiscal year ended April 30, 1998 . Annual
operating expenses include a management fee paid to the Adviser and other
expenses for maintaining shareholder records and furnishing shareholder
services, statements and financial reports. We are waiving 0.225 of 1% of the
0.50 of 1% maximum advisory fee we could charge for the Fund. As a result, we
are charging a 0.275 of 1% management fee. Percentages shown for "Other
Expenses" are based on amounts incurred in the prior fiscal year. Without the
expense waiver, "Total Fund Operating Expenses" were 1.43%. We anticipate the
waiver continuing through the fiscal year end.
ANNUAL FUND OPERATING INSTITUTIONAL
EXPENSES (AS A PERCENTAGE SHARES
OF AVERAGE NET ASSETS)
- --------------------------------------------------------------
Management fee 0.28%
(after fee waiver)
- --------------------------------------------------------------
12b-1 distribution and
service fees None
- --------------------------------------------------------------
Other expenses 0.39%
==============================================
Total Fund Operating Expenses 0.67%
(after fee waiver)
==============================================
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
for the years shown.
EXPENSE INSTITUTIONAL
EXAMPLE SHARES
- --------------------------------------
After 1 year $7
- --------------------------------------
After 3 years $22
- --------------------------------------
After 5 years $38
- --------------------------------------
After 10 years $85
- --------------------------------------------------------------------------------
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. Actual
expenses may be greater or less than those shown.
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The financial highlights table covers The AAL Money Market Fund's Institutional
shares for the period shown. The information is based on a share of beneficial
interest outstanding throughout the applicable period. You should read the table
in conjunction with the Fund's 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, 1998, containing these financial
statements and a more detailed discussion and analysis of the Fund's
performance.
<TABLE>
<CAPTION>
INCOME FROM INVESTMENT LESS DISTRIBUTIONS
OPERATIONS
Share Class NAV: Net Net Total from Dividends Distribution Total
and Periods Start Investment Realized Investment from Net from Net Dividends
of Income and Un- Operations Investment Realized and
Period (Loss) realized Income Gain on Distributions
Gain(Loss) on Investments
Institutional
shares
<S> <C> <C> <C> <C> <C> <C> <C>
Period from
29-Dec-97 to
30-Apr-98 $1.00 $0.017 $0.000 $0.017 -$0.017 $0.000 -$0.017
SUPPLEMENTAL DATA
AND RATIOS
NAV: Total Net Assets Ratio of Ratio of Portfolio
End of Return at End of Net Net Turnover
Period for Period Operating Investment Rate
Period Expenses Income(Loss)
(1) to Average to Average
Net Assets* Net Assets*
(2) (2)
Period from
29-Dec-97 to
30-Apr-98 $1.00 1.67% $234,492 0.67% 5.11% N/A
</TABLE>
* If the Fund had paid all of its expenses for Institutional shares, the
ratios would be as follows:
Ratio of net operating expenses to average net assets (2): 1.43%.
Ratio of net investment income (loss) to average net assets (2): 4.36%.
(1) Total return assumes reinvestment of all dividends and distributions. 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.
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:
n securities issued or guaranteed by the U.S. government or its agencies or
instrumentalities; n commercial paper rated at the time of purchase in the
highest rating category by NRSROs; and n 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 Balanced, High Yield Bond, Municipal Bond, 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. Securities that pay high
dividends, like bonds, are more sensitive to interest rate levels than other
equity securities that pay low dividends.
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.
INVESTMENT GRADE AND MEDIUM GRADE BOND INVESTMENTS
- --------------------------------------------------------------------------------
We may purchase investment grade bonds for The AAL International, Equity Income,
Balanced, High Yield Bond, Municipal Bond and Bond Funds. 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 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.
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 (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.
Market Risk: Frequently, high yield bonds are less liquid than investment grade
bonds. In some cases, these bonds have no resale market at all. As a result,
these bonds are more difficult to price accurately and are subject to price
volatility. We may experience difficulty in valuing the high yield securities in
these portfolios or purchasing or disposing of them on favorable terms,
particularly during adverse market or economic conditions. In the event of an
illiquid market or in the absence of readily available market quotations for
certain high yield bonds in the Funds' portfolios, our judgment will play a
greater role in valuing the securities.
CONVERTIBLE BONDS
- --------------------------------------------------------------------------------
Except for The AAL Money Market Fund, we may invest in convertible bonds,
subject to any restrictions on the quality of bonds in which a Fund may invest.
We also may retain any stocks received upon conversion that do not fall within
the Fund's investment parameters to:
1) permit orderly disposition;
2) establish a long-term holding basis for Federal income tax purposes; or
3) seek capital growth.
Convertible bonds are often rated below investment grade or not rated because
they fall below debt obligations and just above equities in order of preference
or priority on the issuer's balance sheet. Hence, an issuer with investment
grade senior debt may issue convertible securities with ratings less than
investment grade debt.
MORTGAGE-BACKED SECURITIES
- --------------------------------------------------------------------------------
For The AAL Balanced, 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 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.
PORTFOLIO TURNOVER
- --------------------------------------------------------------------------------
We expect The AAL Small Cap Stock, Mid Cap Stock, High Yield Bond, Municipal
Bond and 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. We also 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., 400% 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 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, Balanced,
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 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.
STRUCTURED SECURITIES
- --------------------------------------------------------------------------------
The AAL International Fund may invest in structured notes and/or preferred
stocks. These securities have a value (i.e., principal amount at maturity and/or
coupons or dividend amounts) linked to currencies, interest rates, commodities,
indices or other financial indicators. Typically, these securities are debt
securities or deposits whose value at maturity (i.e., principal value) or coupon
rate is determined by reference to a specific instrument or statistic. For
example, gold structured securities may provide for maturity values that depend
on the price of gold, resulting in securities whose prices tend to rise and fall
together with gold prices. These securities 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.
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:
n commit more than 25% of a Fund's net assets to such instruments; n commit more
than 25% of a Fund's net assets to covered options; or n 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 premiums 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 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 (up to 10% of net assets), Mid Cap Stock (up to 10% of
net assets), Small Cap Stock (up to 10% of net assets), International, Equity
Income and Balanced (common stock portion) 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 Balanced (bond
portion), Bond and High Yield Bond Funds may invest up to 20% of their net
assets in debt securities of foreign issuers that are payable in U.S. dollars.
The AAL International Fund and The AAL Equity Income Fund (up to 15% of its net
assets) may invest in foreign securities primarily trading in countries outside
the United States. 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.
FOREIGN INVESTING EXPENSES
- --------------------------------------------------------------------------------
Investing in foreign securities costs more than investing in U.S. securities due
generally to higher transaction costs, such as the commissions paid per share.
As a result, Funds that invest in foreign securities tend to have higher
expenses, particularly funds that invest primarily in foreign securities (i.e.,
The AAL International Fund). In addition to higher commissions, they generally
have higher advisory and custodial fees. However, you may find investing in a
fund that purchases foreign securities a more efficient way to invest in foreign
securities than investing in individual foreign securities. Higher expenses
attributable to a Fund that invests in foreign securities does not mean that the
Fund has higher expenses than other funds with similar investment policies and
percentages of assets invested in foreign securities.
RISKS OF INVESTING IN FOREIGN SECURITIES
================================================================================
CURRENCY RISK
- --------------------------------------------------------------------------------
Even though a Fund may hold securities denominated or traded in foreign
currencies, 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 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.
NON-UNIFORM 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:
the investment objective of a Fund;
the policies on borrowing and lending securities;
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, Balanced 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
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
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, Prairie
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, Mobil Oil Corp.
(international oil company)
RONALD G. ANDERSON**
4321 North Ballard Road
Appleton, WI 54919
DOB 10/2/48
Trustee and President; Senior Vice President and CFO, 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)
JOHN O. GILBERT**
4321 North Ballard Road
Appleton, WI 54949
DOB 8/30/42
Trustee; President and Chief Executive Officer, Aid Association for Lutherans;
Regent, Luther College; Director, Life Office Management Association, Inc.
* All of the Trustees except for Mr. Pender 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, we, as the Adviser (AAL CMC),
manage the investment and reinvestment of the Funds' assets, provide the Funds
with personnel, facilities, and administrative services, and supervise the
Funds' daily business affairs. We formulate and implement a continuous
investment program for the Funds consistent with each Fund's investment
objectives, policies and restrictions.
We provide 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.
YEAR 2000
Year 2000 is approaching and we are addressing potential problems that could
affect our systems and systems of those of The AAL Mutual Funds' other service
providers, such as the Funds' transfer agent, Firstar Trust Company. Many
computer systems in use today cannot distinguish between the year 2000 and the
year 1900 because of the way the software encodes and calculates dates. We have
formed a committee that is reviewing our systems as well as actively working
with the AAL Mutual Funds' other service providers to address the Year 2000
problem. At this time, however, we cannot assure that these steps will be
sufficient to avoid any adverse impact on the Funds.
PORTFOLIO TRANSACTIONS
- --------------------------------------------------------------------------------
As the Adviser (AAL CMC), we direct the placement of orders for the purchase and
sale of the Funds' portfolio securities. In directing orders, we consider a
number of factors to attain what we believe is the best combination of price and
execution for the Funds, including: when we believe that more than one broker or
dealer is capable of providing the best combination of price and execution in a
transaction. Normally, we select a broker or dealer who furnishes research
services.
As the Adviser, we may have other clients for which we are making investment and
order placement decisions similar to the Funds. When making simultaneous
purchases or sales for the Funds and another client, if any, our 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 our 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 INSTITUTIONAL SHARES IN THE FUNDS
You purchase Institutional shares in a Fund at net asset value (purchase price).
Your initial minimum purchase must be at least $500,000, with a minimum of at
least $50,000 in any one Fund account. You can combine all your Class A, Class B
and Institutional shares for purposes of meeting the $500,000 minimum purchase.
Registered Representatives may receive compensation up to but not exceeding .50
of 1% of amounts invested.
PURCHASE PRICE
- --------------------------------------------------------------------------------
We determine a Fund's net asset value (NAV) per share once daily at the close of
trading on the New York Stock Exchange (NYSE) (normally 3:00 p.m. Central Time).
If our Transfer Agent receives your order in proper form prior to the close of
trading on the NYSE you will recieve that day's price. If not, you will receive
the price when it is next calculated. The share price (net asset value per
share) will decline on the record dates when The AAL Small Cap Stock; Mid Cap
Stock; International; Capital Growth; Equity Income; and Balanced Funds
distribute dividends. Capital gains reduce the share price of all Funds by the
amount of the distribution. If you buy shares before the ex-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.
OPENING AN ACCOUNT
- --------------------------------------------------------------------------------
Please contact the Mutual Funds Service Center, Institutional Sales, at
800-553-6319, ext. 3131 (The Telecommunications Device for the Deaf (TDD) is
800-684-3416) for help on opening an institutional account (purchasing
Institutional shares). We need to determine eligibility for Institutional share
purchases in advance.
BUYING OR SELLING SHARES BY WIRE
- --------------------------------------------------------------------------------
If your organization's or enterprise's bank is a member of or has a
corresponding relationship with a member of the Federal Reserve System, your
organization or enterprise can buy or sell Institutional shares of the Funds by
wire transfer. When placing your order, the following steps apply:
1. Call AAL Capital Management Corporation at 800-553-6319 (The AAL
Mutual Funds Service Center (Service Center)) and provide the
following information:
your account registration;
the name of the Fund(s) in which you want to invest;
your address;
your tax identification number;
the dollar amount;
the name of the wiring bank; and
the name and telephone number of the person at your
bank who we can contact about your purchase.
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. Instruct your bank to use the following instructions when wiring
funds:
WIRE TO: FIRSTAR BANK MILWAUKEE, N. A. ABA #075000022
CREDIT: FIRSTAR TRUST COMPANY ACCOUNT 112-952-137
FURTHER CREDIT: NAME OF FUND (SHAREHOLDER ACCOUNT NUMBER)
(SHAREHOLDER REGISTRATION)
Please call (800) 553-6319 prior to sending the wire to obtain a
confirmation number and to ensure prompt and accurate handling of
funds.
The Fund and its transfer agent are not responsible for the
consequences of delays resulting from the banking or Federal Reserve
Wire system or from incomplete wiring instructions.
3. Complete The AAL Mutual Funds Application and mail it immediately
to:
The AAL Mutual Funds
Institutional Sales
222 West College Ave.
P. O. Box 8004
Appleton, WI 54913-8004.
ACCOUNTS FOR RETIREMENT SAVINGS
- --------------------------------------------------------------------------------
AAL members, their enterprises and Lutheran organizations may establish their
pension, profit sharing and 401(k) plans.
A third party maintenance fee may apply to some retirement accounts. Please
review plan documents for more information.
The Mutual Funds Service Center (800-553-6319) will provide you with all the
materials, documents and forms you need, and will work with you in establishing
your retirement plan.
AUTOMATIC INVESTMENT PLANS
- --------------------------------------------------------------------------------
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:
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;
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
To stop or change the amount of your plan, you must tell us at least 24
hours prior to the transaction date.
SHARE CERTIFICATES
- --------------------------------------------------------------------------------
We will not issue share certificates for the Funds' Institutional shares.
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.
SELLING (REDEEMING) YOUR INSTITUTIONAL SHARES
- --------------------------------------------------------------------------------
Your Lutheran organization or enterprise can sell its 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 before the close of the NYSE (normally 3:00
p.m. Central Time) the organization or enterprise 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 the transaction on the next business
day.
You must have your signature guaranteed if you want:
1) to sell shares with a value of more than $100,000;
2) the proceeds sent to an address other than the one listed for your
account; or
3) You want the check payable to someone other than the account owner(s).
THE AAL MONEY MARKET FUND CHECKS
- --------------------------------------------------------------------------------
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 checks. The following rules and/or guidelines apply:
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);
Our Transfer Agent may impose reasonable fees for each check that is
returned;
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;
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
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 $100,000.
SYSTEMATIC WITHDRAWAL
- --------------------------------------------------------------------------------
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:
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:
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;
To stop or change your plan, you must notify us at least 5 business days
prior to the next withdrawal; and n Because of sales charges, you must
consider carefully the costs of frequent investments in and withdrawals
from your account.
EXCHANGE PRIVILEGE
================================================================================
You may exchange Institutional shares in an AAL Mutual Fund for Institutional
shares in another AAL Mutual Fund. The $50,000 minimum investment rules apply
when you open a new account by exchanging shares. You may have a taxable gain or
loss as a result of an exchange. We reserve the right to end this privilege if
your enterprise or organization makes more than 12 exchanges in a year. We also
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.
BY MAIL
- --------------------------------------------------------------------------------
Please include the following in your request:
name(s) of the account owner(s);
account number(s)
amount of shares (or dollar amount) you want to exchange;
the name of the Fund you are exchanging into; and
signatures of all account owners.
BY TELEPHONE
- --------------------------------------------------------------------------------
The guidelines for exchanging by telephone are:
You can exchange shares by calling the Mutual Fund Service Center at
800-553-6319; When you call us, Mutual Fund Service Representatives will
ask for a form of personal identification to confirm your identity; and
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 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
================================================================================
As the Funds, we try 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, we intend to distribute
substantially all of the Funds' net investment income and net realized capital
gains, if any, less any available capital loss carryover, to our shareholders
annually. We do this to avoid paying income tax on the Funds' 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. We provide you with full information on
dividends and capital gains distributions for each Fund on an annual basis.
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 SMALL CAP STOCK, MID CAP STOCK, INTERNATIONAL, CAPITAL GROWTH, EQUITY
INCOME, BALANCED, HIGH YIELD BOND, 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 and medium-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.
We distribute substantially all net investment income and any net realized
capital gains, if any, for the Funds as follows:
FUND DIVIDENDS CAPITAL
(IF ANY) GAINS
(IF ANY)
- --------------------------------------------------------------------------------
The AAL annually annually
Small Cap Stock Fund
- --------------------------------------------------------------------------------
The AAL annually annually
Mid Cap Stock Fund
- --------------------------------------------------------------------------------
The AAL annually annually
International Fund
- --------------------------------------------------------------------------------
The AAL semi-annually annually
Capital Growth Fund
- --------------------------------------------------------------------------------
The AAL quarterly annually
Equity Income Fund
- --------------------------------------------------------------------------------
The AAL quarterly annually
Balanced Fund
- --------------------------------------------------------------------------------
The AAL monthly annually
High Yield Bond Fund
- --------------------------------------------------------------------------------
The AAL monthly annually
Municipal Bond Fund
- --------------------------------------------------------------------------------
The AAL monthly annually
Bond Fund
- --------------------------------------------------------------------------------
The AAL monthly annually
Money Market Fund
The AAL High Yield Bond, Municipal Bond, 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 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. 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.
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 $4.30 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 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 SMALL CAP STOCK, MID CAP STOCK, INTERNATIONAL, CAPITAL GROWTH, EQUITY
INCOME, BALANCED, HIGH YIELD BOND, MUNICIPAL BOND AND 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.
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 SMALL CAP STOCK, MID CAP STOCK, INTERNATIONAL, CAPITAL GROWTH, EQUITY
INCOME, BALANCED, HIGH YIELD BOND, MUNICIPAL BOND AND 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 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.
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
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 E. 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 twelve series. This prospectus describes Institutional shares for ten
series of the Trust. Class A and Class B shares for these same series are
described in a separate prospectus. 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 Class A and B share 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. Institutional
shares (and 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, Institutional shares (and 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. Matters submitted to shareholder vote must be approved by each Fund
separately except:
1) when required otherwise by the 1940 Act; or
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 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.
Glossary of Important Terms
================================================================================
AMERICAN DEPOSITORY RECEIPTS (ADRs): 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.
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.
ASSET-BACKED SECURITIES: SEE MORTGAGE AND ASSET-BACKED SECURITIES, BELOW.
BOND: In general, a bond is 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 at maturity.
BUSINESS DAY: Any day 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 the
applicable capital gains tax holding period and then sold at a profit, that
profit is a REALIZED LONG-TERM OR MEDIUM-TERM CAPITAL GAIN. If it is sold at a
profit before the applicable period, 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.
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: See American Depository Receipts (ADRs).
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.
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
under-perform.
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.
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 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.
INTEREST RATE RISK: The risk that a rise in the level of interest rates will
reduce the market value (price) of securities held, particularly bonds, in a
Fund's portfolio. Typically, a bond pays a fixed rate of interest (called the
"coupon"). When interest rates rise in the economy the value of the coupon (the
amount of money received on the bond periodically) falls in comparison. As a
result, the price of the bond declines. In general, a decline in prevailing
interest rate levels increases the value of the securities, particularly the
bonds, held in a Fund's portfolio and vice versa. Interest rate fluctuations
affect a Fund's net asset values but not the income received from its existing
portfolio because the income paid on the bonds or other securities does not
change. However, changes in prevailing interest rates will affect the yields on
subsequently purchased securities.
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 of 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.
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.
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 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 revenue
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, Foreign Risk, Inflation Risk, Interest Rate Risk and Market Risk.
SEC: The U.S. Securities and Exchange Commission.
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.
STANDARD & POOR'S INDEX: Also known as the STANDARD & POOR'S 500 (S&P 500(R));
Standard & Poor's Corporation ("S&P") is a subsidiary of McGraw-Hill, Inc. which
provides a number of investor services. The S&P 500 (R) 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(R) is considered the benchmark for large
stock investors.
S&P SMALLCAP 600 INDEX (S&P SMALLCAP): Introduced in October 1994 to track
small-cap stocks. It contains companies chosen by a committee at S&P for their
size, industry characteristics and liquidity. None of the companies in the S&P
SmallCap overlap with the S&P 500(R) or S&P MidCap. However, some companies in
the S&P SmallCap are larger than the S&P MidCap or S&P 500 (R).
S&P MIDCAP 400 INDEX (S&P MIDCAP): Contains companies chosen by a committee at
S&P for their mid-cap size and industry characteristics. None of the companies
in the S&P MidCap overlap with the S&P 500(R) or S&P SmallCap. Some companies in
the S&P MidCap, however, are larger than those in the S&P 500(R) and smaller
than those in the S&P SmallCap. 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 (i.e., principal amount at
maturity and/or coupons or dividend amounts) linked to currencies, interest
rates, commodities, indices or other financial indicators. Typically, these
securities are debt securities or deposits whose value at maturity (i.e.,
principal value) or coupon rate is determined by reference to a specific
instrument or statistic. For example, gold structured securities may provide for
maturity values that depend on the price of gold, resulting in securities whose
prices tend to rise and fall together with gold prices. These securities 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.
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.
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. The Funds do not
charge 12b-1 fees for Institutional shares.
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.
APPENDIX: SECURITY RATINGS
================================================================================
RATINGS IN GENERAL
- --------------------------------------------------------------------------------
A Nationally Recognized Statistical Rating Organization's ("NRSRO") 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 two major
NRSROs, Moody's Investors Service, Inc. ("Moody's") and Standard & Poor's
Corporation ("S&P").
BOND RATINGS
================================================================================
- --------------------------------------------------------------------------------
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.
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.
BB, B, CC, C, C: Debt rated "BB", "B", "CCC", "CC" and "C" is regarded, on
balance, as predominantly speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of the obligation. "BB"
indicates the lowest degree of speculation and "C" the highest degree of
speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
BB: Debt rated "BB" has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial or economic conditions that could lead to inadequate
capacity to meet timely interest and principal payments. The "BBB" rating
category is also used for debt subordinated to senior debt that is assigned an
actual or implied "BBB-" rating.
B: Debt rated "B" has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial or economic conditions likely will impair capacity or willingness to
pay interest and repay principal. The "B" rating is also used for debt
subordinated to senior debt that is assigned an actual or implied "BB" or
"BB-"rating.
CCC: Debt rated "CCC" has a currently identifiable vulnerability to default and
is dependent upon favorable business, financial and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The "CCC" rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
"B" or "B-" rating.
CC: The rating "CC" is typically applied to debt subordinated to senior debt
that is assigned an actual or implied "CCC" rating.
C: The rating "C" is typically applied to debt subordinated to senior debt that
is assigned an actual or implied "CCC-" debt rating. The "C" rating may be used
to cover a situation in which a bankruptcy petition has been filed, but debt
service payments are continued.
CI: The rating "CI" is reserved for income bonds on which no interest is paid.
D: Debt rated "D" is in payment default. The "D" rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes such payments will
be made during such grace period. The "D" rating also will be used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
NR: Indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate
the particular type of obligation as a matter of policy.
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.
COMMERCIAL PAPER RATINGS
- --------------------------------------------------------------------------------
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.
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.
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); (2) 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 (920) 734-7633, 800-553-5319
TDD 800-684-3416
STATEMENT OF ADDITIONAL INFORMATION
Institutional Shares
Dated July 1, 1998
Equity-Oriented Funds
The AAL Small Cap Stock Fund:
Investing In Small Company Stocks
The AAL Mid Cap Stock Fund:
Investing In Mid-Sized Company Stocks
The AAL International Fund:
Investing In Foreign Stocks
The AAL Capital Growth Fund:
Investing In Large Company Stocks
The AAL Equity Income Fund:
Investing in Income-Producing Equity Securities
The AAL Balanced Fund
Investing in Common Stocks, Bonds and Money Market Instruments
Income-Oriented Funds
The AAL High Yield Bond Fund:
Investing in Below Investment Grade Bonds
The AAL Municipal Bond Fund:
Investing In Investment Grade Municipal Securities
The AAL Bond Fund:
Investing In Investment Grade Bonds
The AAL Money Market Fund:
Investing in Money Market Instruments
This statement of additional information is not a prospectus. It provides
additional information on the securities offered in the prospectus. You should
read the statement of additional information in conjunction with The AAL Mutual
Funds prospectus, Institutional shares, dated July 1, 1998, and any supplements
thereto. You may obtain a prospectus at no charge by writing or telephoning your
AAL Capital Management Corporation ("AAL CMC") Registered Representative or The
AAL Mutual Funds ("Funds" or "Trust") at the address and telephone number above.
We have described the Funds' Class A and Class B shares in a separate prospectus
and statement of additional information. We also have described The AAL U.S.
Government Zero Coupon Target Fund, Series 2001, and The AAL U.S. Government
Zero Coupon Target Fund, Series 2006, in a separate prospectus and statement of
additional information.
Reading this Statement of Additional Information
As in 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 placed a glossary defining important terms at the end
of the prospectus. If you are unsure of the meaning of any term in the statement
of additional information, please check the glossary in the prospectus. We also
have an appendix to the prospectus that describes nationally recognized
statistical rating organizations ("NRSROs") and their ratings for bonds and
other debt and money market instruments. If you are unsure of a rating, please
refer to the Appendix in the prospectus. Terms not otherwise defined in the
statement of additional information have the same meaning as in the prospectus.
Table of Contents
Investment Objectives and Policies.................................... --
Investment Techniques.................................................. --
Investment Restrictions................................................ --
Purchases, Redemptions; Pricing Considerations ..........................--
Compensation of the Board of Trustees....................................--
Investment Advisory Services............................................ --
Distributor............................................................. --
Distribution Plan....................................................... --
Portfolio Transactions.................................................. --
Dividends, Distributions and Taxes...................................... --
Calculation of Yield and Total Return................................... --
General................................................................. --
Shareholder Maintenance Agreement....................................... --
Independent Accountants................................................. --
Financial Statements.................................................... --
Investment Objectives and Policies
The following information supplements our discussion of the Funds' investment
objectives and policies described in the prospectus. In pursuing the Funds'
objectives, we invest as described below and employ the investment techniques
described in the prospectus and elsewhere in this Statement of Additional
Information. Except for The AAL Balanced and High Yield Bond Funds, each Fund's
investment objective is a fundamental policy. As such, only a vote of a
"majority of outstanding voting securities" can change a Fund's investment
objective. A majority means the approval of the lesser of: (1) 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
(2) more than 50% of the outstanding voting securities of a Fund.
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 Fund focuses
on companies with a market capitalization of between $30 million and $600
million.
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.
The Fund focuses on companies with a market capitalization of between $400
million and $3.5 billion.
The AAL International Fund: Investing In Foreign Stocks
This Fund seeks capital growth by investing primarily in a diversified portfolio
of foreign stocks.
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 Equity Income Fund: Investing In Income-Producing Equity Securities
This Fund seeks current income, long-term income growth and capital growth by
investing primarily in a diversified portfolio of income-producing equity
securities.
The AAL Balanced Fund: Investing in Common Stocks, Bonds and Money Market
Instruments
This Fund seeks long-term total return through a balance between income and the
potential for long-term capital growth by investing primarily in a diversified
portfolio of common stocks, bonds and money market instruments. We will select
these investments consistent with the investment policies of The AAL Capital
Growth, Bond and Money Market Funds, respectively.
The AAL High Yield Bond Fund: Investing in Below Investment Grade Bonds
This Fund seeks high current income and secondarily capital growth by investing
primarily in a diversified portfolio of high risk, high yield bonds (also known
as "junk bonds").
The AAL Municipal Bond Fund: Investing In Investment Grade 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 bonds.
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 Money Market Fund: Investing In Money Market Instruments
This Fund seeks a high level of current income consistent with capital
preservation and liquidity by investing in a diversified portfolio of
high-quality, short-term money market instruments.
Investment Techniques
We may use the techniques described in the prospectus and statement of
additional Information in pursuing the Funds' investment objectives.
Lending Portfolio Securities
Subject to the fundamental investment restriction (4) listed under "Investment
Restrictions," page __, we may lend a Fund's portfolio securities to
broker-dealers and financial institutions, such as banks and trust companies. As
the adviser, we will monitor the creditworthiness of any firm with which a Fund
engages in securities lending transactions. We would continuously secure the
loan by collateral in cash or cash equivalents maintained (on a current basis)
in an amount equal to or greater than the market value of the securities loaned.
We would continue to receive the equivalent of the interest or dividends paid by
the issuer to the Fund on the securities loaned. We would also receive any
additional returns, such as a fixed fee or a percentage of the collateral. We
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. Generally, we would not have
the right to vote the Fund's loaned securities during the existence of the loan.
However, we would call the loan to permit voting if, in our judgment, a material
event requiring a shareholder vote would otherwise occur before the repayment
date.
In the event of the borrower's default or bankruptcy, we could experience both
delays in liquidating the loan collateral or recovering the loaned securities
and losses for a Fund. For example, during the period when we would seek to
enforce the Fund's rights to the loaned securities, the collateral's value could
decline. We might receive subnormal levels of income or no income from the
loaned securities. We also would incur the expense of enforcing the Fund's
rights to the loaned securities.
Repurchase Agreements
We maintain procedures for evaluating and monitoring the creditworthiness of
firms with which we enter into repurchase agreements for the Funds. We may not
invest more than 10% of a Fund's net assets in repurchase agreements maturing in
more than seven days.
When-Issued and Delayed Delivery Securities
We may purchase securities on a when-issued or delayed-delivery basis for a
Fund, as described in the prospectus. We only purchase on a when-issued or
delayed delivery basis with the intention of actually acquiring the securities,
including long-term when-issued securities. However, we may sell such securities
before settlement date if we deem it advisable for investment reasons.
At the time of purchase we identify liquid assets having a value at least as
great as the purchase price. We have the custodian hold these securities
identified throughout the period of the obligation. Purchasing on a when-issued
or delayed basis as we have described may increase the Fund's net asset value
fluctuation or volatility.
Rated Securities
If a NRSRO reduces or eliminates its rating of a Fund security, we do not have
to sell the security. However, we consider such fact in determining whether we
should continue to hold the security for the Fund. For The AAL Money Market
Fund, we sell downgraded commercial paper to the extent required to comply with
Rule 2a-7 under the Investment Company Act of 1940 (the "Act").
At times a NRSRO changes its ratings for debt securities as a result of changes
at the organization or in its rating system. When this happens, we attempt to
use comparable NRSRO ratings in reassessing investments for a Fund in accord
with its investment policies..
High Yield Bond Market -- The AAL International, Equity Income and High Yield
Bond Funds
We may invest in high risk, high yield bonds for The AAL International, Equity
Income and High Yield Bond Funds. We normally invest at least 65% of The AAL
High Yield Bond Fund's total assets in such securities. As stated in the
prospectus, investing in high yield bonds involves market risk. The market for
high yield bonds has existed for many years and has weathered downturns. In
particular during the late 1980s and early 1990s, the high yield market
experienced a significant downturn. Many corporations had dramatically increased
their use of high yield bonds to fund highly leveraged acquisitions and
restructuring. As a result, from 1989 to 1991, the percentage of lower-quality
securities that defaulted rose significantly above previous default levels.
After this period, default rates decreased.
We may invest in lower-rated asset and mortgage-backed securities for The AAL
High Yield Bond Fund. These securities include interests 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 structures that makes their reaction to interest rates
and other factors difficult to predict, causing high volatility in their market
value. These bonds also carry prepayment risk. During periods of declining
interest rates, prepayment of the loans and mortgages underlying these
securities tend to accelerate. Investors tend to refinance their mortgages (pay
the old mortgage off with a new mortgage at a lower rate) to lower payments.
Accordingly, any prepayment on the existing securities we hold for 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 issued at deep discounts may
experience greater volatility in market value. Asset and mortgage-backed
securities, including CMOs, in addition to greater volatility, may carry
prepayment risks.
CMOs and Multi-Class Pass-Through Securities -- The AAL Balanced, High Yield
Bond and Bond Funds
We may invest in mortgage-backed securities, including CMOs and multi-class
pass-through securities. CMOs and multi-class pass-through securities 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."
A CMO contains a series of bonds or certificates issued in multiple classes.
Each CMO class (referred to as "tranche") has a specified coupon rate and stated
maturity or final distribution date. When people start prepaying the principal
on the collateral underlying a CMO (such as mortgages underlying a CMO), some
classes may retire substantially earlier than the stated maturity or final
distribution dates. The issuer structures a CMO to pay or accrue interest on all
classes on a monthly, quarterly or semi-annual basis. The issuer may allocate
the principal and interest on the underlying mortgages among the classes in many
ways. In a common structure, the issuer applies the principal payments on the
underlying mortgages to the classes according to scheduled cash flow priorities.
There are many classes of CMOs. Interest only classes ("IOs") entitle the class
shareholders 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"). Principal only classes ("POs") entitle the class
shareholders 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 coupon rates that move in the reverse direction
to an applicable index, and accrual (or "Z") bonds (described below).
At any one time, we may not invest more than 7.5% of a Fund's net assets in IOs,
POs, inverse floaters or accrual bonds individually or more than 15% in all such
obligations combined.
Inverse floating CMO classes are typically more volatile than fixed or
adjustable rate CMO classes. We would only invest in inverse floating CMOs to
protect against a reduction in the income earned on investments due to a
predicted decline in interest rates. In the event interest rates increased, we
would lose money on investments in inverse floating CMO classes. An interest
rate increase would cause the coupon rate on an inverse CMO class to decrease,
and, like other mortgage-backed securities, the value would decrease as interest
rates increase.
Cash flow and yields on IO and PO classes are extremely sensitive to principal
payment rates (including prepayments) on the underlying mortgage loans or
mortgage-backed securities. For example, rapid or slow principal payment rates
may adversely affect the yield to maturity of IO or PO bonds, respectively. If
the underlying mortgage assets experience greater than anticipated prepayments
of principal, the holder of an IO bond may incur substantial losses in value due
to the lost interest stream even if the IO bond has a AAA rating. If the
underlying mortgage assets experience slower than anticipated prepayments of
principal, the PO bond will incur substantial losses in value due to lost
prepayments. Rapid or slow principal payment rates may cause IO and PO bond
holders to incur substantially more losses in market value than if they had
invested in traditional mortgage-backed securities. On the other hand, if
interest rates rise, the value of an IO might increase and partially offset
other bond value declines in a Fund's portfolio. If interest rates fall, the
value of a PO might increase offsetting lower reinvestment rates in a Fund's
portfolio.
An accrual or Z bondholder does not receive cash payments until one or more of
the other classes have received their full payments on the mortgage loans
underlying the CMO. During the period when the Z bondholders do not receive cash
payments, interest accrues on the Z class at a stated rate. The accrued interest
is added to the amount of principal due to the Z class. After the other classes
have received their payments in full, the Z class begins receiving cash payments
until it receives its full amount of principal (including the accrued interest
added to the principal amount) and interest at the stated rate. Generally, the
date when cash payments begin on the Z class depends on the prepayment rate of
the mortgage loans underlying the CMO. A faster prepayment rate results in an
earlier commencement of cash payments on the Z class. Like a zero coupon bond,
during its accrual period the Z class has the advantage of eliminating the risk
of reinvesting interest payments at lower rates during a period of declining
interest rates. Like a zero coupon bond, the market value of a Z class bond
fluctuates more widely with changes in interest rates than would the market
value of bond from a class that pays interest currently. Changing interest rates
influence prepayment rates. As noted above, such changes in prepayment rates
affect the date at which cash payments begin on a Z tranche, which in turn
influences its market value.
Structured Securities -- The AAL International and High Yield Bond Funds
We may invest in structured notes and/or preferred stocks for The AAL
International and High Yield Bond Funds. The issuer of a structured security
links the security's coupon, dividend or redemption amount at maturity to some
sort of financial indicator. Such financial indicators can include currencies,
interest rates, commodities and indices. The coupon, dividend and/or redemption
amount at maturity may increase or decrease depending on the value of the linked
or underlying instrument.
Investments in structured securities involve certain risks. In addition to the
normal credit and interest rate risks inherent with a debt security, the
redemption amount may increase or decrease as a result of price changes in the
underlying instrument. Depending on how the issuer links the coupon and/or
dividend to the underlying instrument, the amount of the dividend may be reduced
to zero. Any further declines in the value of the underlying instrument may then
reduce the redemption amount at maturity. Structured securities may have more
volatility than the price of the underlying instrument.
Variable Rate Demand Notes
We may purchase variable rate, master demand notes for the Funds. The notes are
unsecured instruments that permit the amount of the debt to vary and provide for
periodic adjustments in the interest rate. Variable rate, master demand notes
normally do not trade and do not have a secondary market. However, the note
holder may demand principal payment at any time. Except for The AAL High Yield
Bond Fund, we purchase notes rated only in one of the two highest rating
categories by a NRSRO. We also may purchase notes for a Fund where the issuer
has a received a rating in the top two categories for a class of short term debt
obligations comparable in priority and security with the notes. If an issuer of
a variable rate, master demand note defaults on its payment obligation, we may
not be able to dispose of the note due to the absence of a secondary market. As
a result, we might suffer a loss for a Fund to the extent of the default. We
invest in variable rate master demand notes for a Fund only when we believe it
involves minimal credit risk.
In some instances, we may purchase variable rate securities for The AAL Money
Market Fund with actual maturities greater than or equal to 397 days. Generally,
a money market fund is limited to investments with maturities less than 397
days. Variable rate, money market securities have yields that vary in relation
to changes in specific money market rates, such as the prime rate. To purchase
variable rate money market instruments with maturities greater than 397 days, we
must be able to consider these securities as having maturities of less than 397
days pursuant to Securities and Exchange Commission ("SEC") rules. We only
invest in these longer-term, variable rate securities for the Fund when we can
take advantage of the higher yield paid on them as compared to short-term
securities. We only invest when it appears to us that the variable rates on
these securities may reduce the fluctuations in market value typical of
longer-term securities. We may purchase variable rate securities with a put
option for a Fund. The put option may reduce the risk of fluctuations in market
value, because the put option allows us to sell the security back to the issuer
at a set price.
Portfolio Turnover -- The AAL Small Cap Stock, Mid Cap Stock, High Yield Bond,
Municipal Bond and Bond Funds
As noted in the prospectus, portfolio turnover rates in excess of 100% may
increase brokerage and other trading expenses we incur for a Fund.
For the fiscal year ended April 30, 1998, we had portfolio turnover rates of
105.60% and 104.73% for The AAL Small Cap Stock and Mid Cap Stock Funds. The
rates reflected our growth investment styles for the Funds. We also purchased
stocks in initial public offerings and sold them shortly thereafter. Stock
prices in initial public offerings tend to appreciate or decline significantly
after the offering and then level off in price.
The rates also reflect the volatility of small and mid cap stock prices.
We had portfolio turnover rates for The AAL Municipal Bond and Bond Funds of
139.18% and 483.76%. The rate for The AAL Bond Fund reflects our active
selection of the individual bonds that we believe provide the best income within
the Fund's investment parameters at any one time For The AAL Bond Fund, we may
have a portfolio turnover rate for the next fiscal year in excess of 300%, and
as high as 600% or more. Our turnover rate for The AAL Municipal Bond also
reflects our active selection of the individual bonds that we believe provide
the best income and chance for capital appreciation and, thus, preservation, at
any one time. We try to exploit pricing inefficiencies we believe exist in the
municipal securities market.
We may have portfolio turnover in excess of 100% for The AAL High Yield Bond
Fund, which began operations on January 8, 1997. In seeking its objectives, we
buy or sell portfolio securities whenever the portfolio manager believes it
appropriate. Generally, how long we have owned the security for the Fund does
not influence the portfolio manager's decision on when we will trade the
security. From time to time, we 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 in this category. The
turnover rate is not a limiting factor when considering a change in the Fund's
portfolio.
Options and Futures
The following sections pertain to options and futures. Except for The AAL Money
Market Fund, we may engage in options, futures and options on futures
transactions for the Funds. We may engage in options and futures transactions
for bona fide hedging or other permissible risk management reasons (including
enhancing returns for a Fund). When entering into these transactions, we follow
the SEC and the Commodities Futures Trading Commission requirements and set
aside liquid assets in a separate account to secure a Fund's potential
obligations under such contracts. We cannot sell securities held in a segregated
account while the futures or options strategy is outstanding, unless we replace
such assets with other suitable assets. As a result, there is a possibility that
segregation of a large percentage of a Fund's assets could impede portfolio
management or our ability to meet redemption requests or other obligations for a
Fund.
We may try to enhance returns or hedge against a decline in the value of a
Fund's securities by writing (selling) and purchasing options and futures
contracts. For example, during a neutral or declining market, we may gain
additional income by writing options and receiving premiums for a Fund. When we
write (sell) covered call options for a Fund, we forgo the opportunity to profit
from increases in the market value of the underlying securities above the sum of
the options' premium and the exercise price. On the other hand, we reduce the
amount of any decline in the value of the underlying securities to the extent of
the premium we receive from writing the call for a Fund. During a rising market,
we may gain incremental income by purchasing call options and futures contracts
for a Fund.
We also may use options and futures to hedge against an anticipated price
increase in a security we plan to buy for a Fund.
If new types of options and futures contracts become available, we may use them
for the Funds. Prior to their use, however, we must obtain a determination from
the Funds' Board of Trustees that their use would be consistent with the Fund's
investment objectives and policies.
Options on Securities and Indexes
An option contract on a security (or index) gives the holder, in return for a
premium, the right to buy from (call) or sell to (put) the option writer of the
underlying security (or cash value of underlying index) at a specified exercise
price at any time during the option term.
Upon exercise of a call option, the writer (seller) has the obligation to
deliver the underlying security to the holder; provided the holder pays the
exercise price. Upon exercise of a put option, the writer has the obligation to
pay the holder the exercise price upon delivery of the underlying security.
Upon the exercise of an index options, the writer must 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 a statistical composite
that measures changes in the economy or financial market, usually reflecting
specified facets of a particular securities market, a specific group of
financial instruments, securities or economic indicators.).
Options and futures exist on debt, equity, indexes and other securities or
instruments. They may take the form of standardized contracts traded on national
securities exchanges, boards of trade or similar entities. They also may trade
in the over-the-counter market. Some debt instruments, such as bonds, trade with
cash put options, which generally allow the holder to sell the security back to
the issuer at a specified price for a specified amount of time.
When we write options, we may only write "covered" calls or puts for a Fund.
A call option for a Fund is covered if we hold the security underlying the call
for the Fund. Also a call option for a Fund is covered if we have an absolute
and immediate right to acquire the security for the Fund without additional cash
consideration upon conversion or exchange of other securities held in the
portfolio. If additional cash consideration is required, we hold cash or cash
equivalents in such an amount in a segregated account with the Fund's custodian.
An index call option is covered if we hold cash or cash equivalents with the
Fund's custodian equal to the contract value. A written call option is covered
if we hold a call option on the same security or index under two conditions. The
first condition is where the exercise price of the call purchased is equal to or
less than the exercise price of the call written. The second conditions is where
the exercise price of the call purchased is greater than the exercise price of
the call written; provided that we maintain the difference with the Fund's
custodian in cash or cash equivalents in a segregated account.
A put option on a security or an index is covered if we maintain cash or cash
equivalents equal to the exercise price in a segregated account with the Fund's
custodian. A put option is covered if we hold a put on the same security or
index as the put written under two conditions. The first condition is where the
exercise price of the put is equal to or greater than the exercise price of the
put written. The second condition is where the exercise price of the put is less
than the exercise price of the put written; provided we maintain cash or cash
equivalents with the Fund's custodian in a segregated account.
Prior to the expiration or exercise of an option, we may close the option out by
entering into an offsetting transaction. We would affect an offsetting
transaction for a Fund by purchasing or selling an option of the same series
(type, exchange, underlying security or index, exercise price and expiration).
Due to market factors, we may not be able to affect a closing purchase or sale
at the time we would like to for a Fund.
We realize a capital gain from a closing purchase transaction if the premium for
purchasing the closing option is less than the premium received from writing the
option. If the premium for purchasing the closing option is more, we realize a
capital loss for the Fund. If the premium received from a closing sale
transaction is more than the premium paid to purchase the option, we realize a
capital gain for the Fund. If the premium is less, we realize a capital loss for
the Fund.
If an option we write for a Fund expires unexercised, we realize a capital gain
equal to the premium received. If an option we purchased for a Fund expires
unexercised, we realize a capital loss equal to the premium we paid for the
option.
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.
We record a premium paid for an option purchased by us for a Fund as an asset.
We record the premium received for an option written by us for a Fund as a
deferred liability. We mark-to-market the value of an option purchased or
written on a daily basis at the closing price on the exchange on which it
traded. If the option was not traded on an exchange or a closing price was not
available, we would value the option at the mean between the last bid and asked
prices.
Risks Associated with Options on Securities and Indexes
Options transactions have risks. A decision as to whether, when and how we use
options involves the exercise of skill and judgment. For example, significant
differences could exist between the market for the underlying security (or
index) and the market for the overlying options. These differences, such as
differences in the way the underlying securities are trading and the way the
options on the securities are trading, could result in an imperfect correlation
between the markets. As a result, we might not be able to achieve our objectives
in an options transaction for the Fund. Market behavior and unexpected events
may hinder our otherwise well-conceived options transactions we have entered
into for a Fund.
We cannot assure you that a liquid market will exist when we seek to close out
an option position for a Fund. If we could not close out an option we had
purchased for a Fund, we would have to exercise the option to realize any profit
or let the option expire worthless. If we could not close out a covered call
option that we had written for a Fund, we could not sell the underlying security
unless the option had expired not exercised.
When we write a covered call option for a Fund, we forgo the opportunity to
profit from increases in the covering security's market value above the sum of
the premium and the call's exercise price.
If the exchange (or Board of Trade) suspends trading in an option we purchased
for a Fund, we cannot enter into a closing transaction during the suspension. If
the exchange imposes restrictions on the option's exercise, we might not be able
to exercise an option we have purchased for a Fund. 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. 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
In addition to foreign currency futures contracts, which we discuss below, we
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 closing value of the index on the
contract's last trading day and the original price entered into for the
contract. Although the index's value may reflect the value of certain underlying
securities, the party responsible for delivery delivers cash (not the underlying
securities).
A public market exists in futures contracts covering a number of indexes as well
as other financial instruments. Such instruments include: 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. Boards of trade and other issuers may develop and trade other futures
contracts. As with options, if new types of futures contracts become available,
we may use them for the Funds. Prior to their use, however, we must obtain a
determination from the Funds' Board of Trustees that their use would be
consistent with the Fund's investment objectives and policies.
We may purchase and write call and put futures options for a Fund. Our ability
to write call and put futures, however, depends on whether the Commodity Futures
Trading Commission grants certain regulatory relief (such as an exemption from
being considered a commodities pool operator).
Options on futures possess many of the same characteristics as options on
securities and indexes. A futures option gives the holder the right, in return
for the premium paid, to assume a long position (call) or short position (put)
in a futures contract at a specified exercise price at any time during the
period of the option. Upon exercise of a call option, the holder acquires a long
position in the futures contract and the writer is assigned the opposite short
position. In the case of a put option, the opposite is true.
As long as regulatory authorities require, we limit our use of futures and
options on futures to hedging transactions. We might use futures contracts to
hedge against anticipated interest rate changes we believe might adversely
affect either the value of a Fund's securities or the price of securities we
intend to purchase for a Fund. Our hedging strategy may include sales of futures
contracts to offset the effect of expected interest rate increases. It also may
include purchases of futures contracts to offset the effect of expected interest
rate declines. Although we could use other techniques to reduce a Fund's
exposure to interest rate fluctuations, we may be able to hedge a Fund's
exposure more effectively and perhaps at a lower cost by using futures and
options on futures.
The success of any hedging technique depends on our ability to correctly predict
changes in the level and direction of interest rates and other factors. Should
our predictions prove incorrect, the Fund's return might be lower than it would
have been had we not tried the hedging strategy. However, in the absence of the
ability to hedge, we might have to take portfolio actions in anticipation of the
same market movements with similar investment results at potentially greater
transaction costs.
We only enter into standardized futures or options on futures contracts that
trade on U.S. exchanges, boards of trade, or similar entities, or are quoted on
an automated quotation system.
When we purchase or sell a futures contract for a Fund, we deposit with the
custodian (or broker, if legally permitted) a specified amount of cash or U.S.
government securities ("initial margin"). The exchange or board of trade on
which the futures contract trades sets the margin requirement. The exchange may
modify the margin requirement during the term of a futures contract. The initial
margin is in the nature of a performance bond or good faith deposit on the
futures contract. The custodian or broker returns the margin to a Fund upon
termination of the contract, assuming we have fulfilled all contractual
obligations for the Fund. We expect to earn interest income on the initial
margin deposit for a Fund. We value a futures contract held for a Fund on a
daily basis at the official settlement price of the exchange on which it trades.
Each day a we pay or receive cash for the Fund, 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
us for 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, we mark-to-market a Fund's open futures positions.
We are required to deposit and maintain margin on any put and call options on
futures contracts that we have written for a Fund. Such margin deposits vary
depending on the nature of the underlying futures contract (and the related
initial margin requirements), the option's current market and other futures
positions we hold for the Fund.
Some futures contracts call for making or taking delivery of the underlying
securities. Generally we would close out these obligations prior to delivery by
making 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, we realize a capital gain
for the Fund. If the offsetting purchase price is more, we realize a capital
loss for the Fund. Conversely, if an offsetting sale price is more than the
original purchase price, we realize a capital gain for a Fund. If the offsetting
sale price is less, we realize a capital loss for a Fund. We must include the
transaction costs in calculating a gain or loss on the offsetting transactions.
Risks Associated with Futures
There are several risks associated with using futures contracts and options on
futures as hedging techniques. Our purchase or sale of a futures contract may
result in losses in excess of the amount we invested in the futures contract for
a Fund. We cannot guarantee how price movements in the market for the hedging
vehicle and market for the underlying portfolio securities being hedged will
correlate. Significant differences exist between the securities and futures
markets that could result in an imperfect correlation. These differences could
cause a given hedging strategy we have entered into for a Fund to not achieve
its objectives. The degree of imperfect correlation depends on circumstances
such as the variations in the speculative market demand for the futures and/or
futures options contracts used to hedge the underlying portfolio securities. A
decision as to whether, when and how we hedge involves the exercise of skill and
judgment. Our hedges may be unsuccessful to some degree because of unexpected
market behavior or interest rate trends.
Futures exchanges may limit the amount of price fluctuation in a contract for
trading in a single day. An exchange establishes a daily limit on the amount a
contract's price may vary either up or down from the previous day's settlement
price. Once the futures contract trades above or below the daily limit, the
exchange stops trading beyond the limit. The daily limit governs price movements
during a particular trading day but does not limit potential losses for the
contract holders. The daily limit may prevent us from being able to liquidate an
unfavorable position for a Fund. 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.
We cannot assure a liquid market will exist at a time when we seek to close out
a futures or futures options position for a Fund. If a liquid market did not
exist, we would have to continue meeting margin requirements until we could
close the position. We also cannot assure that an active secondary market will
develop or continue to exist for the futures and futures options discussed
above.
Limitations on Options and Futures
We do not enter into an open futures contract position or purchase an option:
the initial margin deposit plus the premiums paid less the amount by which any
such position is "in the money" exceeds 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, we
must maintain with the Fund's 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, we maintain with the
Fund's custodian cash or cash equivalents (including any margin) equal to the
amount such option is in the money until the option expires or we have entered
into an offsetting transaction closing out the option for the Fund.
We may not maintain open short positions in futures contracts, call options
written on futures contracts or call options written on indexes for a Fund, if,
in the aggregate, the market value of all such open positions exceeds the
current value of the Fund's portfolio. In valuing the portfolio, we have to take
into account unrealized gains and losses on the open positions and adjust for
the historical relative volatility of the relationship between the portfolio and
the positions. To the extent we have written call options on specific securities
in a Fund's portfolio, we deduct the value of those securities from the
portfolio's current market value.
We avoid being deemed a "commodity pool operator" by complying with the
Commodity Futures Trading Commission Rules. As such, we do not invest in a
commodity contract for a Fund 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 we have set aside for the Fund 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.
Taxation of Options and Futures
If we exercise a call option for a Fund, we add the premium paid for the call
option to the cost of the security purchased. If we exercise a put option, we
deduct the premium paid for the put option from the proceeds of the security
sold. For index options and futures, which are cash settled, the difference
between the cash received at exercise and the premium paid is a capital gain or
loss.
Our entry into closing purchase transactions for a Fund results in a capital
gain or loss. If an option was "in the money" when we wrote it and we held the
security covering the option for more than one year before writing it for a
Fund, any loss realized in a closing purchase transaction would be long-term for
federal tax purposes. The holding period of the securities covering an "in the
money" option does not include the time period the option was outstanding.
When we hold a futures contract for a Fund until delivery, we will realize a
capital gain or loss on the futures contract. The capital gain or loss is equal
to the difference between the price at the time we entered into the futures
contract for the Fund and the settlement price on the earlier of the delivery
notice date or expiration date. If we deliver securities for a Fund under a
futures contract, we realize a capital gain or loss for the Fund on those
securities.
For Federal income tax purposes, we generally recognize a Fund's yearly net
realized gains and losses on its options, futures and options on futures
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," we may defer the recognition
of losses on certain positions (including options, futures and options on
futures positions, the related securities and certain successor positions
thereto) to a later taxable year for a Fund. Selling futures contracts or
writing call options (or call options on futures) or buying put options (or put
options on futures) for the purposes of hedging against an anticipated change in
the value of a Fund's securities may affect the securities' holding period.
We distribute any recognized net capital gains for a Fund, including any
recognized net capital gains (including year-end mark-to-market gains) on
options and futures transactions for federal income tax purposes. We combine and
distribute a Fund's capital gains on its options and futures transactions and
its capital gains on other investments. We also advise shareholders on the
nature of these distributions for a Fund.
Federal Tax Treatment of Forward Foreign Exchange Contracts
We may enter into forward foreign exchange contracts for a Fund that the
Internal Revenue Service will treat as Section 1256 contracts or straddles under
the Internal Revenue Code.
We must consider these Section 1256 contracts as having been closed at the end
of a Fund's fiscal year and we must recognize any gains or losses on these
contracts for tax purposes at that time. The IRS characterizes such gains or
losses from the normal closing or settlement of such transactions as ordinary
gain or loss. We are required to distribute any net gains on such transactions
to the Fund's shareholders even if we have not actually closed the transaction
and received cash to pay for the distribution.
We may consider forward foreign exchange contracts that offset a foreign dollar
denominated bond or currency position as straddles for tax purposes. Considering
these contracts as straddles allows us to defer a loss on any position in a
straddle to the extent of unrealized gain in an offsetting position.
For a Fund to continue qualifying for federal income tax treatment as a
regulated investment company, it must derive at least 90% of its gross income
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, a Fund's realized gains on the sale or
other disposition of securities, including options, futures or foreign forward
exchange contracts on securities or securities indexes and, in some cases,
currencies held for less than three months is limited to less than 30% of the
Fund's annual gross income. To avoid realizing excessive gains on securities or
currencies held for less than three months, we may have to defer closing out
some options, futures or foreign forward exchange contracts. We anticipate that
the unrealized gains on Section 1256 options, futures and forward foreign
exchange contracts we have held for a Fund for less than three months at the
Fund's fiscal year end, and for which we have to recognize gains for tax
purposes, will be considered gains on securities or currencies held for three
months or greater for purposes of the 30% test.
Foreign Securities
The AAL Small Cap Stock, Mid Cap Stock, Capital Growth, Balanced and Bond
Funds
We may invest in foreign securities trading domestically through depository
receipts or on a U.S. national securities exchange or Nasdaq National Market for
The AAL Small Cap Stock, Mid Cap Stock and Capital Growth Funds. We do not
intend to invest more than 10% of their net assets in such foreign securities.
We may invest up to 20% of The AAL Bond Fund's net assets in debt securities of
foreign issuers payable in U.S. dollars. We may invest in foreign securities for
The AAL Balanced Fund to the extent The AAL Capital Growth and Bond Funds allow
investments in foreign securities for the common stock and fixed-income sectors
of the Fund, respectively. 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.
Foreign Securities - The AAL International, Equity Income and High Yield
Bond Funds
We normally invest at least 65% of The AAL International Fund's total assets in
foreign securities primarily trading in at least 3 different countries, not
including the U.S.
We may invest up to 15% of The AAL Equity Income Fund's net assets in foreign
securities. We also may invest in foreign securities trading domestically
through depository receipts and securities of foreign issuers traded on a U.S.
national securities exchange or Nasdaq National Market without regard to the 15%
limitation. For purposes of diversification for a Fund, we consider depository
receipts as investments in the underlying stocks.
We may invest up to 15% of The AAL High Yield Bond Fund's net assets in foreign
bonds. At this time, we intend to limit our foreign bond purchases for the Fund
to those trading in the U.S.
Foreign investing involves risks in addition to the risks inherent in U.S.
investing. Foreign countries tend to disseminate less public information about
their issuers. Many foreign countries do not subject their companies to uniform
accounting, auditing and financial reporting standards. The value of foreign
investments may rise or fall because of changes in currency exchange rates. As a
result, we may incur costs in converting securities denominated in foreign
currencies into U.S. dollars for a Fund. 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. When necessary, we
may have more difficulty obtaining and enforcing judgments in foreign countries.
We also would incur more expense. Even though we mainly intend to invest in
securities trading in stable and developed countries, we still face the
possibility of expropriation, confiscatory taxation, nationalization, currency
blockage or political or social instability that could affect investments in
such countries.
We may invest in American Depository Receipts ("ADRs") for The AAL International
and Equity Income Funds without limit. ADR facilities may be either "sponsored"
or "un-sponsored." While sponsored and unsponsored ADR facilities are similar,
distinctions exist between the rights and duties of ADR holders and market
practices. Sponsored facilities have the backing or participation of the
underlying foreign issuers. Un-sponsored facilities do not have the
participation by or consent of the issuer of the deposited shares. Un-sponsored
facilities usually request a letter of non-objection from the issuer.
Holders of un-sponsored ADRs generally bear all the costs of such facility. The
costs of the facility can include deposit and withdrawal fees, currency
conversion and other service fees. The depository of an un-sponsored facility
may not have a duty to distribute shareholder communications from the issuer or
to pass through voting rights. Issuers of un-sponsored ADRs do not have an
obligation to disclose material information about the foreign issuers in the
U.S. As a result, the value of the un-sponsored ADR may not correlate with the
value of the underlying security trading abroad or any material information
about the security or the issuer disseminated abroad.
Sponsored facilities enter into an agreement with the issuer that sets out
rights and duties of the issuer, the depository and the ADR holder. The
sponsored agreement also allocates fees among the parties. Most sponsored
agreements provide that the depository will distribute shareholder notices,
voting instructions and other communications. The AAL International and Equity
Income Funds may invest in sponsored and un-sponsored ADRs.
For The AAL International Fund, we also 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. For diversification purposes, we consider investments
in ADRs, ADSs, GDRs, EDRs and CDRs as investments in the underlying stocks for
the Fund.
Classification of Foreign Markets -- The AAL International Fund
Investors often classify foreign markets as mature or emerging. The countries in
which we may invest for The AAL International Fund are classified as follows.
Mature: Australia, Austria, Belgium, 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, China, Czech Republic, Ecuador, Greece,
Hungary, India, Indonesia, Jamaica, Kenya, Israel, Jordan, Malaysia,
Mexico, Morocco, Nigeria, Pakistan, People's Republic of China, Peru,
Philippines, Poland, South Africa, South Korea, Sri Lanka, Taiwan,
Thailand, Turkey, Uruguay, Venezuela and Vietnam.
We may invest in securities of additional countries when such investments are
consistent with the Fund's objective and policies.
Foreign Currency Transactions
Foreign Currency Spot Transactions and Forward Contracts
To manage the currency risk accompanying investments in foreign securities and
to facilitate the purchase and sale of foreign securities, we may engage in
foreign currency transactions on a spot (cash) basis for the Funds. We invest at
the spot rate prevailing in the foreign currency exchange market. We also may
enter into contracts to purchase or sell foreign currencies at a future date
("forward foreign currency" contracts or "forward" contracts).
A forward contract involves an obligation to purchase or sell a specific foreign
currency at a future date at a set price. Forward contracts principally trade in
the inter-bank market and are 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.
Whenever we intend to purchase or sell a security denominated in a foreign
currency for a Fund, we may want to "lock in" the U.S. dollar price of the
security. We can protect a Fund 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. With a forward
contract, we can protect the Fund against a possible loss resulting from an
adverse change in the relationship between the U.S. dollar and the subject
foreign currency between the date the security is purchased or sold and the date
on which the payment is made or received.
We may use forward contracts for a Fund when we believe that a particular
foreign currency may suffer a substantial decline against the U.S. dollar. In
this situation, we would 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. We, however, cannot
precisely match the forward contract amounts and the value of the securities
involved. The securities' values change as a consequence of market movements
between the date we entered into the forward contract for the underlying
currency and the date it matures.
Due to the fact that movement in the short-term currency market is extremely
difficult to predict, successful execution of a short-term hedging strategy is
highly uncertain. Therefore, we do not enter into forward contracts or maintain
a net exposure to such contracts where completion would obligate us to deliver
foreign currency in excess of the value of the Fund's securities or other assets
denominated in that currency. Under normal circumstances, we consider the
long-term prospects for a particular currency. We incorporate the prospects into
our overall long-term diversification strategies. However, we believe that it is
important to have the flexibility to enter into such forward contracts when we
determine that it is in the Fund's best interest.
At the maturity of a forward contract for a Fund, we may either: (1) sell the
portfolio securities and make delivery of the foreign currency; or (2) retain
the securities and terminate our contractual obligation to deliver the foreign
currency by purchasing an "offsetting" contract obligating us to purchase, on
the same maturity date, the same amount of foreign currency.
If we retain the portfolio securities and engage in an offsetting transaction
for the Fund, we will incur a gain or a loss to the extent that there has been
movement in forward contract prices. If we enter into an offsetting transaction,
we may subsequently enter into a forward contract to sell the foreign currency.
Should forward prices decline during the period when we entered into a forward
contract to sell a foreign currency and the date we entered into an offsetting
contract to buy a foreign currency, we will realize a gain to the extent the
price of the currency we agreed to sell exceeds the price of the currency we
agreed to buy. Should forward prices increase, we will suffer a loss to the
extent that the price of the currency we agreed to buy exceeds the price of the
currency we agreed to sell for a Fund. We may not be able to hedge against a
currency devaluation at a price above the level where the market itself has
anticipated the currency's devaluation.
A foreign currency hedge transactions does not protect against or eliminate
fluctuations in the prices of particular portfolio securities. For example, a
foreign currency hedge transaction does not prevent a security's price decline
due to an issuer's deteriorating credit situation. We also cannot forecast with
precision the market value of securities at the expiration of a forward
contract. Accordingly, we may have to purchase additional foreign currency on
the spot market (and bear the expense of such purchase) if: (1) the market value
of the Fund's securities are less than the amount of the foreign currency we are
obligated to deliver for the Fund; and (2) we made a decision to sell the
foreign securities and make delivery of the foreign currency upon expiration of
the contract for the Fund. Conversely, we may have to sell some of a Fund's
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 we are
obligated to deliver for the Fund. We limit our dealings in forward foreign
currency exchange contracts for a Fund to the transactions described above.
Although we value the Funds' assets daily in terms of U.S. dollars, we do not
intend to convert their holdings of foreign currencies into U.S. dollars on a
daily basis. From time to time, however, we will convert a Fund's foreign
currency holdings into U.S. dollars. There are costs associated with converting
foreign currencies into U.S. dollars and you should be award of these costs.
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 us for a Fund at one rate, while offering a lesser
rate of exchange should we desire to resell that currency to the dealer for the
Fund.
Options and Futures Relating to Foreign Currencies
We may purchase and sell currency futures and purchase and write currency
options to increase or decrease a Fund's exposure to different foreign
currencies. We also may purchase and write currency options in conjunction with
the currency futures or forward contracts of the Fund's other series. The uses
and risks of currency options and futures are similar to options and futures on
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 generally is either a foreign
currency or a currency futures contract. The purchaser of a currency call option
obtains the right to purchase the underlying currency. The purchaser of a
currency put option obtains the right to sell the underlying currency.
Currency futures and options values correlate with exchange rates. However, the
futures and options values do not reflect other factors affecting a Fund's
investment value. A currency hedge, for example, should protect a Japanese
Yen-denominated security from a decline in the Yen. The currency hedge, however,
will not protect the particular Fund's Yen denominated investments against a
price decline in the Yen denominated security resulting from deterioration in
the issuers' creditworthiness. Because the value of a Fund's foreign-denominated
investments change in response to many factors other than exchange rates, we
have difficulty matching the exact value of any hedge in currency options and
futures to the value of our foreign investments for a Fund overtime.
Privately Issued Securities: The AAL Money Market Fund
We may invest in securities issued by major corporations without registration
under the Securities Act of 1933 for The AAL Money Market Fund 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 our opinion (as the Adviser), Section 4(2) paper is
no less liquid or salable than commercial paper issued without legal
restrictions on disposition. However, should we deem that section 4(2) paper
issue is illiquid, we would purchase such security for a Fund only in accordance
with our 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 Small Cap Stock, Mid Cap Stock,
International, Capital Growth, Equity Income, Balanced, High Yield Bond, Bond
and Money Market Funds
We may purchase variable rate master demand notes for The AAL Small Cap Stock,
Mid Cap Stock, International, Capital Growth, Equity Income, Balanced, High
Yield Bond, Bond and Money Market Funds. Variable rate, master demand notes are
unsecured instruments that permit the indebtedness thereunder to vary and
provide for period adjustments in the interest rate. The extent to which we can
purchase these securities for the Funds listed is subject to Rule 2a-7 under the
Investment Company Act of 1940. These notes normally do not trade and there is
no secondary market for the notes. However, we may demand payment of the
principal for a Fund at any time. We limit our purchases of variable rate,
master demand notes for a Fund to those: (1) rated in one of the two highest
rating categories by a NRSRO; or (2) that have been issued by an issuer that has
received a rating from the requisite NRSRO in the top two categories with
respect to a class of short-term debt obligations that is comparable in priority
and security with the instrument. If an issuer of a variable rate, master demand
note defaulted on its payment obligation, we might not be able to dispose of the
note for a Fund due to the absence of a secondary market. We might suffer a loss
to the extent of the default for the Fund. We only invest in variable rate
master demand notes only when we deem them to involve minimal credit risk.
Investments In Other Investment Companies
Due to the administration and distribution expenses of managing a mutual fund,
our investments in other investment companies (mutual funds, which are limited
by fundamental investment restriction 14 below) may cause us to increase
payments of such expenses for a Fund.
Investment Restrictions
We operate under the following investment restrictions. For any Fund, we may
not:
(1) invest more than 5% of its net assets (or 5% of The AAL Small Cap
Stock, International, Balanced or High Yield Bond Funds' 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 Fund's net assets (or 25% of The
AAL Small Cap Stock, International, Balanced or High Yield Bond Funds'
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
we may make margin deposits in connection with transactions in options,
futures and options on futures for a Fund;
(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 we reserves freedom of action,
consistent with a Fund's other investment policies and restrictions and as
described in the prospectus and this statement of additional information,
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 we may not loan securities for a Fund 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 we may borrow for a Fund
in amounts not in excess of 10% of its net assets, taken at current value,
and then only from banks as a temporary measure for extraordinary or
emergency purposes (we will not borrow money for the Funds 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 a Fund's 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 we
purchase 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
we may be deemed an underwriter for the Fund under federal securities laws;
(8) purchase or sell real estate, or real estate limited partnership
interests provided that we may invest in securities for a Fund 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 we
may purchase or sell futures and options thereon for hedging purposes for a
Fund as described this statement of additional information;
(10) invest more than 25% of a Fund's net assets (or 25% or more of The AAL
Small Cap Stock, International, Balanced or High Yield Bond Funds' total
assets), taken at current value at the time of each investment, in
securities of non-governmental issuers whose principal business activities
are in the same industry (or 25% or more of The AAL Small Cap Stock,
International, Balanced or High Yield Bond Funds' 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 we may invest
in securities of enterprises engaged in oil, gas or mineral exploration for
a Fund;
(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, 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 Small Cap Stock, International, Balanced or High Yield
Bond Funds' 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 Small Cap Stock, International, Balanced or High Yield Bond Funds'
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 Balanced and High Yield Bond Funds, is
a fundamental policy.
Purchases and Redemptions; Pricing Considerations
We determine the Funds' net asset value only on the days on which the New York
Stock Exchange ("NYSE") is open for trading. That NYSE 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 a Saturday or Sunday, the NYSE
closes on the preceding Friday or the following Monday, respectively.
We determine the net asset value for a Fund 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, we use the last sale price on the
exchange where the securities primarily trade. For securities that have readily
available market quotations, we 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, we value them at fair market
value, as we determine in good faith under the direction of our Board of
Trustees. We may use pricing services in determining the current or fair market
value of securities held in the Funds' portfolios. We value money market
instruments with a remaining maturity of 60 days or less on an amortized costs
basis. We comply with the SEC's requirements for using an amortized cost
valuation method.
Many long-term corporate bonds and notes, certain preferred stocks, tax-exempt
securities and foreign securities do not have reliable market quotations and are
not considered to be readily available for purchase or sale.
To determine the current or fair market value for debt securities, we may, and
generally will, use 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.
We generally price foreign securities in terms of U.S. dollars at the official
exchange rate. Alternatively, we 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. The bank must be a regular participant in the foreign
exchange market. We also may price foreign securities 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 any of these alternatives available 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 NYSE. For purposes of
computing net asset value, we use the market value of any such securities as of
the time their trading day ends. Occasionally, events affecting the value of
such securities may occur between the times these markets close and the time the
NYSE closes. We generally will not reflect these events in the computation of a
Fund's net asset value, unless they are material. If there is a material event,
we will value such securities at their fair value as determined in good faith by
the Board of Trustees.
Foreign securities do no trade on all the days when the NYSE is open. Foreign
securities also may trade on Saturdays and other days when NYSE is not open and
when we do not calculate the Funds' net asset values. We value foreign
securities primarily listed and/or traded in foreign markets at the price as of
the close on its primary market. Unless we determine (under the supervision of
the Board of Trustees) that material events have occurred affecting the value of
a Fund's foreign securities between the time the foreign securities' primary
market closed and NYSE's close, we will not reflect the change in the Fund's net
asset value. As a result, trading on days when a Fund is not accepting purchases
or redemptions may significantly affect a Fund's net asset value.
We intend to pay all redemptions in cash. We are obligated to redeem shares
solely in cash up to the lesser of $250,000 or one percent of the net assets of
a Fund during any 90-day period for any one shareholder. However, we may pay
redemptions in excess of such limit in whole or part by a distribution in kind
of securities. If and to the extent we redeem shares in kind, you, as a
redeeming shareholder might incur brokerage fees in selling the securities
received.
We reserve the right for each Fund to suspend or postpone redemptions during any
period when: (a) trading on the NYSE is restricted, as determined by the SEC, or
that the NYSE is closed for other than customary weekend and holiday closings;
(b) the SEC has by order permitted such suspension; or (c) an emergency, as
determined by the SEC, exists, making disposal of a Fund's portfolio securities
or valuation of its net assets not reasonably practicable.
The AAL Money Market Fund-Amortized Cost Valuation
We value The AAL Money Market Fund's 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. 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, we may have to sell portfolio securities for a
Fund prior to maturity and at a less desirable price.
Although we cannot assure you that we will be able to do so, we will use our
best efforts to maintain a net asset value of $1.00 per share for purchases and
redemptions of The AAL Money Market Fund. The Board of Trustees has established
procedures for this purpose. These procedures require us to review the extent of
any deviation in the Fund's net asset value per share, based on available market
quotations, from the $1.00 amortized cost per share. Should the deviation exceed
1/2 of 1% for the Fund, the Board of Trustees will promptly consider whether we
should initiate efforts to eliminate or reduce material dilution or other unfair
results to shareholders. Such action may include redemption of shares in kind,
selling portfolio securities prior to maturity, reducing or withholding
dividends, and utilizing a net asset value per share as determined by using
available market quotations. We maintain a dollar-weighted average portfolio
maturity of 90 days or less for the Fund. We also do not purchase any instrument
deemed to have a remaining maturity greater than 397 days. We limit portfolio
investments, including repurchase agreements, to those dollar denominated
instruments that the Board of Trustees determines present minimal credit risks
pursuant to our advise as the Adviser. We also comply with the SEC requirements
on the quality of certain portfolio securities for money market funds using the
amortized cost method of valuation. We also comply with the SEC reporting and
record keeping procedures regarding money market funds. We cannot assure you
that we can maintain a constant net asset value at all times. In the event
amortized cost ceases to represent fair value, the Board of Trustees will take
appropriate action.
Compensation of the Board of Trustees
The Funds do not make payments to any of the officers for services to the Trust.
The Funds, however, pay the independent Trustees (those who are not officers or
employees of AAL CMC or the Aid Association for Lutherans ("AAL")) an annual fee
of $25,000. The Funds assess these fees ratably to each series of the AAL Mutual
Funds. The Funds reimburse the Trustees 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, 1998, the
Funds paid an aggregate of $85,751 in Trustees' fees and expenses.
<TABLE>
<CAPTION>
Name of Capacities Aggregate Pension or Estimated Total
Person in which Remuneration Retirement Annual Compensation
Remuneration Benefits Benefits from
Received Accrued Upon Registrant
During Retirement and Fund
Last Complex Paid
Fiscal Year to Trustees*
<S> <C> <C> <C> <C> <C>
Ronald G. Trustee - - - -
Anderson
dob 10/2/48
John H. Pender Trustee - - - -
dob 5/25/30
Richard L. Trustee - - - -
Gunderson **
dob 6/14/33
John O. Gilbert** Trustee - - - -
dob 8/30/42
F. Gregory Trustee $19,500 - - $25,000
Campbell
dob 2/16/39
R. W. Russler Trustee $19,500 - - $25,000
dob 10/28/28
Richard L. Gady Trustee $19,500 - - $25,000
dob 2/28/43
Lawrence M. Trustee $19,500 - - $25,000
Woods dob
4/14/32
* The Fund complex includes the AAL Variable Product Series Fund, Inc.
** As of January 1, 1998, Mr. Gunderson retired from the Board of Trustees and
Mr. Gilbert joined the Board of Trustees.
</TABLE>
Investment Advisory Services
Please refer to our description of the adviser, advisory agreement and fees
under "Management of the Trust" in the prospectus. We have incorporated the
prospectus herein by reference.
The following executive officers of the Trust also serve as officers or
directors of the adviser, AAL CMC, as shown:
<TABLE>
<CAPTION>
<S> <C>
Ronald G. Anderson President; Director and President of AAL Capital Management Corporation since
222 West College Avenue 2/26/97
Appleton, WI 54919-0007
dob 10/2/48
Robert G. Same Secretary; Director since 1987, Executive Vice President since 2/14/97, and
222 West College Avenue Secretary of AAL Capital Management Corporation since 1987
Appleton, WI 54919-0007
Terrance P. Gallagher Treasurer; Director and Chief Financial Officer of AAL Capital Management
222 West College Avenue Corporation since 1994, Comptroller since 1992 and Senior Vice President since 1996
Appleton, WI 54919-0007
dob 9/20/58
</TABLE>
The adviser, AAL CMC, furnishes and pays for all office space and facilities,
equipment and clerical personnel necessary for carrying out the adviser's duties
under the advisory agreement. The adviser also pays all compensation of
Trustees, officers and employees of the Trust who are the adviser's affiliated
persons. 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 the Funds' 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 the Trust's shareholders; (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 non-recurring expenses as may arise, including
litigation affecting the Trust and the legal obligations that the Trust may have
to indemnify its officers and Trustees with respect thereto; and (m) all
expenses that 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 may waive its advisory fees for, assume or reimburse the expenses
of, any Fund at any time. As of September 1, 1997, the adviser is waiving .225
of 1% of its .50 of 1% maximum advisory fee for The AAL Money Market Fund.
Effectively, the adviser is charging only a 0.275 of 1% advisory fee for the
Fund. The adviser is reimbursing The AAL High Yield Bond Fund expenses in excess
of 1.00%, 1.75% and .75% for Class A, Class B and Institutional shares,
respectively. Any fee waivers or expense assumptions the adviser makes are
voluntary. The adviser may discontinue any fee waivers or expense reimbursements
at any time. The Funds have paid advisory fees net of reimbursements to the
adviser, for the past three fiscal years ended April 30, 1998, as follows:
<TABLE>
<CAPTION>
For the Year Ended April 30, 1996 April 30, 1997 April 30, 1998
<S> <C> <C> <C>
Small Cap Stock Fund N/A $159,016 $690,590
Mid Cap Stock Fund $2,207,510 $3,188,294 $4,070,582
International Fund $183,656 $873,585 $1,280,101
Capital Growth Fund $7,332,620 $9,121,422 $12,742,588
Equity Income Fund $445,179 $643,863 $809,833
Balanced Fund N/A N/A $27,618
High Yield Bond Fund N/A $60,205 $522,217
Municipal Bond Fund $2,215,237 $2,153,751 $2,163,729
Bond Fund $2,410,603 $2,214,486 $1,921,733
Money Market Fund $448,619 $780,148 $1,088,957
</TABLE>
From the adviser's advisory fees, it 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, we paid sub-advisory fees from the advisory fees
received for The AAL Mid Cap Stock, Capital Growth, Equity Income, Municipal
Bond, 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
advisory 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 agreements.
The Trust has agreed to use its best efforts to change its name if we, as the
adviser (AAL CMC) cease to act as such with respect to the Funds. The continued
use of the Trust's present name (The AAL Mutual Funds) would create confusion in
the context of the Adviser (AAL CMC) or AAL'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 by the Board of Trustees on May 18, 1993, and
the sole shareholder on June 30, 1993;
The AAL Equity Income 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;
The AAL High Yield Bond Fund by the Board of Trustees on May 29, 1996, and
the sole shareholder on January 8, 1997; and
The AAL Balanced Fund by the Board of Trustees on November 19, 1997, and
the sole shareholder on January 2, 1998.
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 us (as the adviser) of, the sub-advisers, Duff & Phelps Investment
Management Co., and Pilgrim Baxter & Associates Ltd., for The AAL Mid Cap Stock,
Capital Growth, Equity Income, Municipal Bond, 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 sub-advisory agreement with Societe Generale
Asset Management Corp. ("SoGen") 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. The vote for approval must include the
approval of a majority of the Trustees who are not interested persons (as
defined in the Act). The advisory and sub-advisory agreements are terminable
upon assignment. The advisory agreement is also terminable 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. The adviser may terminate the
agreement on 60 days written notice to the Trust.
Distributor
The distributor, AAL CMC, is the exclusive underwriter for the Funds. The
distributor has a written distribution agreement with the Funds, dated June 15,
1987, as amended. The distributor offers the Funds' shares for sale on a
continuous basis through its field sales force.
The public offering price of a Fund's Institutional shares is the net asset
value next computed. An investor can combine Class A, Class B and Institutional
shares for purposes of qualifying for the $500,000 minimum purchase requirement
for Institutional shares. The Funds began offering Institutional shares on
December 29, 1997.
The distributor does not receive compensation in connection with redemptions and
repurchases or brokerage commissions for Institutional shares.
The amount of underwriting commissions received and retained by the distributor
for the period from December 29, 1997 through the fiscal year ended April 30,
1998 were as follows:
Institutional Shares
For the Fiscal Year Ended Aggregate Commissions Retained Commissions
From 12/29/97 through April
30, 1998 $0 $0
General
The distributor, AAL CMC, acts as exclusive underwriter for the Fund's Class A
and Class B shares and 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.
Portfolio Transactions
AAL CMC, as the adviser, and SoGen, as the sub-adviser for The AAL International
Fund, direct the placement of orders for the purchase and sale of the Funds'
portfolio securities.
The securities transaction costs for each Fund consist primarily of brokerage
commissions or dealer or underwriter spreads. Bonds and money market instruments
generally trade on a net basis and do not involve either brokerage commissions
or transfer taxes.
Occasionally, we, as the adviser, purchase securities directly from the issuer
for a Fund. For securities traded primarily in the over-the-counter market, we
deal with the sellers who make a market in the securities directly unless we can
find better prices and execution available elsewhere. Such dealers usually act
as principals for their own account. In placing portfolio transactions, we seek
the best combination of price and execution.
In determining which brokers provide best execution, we look primarily at the
prices quoted by the brokers. Normally, we place orders with the broker who has
the most favorable prices. Ordinarily, we expect to execute securities
transactions in the primary markets. In assessing the best net price, we
consider all relevant factors. The relevant factors include the security
market's breadth, the security's price, the broker or dealer's financial
condition and execution capability and the reasonableness of the commission, if
any (for the specific transaction and on a continuing basis). Although we are
the sole distributors for the Funds' shares, we (as the adviser) may in the
future consider the willingness of particular brokers to sell the Funds' shares
as a factor in the selection of brokers for the Funds' portfolio transactions.
However our selection would still be subject to the overall best price and
execution standard.
Assuming equal execution capabilities, we may take into consideration other
factors in selecting brokers or dealers. We may consider "brokerage and research
services" (as those terms are defined in Section 28(e) of the Securities
Exchange Act of 1934), statistical quotations (specifically the quotations
necessary to determine the Funds' net asset values, and other information
provided to us or the sub-adviser for The AAL International Fund (or their
affiliates). We 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. We must determine, in
good faith, however, that such commission was reasonable in relation to the
value of the brokerage and research services provided. The commission must be
reasonable in terms of that particular transaction or in terms of all the
accounts over which we, as an adviser, exercise investment discretion. It is
possible that certain of the services received by us attributable to a
particular transaction benefit one or more other accounts for which we exercise
investment discretion. The Funds paid $3,143,251, $4,205,263 and $ 1,697,844 in
brokerage commissions in each of past three fiscal years ending on April 30,
1998, 1997 and 1996, respectively.
Dividends, Distributions and Taxes
The AAL Small Cap Stock, Mid Cap Stock, International, Capital Growth,
Equity Income, Balanced, High Yield Bond, Bond and Money Market Funds
Except for The AAL Municipal Bond Fund, any dividends from net investment income
and short-term capital gains (collectively "income dividends") that we
distribute to you from the Funds are taxable to you as ordinary income whether
we have paid these distributions in cash or additional shares. Any long-term
capital gains ("capital gains distributions") that we distribute to you from the
Funds are taxable to you as long-term capital gains whether we have paid these
distributions in cash or additional shares. Long-term capital gains are treated
as long-term capital gains regardless of the length of time you have owned the
shares. We distribute substantially all of the Funds' net investment income and
net realized long-term capital gains to avoid the imposition of federal income
and excise tax liability. We pay any dividends for The AAL Small Cap Stock, Mid
Cap Stock and International Funds annually. We pay any dividends for The AAL
Capital Growth Fund semi-annually and we pay any dividends for the AAL Equity
Income and Balanced Funds quarterly. We accrue income dividends daily and pay
any dividends monthly for The AAL High Yield Bond, Bond and Money Market Funds.
We expect to distribute any capital gains annually for these Funds.
The AAL Municipal Bond Fund
For The AAL Municipal Bond Fund, we accrue any income dividends daily and
distribute any net investment income in monthly dividends. We distribute any net
realized capital gains at least annually. Dividends derived from the interest
earned on municipal securities constitute "exempt-interest dividends."
Generally, exempt-interest dividends are not subject to federal income tax.
Distributions of net realized capital gains (whether from tax-exempt or taxable
securities) are taxable to shareholders. We report the federal income tax status
of all distributions to shareholders annually. In the report, we 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.
You may not be able to deduct any interest expense you incur on money borrowed
to purchase or carry shares of the Fund for federal income tax purposes. You
also may be subject to state and local taxes on dividends from this Fund,
including those which are exempt from federal income tax.
If you or your entity are "substantial users" (or persons who are related to
"substantial users") of facilities financed by industrial revenue bonds, you or
your entity should consult your tax advisers before purchasing shares of The AAL
Municipal Bond Fund. 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" to the individual and corporate alternative minimum
tax. Such tax-exempt interest includes, 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. We limit our investment in
private activity bonds to no more than 20% of the Fund's assets. Certain
corporate shareholders may be subject to a federal "environmental" tax with
respect to their receipt of dividends and distributions.
The AAL International Fund -- Foreign Withholding Tax
We may be subject to income and withholding taxes on income and gains derived
from The AAL International Fund's investments outside the U.S. Our payment of
such foreign taxes reduces the yield on investments for the Fund. Tax treaties
between certain countries and the U.S. may reduce or eliminate these foreign
withholding taxes. If more than 50% of the Fund's total asset value at the close
of any taxable year consists of foreign corporate stocks or other securities, we
may elect (for U.S. federal income tax purposes) to treat any foreign country
income or withholding taxes we have paid on behalf of the Fund as paid by the
Fund's shareholders. The foreign income or withholding taxes must be those that
could be treated as income taxes under U.S. income tax principles. For any year
we make such an election for the Fund, the shareholder must include as income
(in addition to taxable dividends received) his pro rata share of such foreign
income and withholding taxes. The shareholder is entitled, subject to certain
limitations, to credit his portion of these foreign taxes against his U.S.
federal income tax due or deduct it (as an itemized deduction) from his U.S.
taxable income. Generally, this foreign tax credit is subject to the limitation
that it may not exceed the shareholder's U.S.
tax attributable to his foreign source taxable income.
If we make the pass through election described above, the Fund's foreign income
flows through to the shareholders. The Internal Revenue Service will not treat
certain gains from the sale of securities and currency fluctuations 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.
Corporations and individuals can use the foreign tax credit to offset only 90%
of any alternative minimum tax (as computed under the Code for purposes of this
limitation) imposed upon them. If we do not make the pass through election, the
foreign taxes we pay for the Fund will reduce the Fund's income. Any
distributions we make for the Fund will be treated as U.S. source income.
We will notify each shareholder within 60 days after the close of the Fund's
taxable year whether, pursuant to the election described above, we will make the
pass through election and treat any foreign taxes paid by the Fund as paid by
its shareholders for that year. If we make the pass through election, we will
designate the shareholder's portion of the foreign taxes paid to such country.
We also will designate the portion of the Fund's dividends and distributions
that represent income derived from sources within such country.
Our investments in certain foreign corporations that generate largely passive
investment type income, or that hold a significant percentage of assets which
generate passive income ("passive foreign investment companies" or "PFICs") are
subject to special tax rules. These special tax rules are designed to prevent
deferral of U.S. taxation on the Fund's share of the PFIC's earnings. In the
absence of certain elections to report these earnings on a current basis, we
would have to report certain "excess distributions" and any gain from the
disposition of PFIC's stock as ordinary income. We would have to report these
excess distributions and gains as ordinary income regardless of whether we
actually received any distributions from the PFIC. We would have to allocate
this ordinary income ratably throughout the holding period for the stocks. We
would have to pay taxes for the Fund on any amounts allocable to a prior taxable
year at the highest applicable tax rate from that year. We also would have to
increase this rate by an interest charge determined as though the amounts were
an underpayment of the tax for that year. We would have to include the amounts
allocated to the year of the distribution or disposition in the Fund's net
investment income for that year. To the extent the amounts allocated were
distributed as a dividend to shareholders such amounts would not be taxable to
the Fund.
Summary
We have only provided you with a summary of certain tax considerations generally
affecting the Funds and shareholders. We urge you to consult your tax advisors
with specific reference to your own tax situations, including state and local
tax liability.
Calculation of Yield and Total Return
From time to time we advertise the yields and total returns for the Funds'
shares for various periods of investment. We always include uniform performance
calculations based on standardized methods established by the SEC, which reflect
the front-end sales charge on a Class A share and the CDSC on a Class B share.
We do not impose sales charges or Rule "12b-1 fees" on Institutional shares. We
also may include other total return information without giving effect to sales
charges. Yields and total returns are calculated based on historical earnings
and appreciation. We do not intend any yield or total return calculations to
indicate future performance. You should consider performance information in
light of: the particular Fund's investment objectives and policies;
characteristics and quality of the Fund's portfolio securities; and the market
conditions during the applicable period. You should not consider the performance
information as a representation of what may be achieved in the future. When
comparing any such performance information to published performance data for
alternative investments, you should consider the differences in the methods used
in calculating performance information, and the impact of taxes on alternative
investments in addition to the factors listed.
Standardized Performance Information
Average Annual Total Return. For each of the Funds, except The AAL Money Market
Fund, we compute the standardized average annual total return for Institutional
shares by finding the average annual compounded rates of return for these 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:
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 (i.e., CDSC for Class B
shares, none for Institutional 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.
Return for Institutional Shares for the Period from Inception through
the Fiscal Year Ended April 30, 1998, Based on Gross Amount Invested
The AAL Mutual Fund Return for the Period
and Inception Date Since Inception
Small Cap Stock 11.41%
12/29/97
Mid Cap Stock 10.83%
12/29/97
International 10.48%
12/29/97
Capital Growth 13.90%
12/29/97
Equity Income 9.34%
12/29/97
Balanced 8.17%
High Yield Bond 3.28%
Municipal -.09%
Bond 1.24%
There is no standardized average annual return information for the one-year,
five-year and 10-year periods based on gross amount invested for Institutional
shares. Institutional shares first became available to investors on December 29,
1997. The returns reflect the period from December 29, 1997 through April 30,
1998 and are not annualized because Institutional shares have not been in
existence for more than one year. For annual return information for the Fund's
Class A and Class B shares based on gross amount invested, please see the
separate prospectus and statement of additional information.
Current Yield. We base current yield quotations for the Funds, except The AAL
Money
Market Fund, on a 30-day (or one-month) period. We compute the current yield by
dividing the net investment income per share for each class earned during the
period by the maximum offering price per (i.e., net asset value for
Institutional shares) 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, we determine the income earned on debt
obligations by applying a calculated yield-to-maturity percentage to the
obligations held during the period. We calculate the interest earned on
mortgage-backed securities by using the coupon rate and principal amount after
adjustment for a monthly pay down. We determine the income earned on stocks by
using the stated annual dividend rate applied over the performance period. The
current yields for The AAL Small Cap Stock, Mid Cap Stock, International,
Capital Growth, Equity Income, Balanced, High Yield Bond, Municipal Bond and
Bond Funds for the 30-day period ended April 30, 1998 for Institutional shares
were:
The AAL Mutual Funds
Institutional Share Yields
30-day period ended 4/30/98
Small Cap Stoc -.40% Balanced 1.86%
Mid Cap Stock .17% High Yield Bond 8.64%
International 4.35% Municipal Bond 4.46%
Capital Growth .81% Bond 5.76%
Equity Income .89%
When we are advertising yield for a Fund, we 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. We calculate a tax equivalent yield for The AAL Municipal
Bond Fund based on a 30-day (or one-month) period for Institutional shares. We
compute the tax equivalent yield by dividing the portion of the Fund's yield 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 the portion of the yield 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 AAL Municipal Bond Fund's tax equivalent yield at 31% tax rate for the
30-day period ended April 30, 1998, for Institutional shares was 6.46%.
Current and Effective Yield - The AAL Money Market Fund. We may quote a current
or effective yield for The AAL Money Market Fund's Institutional 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. We compute these yields 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 always
equals the total dividends declared with respect to the account. We compute the
yields for each share class 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, 1998, The AAL Money Market Fund's
current and effective yields for Institutional shares were 4.78% and 4.90%,
respectively.
Normal changes in income earned and expenses affect the Fund's yield. Also, any
efforts we undertake to restrict or supplement the Fund's dividends to maintain
its net asset value at $1.00 will affect the Fund's yield. (See "Net Asset
Value" in the prospectus and in this statement of additional information.) Any
portfolio changes we make due to net purchases or redemptions will affect the
Fund's yield. Accordingly, the Fund's yield may vary from day to day. The yield
stated for a particular past period is not a representation as to its future
yield. We do not guarantee the Fund's yield and the Fund's principal is not
insured. Although there is no assurance that we will be able to do so, we use
our best efforts to maintain a net asset value of $1.00 per share for the Fund.
Other Performance Information
We may from time to time include in the Funds' 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 a Fund's 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 a Fund's 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 a Fund's shares; and (4) performance
relative to the performance of other investments such as stocks, bonds, closed
end funds, certificates of deposit, as well as various indices such as the
Consumer Price Index and indices generated by lbbotson & Associates and Chase
Global Data and Research Products for a Fund's shares.
Average Annual Total Return. Except for The AAL Money Market Fund, we may
advertise an average annual total return calculation for a Fund's shares, for
any appropriate time period, based upon the value of a net investment in the
Fund for the class. For Institutional shares there would not be a difference
between the net returns and the gross (or standardized) returns. The calculation
would be the same because Institutional shares do not have sales charges. For
Class A and Class B shares the difference between net return and gross returns
would be the calculation after deducting the maximum sales charge for Class A
shares and the CDSC for Class B shares. We advertise average annual total return
for net amount invested according to the following formula:
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 investment) at the end of
any period after deducting all non-recurring
charges (CDSC for Class B shares, none for
Institutional 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.
Return for Institutional Shares for the Period from Inception,
12/29/97, through the Fiscal Year Ended April 30, 1998, Based on Net
Amount Invested
The AAL Mutual Fund Return for the Period Since
and Inception Date for Inception
Institutional Shares
Small Cap Stock 11.41%
12/29/97
Mid Cap Stock 10.83%
12/29/97
International 10.48%
12/29/97
Capital Growth 13.90%
12/29/97
Equity Income 9.34%
12/29/97
Balanced 8.17%
12/29/97
High Yield Bond 3.28%
12/29/97
Municipal -.09%
12/29/97
Bond 1.24%
12/29/97
There is no average annual return information for the one-year, five-year and
10-year periods based on net amount invested for Institutional shares.
Institutional shares first became available to investors on December 29, 1997.
The returns reflect the period from December 29, 1997 through April 30, 1998 and
are not annualized because Institutional shares have not been in existence for
more than one year. For annual return information for the Fund's Class A and
Class B shares based on net amount invested, please see the separate prospectus
and statement of additional information.
Performance information for the Funds' shares may be compared to various
unmanaged indexes, such as Morgan Stanley's EAFE and World, Dow Jones Industrial
and Averages, the S&P 500(R), S&P MidCap, 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 AAL Mutual Funds' Declaration of Trust permits the Trustees to issue an
unlimited number of full and fractional shares of beneficial interest. The
Declaration also permits the Trustees 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, Class B and Institutional 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 liquidated the Funds' shares, all
shareholders of a Fund would share pro rata in its net assets for the class
available for distribution to shareholders. If the Board deems it advisable and
in the best interests of shareholders, it may create additional share classes.
These share classes may differ from each other only as to dividends or, as is
the case with the Funds, as to assets and liabilities. Where share classes
differ in regards to assets and liabilities, the different classes are referred
to as the different series of the Funds (i.e., The AAL Bond Fund is a series of
The AAL Mutual Funds). Within each series, the different classes of shares are
referred to as different share classes, such as Class A, Class B and
Institutional shares. Shares of each series are entitled to vote as a series
only to the extent required by the '40 Act or as permitted by the Trustees. The
Trustees allocate income and operating expenses among the different Funds'
series and classes of shares fairly.
As of April 30, 1998, the Trust's officers and Trustees owned less than 1% of
the shares of any Funds. As of April 30, 1998, the following account holders
held in excess of 5% of the following Funds' shares:
Ownership
Shareholder Percentage
LCMS Foundation
The AAL Bond Fund 7.58%
Except for the election of Trustees and ratification of the selection of
accountants, any matter that the Funds are required to submit to the
shareholders for a vote is not deemed to be effective 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 custodian for The AAL Small Cap Stock, Mid Cap Stock, Capital Growth, Equity
Income, Balanced, High Yield Bond, Municipal Bond, Bond and Money Market Funds
is Firstar Trust Company ("Firstar"). The custodian for The AAL International
Fund is The Chase Manhattan Bank, N. A. The custodians are responsible for
holding the Funds' assets.
Administrative Services Agreement
AAL CMC provides certain administrative, accounting and pricing services to the
Funds. These administrative services include 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 balances monthly; recording purchases and sales based on sub-adviser
communications (SoGen's communications regarding The AAL International Fund);
and preparing monthly and annual summaries to assist in the preparation of
financial statements of, and regulatory reports for, the Funds. Formerly,
Firstar, provided these administrative services. However, the Funds' Trustees
and shareholders approved an administrative services agreement with AAL CMC to
provide these administrative services for the Funds. The Administrative Services
Agreement 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 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 following
Funds to this agreement on the following dates:
The AAL Mid Cap Stock Fund 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 Fund on February 28, 1996; The AAL High Yield Bond Fund on
May 29, 1996; and The AAL Balanced Fund on November 19, 1997.
The principal motivation for having AAL CMC, as the adviser for the Funds,
provide these services was cost. AAL CMC 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
AAL CMC is not voluntarily absorbing any expenses of that Fund. The annual rates
of payment approved by the Trustees presently are:
The AAL Small Cap Stock Fund - $40,000 The AAL Mid Cap Stock Fund - $40,000
The AAL International Fund - $45,000 The AAL Capital Growth Fund - $40,000
The AAL Equity Income Fund - $40,000 The AAL Balanced Fund - $40,000 The
AAL High Yield Bond Fund - $40,000 The AAL Municipal Bond Fund - $40,000
The AAL Bond Fund - $40,000 The AAL Money Market Fund - $40,000
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 continues 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. In either case, the agreement must
also be approved at least annually 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 either party assigns the agreement. The agreement
also terminates without penalty by either party on 60-days' notice. The
agreement provides that neither AAL CMC 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 CMC for certain
shareholder maintenance services, effective April 1, 1995. These shareholder
services include answering customer inquiries regarding account status,
explaining and assisting customers with the exercise of their account options
and facilitating shareholder telephone transaction requests.
The annual fee payable to AAL CMC for providing such shareholder 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. The annual fee is also based on 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
$4.30 per account, effective June 1, 1998. The shareholder maintenance agreement
continues 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. In either case, the agreement must be approved annually
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 either
party assigns the agreement. The agreement also terminates 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 ("Price Waterhouse"),
examine the Funds' annual financial statements. Price Waterhouse also assists in
the preparation of certain reports to the SEC and reviews the Trust's state and
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, 1998, are hereby
incorporated by reference.
<PAGE>
THE AAL MUTUAL FUNDS
PART C
Institutional Shares
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, 1998, for
the following series: The AAL Small Cap Stock, Mid Cap Stock, International,
Capital Growth, Equity Income, Balanced, High Yield Bond, Municipal Bond, 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, 1998, 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 and Class A and Class B shares for The AAL Small Cap Stock,
Mid Cap Stock, International, Capital Growth, Equity Income, Balanced, High
Yield Bond, Municipal Bond, Bond and Money Market Funds are contained in a
separate prospectuses. 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:
(10) Opinion and Consent of Counsel;
(11) Consent of Independent Auditors;
(16) Schedules for Computations of Performance for Institutional Shares for The
AAL Small Cap Stock, Mid Cap Stock, International, Capital Growth, Equity
Income, Balanced, High Yield Bond, Municipal Bond, and Money Market Funds;
(17) 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, 1998, the following indicates the number of record shareholders of
each series of the Registrant:
Class A Class B Class I
The AAL Small Cap Stock Fund - 28,420 5,874 3
The AAL Mid Cap Stock Fund - 87,795 5,477 7
The AAL International Fund - 29,334 3,369 4
The AAL Capital Growth Fund - 180,675 13,501 8
The AAL Equity Income Fund - 22,049 1,316 5
The AAL Balanced Fund - 4,189 624 3
The AAL High Yield Bond Fund - 8,124 1,420 3
The AAL Municipal Bond Fund - 17,410 409 1
The AAL Bond Fund - 25,997 321 1
The AAL Money Market Fund - 28,953 223 4
The AAL U.S. Government Zero Coupon Target Funds, Series 2001 - 210;and
The AAL U.S. Government Zero Coupon Target Funds, Series 2006 - 218.
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, 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)
<TABLE>
<CAPTION>
<S> <C> <C>
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 and President
Robert G. Same Executive Vice President, Secretary and
222 W. College Ave. Secretary and Director Vice President
Appleton, WI 54919
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 and
Appleton, WI 54919 Director
James H. Abitz Director None
222 W. College Ave.
Appleton, WI 54919
Woodrow E. 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
Jeffrey Verhagen Vice President None
222 West College Ave.
Appleton, WI 54919
Charles D. Gariboldi, Jr. Assistant Vice President Assistant Treasurer
222 West College Ave.
Appleton, WI 54919
Charles Friedman Assistant Vice President None
222 West College Ave.
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
Cindy Haas Assistant Vice President None
222 West College Ave.
Appleton, WI 54919
</TABLE>
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 certifies that this filing meets
the requirements of Rule 485(b) under the Securities Act of 1933 and that it 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 1st day of June, 1998.
THE AAL MUTUAL FUNDS
- ---------------------------------------------------
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/ John H. Pender* Trustee June 1, 1998
- ---------------------------------
John H. Pender
/s/ John O. Gilbert Trustee June 1, 1998
- ---------------------------------
John O. Gilbert
/s/ Richard L. Gady* Trustee June 1, 1998
- ---------------------------------
Richard L. Gady
/s/ D. W. Russler* Trustee June 1, 1998
- ---------------------------------
D. W. Russler
/s/ Lawrence M. Woods* Trustee June 1, 1998
- ---------------------------------
Lawrence M. Woods
/s/ F. Gregory Campbell* Trustee June 1, 1998
- ---------------------------------
F. Gregory Campbell
Principal June 1, 1998
- --------------------------------- Financial and
Terrance P. Gallagher Accounting Officer
Trustee and June 1, 1998
- --------------------------------- President
Ronald G. Anderson, Trustee
*Pursuant to Powers of Attorney
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENT that the person whose signature appears below
authorizes Ronald G. Anderson or John O. Gilbert to act as attorney-in-fact and
agent, with full power of substitution and re-substitution, for such person and
in such person's name, place and stead, in any and all capacities, to sign any
or all amendments) to the Registration Statement on Form N-1A of The AAL Mutual
Funds, and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorney-in-fact and agent full power and authority to do and perform each
and every act and thing requisite and necessary to be done for all intents and
purposes as such person might or could do in person, hereby ratifying and
confirming that said attorney-in-fact and agent, or his substitute or
substitutes, may lawfully do or cause to be done by virtue thereof.
/s/ John H. Pender
- ---------------------
John H. Pender
as Trustee, but not
individually
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENT that the person whose signature appears below
authorizes Ronald G. Anderson or John O. Gilbert to act as attorney-in-fact and
agent, with full power of substitution and re-substitution, for such person and
in such person's name, place and stead, in any and all capacities, to sign any
or all amendments) to the Registration Statement on Form N-1A of The AAL Mutual
Funds, and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorney-in-fact and agent full power and authority to do and perform each
and every act and thing requisite and necessary to be done for all intents and
purposes as such person might or could do in person, hereby ratifying and
confirming that said attorney-in-fact and agent, or his substitute or
substitutes, may lawfully do or cause to be done by virtue thereof.
/s/ D. W. Russler
- ---------------------
D. W. Russler
as Trustee, but not
individually
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENT that the person whose signature appears below
authorizes Ronald G. Anderson or John O. Gilbert to act as attorney-in-fact and
agent, with full power of substitution and re-substitution, for such person and
in such person's name, place and stead, in any and all capacities, to sign any
or all amendments) to the Registration Statement on Form N-1A of The AAL Mutual
Funds, and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorney-in-fact and agent full power and authority to do and perform each
and every act and thing requisite and necessary to be done for all intents and
purposes as such person might or could do in person, hereby ratifying and
confirming that said attorney-in-fact and agent, or his substitute or
substitutes, may lawfully do or cause to be done by virtue thereof.
/s/ F. Gregory Campbell
- ---------------------
F. Gregory Campbell
as Trustee, but not
individually
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENT that the person whose signature appears below
authorizes Ronald G. Anderson or John O. Gilbert to act as attorney-in-fact and
agent, with full power of substitution and re-substitution, for such person and
in such person's name, place and stead, in any and all capacities, to sign any
or all amendments) to the Registration Statement on Form N-1A of The AAL Mutual
Funds, and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorney-in-fact and agent full power and authority to do and perform each
and every act and thing requisite and necessary to be done for all intents and
purposes as such person might or could do in person, hereby ratifying and
confirming that said attorney-in-fact and agent, or his substitute or
substitutes, may lawfully do or cause to be done by virtue thereof.
/s/ Richard L. Gady
- ---------------------
Richard L. Gady
as Trustee, but not
individually
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENT that the person whose signature appears below
authorizes Ronald G. Anderson or John O. Gilbert to act as attorney-in-fact and
agent, with full power of substitution and re-substitution, for such person and
in such person's name, place and stead, in any and all capacities, to sign any
or all amendments) to the Registration Statement on Form N-1A of The AAL Mutual
Funds, and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorney-in-fact and agent full power and authority to do and perform each
and every act and thing requisite and necessary to be done for all intents and
purposes as such person might or could do in person, hereby ratifying and
confirming that said attorney-in-fact and agent, or his substitute or
substitutes, may lawfully do or cause to be done by virtue thereof.
/s/ Lawrence M. Woods
- ---------------------
Lawrence M. Woods
as Trustee, but not
individually
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENT that the person whose signature appears below
authorizes John O. Gilbert to act as attorney-in-fact and agent, with full power
of substitution and re-substitution, for such person and in such person's name,
place and stead, in any and all capacities, to sign any or all amendments) to
the Registration Statement on Form N-1A of The AAL Mutual Funds, and to file the
same, with all exhibits thereto, and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said attorney-in-fact
and agent full power and authority to do and perform each and every act and
thing requisite and necessary to be done for all intents and purposes as such
person might or could do in person, hereby ratifying and confirming that said
attorney-in-fact and agent, or his substitute or substitutes, may lawfully do or
cause to be done by virtue thereof.
/s/ F. Ronald G. Anderson
- ---------------------
Ronald G. Anderson
as Trustee, but not
individually
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENT that the person whose signature appears below
authorizes Ronald G. Anderson to act as attorney-in-fact and agent, with full
power of substitution and re-substitution, for such person and in such person's
name, place and stead, in any and all capacities, to sign any or all amendments)
to the Registration Statement on Form N-1A of The AAL Mutual Funds, and to file
the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorney-in-fact and agent full power and authority to do and perform each and
every act and thing requisite and necessary to be done for all intents and
purposes as such person might or could do in person, hereby ratifying and
confirming that said attorney-in-fact and agent, or his substitute or
substitutes, may lawfully do or cause to be done by virtue thereof.
/s/ John O. Gilbert
- ---------------------
John O. Gilbert
as Trustee, but not
individually
<PAGE>
Exhibit Index
Item 24
(b)(10) Opinion and Consent of Counsel;
(b)(11) Consent of Independent Auditors;
(b)(16) Schedules for Computations of Performance for Institutional shares for
The AAL Small Cap Stock, Mid Cap Stock, International, Capital Growth,
Equity Income, Balanced, High Yield Bond, Municipal Bond, Bond and Money
Market Funds; and
27 Financial Data Schedule.
EXHIBIT 24(b)(10)
Opinion and Consent of Counsel for Immediate Effectiveness
485(b) Filing
See Transmittal Letter
EXHIBIT 24 (b)(11)
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Statement of
Additional Information constituting parts of this Post-Effective Amendment No.
27 to the registration statement on Form N-1A (the "Registration Statement") of
our report dated May 15, 1998, relating to the financial statements and
financial highlights appearing in the April 30, 1998 Annual Report of The AAL
Small Cap Stock Fund, The AAL Mid Cap Stock Fund, The AAL International Fund,
The AAL Capital Growth Fund, The AAL Equity Income Fund, The AAL Balanced Fund,
The AAL High Yield Bond Fund, The AAL Municipal Bond Fund, The AAL Bond Fund and
The AAL Money Market Fund (ten of the funds comprising The AAL Mutual Funds),
which are also incorporated by reference into the Registration Statement. We
also consent to the references to us under the headings "Financial Highlights"
in the Prospectus and under the heading "Other Service Providers" in the
Statement of Additional Information.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Milwaukee, Wisconsin
June 23, 1998
EXHIBIT 24(b)(16)
Schedules for Computations of Performance for Institutional
shares for The AAL Small Cap Stock, Mid Cap Stock, International,
Capital Growth, Equity Income, Balanced, High Yield Bond,
Municipal Bond, Bond and Money Market Funds
The AAL Small Cap Stock Fund Class I
4/30/98
(Assuming Reinvestment of all dividends)
Dividends Ending Ending
Date NAV Per Share Shares Dollars
- --------------------------------------------------------------
29-Dec-98 12.45 80.321 1,000.00
26-Jan-98 12.23 80.321 982.33
23-Feb-98 13.26 80.321 1,065.06
27-Mar-98 13.66 80.321 1,097.19
26-Apr-98 13.87 80.321 1,114.06
26-May-98 #DIV/0! #DIV/0!
25-Jun-98 #DIV/0! #DIV/0!
25-Jul-98 #DIV/0! #DIV/0!
24-Aug-98 #DIV/0! #DIV/0!
23-Sep-98 #DIV/0! #DIV/0!
23-Oct-98 #DIV/0! #DIV/0!
22-Nov-98 #DIV/0! #DIV/0!
22-Dec-98 #DIV/0! #DIV/0!
21-Jan-99 #DIV/0! #DIV/0!
20-Feb-99 #DIV/0! #DIV/0!
22-Mar-99 #DIV/0! #DIV/0!
21-Apr-99 #DIV/0! #DIV/0!
21-May-99 #DIV/0! #DIV/0!
20-Jun-99 #DIV/0! #DIV/0!
n = 2.991803
- --------------------------------------------------------------
Net
Annualized From inception (1/2/98) 38.14553%
For Last 12 Months 11.40562%
---------
For Calendar Year 1998 11.40562%
---------
- --------------------------------------------------------------
Cumulative distributions -
The AAL Mid Cap Stock Fund Class I
4/30/98
(Assuming Reinvestment of all dividends)
Dividends Ending Ending
Date NAV Per Share Shares Dollars
- ------------------------------------------------------------------
29-Dec-98 14.40 69.444 1,000.00
26-Jan-98 14.16 69.444 983.33
23-Feb-98 15.19 69.444 1,054.86
27-Mar-98 15.78 69.444 1,095.83
26-Apr-98 15.96 69.444 1,108.33
26-May-98 #DIV/0! #DIV/0!
25-Jun-98 #DIV/0! #DIV/0!
25-Jul-98 #DIV/0! #DIV/0!
24-Aug-98 #DIV/0! #DIV/0!
23-Sep-98 #DIV/0! #DIV/0!
23-Oct-98 #DIV/0! #DIV/0!
22-Nov-98 #DIV/0! #DIV/0!
22-Dec-98 #DIV/0! #DIV/0!
21-Jan-99 #DIV/0! #DIV/0!
20-Feb-99 #DIV/0! #DIV/0!
22-Mar-99 #DIV/0! #DIV/0!
21-Apr-99 #DIV/0! #DIV/0!
21-May-99 #DIV/0! #DIV/0!
20-Jun-99 #DIV/0! #DIV/0!
n = 2.991803
- ------------------------------------------------------------------
Net
Annualized From inception (1/2/98) 36.03324%
For Last 12 Months 10.83333%
---------
For Calendar Year 1998 10.83333%
---------
- ------------------------------------------------------------------
Cumulative distributions -
The AAL International Fund Class I
4/30/98
(Assuming Reinvestment of all dividends)
Dividends Ending Ending
Date NAV Per Share Shares Dollars
- -------------------------------------------------------------------
29-Dec-98 10.11 98.912 1,000.00
26-Jan-98 10.38 98.912 1,026.71
23-Feb-98 10.75 98.912 1,063.30
27-Mar-98 11.09 98.912 1,096.93
26-Apr-98 11.17 98.912 1,104.85
26-May-98 #DIV/0! #DIV/0!
25-Jun-98 #DIV/0! #DIV/0!
25-Jul-98 #DIV/0! #DIV/0!
24-Aug-98 #DIV/0! #DIV/0!
23-Sep-98 #DIV/0! #DIV/0!
23-Oct-98 #DIV/0! #DIV/0!
22-Nov-98 #DIV/0! #DIV/0!
22-Dec-98 #DIV/0! #DIV/0!
21-Jan-99 #DIV/0! #DIV/0!
20-Feb-99 #DIV/0! #DIV/0!
22-Mar-99 #DIV/0! #DIV/0!
21-Apr-99 #DIV/0! #DIV/0!
21-May-99 #DIV/0! #DIV/0!
20-Jun-99 #DIV/0! #DIV/0!
n = 2.991803
- -------------------------------------------------------------------
Net
Annualized From inception (1/2/98) 34.75693%
For Last 12 Months 10.48467%
---------
For Calendar Year 1998 10.48467%
The AAL Capital Growth Fund Class I
4/30/98
(Assuming Reinvestment of all dividends)
Dividends Ending Ending
Date NAV Per Share Shares Dollars
- -------------------------------------------------------------------
29-Dec-98 26.05 38.388 1,000.00
26-Jan-98 26.07 38.388 1,000.77
23-Feb-98 28.14 38.388 1,080.23
27-Mar-98 29.27 38.388 1,123.61
26-Apr-98 29.67 38.388 1,138.96
26-May-98 #DIV/0! #DIV/0!
25-Jun-98 #DIV/0! #DIV/0!
25-Jul-98 #DIV/0! #DIV/0!
24-Aug-98 #DIV/0! #DIV/0!
23-Sep-98 #DIV/0! #DIV/0!
23-Oct-98 #DIV/0! #DIV/0!
22-Nov-98 #DIV/0! #DIV/0!
22-Dec-98 #DIV/0! #DIV/0!
21-Jan-99 #DIV/0! #DIV/0!
20-Feb-99 #DIV/0! #DIV/0!
22-Mar-99 #DIV/0! #DIV/0!
21-Apr-99 #DIV/0! #DIV/0!
21-May-99 #DIV/0! #DIV/0!
20-Jun-99 #DIV/0! #DIV/0!
n = 2.991803
- -------------------------------------------------------------------
Net
Annualized From inception (1/2/98) 47.59317%
For Last 12 Months 13.89635%
---------
For Calendar Year 1998 13.89635%
---------
- -------------------------------------------------------------------
Cumulative distributions -
The AAL Equity Income Fund Class I
4/30/98
(Assuming Reinvestment of all dividends)
Dividends Ending Ending
Date NAV Per Share Shares Dollars
- -----------------------------------------------------------------------
29-Dec-98 13.14 76.104 1,000.00
31-Jan-98 13.05 76.104 993.15
28-Feb-98 13.68 76.104 1,041.10
31-Mar-98 14.31 0.057 76.407 1,093.38
30-Apr-98 14.31 76.407 1,093.38
30-May-98 #DIV/0! #DIV/0!
29-Jun-98 #DIV/0! #DIV/0!
29-Jul-98 #DIV/0! #DIV/0!
28-Aug-98 #DIV/0! #DIV/0!
27-Sep-98 #DIV/0! #DIV/0!
27-Oct-98 #DIV/0! #DIV/0!
26-Nov-98 #DIV/0! #DIV/0!
26-Dec-98 #DIV/0! #DIV/0!
25-Jan-99 #DIV/0! #DIV/0!
24-Feb-99 #DIV/0! #DIV/0!
26-Mar-99 #DIV/0! #DIV/0!
25-Apr-99 #DIV/0! #DIV/0!
25-May-99 #DIV/0! #DIV/0!
24-Jun-99 #DIV/0! #DIV/0!
n = 2.991803
- -----------------------------------------------------------------------
Net
Annualized From inception (1/2/98) 30.61540%
For Last 12 Months 9.33790%
--------
For Calendar Year 1998 9.33790%
--------
- -----------------------------------------------------------------------
Cumulative distributions 0.0570000000
The AAL Balanced Fund Class I
4/30/98
(Assuming Reinvestment of all dividends)
Dividends Ending Ending
Date NAV Per Share Shares Dollars
- -----------------------------------------------------------------
29-Dec-98 10.00 100.000 1,000.00
26-Jan-98 10.06 100.000 1,006.00
23-Feb-98 10.51 100.000 1,051.00
27-Mar-98 10.71 0.027 100.252 1,073.70
26-Apr-98 10.79 100.252 1,081.72
26-May-98 #DIV/0! #DIV/0!
25-Jun-98 #DIV/0! #DIV/0!
25-Jul-98 #DIV/0! #DIV/0!
24-Aug-98 #DIV/0! #DIV/0!
23-Sep-98 #DIV/0! #DIV/0!
23-Oct-98 #DIV/0! #DIV/0!
22-Nov-98 #DIV/0! #DIV/0!
22-Dec-98 #DIV/0! #DIV/0!
21-Jan-99 #DIV/0! #DIV/0!
20-Feb-99 #DIV/0! #DIV/0!
22-Mar-99 #DIV/0! #DIV/0!
21-Apr-99 #DIV/0! #DIV/0!
21-May-99 #DIV/0! #DIV/0!
20-Jun-99 #DIV/0! #DIV/0!
n = 2.991803
- -----------------------------------------------------------------
Net
Annualized From inception (1/2/98) 26.49261%
For Last 12 Months 8.17202%
--------
For Calendar Year 1998 8.17202%
--------
- -----------------------------------------------------------------
Cumulative distributions 0.0270
The AAL High Yield Bond Fund Class I
4/30/98
(Assuming Reinvestment of all dividends)
Dividends Ending Ending
Date NAV Per Share Shares Dollars
- ----------------------------------------------------------------------------
29-Dec-98 10.29 97.182 1,000.00
26-Jan-98 10.37 0.075427766 97.889 1,015.10
23-Feb-98 10.37 0.078248541 98.627 1,022.76
27-Mar-98 10.37 0.08386643514 99.425 1,031.04
26-Apr-98 10.31 0.07738743714 100.171 1,032.76
26-May-98 #DIV/0! #DIV/0!
25-Jun-98 #DIV/0! #DIV/0!
25-Jul-98 #DIV/0! #DIV/0!
24-Aug-98 #DIV/0! #DIV/0!
23-Sep-98 #DIV/0! #DIV/0!
23-Oct-98 #DIV/0! #DIV/0!
22-Nov-98 #DIV/0! #DIV/0!
22-Dec-98 #DIV/0! #DIV/0!
21-Jan-99 #DIV/0! #DIV/0!
20-Feb-99 #DIV/0! #DIV/0!
22-Mar-99 #DIV/0! #DIV/0!
21-Apr-99 #DIV/0! #DIV/0!
21-May-99 #DIV/0! #DIV/0!
20-Jun-99 #DIV/0! #DIV/0!
n = 2.991803
- ----------------------------------------------------------------------------
Net
Annualized From inception (1/2/98) 10.12586%
For Last 12 Months 3.27646%
--------
For Calendar Year 1998 3.27646%
--------
- ----------------------------------------------------------------------------
Cumulative distributions 0.3149301791
The AAL Municipal Bond Fund Class I
4/30/98
(Assuming Reinvestment of all dividends)
Dividends Ending Ending
Date NAV Per Share Shares Dollars
- --------------------------------------------------------------------------
29-Dec-98 11.59 86.281 1,000.00
31-Jan-98 11.65 0.04341241917 86.603 1,008.92
28-Feb-98 11.58 0.04540493825 86.942 1,006.79
31-Mar-98 11.52 0.04652012967 87.293 1,005.62
30-Apr-98 11.40 0.04544561243 87.641 999.11
30-May-98 #DIV/0! #DIV/0!
29-Jun-98 #DIV/0! #DIV/0!
29-Jul-98 #DIV/0! #DIV/0!
28-Aug-98 #DIV/0! #DIV/0!
27-Sep-98 #DIV/0! #DIV/0!
27-Oct-98 #DIV/0! #DIV/0!
26-Nov-98 #DIV/0! #DIV/0!
26-Dec-98 #DIV/0! #DIV/0!
25-Jan-99 #DIV/0! #DIV/0!
24-Feb-99 #DIV/0! #DIV/0!
26-Mar-99 #DIV/0! #DIV/0!
25-Apr-99 #DIV/0! #DIV/0!
25-May-99 #DIV/0! #DIV/0!
24-Jun-99 #DIV/0! #DIV/0!
n = 2.991803
- --------------------------------------------------------------------------
Net
Annualized From inception (1/2/98) -0.26530%
For Last 12 Months -0.08875%
For Calendar Year 1998 -0.08875%
- --------------------------------------------------------------------------
Cumulative distributions 0.1807830995
The AAL Bond Fund Class I
4/30/98
(Assuming Reinvestment of all dividends)
Dividends Ending Ending
Date NAV Per Share Shares Dollars
- ---------------------------------------------------------------------------
29-Dec-98 10.06 99.404 1,000.00
31-Jan-98 10.09 0.04882634293 99.885 1,007.84
28-Feb-98 10.02 0.04754235009 100.359 1,005.59
31-Mar-98 10.00 0.04965558169 100.857 1,008.57
30-Apr-98 9.99 0.04774855183 101.339 1,012.38
30-May-98 #DIV/0! #DIV/0!
29-Jun-98 #DIV/0! #DIV/0!
29-Jul-98 #DIV/0! #DIV/0!
28-Aug-98 #DIV/0! #DIV/0!
27-Sep-98 #DIV/0! #DIV/0!
27-Oct-98 #DIV/0! #DIV/0!
26-Nov-98 #DIV/0! #DIV/0!
26-Dec-98 #DIV/0! #DIV/0!
25-Jan-99 #DIV/0! #DIV/0!
24-Feb-99 #DIV/0! #DIV/0!
26-Mar-99 #DIV/0! #DIV/0!
25-Apr-99 #DIV/0! #DIV/0!
25-May-99 #DIV/0! #DIV/0!
24-Jun-99 #DIV/0! #DIV/0!
n = 2.991803
- ---------------------------------------------------------------------------
Net
Annualized From inception (1/2/98) 3.74843%
For Last 12 Months 1.23758%
--------
For Calendar Year 1998 1.23758%
--------
- ---------------------------------------------------------------------------
Cumulative distributions 0.1937728265
The AAL Money Market Fund Class I
4/30/98
(Assuming Reinvestment of all dividends)
Dividends Ending Ending
Date NAV Per Share Shares Dollars
- ----------------------------------------------------------------------------
29-Dec-98 1.00 1,000.000 1,000.00
31-Jan-98 1.00 0.0042054 1,004.205 1,004.21
28-Feb-98 1.00 0.00381188476 1,008.033 1,008.03
31-Mar-98 1.00 0.00468337973 1,012.754 1,012.75
30-Apr-98 1.00 0.00385561959 1,016.659 1,016.66
30-May-98 #DIV/0! #DIV/0!
29-Jun-98 #DIV/0! #DIV/0!
29-Jul-98 #DIV/0! #DIV/0!
28-Aug-98 #DIV/0! #DIV/0!
27-Sep-98 #DIV/0! #DIV/0!
27-Oct-98 #DIV/0! #DIV/0!
26-Nov-98 #DIV/0! #DIV/0!
26-Dec-98 #DIV/0! #DIV/0!
25-Jan-99 #DIV/0! #DIV/0!
24-Feb-99 #DIV/0! #DIV/0!
26-Mar-99 #DIV/0! #DIV/0!
25-Apr-99 #DIV/0! #DIV/0!
25-May-99 #DIV/0! #DIV/0!
24-Jun-99 #DIV/0! #DIV/0!
n = 2.991803
- ----------------------------------------------------------------------------
Net
Annualized From inception (1/2/98) 5.06722%
For Last 12 Months 1.66591%
--------
For Calendar Year 1998 1.66591%
--------
- ----------------------------------------------------------------------------
Cumulative distributions 0.0165562841
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000811869
<NAME> THE AAL MUTUAL FUNDS
<SERIES>
<NUMBER> 10
<NAME> THE AAL SMALL CAP STOCK FUND CLASS I
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 4-MOS
<FISCAL-YEAR-END> APR-30-1998
<PERIOD-START> JAN-02-1998
<PERIOD-END> APR-30-1998
<INVESTMENTS-AT-COST> 118268936
<INVESTMENTS-AT-VALUE> 135331035
<RECEIVABLES> 635020
<ASSETS-OTHER> 282128
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 136248183
<PAYABLE-FOR-SECURITIES> 969531
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 185983
<TOTAL-LIABILITIES> 1155514
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 114599301
<SHARES-COMMON-STOCK> 30103
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 9359
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 3421910
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 17062099
<NET-ASSETS> 417383
<DIVIDEND-INCOME> 414834
<INTEREST-INCOME> 193471
<OTHER-INCOME> 0
<EXPENSES-NET> 1646285
<NET-INVESTMENT-INCOME> (1037980)
<REALIZED-GAINS-CURRENT> 9736718
<APPREC-INCREASE-CURRENT> 20348718
<NET-CHANGE-FROM-OPS> 29047456
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 30103
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 87210458
<ACCUMULATED-NII-PRIOR> 4720
<ACCUMULATED-GAINS-PRIOR> (628403)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 690590
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1646285
<AVERAGE-NET-ASSETS> 143381
<PER-SHARE-NAV-BEGIN> 12.45
<PER-SHARE-NII> (.006)
<PER-SHARE-GAIN-APPREC> 1.426
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 13.87
<EXPENSE-RATIO> 1.19
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
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<NAME> THE AAL MID CAP FUND CLASS I
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 4-MOS
<FISCAL-YEAR-END> APR-30-1998
<PERIOD-START> JAN-02-1998
<PERIOD-END> APR-30-1998
<INVESTMENTS-AT-COST> 559026647
<INVESTMENTS-AT-VALUE> 676194561
<RECEIVABLES> 16282850
<ASSETS-OTHER> 130988
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 692608399
<PAYABLE-FOR-SECURITIES> 5581750
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 827341
<TOTAL-LIABILITIES> 6409091
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 537642520
<SHARES-COMMON-STOCK> 72934
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 27822
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 31361052
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 117167914
<NET-ASSETS> 1164361
<DIVIDEND-INCOME> 4723476
<INTEREST-INCOME> 1376271
<OTHER-INCOME> 0
<EXPENSES-NET> 7793273
<NET-INVESTMENT-INCOME> (1693526)
<REALIZED-GAINS-CURRENT> 66674556
<APPREC-INCREASE-CURRENT> 118067392
<NET-CHANGE-FROM-OPS> 183048422
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 73106
<NUMBER-OF-SHARES-REDEEMED> (172)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 221193651
<ACCUMULATED-NII-PRIOR> 23600
<ACCUMULATED-GAINS-PRIOR> 22822205
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 4070582
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 7793273
<AVERAGE-NET-ASSETS> 352976
<PER-SHARE-NAV-BEGIN> 14.40
<PER-SHARE-NII> .002
<PER-SHARE-GAIN-APPREC> 1.558
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 15.96
<EXPENSE-RATIO> .86
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
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