The AAL Mutual Funds
222 West College Avenue
Appleton, WI 54919-0007
Telephone (920) 734-7633, 800-553-6319
TDD 800-684-3416
STATEMENT OF ADDITIONAL INFORMATION
Class A and B Shares
Dated July 1, 2000
As Amended July 3, 2000
Equity and Balanced Funds
The AAL Technology Stock Fund
The AAL Aggressive Growth Fund
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
Fixed-Income Funds
The AAL High Yield Bond Fund
The AAL Municipal Bond Fund
The AAL Bond Fund
The AAL Money Market Fund
Index Funds
The AAL Large Company Index Fund II
The AAL Mid Cap Index Fund II
The AAL Small Cap Index Fund II
This Statement of Additional Information is not a prospectus. It provides
additional information on the securities offered in the prospectus. You should
read this Statement of Additional Information in conjunction with The AAL Mutual
Funds' prospectuses, Class A and B shares: Equity Prospects, Fixed Income
Prospectus, and Index Fund Prospectus dated July 1, 2000, 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 above address and telephone number.
The financial statements of each Fund and the independent accountant's report
thereof, are incorporated by reference into this Statement of Additional
Information from the Fund's Annual Report to Shareholders (see "Financial
Statements").
TABLE OF CONTENTS PAGE
FUNDS HISTORY
INVESTMENT STRATEGIES AND RISKS
MANAGEMENT OF THE FUNDS
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
INVESTMENT ADVISORY AND OTHER SERVICES
BROKERAGE ALLOCATION AND OTHER PRACTICES
CAPITAL STOCK AND OTHER SECURITIES
PURCHASE, REDEMPTION, AND PRICING OF SHARES
TAXATION OF THE FUNDS
UNDERWRITERS
CALCULATION OF PERFORMANCE DATA
FINANCIAL STATEMENTS
<PAGE>
FUNDS HISTORY
The AAL Mutual Funds (the "Trust" or "Funds") was organized as a Massachusetts
Business Trust on March 31, 1987, and is registered as an open-end diversified
management investment company under the Investment Company Act of 1940 ("1940
Act"). The Trust commenced operations on July 16, 1987, and currently consists
of twenty series (each a "Fund" and collectively, the "Funds"): The AAL
Technology Stock, Aggressive Growth, Small Cap, Mid Cap, International, Capital
Growth, Equity Income, Balanced, High Yield Bond, Municipal Bond, Bond, Money
Market, Large Company Index, Large Company Index II, Mid Cap Index, Mid Cap
Index II, Small Cap Index II, Bond Index and U.S. Government Zero Coupon Target
Funds Series 2001 and 2006 Funds.
On January 8, 1997, the Trust redesignated its existing shares as Class A shares
and began offering Class B shares of The AAL Small Cap Stock, Mid Cap Stock,
International, Capital Growth, Equity Income, Balanced, High Yield Bond,
Municipal Bond, Bond, and Money Market Funds. On July 1, 2000, the Trust began
offering shares of five new series, each with Class A and Class B Shares; The
AAL Technology Stock Fund, The AAL Aggressive Growth Fund, The AAL Large Company
Index Fund II, The AAL Mid Cap Index Fund II and The AAL Small Cap Index Fund
II. Class A shares are subject to a maximum 4.00% sales charge of the offering
price and a 0.25% annual 12b-1 and service fee. Class B shares are offered at
net asset value and a 1.00% annual 12b-1 and service fee. In addition, Class B
shares have a contingent deferred sales charge of 5.00% declining 1.00% each
year upon redemption during the first five years.
On December 29, 1997, the Trust began issuing a third class of Fund shares
(institutional) of The AAL Small Cap, Mid Cap, International, Capital Growth,
Equity Income, Balanced, High Yield Bond, Municipal Bond, Bond, and Money Market
Funds. On December 31, 1999, the Trust began offering Institutional shares of
three additional series; The AAL Large Company Index Fund, The AAL Mid Cap Index
Fund, and The AAL Bond Index Fund. On July 1, 2000, the Trust began offering
Institutional shares of two more series; The AAL Technology Stock Fund and The
AAL Aggressive Growth Fund. The Institutional shares are offered at net asset
value and have no annual 12b-1 fees or charges.
Each class of shares has identical rights and privileges except with respect to
voting matters affecting a single class of shares and the exchange privilege of
each class of shares.
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 twenty series. The Equity and Balanced, Fixed-Income, and Index
Prospectuses describe Class A and Class B shares for fifteen series of the
Trust. Institutional shares 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 Class 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. Class A and B shares (and Institutional shares)
have identical voting rights except that each class has exclusive voting rights
on any matter submitted to shareholders relating solely to the class. In
addition, Class A and Class B shares (and Institutional 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. Class A and Class B shares
have exclusive voting rights on matters involving the 12b-1 Distribution Plan as
applied to that class. Matters submitted to shareholder vote must be approved by
each Fund separately except:
(1) when required otherwise by the 1940 Act; or
(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.
At the request of shareholders holding 10% or more of the outstanding shares of
the Fund, the Fund will hold a special meeting for the purpose of considering
the removal of a trustee(s) from office, and the Fund will cooperate with and
assist shareholders of record who notify the Fund that they wish to communicate
with 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 1940 Act,
as amended.
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.
INVESTMENT STRATEGIES AND RISKS
Each of the Funds is an open-end management investment company. The following
information supplements our discussion of the Funds' investment objectives,
policies and strategies 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.
INVESTMENT OBJECTIVES
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.
INVESTMENT RESTRICTIONS
In addition to those policies noted in the prospectus, each Fund must follow
certain 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
the 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 a 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 reserve 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 which 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 we may
purchase or sell futures and options thereon for hedging purposes and to
enhance returns for a Fund as described in this Statement of Additional
Information;
(10) invest 25% or more of a Fund's net assets (or 25% or more of The AAL
Technology Stock, Aggressive Growth, 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, 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 that are illiquid due to legal or contractual restrictions
on resale if, as a result thereof, more than 10% of a Fund's net assets
(15% for The AAL Aggressive Growth Fund), taken at current value at the
time of such investment, would be invested in such securities;
(13) except for The AAL Technology Stock, Aggressive Growth and 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 Technology Stock, Aggressive Growth, 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 Aggressive Growth, Balanced and High
Yield Bond Funds, is a fundamental policy.
INVESTMENT TECHNIQUES
We may use the following techniques described in the prospectus and Statement of
Additional Information in pursuing the Funds' investment objectives.
Temporary Defensive Positions
Except for The AAL Large Company Index Fund II, The AAL Mid Cap Index Fund II
and The AAL Small Cap Index Fund II, we have a temporary defensive position
policy that allows us to invest up to 100% of a Fund's total assets in cash and
short-term money market obligations, including tax-exempt money market funds and
investment grade fixed-income securities when significant adverse market,
economic, political or other circumstances require immediate action to avoid
losses. Primarily, we may purchase the following types of securities for
temporary defensive purposes:
o securities issued or guaranteed by the U.S. government or its agencies or
instrumentalities;
o commercial paper rated at the time of purchase in the highest rating
category by NRSRO's; and
o bank obligations, including repurchase agreements, of banks having total
assets in excess of $1 billion.
For temporary defensive purposes 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%. The AAL Large Company Index Fund II, The AAL Mid Cap Index Fund
II and The AAL Small Cap Index Fund II do not engage in defensive strategies.
Temporary defensive positions are generally inconsistent with the Funds'
investment objectives and may temporarily cause a Fund not to achieve its
objectives.
Lending Portfolio Securities
Subject to the fundamental investment restriction (4) listed under "Investment
Restrictions," 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 any losses sustained by the 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 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 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.
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
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 when-issued securities with long-term issue dates of a year or more.
However, we may sell such securities before the 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.
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 "33 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 33
Act. Institutional markets for restricted securities have developed as a result
of Rule 144A, providing both readily ascertainable market values for 144A
securities and the ability to liquidate these investments to satisfy redemption
orders. However, an insufficient number of qualified institutional buyers
interested in purchasing certain Rule 144A securities held by a Fund could
adversely affect their marketability, causing us to sell the securities at
unfavorable prices.
Investment Grade and Medium Grade Bond Investments
We may purchase investment grade bonds for The AAL Aggressive Growth,
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 S&P or Baa or better by 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.
Rated Securities
If a NRSRO reduces or eliminates its rating of a Fund security, we do not have
to sell the security. However, in consultation with the Funds' Board of
Trustees, 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 1940 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.
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 generally 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 that
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.
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 Commercial Paper Ratings
An 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+).
Convertible Bonds
Except for The AAL Money Market Funds, 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, any issuer with investment
grade senior debt may issue convertible securities with ratings less than
investment grade debt.
Mortgage-Backed Securities
For The AAL Aggressive Growth, Balanced, High Yield Bond and 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.
High Yield Bond Market
We may invest in high risk, high yield bonds for The AAL Aggressive Growth,
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.
Collateralized Mortgage Obligations and Multi-Class Pass-Through Securities --
For The AAL Aggressive Growth, 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.
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 a 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
We may invest in structured notes and/or preferred stocks for The AAL Aggressive
Growth, 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 AAL Technology Stock,
Aggressive Growth, 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 periodic adjustments in the
interest rate. The extent to which we can purchase these securities for The AAL
Money Market Fund 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 The AAL Money
Market 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
when we deem them to involve minimal credit risk.
Standard & Poor's Depositary Receipts ("SPDRs")
The Funds may invest in Standard & Poor's Depositary Receipts, commonly referred
to as SPDRs, subject to the investment restrictions concerning investment in
other mutual funds. A SPDR is a unit investment trust. In accordance with its
Declaration of Trust, a SPDR is a pooled investment designed to closely track
the price and yield performance of a specific index or group of securities; such
as the S&P 500 Index, the S&P MidCap 400 Index, the Nasdaq 100 or the S&P
SmallCap 600 Index. Each SPDR trust portfolio holds corresponding shares in all
the securities of a particular index. Each SPDR share represents an undivided
ownership interest in that SPDR's trust portfolio. SPDR shares trade on a
secondary market, the American Stock Exchange (AMEX). Any asset-based fee
charged by the sponsor of the SPDR is reimbursed by the Adviser so there is no
additional cost to the Funds.
Portfolio Turnover Rates
We expect The AAL Technology Stock, Aggressive Growth, 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%. Portfolio turnover rates over 100% are considered high. 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 these Funds. We also may realize more taxable gains and losses
than in portfolios with less turnover. Increased expenses and tax consequences
of these trading practices may lower returns for shareholders. We may trade for
a Fund at a portfolio rate significantly exceeding 100% (i.e., 600% or more for
The AAL Bond Fund and 300% or more for The AAL Balanced Fund), when we believe
the benefits of short-term investments outweigh any increase in transactions
costs or capital gains.
For the fiscal year ended April 30, 2000, The AAL Small Cap Stock and Mid Cap
Stock Funds had portfolio turnover rates of 147.01% and 142.26%, respectively.
The rates reflected our growth investment styles for the Funds. The Funds 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.
The portfolio turnover rates for The AAL Municipal Bond and Bond Funds were
210.32% and 163.31%, respectively. 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. The AAL Bond Fund 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 Fund 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.
The portfolio turnover rate for The AAL High Yield Bond Fund was 53.59%. In
seeking to achieve its investment objectives, we buy or sell portfolio
securities whenever the portfolio manager believes it appropriate. Generally,
the length of time we have owned the security in 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 Fund intend to comply with guidelines for eligibility for exclusion from the
definition of the term "commodity pool operator" adopted by the Commodity
Futures Trading Commission ("CFTC") and the National Futures Association, which
regulate futures markets. The Funds will use futures contracts and related
options primarily for bona fide hedging purposes within the meaning of CFTC
regulations. To the extent that the Funds hold positions in futures contracts
and related options that do not fall within the definition of bona fide hedging
transactions, the aggregate initial margin and premiums required to establish
such positions will not exceed 5% of the fair market value of a Fund's net
assets, after taking into account unrealized profits and unrealized losses on
any contracts it has entered into.
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 and to a limited extent to enhance return. We do not use
options, futures and other derivatives for speculative purposes. When entering
into these transactions, we follow the SEC and the CFTC 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 Funds' 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 option, 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 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 and to a limited extent to enhance
returns. 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 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. 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 ensure 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 ensure 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.
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 settled in cash, 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 as income a Fund's
yearly net unrealized 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 certain 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.
FOREIGN SECURITIES
We also may invest assets of the Fund 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 Technology Stock, Aggressive Growth, 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 25% of The AAL Aggressive Growth Fund's net assets in
foreign securities. We may also invest up to 15% of The AAL Technology Stock and
Equity Income Funds' 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.
American Depository Receipts
We may invest in American Depository Receipts ("ADRs") for The AAL Technology
Stock, Aggressive Growth, International and Equity Income Funds without limit.
ADR facilities may be either "sponsored" or "un-sponsored." While sponsored and
un-sponsored 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 Technology Stock,
Aggressive Growth, International and Equity Income Funds may invest in sponsored
and un-sponsored ADRs.
Other Foreign Investments
For The AAL Aggressive Growth and 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.
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 all Funds, unless there
are investment restrictions to the contrary. 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), subject to the segregation
of assets as required under the 1940 Act.
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 or exposed to 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 or exposed to 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 investments
denominated in or exposed to a foreign currency 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 over time.
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.
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 Aggressive Growth and 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. The secondary market for Section 4(2)
paper could become illiquid if institutional participants lost interest in these
investments. 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.
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 above) may cause the Funds to pay fees
and expenses which are duplicative of current Fund expenses.
OTHER INVESTMENT RISKS
Each of the previously described investment techniques contains an element of
risk. You should also be aware of the following risks associated with an
investment in the Funds.
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 duration. Securities that pay high
dividends, like bonds, are more sensitive to interest rate levels than other
equity securities that pay low dividends.
Investing in a Bond 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, maturities and prices. Both share prices and dividends
may fluctuate in a mutual fund owning bonds.
Initial Public Offerings
From time to time the Funds may invest in an initial public offering ("IPO") of
a security. Investments in an IPO are made consistent with the individual Fund's
investment objective and investment strategies. On occasion the Funds will
participate in an oversubscribed IPO ("Hot IPO"). Because the IPO is
oversubscribed, this presents the Funds with the opportunity to "flip" or trade
the security at higher prices. Proceeds from the Hot IPO are distributed among
the Funds consistent with the Funds' "Initial Public Offerings Policies and
Procedures." Investments in IPO's and Hot IPO's may have a magnified performance
impact on a Fund with a small asset base. A Fund may not experience similar
performance as its assets grow.
MANAGEMENT OF THE FUNDS
BOARD OF TRUSTEES AND EXECUTIVE OFFICERS
The Trustees and Executive Officers of the Funds and their principal occupations
during the past five years are described below. Unless otherwise specified, the
business address of all Trustees and Officers is 222 West College Avenue,
Appleton, WI 54919-0007:
<TABLE>
<CAPTION>
<S> <C> <C>
Name, Address and Age Position with the Funds Principal Occupation
F. Gregory Campbell Trustee President, Carthage College
d/o/b 2/16/39
2001 Alford Park Drive
Kenosha, WI 53140
Woodrow E. Eno* Trustee Senior Vice-President
d/o/b 4/5/46 Vice-President Secretary and General Counsel
Aid Association for Lutherans
Richard L. Gady Trustee Vice-President of Public Affairs
d/o/b 2/28/43 and Chief Economist, ConAgra,
One ConAgra Drive Inc. (agribusiness)
Omaha, NE 68102-5001
John O. Gilbert* Trustee President and Chief Executive Officer,
d/o/b 8/30/42 Aid Association for Lutherans
John H. Pender Trustee Retired; formerly Senior Vice-President
d/o/b 5/25/30 And Chief Investment Officer,
1056 S. Manzanita Ave. Aid Association for Lutherans
Palm Springs, CA 92264
Edward W. Smeds Trustee Retired; President, Customer Service
d/o/b 2/15/36 and Operations, Kraft Foods
10 Regent Wood Road (food and agriculture)
Northfield, IL 60093
Lawrence M. Woods Trustee Retired; formerly Executive
d/o/b 4/14/32 Vice-President and Director Mobil Oil
524 Sunset Drive Corporation (oil producer)
Worland, WY 82401
Robert G. Same President Vice-President, Chief Compliance
d/o/b 7/28/45 Officer and Deputy General Counsel,
Aid Association for Lutherans;
President, AAL Capital Management
Corporation
James H. Abitz Vice-President Vice-President, Investments, Aid
d/o/b 5/27/45 Association for Lutherans
Charles D. Gariboldi Treasurer Assistant Vice-President, Fund
d/o/b 12/31/59 Accounting, Aid Association for
Lutherans
Joseph R. Mauel Assistant Treasurer Director, Fund Accounting
d/o/b 11/26/59
Todd J. Kelly Assistant Treasurer Manager of Mutual Fund Accounting, Aid
d/o/b 8/15/69 Association for Lutherans
Frederick D. Kelsven Secretary Assistant General Counsel, Aid
d/o/b 2/9/47 Association for Lutherans;
Vice-President and Chief Compliance
Officer, Aetna Retirement Services
(financial services); Director of
Compliance, Nationwide Financial
Services (financial services)
Steven Fredricks Assistant Secretary Assistant General Counsel, Securities
d/o/b 7/25/70 and Investment Law, Aid Association
for Lutherans; Attorney, Azaria
Financial Services, LLP (financial
services)
</TABLE>
* Denotes Trustees who are "interested persons" of the Funds, as defined in the
Investment Company Act of 1940.
COMPENSATION TABLE
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 Aid Association for Lutherans) an annual fee of $27,500.
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, 2000, the Funds paid an
aggregate of $66,065 in Trustees' fees and expenses. In addition, each Trustee
of the Funds or Trust who is not affiliated with the AAL or the Adviser is
eligible to participate in a deferred compensation plan with respect to these
fees. Participants in the plan may designate their deferred Trustee's fees as if
invested in any one of the Funds. The value of each Trustee's deferred
compensation account will increase or decrease as if it were invested in shares
of the selected Funds. The Funds maintain their proportionate share of AAL's
liability for the deferred fees. Fees paid to the Trustees for the fiscal year
ended April 30, 2000 are set forth below.
<TABLE>
<CAPTION>
<S> <C> <C>
Name, Postion Aggregate Compensation from Funds Total Compensation from Funds and Fund
Complex Paid to Trustees (1)
F. Gregory Campbell $25,625 $31,875
Woodrow E. Eno $0 $0
Richard L. Gady(2) $12,500 $18,750
John O. Gilbert $0 $0
John H. Pender $0 $0
Edward W. Smeds(2) $12,500 $18,750
Lawrence M. Woods(2) $12,500 $18,750
</TABLE>
(1) Includes compensation received for serving as a Director of the AAL
Variable Product Series Fund, Inc., a family of mutual funds that has the
same Board as The AAL Mutual Funds and is also managed by AAL CMC.
(2) Payment reflects Trustee compensation that was deferred and invested into
the Funds for the year ended April 30, 2000.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As of April 30, 2000, the Trust's officers and Trustees owned less than 1% of
the shares of any Funds. As of April 30, 2000, no account holders held in excess
of 5% of any Fund's shares:
INVESTMENT ADVISORY AND OTHER SERVICES
INVESTMENT ADVISER
Please refer to our description of the adviser, advisory agreement and fees
under "Management, Organization, and Capital Structure" in the prospectuses. We
have incorporated the prospectuses herein by reference.
SUB-ADVISERS
The following supplements our discussion of the sub-advisers as contained in the
prospectuses.
The AAL International Fund - Oechsle International Advisors, LLC
Oechsle International Advisors, LLC ("Oechsle LLC") is the sub-adviser to the
International Stock Portfolio. Oechsle LLC is a Delaware limited liability
company and a registered investment adviser. It has served as sub-adviser to the
Fund since November 1, 1998. Oechsle LLC makes the day-to-day investment
decisions for the Fund under the Board of Trustees and AAL CMC's direction and
control. Oechsle LLC determines which securities to purchase and sell, arranges
the purchases and sales and gives other help in formulating and implementing the
investment program for the Fund. Oechsle, LLC has principal offices at One
International Place, Boston, Massachusetts 02110.
The AAL Aggressive Growth Fund - Janus Capital Corporation
Janus Capital Corporation ("Janus") makes the day-to-day investment decisions
for The AAL Aggressive Growth Fund under the Board of Trustees and AAL CMC's
direction and control. Janus determines which securities to purchase and sell,
arranges the purchases and sales and gives other help in formulating and
implementing the investment program for the Fund's portfolio. Janus has its
principal offices at 100 Fillmore Street, Denver, Colorado 80206-4928.
Kansas City Southern Industries, Inc. ("KCSI"), indirectly through its wholly
owned subsidiary, Stilwell Financial Inc., owns approximately 81% of the
outstanding voting stock of Janus. KCSI is a publicly traded holding company
whose primary subsidiaries are engaged in transportation, information processing
and financial services. Thomas H. Bailey, President and Chairman of the Board of
Janus owns approximately 12% of Janus voting stock, and, by agreement with KCSI,
selects at least a majority of the Janus Board, subject to the approval of
Stilwell Financial, which cannot be unreasonably withheld.
KCSI has announced its intention to separate its transportation and financial
services businesses. KCSI anticipates the separation to be completed in July,
2000.
The AAL High Yield Bond Fund - Pacific Investment Management Company
Pacific Investment Management Company ("PIMCO") is a Delaware general
partnership and is a wholly-owned subsidiary of PIMCO Advisors, L.P. ("PIMCO
Advisors"). PIMCO is located at 800 Newport Center Drive, Newport Beach,
California 92660. PIMCO is a money management firm and is registered as an
investment adviser with the Securities and Exchange Commission
Allianz of America, Inc. ("Allianz of America") owns approximately 70% of the
outstanding partnership interests in PIMCO Advisors. The remainder of the
partnership interests in PIMCO Advisors are owned by Pacific Life Insurance
Company ("Pacific Life"). Allianz of America is a subsidiary of Allianz AG.
Allianz AG is a leading provider of financial services, particularly in Europe,
and is represented in 68 countries world-wide through subsidiaries, branch and
representative offices, and other affiliated entities.
Significant institutional shareholders of Allianz AG currently include, among
others, Dresdner Bank AG, Deutsche Bank AG, Munich Reinsurance and Hypo
Vereinsbank. Credit Lyonnais, Dresdner Bank AG and Deutsche Bank AG, as well as
certain broker-dealers that might be deemed to be affiliated with these
entities, such as DB Alex Brown LLC, Deutsche Bank Securities, Inc. and Dresdner
Kleinwort Benson North America LLC (collectively, the "Affiliated Brokers"), may
be considered to be affiliated persons of PIMCO. Absent an SEC exemption or
other relief, the Fund generally will be precluded from effecting principal
transactions with the Affiliated Brokers, and its ability to purchase securities
being underwritten by an Affiliated Broker or to utilize the Affiliated Brokers
for agency transactions is subject to restrictions. PIMCO does not believe that
the applicable restrictions on transactions with the Affiliated Brokers
described above will materially adversely affect its ability to provide services
to the Fund, the Fund's ability to take advantage of market opportunities, or
the Fund's overall performance.
AFFILIATED PERSONS
There are currently no affiliated persons of the Fund or AAL CMC, the Funds'
adviser.
ADVISER FEES
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.
ADVISER FEES PER FUND
<TABLE>
<CAPTION>
<S> <C>
THE AAL TECHNOLOGY STOCK FUND 0.75% on the average daily net assets
THE AAL AGGRESSIVE GROWTH FUND 0.25% on average daily net assets above the sub-adviser's fee
Sub-Adviser Fees 0.55% on the first $100 million
Janus 0.50% on the next $400 million
0.45% on the average daily net assets over $500 million
THE AAL SMALL CAP STOCK FUND 0.70% on the first $200 million
0.65% on the average daily net assets over $200 million
THE AAL MID CAP STOCK FUND 0.70% on the first $200 million
0.65% on the average daily net assets over $200 million
THE AAL INTERNATIONAL FUND 0.25% on average daily net assets above the sub-adviser's fee
Sub-Adviser Fees 0.40% on the first $50 million
Oechsle International Advisers 0.35% on the average daily net assets over $50 million
THE AAL CAPITAL GROWTH FUND 0.65% on the first $500 million
0.575% on the next $500 million
0.50% on the average daily net assets over $1 billion
THE AAL EQUITY INCOME FUND 0.45% on the average daily net assets
THE AAL LARGE COMPANY INDEX FUND II 0.25% on the average daily net assets
THE AAL MID CAP INDEX FUND II 0.25% on the average daily net assets
THE AAL SMALL CAP INDEX FUND II 0.25% on the average daily net assets
THE AAL BALANCED FUND 0.55% onaverage daily net assets above the sub-adviser's fee
THE AAL HIGH YIELD BOND FUND 0.55% on the average daily net assets
Sub-Adviser Fees 0.25% on the average daily net assets
PIMCO
THE AAL MUNICIPAL BOND FUND 0.45% on the average daily net assets
THE AAL BOND FUND 0.45% on the average daily net assets
THE AAL MONEY MARKET FUND 0.50% on the first $500 million
0.45% on the average daily net assets over $500 million
</TABLE>
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% and 1.75% for Class A and Class B 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 following
table shows the advisory fees for the past three fiscal years ended April 30,
2000, paid by each of the Funds respectively.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
FUND APRIL 30, 2000 APRIL 30, 1999 APRIL 30, 1998
THE AAL TECHNOLOGY STOCK FUND N/A N/A N/A
THE AAL AGGRESSIVE GROWTH FUND N/A N/A N/A
THE AAL SMALL CAP STOCK FUND $1,139,125 $913,406 $690,590
THE AAL MID CAP STOCK FUND $4,562,263 $4,027,980 $4,070,582
THE AAL INTERNATIONAL FUND $1,200,110 $1,050,033 $1,280,101
THE AAL CAPITAL GROWTH FUND $21,248,554 $16,628,122 $12,742,588
THE AAL EQUITY INCOME FUND $1,323,521 $1,091,335 $809,233
THE AAL LARGE COMPANY INDEX FUND II N/A N/A N/A
THE AAL MID CAP INDEX FUND II N/A N/A N/A
THE AAL SMALL CAP INDEX FUND II N/A N/A N/A
THE AAL BALANCED FUND $1,280,721 $478,088 $27,618
THE AAL HIGH YIELD BOND FUND $816,005 $736,426 $522,217
THE AAL MUNICIPAL BOND FUND $2,247,970 $2,272,553 $2,163,729
THE AAL BOND FUND $1,785,045 $1,858,562 $1,921,733
THE AAL MONEY MARKET FUND $1,685,613 $1,360,362 $1,088,957
</TABLE>
During the fiscal year ended April 30, 2000, AAL CMC, as the adviser,
voluntarily reimbursed advisory fees for the Funds. Actual advisory fees, net of
reimbursements were as follows:
FUND APRIL 30, 2000
THE AAL TECHNOLOGY STOCK FUND N/A
THE AAL AGGRESSIVE GROWTH FUND N/A
THE AAL SMALL CAP STOCK FUND $945,778
THE AAL MID CAP STOCK FUND $3,924,741
THE AAL INTERNATIONAL FUND $1,084,827
THE AAL CAPITAL GROWTH FUND $20,550,870
THE AAL EQUITY INCOME FUND $1,149,058
THE AAL LARGE COMPANY INDEX FUND II N/A
THE AAL MID CAP INDEX FUND II N/A
THE AAL SMALL CAP INDEX FUND II N/A
THE AAL BALANCED FUND $1,176,958
THE AAL HIGH YIELD BOND FUND $552,650
THE AAL MUNICIPAL BOND FUND $1,986,615
THE AAL BOND FUND $1,484,341
THE AAL MONEY MARKET FUND $826,238
The sub-advisory fee for The AAL Aggressive Growth Fund is payable from the
maximum 0.80% annual advisory fee paid to the adviser. The sub-advisory fee for
The AAL International Fund is payable from the maximum 0.65% annual advisory fee
paid to the adviser. The sub-advisory fee for The AAL High Yield Bond Fund is
payable from the maximum 0.55% annual advisory fee paid to the adviser. The
advisory agreement and sub-advisory agreements for The AAL Aggressive Growth,
International, and High Yield Bond Funds 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 the adviser
ceases to act as such with respect to the Funds and the continued use of the
Trust's present name (The AAL Mutual Funds) would create confusion in the
context of the adviser or AAL's business.
The investment advisory agreement, as amended, 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 June 2, 2000.
The advisory agreement and sub-advisory agreements 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.
CODE OF ETHICS
Rule 17j-1 promulgated under Section 17(j) of the Investment Company Act of 1940
makes it illegal for persons associated with the Fund, the adviser or
sub-adviser, who have knowledge of portfolio securities trades that the Fund
makes or intends to make, to use that information in a manner that benefits that
person and/or harms the Fund. To protect the Fund against such conduct, the
Fund, the adviser and sub-adviser have adopted codes of ethics in accordance
with requirements established under Rule 17j-1. The code of ethics do not
prohibit persons who have knowledge of the Fund's portfolio securities trades
from investing in the same securities; however, the codes of ethics establish
time frames, prior approval procedures and reporting requirements designed to
assure that persons who have knowledge of the Funds' portfolio securities trades
cannot use that information in a manner which is detrimental to the Fund and/or
which benefits them.
12B-1 DISTRIBUTION PLAN
The Funds have adopted a distribution plan for Class A and Class B shares (the
"Distribution Plan" or "Plan") pursuant to Rule 12b-1 (the "Rule") under the
Act.
The Distribution Plan authorizes the distributor, AAL CMC, to make certain
payments (either as a "12b-1 distribution fee" or a "service fee") to any
qualified recipient. As defined in the Plan, the qualified recipient must have
rendered assistance in the distribution of the Funds' shares (such as selling or
placing the Funds' shares, or providing administrative assistance, such as
maintaining sub-accounting or other records). The Plan authorizes the
distributor to purchase advertising for the Funds' shares, to pay for sales
literature and other promotional material, and to make payments to the sales
personnel. The Distribution Plan does not cover Institutional shares. As a
result, the Funds may not make any payments pursuant to the Plan in connection
with Institutional shares.
The Funds reimburse any payments made or expenses incurred under the Plan to
qualified recipients for Class A and Class B shares as follows:
Class A Shares - All Funds
In a given fiscal year, the Funds, pursuant to the Plan, pay up to a limit of
0.25 of 1% of the average net assets (0.125 of 1% for The AAL Money Market Fund)
as a service fee for Class A shares. The Funds do not reimburse or pay for
expenses of past fiscal years or in contemplation of expenses for future fiscal
years. Since September 1, 1997, the distributor has waived 0.100 of 1% of the
0.125 of 1% maximum 12b-1 service fee for Class A shares under the Plan for The
AAL Money Market Fund (prior to January 8, 1997, 12b-1 service fees for Class A
shares were described as 12b-1 distribution fees), effectively charging a 0.025
of 1%, 12b-1 service fee. This continuing reimbursement (waiver) is voluntary.
The distributor may modify or discontinue its reimbursements at any time.
Class B Shares - All Funds
In a given fiscal year, the Funds pay up to a limit of 0.75 of 1% of the average
daily net assets as a 12b-1 distribution fee and up to a limit of 0.25 of 1% of
the average daily net assets (0.125 of 1% for The AAL Money Market Fund) as a
service fee for Class B shares. Pursuant to the Plan, the Funds do not reimburse
or pay for expenses of past fiscal years or in contemplation of expenses for
future fiscal years. Since September 1, 1997, the distributor has waived 0.100
of 1% of the 0.125 of 1% maximum 12b-1 service fee for Class B shares under the
Plan for The AAL Money Market Fund, effectively charging a 0.025 of 1%, 12b-1
service fee. This continuing reimbursement (waiver) is voluntary. The
distributor may modify or discontinue its reimbursements at any time.
The Plan authorizes without limit any payments by a Fund for Class A and Class B
shares that are "primarily intended to result in the sale of shares" issued by a
Fund within the meaning of the Rule under the Plan. Such payments shall not be
included in the limitations contained in the Plan, including: (a) the costs of
the preparation, printing and mailing of all required reports and notices to
shareholders, irrespective of whether such reports or notices contain or are
accompanied by material intended to result in the sale of shares of the Fund or
other funds or other investments; (b) the costs of preparing, printing and
mailing of all prospectuses to shareholders; (c) the costs of preparing,
printing and mailing of any proxy statements and proxies, irrespective of
whether any such proxy statement includes any item relating to, or directed
toward, the sale of the Fund's shares; (d) all legal and accounting fees
relating to the preparation of any such reports, prospectuses, proxies and proxy
statements; (e) all fees and expenses relating to the qualification of the Funds
and or their shares under the securities or "Blue Sky" laws of any jurisdiction;
(f) all fees under the Act and the Securities Act of 1933, including fees in
connection with any application for exemption relating to or directed toward the
sale of the Fund's shares; (g) all fees and assessments of the Investment
Company Institute or any successor organization or industry association
irrespective of whether some of its activities are designed to provide sales
assistance, (h) all costs of preparing and mailing confirmations of shares sold
or redeemed or share certificates and reports of share balances; and (i) all
costs of responding to telephone or mail inquiries of shareholders.
The Plan also states that the distribution costs of the Trust's Class A and
Class B shares are expected to exceed the sum of permitted payments, permitted
expenses, and the portion of the sales charge retained by the distributor. The
adviser's profits, if any, are primarily dependent on the advisory fees paid by
the Funds to the adviser. If and to the extent that any investment advisory fees
paid by the Funds might, in view of any excess distribution costs and the common
ownership of the adviser and distributor, be considered as indirectly financing
any activity primarily intended to result in the sale of shares issued by the
Funds, the payment of such fees is authorized under the Plan. The Plan states
that in taking any action contemplated by Section 15 of the Act as to any
investment advisory contract to which the Trust is a party, the Board of
Trustees, including its Trustees who are not "interested persons" as defined in
the Act, and who have no direct or indirect financial interest in the operation
of the Plan or any agreements related to the Plan ("Qualified Trustees"), shall,
in acting on the terms of any such contract, apply the "fiduciary duty" standard
contained in Sections 36(a) and (b) of the Act.
The Plan requires that while it is in effect, the distributor, shall report in
writing at least quarterly to the Trustees, and the Trustees shall review, the
following: (a) the amounts of all payments, the identity of recipients of each
such payment, the basis on which each such recipient was chosen and the basis on
which the amount of the payments were made; (b) the amounts of expenses and the
purpose of each such expense; and (c) all costs of the other payments specified
in the Plan (making estimates of such costs where necessary or desirable) in
each case during the preceding calendar or fiscal quarter. The aggregate amount
paid by the Funds to the distributor under the Plan for Class A shares for the
fiscal year ended April 30, 2000, and the manner in which this amount was spent
is as follows:
CLASS A SHARES
Gross 12b-1 Fees Paid by the Funds for Class A Shares $15,551,182
EXPENDITURES
Compensation to Registered Representatives $15,479,264
Other $71,918
The aggregate amount paid by the Funds to the distributor under the Plan for
Class B shares for the fiscal year ended April 30, 2000 and the manner in which
this amount was spent is as follows:
CLASS B SHARES
Gross 12b-1 Fees Paid by the Funds for Class B Shares $1,830,338
EXPENDITURES
Compensation to Registered Representatives $1,032,995
Other $797,343
Management and the Board of Trustees believe that the Distribution Plan and the
service and 12b-1 fees have a positive impact on the Funds' sales and the Funds'
retention of assets, both of which are beneficial to the Funds and the Funds'
shareholders.
The Trust's shareholders approved the Plan at the Trust's first meeting of
shareholders held on September 13, 1988. The Plan at that time and up until
January 8, 1997, included only the shares now referred to as Class A shares. As
of January 8, 1997, the Plan includes Class B shares. The Plan as Amended and
Restated was approved by the sole shareholder of the Trust's Class B shares on
January 8, 1997. The Plan will continue in effect from year-to-year only so long
as such continuance is specifically approved at least annually by the Board of
Trustees and the Qualified Trustees (as defined in the Plan) cast in person at a
meeting called for the purpose of voting on such continuance. The Plan may be
terminated at any time without penalty by a vote of a majority of the Qualified
Trustees. The Plan also may be terminated by the vote of the holders of a
majority of the outstanding voting securities for each class of shares of the
Trust. The Plan may be terminated with respect to any Fund by the vote of a
majority of the outstanding shares for each class of such Fund. The Plan may not
be amended to increase materially the amount of payments to be made for the
separate class shares without shareholder approval of the class. While the Plan
is in effect, the selection and nomination of those Trustees who are not
interested persons of the Trust is committed to the discretion of such
disinterested Trustees. Nothing in the Plan will prevent the involvement of
others in such selection and nomination if the final decision on any such
selection and nomination is approved by a majority of such disinterested
Trustees.
ADDITIONAL INFORMATION
Custodian
The custodian for the Funds is Citibank, N.A.. The custodian is responsible for
holding the Funds' assets.
Administrative Services Agreement
Pursuant to an Administrative Services Agreement ("Agreement") between the Funds
and AAL, effective January 1, 1999, AAL 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 (Oechsle'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.
The principal reason for having AAL provide these services is cost. AAL has
agreed to provide these services at rates that would not exceed the rates
charged by unaffiliated vendors for similar services. The annual rates of
payment approved by the Trustees presently are:
o The AAL Technology Stock Fund $40,000
o The AAL Aggressive Growth Fund $40,000
o The AAL Small Cap Stock Fund - $40,000
o The AAL Mid Cap Stock Fund - $40,000
o The AAL International Fund - $45,000
o The AAL Capital Growth Fund - $40,000
o The AAL Equity Income Fund - $40,000
o The AAL Large Company Index Fund II $35,000
o The AAL Mid Cap Index Fund II $35,000
o The AAL Small Cap Index Fund II $35,000
o The AAL Balanced Fund - $40,000
o The AAL High Yield Bond Fund - $40,000
o The AAL Municipal Bond Fund - $40,000
o The AAL Bond Fund - $40,000
o The AAL Money Market Fund - $40,000
o The AAL U. S. Government Zero Coupon Target Fund Series 2001 - $2,500
o 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 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 Bank, N.A., as transfer and dividend disbursing
agent, and the normal full-service fee schedule published by Firstar Bank, N.A..
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 $3.75 per
account, effective April 30, 2000. 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 Funds but may be in
the future.
Independent Accountants
The Trust's independent accountants, PricewaterhouseCoopers LLP
("PricewaterhouseCoopers"), examine the Funds' annual financial statements.
PricewaterhouseCoopers also assists in the preparation of certain reports to the
SEC and reviews the Trust's state and federal tax returns.
BROKERAGE ALLOCATION AND OTHER PRACTICES
AAL CMC, as the adviser, and Oechsle as the sub-adviser for The AAL
International Fund, Janus as the sub-adviser for The AAL Aggressive Growth Fund,
and PIMCO as the sub-adviser for The AAL High Yield Bond 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 may 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, AAL CMC looks 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-advisers for The AAL Aggressive Growth Fund, The AAL
International Fund, and The AAL High Yield Bond 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 the following in brokerage commissions in each of the past three
fiscal years ended April 30, 2000.
April 30, 2000 April 30, 1999 April 30, 1998
The AAL Mutual Funds $3,736,355 $3,693,873 $3,143,251
CAPITAL STOCK AND OTHER SECURITIES
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 (e.g., 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.
Except for the election of Trustees and ratification of the selection of
independent 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.
Except for The AAL Small Cap Stock, Mid Cap Stock, 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.
PURCHASE, REDEMPTION, AND PRICING OF SHARES
Purchases and redemptions are discussed in the Prospectus under the headings;
"Purchasing Shares" and "How to Redeem Shares," and that information is
incorporated herein by reference.
We generally determine the Funds' net asset value only on the days when the New
York Stock Exchange ("NYSE") is open for trading. We will not determine the net
asset value on days when the NYSE is closed or AAL is closed. The 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 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 either 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.
Foreign securities may not be traded on all days when the NYSE is open. Also,
foreign securities may trade on Saturdays and other days when the 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 the close of the NYSE, 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.
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.
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
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.
LETTER OF INTENT
Under a Letter of Intent, as described in the prospectus, shares totaling 5% of
the dollar amount indicated in the letter will be held in escrow by the transfer
agent in the name of the purchaser. A Letter of Intent neither obligates you to
purchase nor requires us to sell the indicated amount. If you do not invest the
amount indicated within the 13-month period, you, as the purchaser, are required
to pay the difference between the sales commission otherwise applicable to the
purchases made during this period and sales charges actually paid. When the
Letter of Intent expires, we liquidate sufficient shares in escrow to obtain the
difference.
CLOSING SMALL ACCOUNTS
All AAL Mutual Funds account owners share the high cost of maintaining accounts
with low balances. To reduce this cost, we reserve the right, subject to legal
restrictions, if any, to close an account when, due to a redemption, its value
is less than $250. This does not apply to retirement plan accounts. We will
notify you in writing before closing any account, and you will have 30 days to
add money to bring the balance up to $250.
TAXATION OF THE FUNDS
The following is only 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.
DIVIDENDS, DISTRIBUTIONS AND TAXES
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 AAL Technology Stock, Aggressive Growth, Small Cap
Stock, Mid Cap Stock, International, Capital Growth, Equity Income, Large
Company Index II, Mid Cap Index II, Small Cap Index II, Balanced, High Yield
Bond, Bond and Money Market 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 Technology Stock,
Aggressive Growth, Small Cap Stock, Mid Cap Stock, International, Large Company
Index II, Mid Cap Index II and Small Index II 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 DIVIDENDS, DISTRIBUTIONS AND TAXES
This Fund expects to 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 use of options and futures for The AAL Municipal Bond Fund portfolio may
result in taxable income. You should consult your personal tax adviser to
determine the consequences of federal, state and local taxes.
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 PFICs 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 PFICs 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.
UNDERWRITERS
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.
CLASS A SHARES
The public offering price of a Fund's Class A share is the net asset value next
computed plus a sales charge that varies based on the quantity purchased. The
public offering price of a Fund's Class A share is calculated by dividing the
net asset value of the Class A share being purchased by the difference
(expressed as a decimal) between 100% and the sales charge percentage of the
offering price applicable to the purchase (see "Purchasing Shares" in the
Prospectus). The sales charge scale set forth in the prospectus applies to
purchases of Class A shares of a particular Fund alone or in combination with
shares of all classes of the other Funds (as noted under "Right of
Accumulation") by any person, including family members who live with the
purchaser (i.e., husband, wife and minor children) and bona fide trustees. The
sales charge scale also applies to purchases made under the right of
accumulation or letter of intent as set forth in the prospectus. The distributor
offers a reduction in the sales charges for a Fund for non-profit organizations,
charitable trusts, charitable remainder unitrusts, endowments, AAL branches and
congregations (See "50% Reduction" in the Prospectus).
The distributor does not receive compensation in connection with redemptions and
repurchases or brokerage commissions for Class A shares. The amount of
underwriting commissions received and retained by the distributor for the past
three years ended April 30, 1999 for Class A Shares were as follows:
CLASS A SHARES
For the Fiscal Year Ended Aggregate Commissions Retained Commissions
April 30, 2000 $19,149,039 $13,962,423
April 30, 1999 $18,088,340 $7,783,221
April 30, 1998 $18,026,973 $7,289,125
CLASS B SHARES
The public offering price of a Fund's Class B shares is the net asset value (see
"Purchasing Shares" in the prospectus). The aggregate redemption fees
(underwriting commissions) received and retained by the distributor were as
follows:
CLASS B SHARES
For the Fiscal Year Ended Aggregate Commissions Retained Commissions
April 30, 2000 $245,818 $245,818
April 30, 1999 $169,047 $169,047
April 30, 1998 $36,668 $36,668
INSTITUTIONAL SHARES
The public offering price of a Fund's Institutional shares is the net asset
value. The distributor began offering the Institutional shares for the Funds on
December 29, 1997. For information on Institutional shares, please see the
separate prospectus and statement of additional information.
CALCULATION OF PERFORMANCE DATA
From time to time we advertise the yields and total returns for the Funds' Class
A and Class B shares for various investment periods. We always include uniform
performance calculations based on standardized methods established by the SEC.
These calculations reflect the front-end sales charge on a Class A share and the
contingent deferred sales charge ("CDSC") on a Class B share. 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 by finding the average annual
compounded rates of return for Class A and Class B shares over the 1, 5 and 10
year periods (or the portion thereof during which the Fund has been in
existence) that would equate the initial amount invested in each class to the
ending redeemable value according to the following formula:
P(1+T)^n = ERV
Where:
P = A hypothetical $1,000 initial payment;
T = Average annual total return for the class;
n = Number of years;
ERV = Ending redeemable value for the class (of the hypothetical $1,000 payment)
at the end of the 1, 5 and 10 year periods (or fractional portion thereof),
after deduction of all non-recurring charges for the class (CDSC for Class B
shares), assuming redemption at the end of the period;
^ = raised to the power of.
ANNUAL RETURNS FOR THE 1 AND 5-YEAR, 10-YEAR AND SINCE INCEPTION PERIODS ENDED
APRIL 30, 2000, FOR CLASS A SHARES BASED ON GROSS AMOUNT INVESTED
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
The AAL Mutual Fund and Total Return for the Average Annual Return Average Annual Average Annual
Inception Date 1-Year Period for the 5-Year Period Return for the Return for the
10-Year Period Period Since
Inception for Funds
in Existence for
less than 10 Years
Technology Stock N/A N/A N/A N/A
7/1/00
Aggressive Growth N/A N/A N/A N/A
7/1/00
Small Cap Stock 28.75% N/A N/A 12.20%
7/1/96
Mid Cap Stock 22.19% 16.85% N/A 13.51%
6/30/93
International 18.98% N/A N/A 10.55%
8/1/95
Capital Growth 4.92% 23.15% 16.97% N/A
7/16/87
Equity Income (4.76)% 12.44% N/A 9.67%
3/18/94
Large Company Index II N/A N/A N/A N/A
7/1/00
Mid Cap Index II N/A N/A N/A N/A
7/1/00
Small Cap Index II N/A N/A N/A N/A
7/1/00
Balanced 0.56% N/A N/A 9.91%
12/29/97
High Yield Bond (10.70)% N/A N/A 0.05%
1/8/97
Municipal Bond (7.94)% 4.53% 6.16% N/A
7/16/87
Bond (4.07)% 4.49% 6.39% N/A
7/16/87
</TABLE>
Annual Returns for the 1-Year and Since Inception Periods Ended April 30, 2000,
for Class B Shares Based on Gross Amount Invested*
<TABLE>
<CAPTION>
<S> <C> <C>
The AAL Mutual Fund and Inception Date Total Return for the 1-Year Period Average Annual Return for the Period
Since Inception
Technology Stock N/A N/A
7/1/00
Aggressive Growth N/A N/A
7/1/00
Small Cap Stock 27.71% 9.54%
1/8/97
Mid Cap Stock 20.71% 11.70%
1/8/97
International 17.44% 10.73%
1/8/97
Capital Growth 3.09% 22.18%
1/8/97
Equity Income (6.71)% 10.62%
1/8/97
Large Company Index II N/A N/A
7/1/00
Mid Cap Index II N/A N/A
7/1/00
Small Cap Index II N/A N/A
7/1/00
Balanced (1.26)% 9.74%
12/29/97
High Yield Bond (12.38)% (0.00)%
1/8/97
Municipal Bond (9.79)% 2.54%
1/8/97
Bond (6.03)% 3.07%
1/8/97
</TABLE>
* There is no standardized average annual return information for the five-year
and 10-year periods, which is based on gross amount invested, available for
Class B shares. Class B shares first became available to investors on January 8,
1997.
Current Yield
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 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 that 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, 2000, for Class A shares were:
The AAL Technology Stock N/A
The AAL Aggressive Growth N/A
The AAL Small Cap Stock Fund (0.50)%
The AAL Mid Cap Stock Fund 0.06%
The AAL International Fund (0.09)%
The AAL Capital Growth Fund 0.34%
The AAL Equity Income Fund 1.34%
The AAL Large Company Index II N/A
The AAL Mid Cap Index II N/A
The AAL Small Cap Index II N/A
The AAL Balanced Fund 3.02%
The AAL High Yield Bond Fund 10.84%
The AAL Municipal Bond Fund 4.73%
The AAL Bond Fund 6.53%
The current yields for the AAL Small Cap Stock, Mid Cap Stock, International,
Equity Income, Balanced, High Yield Bond, Municipal Bond and Bond Funds for the
30-day period ended April 30, 200, for Class B shares were:
The AAL Technology Stock N/A
The AAL Aggressive Growth N/A
The AAL Small Cap Stock Fund (1.57)%
The AAL Mid Cap Stock Fund (1.02)%
The AAL International Fund (1.08)%
The AAL Capital Growth Fund (0.82)%
The AAL Equity Income Fund 0.35%
The AAL Large Company Index II N/A
The AAL Mid Cap Index II N/A
The AAL Small Cap Index II N/A
The AAL Balanced Fund 2.21%
The AAL High Yield Bond Fund 10.66%
The AAL Municipal Bond Fund 4.05%
The AAL Bond Fund 5.82%
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 - The AAL Municipal Bond Fund
We calculate a tax equivalent yield for The AAL Municipal Bond Fund based on a
30-day (or one-month) period for Class A and Class B 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 tax equivalent yield at 31% tax rate for the 30-day period ended April 30,
2000, for a Class A share and a Class B share for The AAL Municipal Bond Fund
were 6.86% and 5.87%, respectively.
Current and Effective Yield - The AAL Money Market Fund
We may quote a current or effective yield for The AAL Money Market Fund's Class
A and Class B shares from time-to-time. The current yield is an annualized yield
based on the net change in account value for each class for a seven-day period.
The effective yield is an annualized yield based on a daily compounding of the
current yield for each share class. 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/Beginning Account Value
per Class) x (365/7)
Effective Yield = [(Net Change in Account Value per Class/Beginning Account
Value per Class)]^(365/7) + 1] - 1
For the seven-day period ended April 30, 2000, the current and effective yields
of The AAL Money Market Fund for Class A shares were 5.47% and 5.62%,
respectively, and for Class B shares 4.39% and 4.48%, respectively.
Normal changes in the 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 Class A and B shares; (2) calculations of the growth of an investment (or
series of investments), at various assumed interest rates and compounding, to
show the effect of the length of time, interest rate and/or tax deferral on an
investment for Class A and B shares; (3) illustrate the concepts of asset
allocation by use of hypothetical case studies using various risk levels and
life cycles, as well as illustrating the effect of various tax brackets and tax
deferrals on hypothetical systematic investing for Class A and Class B shares;
and (4) performance relative to the performance of other investments such as
stocks, bonds, closed end funds, certificates of deposit, as well as various
indices such as the Consumer Price Index and indices generated by lbbotson &
Associates and Chase Global Data and Research Products for Class A and B shares.
Average Annual Total Return on Net Amount Invested
Except for The AAL Money Market Fund, we may advertise an average annual total
return calculation for Class A and Class B shares for any appropriate time
period, based upon the value of a net investment in the Fund for the class. We
deduct the maximum sales charge for Class A shares and deduct the CDSC for Class
B shares. We advertise average annual total return for net amount invested
according to the following formula:
P(1+T)^n = ERV
Where:
P = A hypothetical $1,000 initial payment (the hypothetical initial net
investment after deduction of the sales load);
T = Average annual total return for the class;
n = Number of years;
ERV = Ending redeemable value for the class (of the hypothetical $1,000 payment)
at the end of the 1, 5 and 10 year periods (or fractional portion thereof),
after deduction of all non-recurring charges for the class (CDSC for Class B
shares), assuming redemption at the end of the period;
^ = raised to the power of.
Annual Returns for the 1-Year, 5-Year, 10-Year and Since Inception Periods Ended
April 30, 2000, for Class A Shares Based on Net Amount Invested
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
The AAL Mutual Fund and Total Return for the Average Annual Return Average Annual Average Annual
Inception Date 1-Year Period for the 5-Year Period Return for the Return for the
10-Year Period Period Since
Inception for Funds
in Existence for
less than 10 Years
Technology Stock N/A N/A N/A N/A
7/1/00
Aggressive Growth N/A N/A N/A N/A
7/1/00
Small Cap Stock 34.07% N/A N/A 13.41%
7/1/96
Mid Cap Stock 27.29% 17.82% N/A 14.20%
6/30/93
International 23.91% N/A N/A 11.51%
8/1/95
Capital Growth 9.28% 24.16% 17.45% N/A
7/16/87
Equity Income (0.80)% 13.35% N/A 10.41%
3/18/94
Large Company Index II N/A N/A N/A N/A
7/1/00
Mid Cap Index II N/A N/A N/A N/A
7/1/00
Small Cap Index II N/A N/A N/A N/A
7/1/00
Balanced 4.78% N/A N/A 11.87%
12/29/97
High Yield Bond (7.00)% N/A N/A 1.30%
1/8/97
Municipal Bond (4.09)% 5.39% 6.59% N/A
7/16/87
Bond (0.11)% 5.34% 6.83% N/A
7/16/87
</TABLE>
Annual Returns for the 1-Year and Since Inception Periods Ended April 30, 2000,
for Class B Shares Based on Net Amount Invested*
<TABLE>
<CAPTION>
<S> <C> <C>
The AAL Mutual Fund and Inception Date Total Return for the 1-Year Period Average Annual Return for the Period
Since Inception
Technology Stock N/A N/A
7/1/00
Aggressive Growth N/A N/A
7/1/00
Small Cap Stock 32.71% 10.02%
1/8/97
Mid Cap Stock 25.71% 12.16%
1/8/97
International 22.44% 11.20%
1/8/97
Capital Growth 8.09% 22.55%
1/8/97
Equity Income (1.80)% 11.09%
1/8/97
Large Company Index II N/A N/A
7/1/00
Mid Cap Index II N/A N/A
7/1/00
Small Cap Index II N/A N/A
7/1/00
Balanced 3.74% 10.86%
12/29/97
High Yield Bond (7.65)% 0.60%
1/8/97
Municipal Bond (4.99)% 3.11%
1/8/97
Bond (1.09)% 3.63%
1/8/97
</TABLE>
* There is no standardized average annual return information for the five-year
and 10-year periods, which is based on gross amount invested, available for
Class B shares. Class B shares first became available to investors on January 8,
1997.
INDEX INFORMATION
The S&P 500 Index
The S&P 500 Index is a broad index of larger capitalization stocks. It is
composed of 500 common stocks representing more than 70% of the total market
value of all publicly traded common stocks. The index is constructed by Standard
& Poor's, which chooses stocks on the basis of market values and industry
diversification. Most of the largest 500 companies listed on the U.S. stock
exchanges are included in the index. Most stocks in the index are listed on the
New York Stock Exchange. A much smaller number come from the American Stock
Exchange and the over-the-counter market. The index is capitalization-weighted,
--that is, stocks with a larger capitalization (shares outstanding times current
price) have a greater weight in the index. Market capitalizations of stocks in
the index as of December 1998, range from $487 million to $345.8 billion. The
median capitalization was $7.75 billion. S&P periodically makes additions and
deletions to the index. Selection of a stock for inclusion in the S&P 500 Index
in no way implies an opinion by Standard & Poor's as to its attractiveness as an
investment.
The S&P MidCap 400 Index
The S&P MidCap 400 Index is a capitalization weighted index of 400 domestic
stocks chosen for market size, liquidity and industry representation. The
component stocks are weighted according to the total market value of their
outstanding shares. The impact of a component's price change is proportional to
the issue's total market share value, which is share price times the number of
shares outstanding. These are summed up for all 400 stocks and divided by a
predetermined base value. The base value for the Standard & Poor's MidCap 400
Index is adjusted to reflect changes in capitalization resulting from mergers,
acquisitions, stock rights and substitutions, as well as other activities.
The S&P SmallCap 600 Index
The S&P SmallCap 600 Index is a capitalization weighted index of 600 domestic
stocks chosen for market size, liquidity and industry representation. The
component stocks are weighted according to the total market value of their
outstanding shares. The impact of a component's price change is proportional to
the issue's total market share value, which is share price times the number of
shares outstanding. These are summed up for all 600 stocks and divided by a
predetermined base value. The base value for the Standard & Poor's SmallCap 600
Index is adjusted to reflect changes in capitalization resulting from mergers,
acquisitions, stock rights and substitutions, as well as other activities.
Disclaimers and Limitations of Liabilities of Standard & Poor's
The disclaimers and limitations set forth below are set forth in a contract
between Standard & Poor's and AAL CMC. The Product refers to the Large Company
Index Fund and the Mid Cap Index Fund, and the Licensee refers to AAL CMC.
Standard & Poor's requires that such disclaimers be disclosed in this
Registration Statement.
The Product is not sponsored , endorsed, sold or promoted by Standard & Poor's,
a division of The McGraw-Hill Companies, Inc. ("S&P"). S&P makes no
representation or warranty, express or implied, to the owners of the Product or
any member of the public regarding the advisability of investing in securities
generally or in the Product particularly or the ability of the S&P 500 Index or
the S&P MidCap 400 Index to track general stock market performance. S&P's only
relationship to the Licensee is the licensing of certain trademarks and trade
names of S&P, the S&P 500 Index, the S&P MidCap 400 Index and the S&P SmallCap
600 Index which is determined, composed and calculated by S&P without regard to
Licensee or the Product. S&P has no obligation to take the needs of the Licensee
or the owners of the Product into consideration in determining, composing or
calculating the S&P 500 Index, the S&P MidCap 400 Index and the S&P SmallCap 600
Index. S&P is not responsible for, and has not participated in the determination
of the prices and amount of the Product or timing of the issuance or sale of the
Product or in the determination or calculation of the equation by which the
Product is to be converted into cash. S&P has no obligation or liability in
connection with the administration, marketing or trading of the Product.
S&P does not guarantee the accuracy and/or the completeness of the the S&P 500
Index, the S&P MidCap 400 Index and the S&P SmallCap 600 Index, or any data
included therein, and S&P shall have no liability for any errors, omissions or
interruptions therein. S&P makes no warranty, express or implied, as to the
results obtained by Licensee, owners of the Product or any other person or
entity from the use of the S&P 500 Index, the S&P MidCap 400 Index and the S&P
SmallCap 600 Index, or any data included therein. S&P makes no express or
implied warranties and expressly disclaims all warranties of merchantability or
fitness for a particular purpose or use with respect to the S&P 500 Index, the
S&P MidCap 400 Index and the S&P SmallCap 600 Index, or any data included
therein. Without limiting any of the foregoing, in no event shall S&P have any
liability for any special, punitive, indirect or consequential damages
(including lost profits), even if notified of the possibility of such damages.
OTHER PERFORMANCE INFORMATION
Performance information for Class A and B shares for the Funds may be compared
to various unmanaged indexes, such as Morgan Stanley's EAFE and World, Dow Jones
Industrial and Averages, the S&P 500, S&P MidCap 400, S&P Small Cap or Lehman
Brothers High Yield Index, Lehman Brothers Aggregate or other Lehman Bond
Indexes, as well as indices of similar mutual funds, and various foreign country
and currency indices. The Funds may include in their advertising rankings
published by recognized statistical services or publishers such as Morningstar,
Lipper Analytical Services, Inc., Weisenberger Investment Companies Services or
rankings shares published by other comparable national services that rank mutual
funds. They also may use information from publications such as Barron's,
Business Week, The Economist, Financial World, Forbes, Fortune, Kiplinger's
Personal Finance, Money, Smart Money, the Star, The Wall Street Journal or
Worth, and from videotapes of television shows and interviews involving
investment experts, including employees of the adviser and/or sub-adviser for
The AAL International Fund. Advertisements may depict performance graphically.
FINANCIAL STATEMENTS
The AAL Mutual Funds (Trust) has filed audited financial statements, notes to
financial statements and report of independent accountants for the Trust for the
fiscal year ended April 30, 2000, which are incorporated by reference from the
Annual Report to Shareholders dated April 30, 2000, into this Statement of
Additional Information. These include the audited financial statements below:
1. Schedules of Investments as of April 30, 2000.
2. Statement of Assets and Liabilities as of April 30, 2000.
3. Statement of Operations for fiscal year ended April 30, 2000.
4. Statement of Changes in Net Assets for fiscal year ended April 30, 2000.
5. Notes to Financial Statements
