Semi-Annual Report
October 31, 1996
The AAL U. S. Government
Zero Coupon Target Funds
Series 2001 and 2006
Helping You Build a Better Financial Future
[AAL Logo]
THE AAL MUTUAL FUNDS
<PAGE>
[AAL Logo]
THE AAL MUTUAL FUNDS
222 West College Avenue, Appleton, WI 54919-0007
800-553-6319
World Wide Web: http://www.aal.org
e-mail address: [email protected]
BOARD OF TRUSTEES John H. Pender--Chairman of the Board
Richard L. Gady
Lawrence M. Woods
D.W. Russler
F. Gregory Campbell
Richard L. Gunderson
Ronald Anderson
OFFICERS H. Michael Spence--President
Robert G. Same--Vice President & Secretary
Terrance P. Gallagher--Treasurer
Charles D. Gariboldi, Jr.--Assistant Treasurer
Joseph F. Wreschnig--Assistant Secretary
INVESTMENT ADVISER
AND DISTRIBUTOR AAL Capital Management Corporation
222 West College Avenue
Appleton, WI 54919-0007
CUSTODIAN, TRANSFER AGENT
AND DISBURSING AGENT Firstar Trust Company
615 East Michigan Street
P.O. Box 2981
Milwaukee, WI 53201-2981
LEGAL COUNSEL Quarles & Brady
411 East Wisconsin Avenue
Milwaukee, WI 53202
INDEPENDENT ACCOUNTANTS Price Waterhouse LLP
Suite 1500
100 East Wisconsin Avenue
Milwaukee, WI 53202
<PAGE>
[AAL logo]
THE AAL MUTUAL FUNDS
December 15, 1996
Dear AAL Target Funds Shareholder:
We are pleased to provide you with the updated semi-annual report for The AAL
U.S. Government Zero Coupon Target Funds. In addition to the Target Funds, which
are no longer open to investors, we also offer eight other diverse portfolios to
help you plan for your financial future, including:
EQUITY
o The AAL Capital Growth Fund for capital appreciation with the potential
for income
o The AAL Mid Cap Stock Fund for capital appreciation
o The AAL Small Cap Stock Fund for capital appreciation
o The AAL International Fund for capital growth
o The AAL Utilities Fund for current income, long-term growth of income and
capital appreciation
INCOME
o The AAL Bond Fund for current income
o The AAL Municipal Bond Fund for current income exempt from federal income
taxes
o The AAL Money Market Fund for preservation of capital and liquidity
To invest in these Funds, you can either use new dollars to purchase shares, or
you can use our exchange privilege to exchange your current Target Fund shares
for those of another Fund--at no additional cost to you. For more information
about these Funds and the exchange privilege, contact your local Registered
Representative or call our Mutual Fund Service Center at 800-553-6319 for your
complimentary prospectus kit.
Thank you again for your continued confidence in The AAL Mutual Funds. We look
forward to serving you again in the near future.
Sincerely,
/s/ H. Michael Spence
H. Michael Spence
President
<PAGE>
The AAL U.S. Government Zero Coupon Target Funds are no longer open to
investors. However, we will continue to provide you with semi-annual financial
statements for these Funds. We are also providing you with a copy of the
semi-annual financial statements for The AAL Capital Growth, Mid Cap Stock,
Small Cap Stock, International, Utilities, Bond, Municipal Bond and Money Market
Funds.
These Funds Seek: High investment return from U.S. Government securities that
provide investors with a reasonable assurance that they will receive a target
dollar amount predictable at the time of investment.
The AAL U.S. Government
Zero Coupon Target Fund:
Series 2001
SCHEDULE OF INVESTMENTS AS OF OCTOBER 31, 1996
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Principal Long-Term Yield to Maturity Market
Amount Obligations (100.0%) Maturity Date Value
- -----------------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT ZERO
COUPON BONDS
Separate Trading of Registered Interest
and Principal of Securities
$2,438,000 (amortized cost basis $1,712,745) 6.09% 11/15/2001 $1,802,070
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
The AAL U.S. Government
Zero Coupon Target Fund:
Series 2006
SCHEDULE OF INVESTMENTS AS OF OCTOBER 31, 1996
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Principal Long-Term Yield to Maturity Market
Amount Obligations (100.0%) Maturity Date Value
- -----------------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT ZERO COUPON BONDS
Separate Trading of Registered Interest
and Principal of Securities
$2,938,000 (amortized cost basis $1,357,532) 6.54% 11/15/2006 $1,539,950
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
<S> <C> <C>
The AAL U.S. Government Zero Coupon
Target Target
Fund Fund
October 31, 1996 2001 2006
- -----------------------------------------------------------------------------------------------------------------------------
Assets
Investments, at Value
(Cost: $1,712,745 and $1,357,532 respectively) $1,802,070 $1,539,950
Prepaid Expenses 1,489 1,540
Receivable from Affiliate 1,277 2,067
Cash --- ---
------------ ----------
Total Assets $1,804,836 $1,543,557
========== ==========
Liabilities
Income Distributions Payable $84,440 $70,720
Accrued Expenses 15,968 14,327
------ ------
Total Liabilities 100,408 85,047
------- ------
Net Assets
Trust Capital (Beneficial Interest) 1,603,067 1,259,144
Accumulated Undistributed Net Income (Loss) (3,985) (3,491)
Net Unrealized Appreciation on Investments 89,325 182,418
Accumulated Net Realized Gain on Investments 16,021 20,439
------ -------
Total Net Assets 1,704,428 1,458,510
--------- ---------
Total Liabilities and Capital $1,804,836 $1,543,557
========== ==========
Shares of Beneficial Interest Outstanding
(Unlimited Number of Shares Authorized) 158,664 123,929
======= =======
Net Asset Value per Share $10.74 $11.77
====== ======
Maximum Public Offering Price $11.28 $12.36
====== ======
</TABLE>
<PAGE>
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
<S> <C> <C>
The AAL U.S. Government Zero Coupon
Target Target
Fund Fund
For the Six Months Ended October 31, 1996 2001 2006
- -----------------------------------------------------------------------------------------------------------------------------
Investment Income
Taxable Interest 62,235 $53,126
------ -------
Expenses
Audit and Legal Fees 3,344 3,294
Custodian Fees 152 156
Administrative Service Fees 1,622 1,622
Printing and Postage Expense 847 1,016
S.E.C. and State Registration Fees 902 951
Transfer Agent Fees 771 788
Trustees Fees and Expenses 1,820 1,820
Shareholder Maintenance Fee 58 60
Other Expenses 252 252
--- ---
Total Expenses 9,768 9,959
----- -----
Less Reimbursement from Adviser (2,545) (2,663)
------- -------
Total Net Expenses 7,223 7,296
----- -----
Net Investment Income 55,012 45,830
------ ------
Realized and Unrealized Gain on Investments
Net Realized Gain on Investments 8,590 12,977
Decrease in Unrealized Appreciation on Investments 21,567 40,509
------ ------
Net Realized and Unrealized Gains on Investments 30,157 53,486
------ ------
Net Increase in Net Assets Resulting from Operations $85,169 $99,316
======= =======
</TABLE>
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
The AAL U.S. Government Zero Coupon
Target Fund 2001 Target Fund 2006
<S> <C> <C> <C> <C>
Year Six Months Year Six Months
Ended Ended Ended Ended
4/30/96 10/31/96 4/30/96 10/31/96
Operations
Net Investment Income $109,062 $55,012 $90,289 $45,830
Net Realized Gain on Investments 11,450 8,590 16,358 12,977
Increase (Decrease) in Unrealized
Appreciation on Investments 40,152 21,567 59,474 40,509
------ ------ ------ ------
Net Increase in Net Assets
Resulting from Operations 160,664 85,169 166,121 99,316
------- ------ ------- -------
Distributions to Shareholders
Dividends from Net Investment Income (128,425) (55,012) (110,055) (45,830)
Capital Gains Distributions (6,784) --- (11,663) ---
------- -------- -------- --------
Total Distributions
to Shareholders (135,209) (55,012) (121,718) (45,830)
--------- -------- --------- --------
Trust Shares Transactions
Income Dividends Reinvested 123,680 --- 107,009 ---
Capital Gains Distributions Reinvested 6,654 -------- 11,579 --------
Redemption of Trust Shares (99,272) (136,763) (83,449) (74,679)
-------- --------- -------- --------
Net Increase (Decrease)
in Trust Capital 31,062 (136,763) 35,139 (74,679)
------ --------- ------ --------
Net Increase (Decrease)
in Net Assets 56,517 (106,606) 79,542 (21,193)
Net Assets Beginning of Period 1,754,517 1,811,034 1,400,161 1,479,703
--------- --------- --------- ---------
Net Assets End of Period $1,811,034 $1,704,428 $1,479,703 $1,458,510
========== ========== ========== ==========
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(A) ORGANIZATION
The AAL Mutual Funds (the "Trust") was organized as a Massachusetts Business
Trust on March 31, 1987, and is registered as an open-end diversified management
company under the Investment Company Act of 1940. The Trust commenced operations
on July 16,1987, and currently consists of The AAL Capital Growth, Mid Cap
Stock, Small Cap Stock, International, Utilities, Bond, Municipal Bond, Money
Market and U.S. Government Zero Coupon Target, Series 2001 and 2006 Funds. The
ten AAL Mutual Funds are collectively referred to as the "Funds".
On November 14, 1990, The AAL U. S. Government Zero Coupon Target Funds, Series
2001 and 2006, commenced operations. Effective June 1, 1993, the Board of
Trustees of The AAL Mutual Funds closed The AAL U.S. Government Zero Coupon
Target Funds, Series 2001 and 2006, to new shareholders and to additional
purchases of shares by existing shareholders.
(B) SIGNIFICANT ACCOUNTING POLICIES
The Funds' principal accounting policies are:
Valuation - Securities traded on national securities exchanges are valued at
last reported sales prices. All other securities are valued at the latest bid
quotation if such quotations are readily available. Otherwise, such securities
are valued at a fair value as determined in good faith by the Investment Adviser
under supervision of the Board of Trustees.
Federal Income Taxes - The Funds' policy is to comply with the requirements of
the Internal Revenue Code which are applicable to regulated investment companies
and to distribute substantially all of their taxable income to their
shareholders. The Funds accordingly paid no Federal income taxes and no Federal
income tax provision was required.
Distributions to Shareholders - Net investment income is distributed to each
shareholder as a dividend. Dividends from the Target Funds are declared daily
and distributed annually. Net realized gains from securities transactions, if
any, are distributed at least annually in the calendar year.
Other - For financial statement purposes, investment security transactions are
accounted for on trade date. Interest income is recognized on an accrual basis.
Discount is amortized over the life of the respective Bonds. Realized gains or
losses on sales are determined on a specific cost identification basis.
In accordance with Generally Accepted Accounting Principles, the Funds met the
requirements of Statement of Position 93-2 which requires that permanent
financial reporting and tax differences be reclassified to trust capital.
Use Of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
<PAGE>
NOTES TO FINANCIAL STATEMENTS--Continued
(C) INVESTMENT ADVISORY MANAGEMENT FEES AND TRANSACTIONS WITH
RELATED PARTIES
The Trust has entered into an Investment Advisory Agreement with AAL Capital
Management Corporation (the "Adviser") under which the two separate Target Fund
portfolios pay a fee for investment advisory services. The annual rate of fees
under the Investment Advisory Agreement are calculated at: .50 of I% of the
average daily net assets of The AAL U.S. Government Zero Coupon Target Funds,
Series 2001 and Series 2006. Payments under the Investment Advisory Agreement
were waived effective July 1, 1993. For the period May 1, 1995, through October
31, 1995, the Adviser entered into a sub-advisory agreement with Duff & Phelps
Investment Management Co. (the "Sub-Adviser"). The sub-advisory fee, which was
paid by the Adviser, was equal to: .10 of 1% of the average daily net assets for
The AAL Target Funds. Effective November 1, 1995, the agreement was terminated.
The Trust has entered into an Administrative Services Agreement with the Adviser
pursuant to which the Adviser provides certain administrative services. For the
six months ended, October 31, 1996 respectively, the Adviser received $3,333
from The AAL U.S. Government Zero Coupon Target Funds, Series 2001 and 2006. The
Trust has also contracted with AAL Capital Management Corporation for certain
shareholder maintenance services, effective April 1, 1995. These shareholder
services include, pre-processing and quality control of new accounts,
shareholder correspondence, account response and answering customer inquiries
regarding account status, options and facilitating shareholder telephone
transactions. Fees charged to the Fund under terms of the contract approximated
$4.08 per shareholder account for the six months ended October 31, 1996.
The Trust has adopted a distribution plan ("The Plan") pursuant to Rule 12b-1
under the Investment Company Act of 1940. The Plan authorizes the Trust to use a
portion of its assets to finance certain sales activities relating to the
distribution of shares to investors. Payments under The Plan are equal to a
maximum of .10 of 1% of the average daily net assets. Payments under The Plan
were waived effective July 1, 1993.
Trustees of the Trust not affiliated with AAL or the Adviser receive an annual
fee of $ 1,000 and $250 from the Target Funds for each meeting of the Board of
Trustees or Committee thereof, attended. No remuneration has been paid by the
Trust to any of the officers or affiliated Trustees of the Trust. In addition,
the Trust reimbursed unaffiliated Trustees for reasonable expenses incurred in
relation to attendance at the meetings.
Each Fund is charged for those expenses that are directly attributable to it,
such as advisory, custodian and certain shareholder service fees, while other
expenses that cannot be directly attributable to a Fund are allocated among the
Funds in proportion to the net assets of the respective Fund.
The Adviser reimburses the Funds for annual expenses in excess of the lowest
expense limitation imposed by the states. In addition to the reimbursement
required under the Investment Advisory Agreement, the Adviser voluntarily has
reimbursed The AAL Target Funds for all expenses in excess of 1% of average
daily net assets since inception.
AAL is the ultimate parent company for AAL Capital Management Corporation.
<PAGE>
NOTES TO FINANCIAL STATEMENTS--Continued
(D) SECURITY TRANSACTIONS
During the years ended April 30, 1996, and six months ended October 31, 1996,
purchases and sales of securities other than short-term obligations were as
follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Purchases Sales
Year Six Months Year Six Months
Ended Ended Ended Ended
4/30/96 10/31/96 4/30/96 10/31/96
Target Fund 2001 -- -- $117,412 147,268
Target Fund 2006 -- -- 105,398 84,629
</TABLE>
All purchases and sales of The AAL U.S. Government Target Funds, Series 2001 and
2006 were in U.S. government obligations.
Cost of investments is substantially the same for financial reporting purposes
and Federal income tax purposes.
The gross unrealized appreciation on investments at April 30, 1996, and October
31, 1996, were as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
4/30/96 10/31/96
Net Unrealized Net Unrealized
Appreciation (Depreciation) Appreciation Appreciation (Depreciation) Appreciation
Target Fund 2001 $67,758 -- $67,758 $89,325 -- $89,325
Target Fund 2006 141,909 -- 141,909 182,418 -- 182,418
</TABLE>
<PAGE>
(E) TRUST TRANSACTIONS
Transactions in trust shares were as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Target Fund 2001 Target Fund 2006
---------------- ----------------
Year Six Months Year Six Months
Ended Ended Ended Ended
4/30/96 10/31/96 4/30/96 10/31/96
Shares Purchases -- -- -- --
Income Dividends Reinvested 11,023 -- 8,386 --
Capital Gains Reinvested 589 -- 902 --
Shares Redeemed (9,140) (13,045) (6,842) (6,615)
------- -------- ------- -------
Net Increase (Decrease)
of Trust Shares 2,472 (13,045) 2,446 (6,615)
===== ======== ===== =======
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS
Target Fund 2001
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Period Year Year Year Year Year Six Months
Ended Ended Ended Ended Ended Ended Ended
Per Share Information 4/30/91 4/30/92 4/30/93 4/30/94 4/30/95 4/30/96 10/31/96
- --------------------- ------- ------- ------- ------- ------- ------- --------
Net Asset Value:
Beginning of Period $10.00 $10.25 $10.61 $12.25 $10.54 $10.37 $10.55
Income from Investment Operations
Net Investment Income 0.444 0.772 0.741 0.700 0.663 0.647 0.322
Net Realized and Unrealized
Gain (Loss) on Investments 0.250 0.360 1.679 (0.623) 0.000 0.335 0.190
----- ----- ----- ------- ----- ----- -----
Total from Investment Operations 0.694 1.132 2.420 0.077 0.663 0.982 0.512
----- ----- ----- ----- ----- ----- -----
Distributions from:
Net Investment Income (0.444) (0.772) (0.741) (0.700) (0.663) (0.761) (0.322)
Net Realized Capital Gains (d) --- --- (0.039) (1.087) (0.170) (0.041) ---
--------- --------- ------- ------- ------- ------- ------
Total Distributions (0.444) (0.772) (0.780) (1.787) (0.833) (0.802) (0.322)
------- ------- ------- ------- ------- ------- -------
Net Increase (Decrease)
in Net Asset Value 0.250 0.360 1.640 (1.710) (0.170) 0.180 0.190
Net Asset Value:
End of Period $10.25 $10.61 $12.25 $10.54 $10.37 $10.55 $10.74
Total Return (e) 6.97% 10.76% 23.27% (0.34%) 6.82% 9.23% 6.84%
Supplemental Data & Ratios
Net Assets, End of Period $668,211 $1,494,818 $2,760,499 $1,824,482 $1,754,517 $1,811,034 $1,704,428
Ratio of Expenses to
Average Net Assets (a)(b) 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 0.82%
Ratio of Net Investment Income
to Average Net Assets (a) (c) 10.21% 7.19% 6.38% 5.74% 6.50% 5.84% 6.21%
Portfolio Turnover Rate 0.00% 2.93% 2.79% 1.65% 0.00% 0.00% 0.00%
</TABLE>
(a) Calculated on an annualized basis.
(b) Computed after giving effect to Adviser's expense limitation undertaking. If
the Funds had paid all of their expenses, the ratio would have been as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Year Year Year Year Year Year Six Months
Ended Ended Ended Ended Ended Ended Ended
4/30/91 4/30/92 4/30/93 4/30/94 4/30/95 4/30/96 10/31/96
The AAL U.S. Government Target Fund
Series 2001 13.27% 7.32% 4.60% 2.33% 2.00% 1.74% 1.10%
The AAL U.S. Government Target Fund 17.44% 10.36% 6.19% 6.19% 2.49% 2.07% 1.37%
Series 2006
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS
Target Fund 2006
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Period Year Year Year Year Year Period
Ended Ended Ended Ended Ended Ended Ended
Per Share Information 4/30/91 4/30/92 4/30/93 4/30/94 4/30/95 4/30/96 10/31/96
- --------------------- ------- ------- ------- ------- ------- ------- --------
Net Asset Value:
Beginning of Period $10.00 $10.31 $10.42 $12.52 $10.96 $10.93 $11.33
Income from Investment Operations
Net Investment Income 0.473 0.824 0.795 0.740 0.734 0.711 0.356
Net Realized and Unrealized
Gain (Loss) on Investments 0.310 0.116 2.114 (0.567) 0.184 0.648 0.440
----- ----- ----- ------- ----- ----- -----
Total from Investment Operations 0.783 0.940 2.909 0.173 0.918 1.359 0.796
----- ----- ----- ----- ----- ----- -----
Distributions from:
Net Investment Income (0.473) (0.824) (0.795) (0.740) (0.734) (0.865) (0.356)
Net Realized Capital Gains (d) --- (0.006) (0.014) (0.993) (0.214) (0.094) ---
------- ------- ------- ------- ------- ------- ---
Total Distributions (0.473) (0.830) (0.809) (1.733) (0.948) (0.959) (0.356)
------- ------- ------- ------- ------- ------- -------
Net Increase (Decrease)
in Net Asset Value 0.310 0.110 2.100 (1.560) (0.030) 0.400 0.440
Net Asset Value:
End of Period $10.31 $10.42 $12.52 $10.96 $10.93 $11.33 $11.77
------ ------ ------ ------ ------ ------ ------
Total Return (e) 7.86% 8.73% 28.44% 0.18% 9.05% 11.80% 9.08%
Supplemental Data & Ratios
Net Assets, End of Period $451,758 $1,066,226 $1,951,566 $1,364,890 $1,400,161 $1,479,703 $1,458,510
Ratio of Expenses to
Average Net Assets (a)(b) 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00%
Ratio of Net Investment Income
to Average Net Assets (a)(c) 10.70% 7.68% 6.79% 5.86% 6.95% 5.83% 6.30%
Portfolio Turnover Rate 2.78% 2.31% 5.44% 1.05% 0.00% 0.00% 0.00%
</TABLE>
(c) If the Funds had paid all of their expenses the ratio would have been as
follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Year Year Year Year Year Year Six Months
Ended Ended Ended Ended Ended Ended Ended
4/30/91 4/30/92 4/30/93 4/30/94 4/30/95 4/30/96 10/31/96
The AAL U.S. Government Target Fund
Series 2001 (2.06%) 0.87% 2.78% 4.41% 5.51% 5.10% 5.92%
The AAL U.S. Government Target Fund
Series 2006 (5.75%) (1.68%) 1.60% 3.72% 5.46% 4.76% 5.93%
</TABLE>
(d) 100% of distributions from net realized capital gains during the fiscal
year ended April 30, 1996, were long term.
(e) Total returns are based on net amount invested for a six month period.
