Table of Contents
USAA Family of Funds 1
Message from the President 2
Investment Review 4
Message from the Manager 5
Financial Information:
Independent Auditors' Report 7
Statement of Assets and Liabilities 8
Portfolio of Investments in Securities 9
Notes to Portfolio of Investments 14
Statement of Operations 15
Statements of Changes in Net Assets 16
Notes to Financial Statements 17
Important Information:
Through our ongoing efforts to reduce expenses and respond to
shareholder requests, your annual and semiannual report mailings are now
"streamlined." One copy of each report will be sent to each address,
instead of our previous practice of sending one report to every
registered owner. For many shareholders and their families, this
eliminates duplicate copies, saving paper and postage costs to the Fund.
If you are the primary shareholder on at least one account, prefer not
to participate in streamlining, and would like to continue receiving one
report per registered account owner, you may request this in writing to:
USAA Investment Management Company
Attn: Report Mail
9800 Fredericksburg Road
San Antonio, TX 78284-8916
or phone a Mutual Fund Representative at 1-800-531-8448 during business
hours.
This report is for the information of the shareholders and others who
have received a copy of the currently effective prospectus of the USAA
Short-Term Bond Fund, managed by USAA Investment Management Company
(IMCO). It may be used as sales literature only when preceded or
accompanied by a current prospectus which gives further details about
the fund.
USAA with the eagle is registered in the U.S. Patent & Trademark Office.
(copyright)1995, USAA. All rights reserved.
USAA Family of Funds Performance Summary
If you own only one or two USAA funds, you may not be aware of the
performance of our other funds. This summary is a snapshot of the
performance of all 29 funds by investment objective as of June 30, 1995.
If you're interested in more information, please call us at
1-800-531-1087 for a prospectus. Please read the prospectus carefully
before investing.
<TABLE>
<CAPTION>
Average Annual Total Return**
Investment Inception Since 7-Day 30-Day***
Objective Date 1 yr 5 yrs 10 yrs Inception Simple SEC
Capital Appreciation
<S> <C> <C> <C> <C> <C> <C> <C>
Aggressive Growth 10/19/81 39.72 11.12 9.78 - - -
Emerging Markets 11/7/94 - - - (.50 ) - -
Gold 8/15/84 6.88 4.66 2.86 - - -
Growth 4/5/71 26.34 12.37 11.75 - - -
Growth & Income 6/1/93 21.19 - - 10.49 - -
International 7/11/88 4.23 7.89 - 9.33 - -
World Growth 10/1/92 7.88 - - 11.71 - -
Asset Allocation
Growth and Tax
Strategy**** 1/11/89 11.09 8.59 - 8.93 - 4.06
Cornerstone
Strategy**** 8/15/84 9.25 9.24 12.00 - - -
Income - Taxable
GNMA 2/1/91 11.00 - - 8.08 - 6.79
Income 3/4/74 15.07 10.00 10.04 - - 6.87
Income Stock 5/4/87 19.52 12.26 - 11.44 - -
Short-Term Bond 6/1/93 8.40 - - 4.83 - 6.77
Income - Tax Exempt
Long-Term 3/19/82 7.28 7.66 8.60 - - 5.79
Interediate-Term 3/19/82 7.60 7.71 7.82 - - 5.22
Short-Term 3/19/82 5.23 5.52 5.76 - - 4.36
California Bond* 8/1/89 8.96 7.66 - 7.23 - 5.79
Florida Tax-Free Income*10/1/93 7.82 - - .09 - 5.71
New York Bond* 10/15/90 7.36 - - 8.65 - 5.60
Texas Tax-Free Income* 8/1/94 - - - 8.40 - 5.63
Virginia Bond* 10/15/90 8.79 - - 8.31 - 5.78
Money Market
Money Market 2/2/81 5.33 4.76 6.06 - 5.75 -
Tax Exempt Money Market 2/6/84 3.34 3.57 4.45 - 3.82 -
Treasury Money Market
Trust 2/1/91 5.06 - - 4.01 5.69 -
California Money Market* 8/1/89 3.31 3.36 - 3.71 3.74 -
Florida Tax-Free Money
Market* 10/1/93 3.23 - - 2.72 3.74 -
New York Money Market* 10/15/90 3.15 - - 2.98 3.69 -
Texas Tax-Free Money
Market* 8/1/94 - - - 3.06 3.72 -
Virginia Money Market* 10/15/90 3.25 - - 3.18 3.61 -
</TABLE>
* Shares of the state funds are authorized for sale only to residents of
the states listed above.
** Total return equals income yield plus share price change and assumes
reinvestment of all dividends and capital gain distributions. No
adjustment has been made for taxes payable by shareholders on their
reinvested dividends and capital gain distributions. The performance
data quoted represents past performance and is not an indication of
future results. Investment return and principal value of an investment
will fluctuate, and an investor's shares, when redeemed, may be worth
more or less than their original cost.
An investment in any money market fund is neither insured nor guaranteed
by the U.S. government and there is no assurance that any of the funds
will maintain a stable net asset value of $1 per share.
Some tax-exempt income may be subject to state or local taxes or the
federal alternative minimum tax.
Foreign investing is subject to additional risks, which are discussed in
the funds' prospectuses.
*** Calculated as prescribed by the Securities and Exchange Commission.
**** Formerly known as Balanced Portfolio Fund and Cornerstone Fund,
respectively.
Message from the President
" . . . I did decide to practice one
thing I have preached for many years."
Most of these messages look back at events. This one looks forward.
On January 29, 1995, my wife and I became grandparents. Karl Joseph
Marbach was born to Alexandra, my wife's daughter, and her husband
Keith Marbach. When my wife learned of the name Alexandra and Keith
had chosen, she smiled. She noted that my middle names are Joseph Carl,
and she said, "I think this kid's college education is secure."
"Secure" may be an exaggeration, but I did decide to practice one thing
I have preached for many years. I told Alexandra to get the little fellow
a social security number, and as soon as she furnished that to me (well,
almost as soon), I opened an InveStart((registered trademark)) account for
Karl Joseph. This account, in the USAA Income Stock Fund, was opened for
$100, and will have $50 per month added to it by an electronic funds
transfer from my checking account.
InveStart is a program that we have offered for many years. For now it
is available for use with the Income Stock Fund, Cornerstone Strategy
Fund and Money Market Fund.(1) That lineup will soon expand. We
originally intended it for young USAA members as a good way to start
investing. We found, however, that many grandparents were using it as I
just did.
The effect for Karl Joseph can be quite powerful. It is well documented
that the stock market, as measured by the S&P 500 stock index, has
produced a total return of 10% for the last 18 years ended July 31, 1995
(Source: Lipper Analytical Services, Inc.).(2)
The chart on the next page shows the growth of an account with a $100
initial investment and $50 subsequent monthly investments for 18 years
at an 8% return - a hypothetical figure based upon and more conservative
than historical results. It is for illustrative purposes only and should
not be considered an indication of fund performance by any of the USAA
Family of Funds.
[Photograph of Michael J. C. Roth, President and Chairman of the Board
appears here]
A systematic plan like this doesn't assure a profit or protect against
loss in declining markets. Since such a plan involves continuous investment
in securities regardless of fluctuating price levels of such securities,
you should consider your financial ability to continue purchases through
periods of low and high price levels.
[A graph is shown here which shows the growth of an account with a $100
initial investment and $50 subsequent monthly investments for 18 years
at an 8% return - a hypothetical figure based upon and more conservative
than historical results. The horizontal axis shows the years, and the
vertical axis shows the dollar amount. The beginning value is $100 and the
ending value is $24,209.]
In 18 years, college will cost more than it does now. This sum today
would go a long way toward an education in an in-state public university.
In 18 years it will not buy as much education as it does today, but it
will be quite meaningful. If we add to the cash flow on birthdays, or if
other relatives kick in, it will be even more meaningful. And it
is relatively painless.
I promise to keep you posted on the progress of Karl Joseph's education
fund. This is not theoretical; it is real.
Sincerely,
Michael Joseph Carl Roth
President and
Vice Chairman of the Board
(1)An investment in a money market fund is neither insured nor
guaranteed by the U.S. government, and there can be no assurance that
the fund will maintain a stable net asset value of $1 per share. Please
read the prospectus carefully before you invest or send money.
(2)Past performance is no guarantee of future results.
Hypothetical Illustration:
Investment Review
Short-Term bond fund
OBJECTIVE: High current income consistent with preservation of
principal.
Types of Investments: A broad range of investment-grade debt securities.
7/31/95
Net Assets $76.2 Million
Net Asset Value Per Share 9.87
The 30-Day SEC Yield, calculated as prescribed by the Securities and
Exchange Commission, was 6.70% based on the July 31, 1995, offering
price. On that date, the weighted average maturity of the portfolio
was 2.8 years.
Average Annual Total Return as of 7/31/95
1 Year 7.90%
Since inception on June 1, 1993 4.79%
[A graph is shown here which is a comparison of the change in value
of a $10,000 investment, for the period of 6/1/93 to 7/31/95, with
dividends and capital gains reinvested. The ending value of each item
graphed is as follows: Lehman Brothers 1-3 Yr. Govt./Corp. Index -
$11,077, USAA Short-Term Bond Fund - $11,070 and the Lipper Short
Investment Grade Debt Avg. - $10,952.]
The Lehman Brothers 1-3 Year Government/Corporate Index is an unmanaged
index made up of all the government, agency, and corporate bonds longer
than one year and less than three years. The Lipper Short Investment
Grade Debt Average is the average performance level of all Short Investment
Grade Debt Funds, as reported by Lipper Analytical Services, an independent
organization that monitors the performance of mutual funds.
Total return equals income yield plus share price change and assumes
reinvestment of all dividends and capital gain distributions. No
adjustment has been made for taxes payable by shareholders on their
reinvested income dividends and capital gain distributions. The
performance data quoted represents past performance and is not an
indication of future results. Investment return and principal value of
an investment will fluctuate, and an investor's shares, when redeemed,
may be worth more or less than their original cost.
Message from the Manager
[Photograph of Paul Lundmark, Portfolio Manager, appears here]
The Last Six Months
Since the last report on January 31, 1995, interest rates have declined
dramatically. The increases in overnight rates instituted by the Federal
Reserve Board in 1994 caused the economy to slow significantly. In
response, the Federal Reserve Board eased overnight rates by a quarter
of a percent in early July. The economy is now showing some signs of
life, but inflation seems well contained.
Portfolio Strategies
Given the bullish sentiment in the market, I lengthened the average
weighted maturity from 2.3 years as of January 31, 1995, to 2.8 years as
of July 31, 1995. I accomplished this by buying fixed-rate, corporate-debt
securities with longer maturities and by decreasing the combined percentage
of cash-equivalent and variable-rate demand notes from 49% to 43% of net
assets. Generally, when rates fall, securities with longer maturities will
show greater price appreciation.
I continue to hold a significant position in BBB-rated corporate bonds.
Investor demand is still high for BBB-corporate securities because of
their higher yields, so there is potential for them to perform
relatively well.
[A pie chart is shown here depicting the Portfolio Mix as of July 31,
1995 of the USAA Short-Term Bond Fund to be: Cash Equivalents - 43%,
BBB Rated Corporate Bonds - 49%, BB Rated Corporate Bonds - 5% and
A Rated Corporate Bonds - 3%]
While I have cut back on the percentage of cash-equivalents and
variable-rate demand notes, they still comprise a significant percentage
of the Fund. They provide stability to the net asset value and position
the Fund well if interest rates should start to increase.
I also want to report that the prices on the two dollar-denominated
holdings of Mexican companies, which comprise only 5.1% of the
portfolio, have rebounded since the January 31, 1995 report. Empresas La
Moderna and Fomento Economico Mexicano continue to be excellent
companies that can service their debt obligations without any problem.
Outlook
I always like to stress that it is impossible to predict the course
interest rates will take. However, the general feeling is that the
economy is not going into a recession nor should it be so robust as
to significantly increase inflation. In this environment, the Fund
should provide high current income balanced with minimal price volatility.
Percentages of the net assets in the portfolio of the investments
referenced in the Message from the Manager are as follows: Empresas La
Moderna 2.5% and Fomento Economico Mexicano 2.6%.
See page 9 for a complete listing of the Portfolio of Investments in
Securities.
Independent Auditors' Report
The Shareholders and Board of Directors
USAA Mutual Fund, Inc.:
We have audited the accompanying statement of assets and liabilities and
portfolio of investments in securities of the Short-Term Bond Fund of
USAA Mutual Fund, Inc. as of July 31, 1995, the related statement of
operations for the year ended July 31, 1995, the statements of changes
in net assets for the year ended July 31, 1995 and the ten-month period
ended July 31, 1994, and the financial highlights information presented
in note 6 to the financial statements for each of the periods in the
three-year period ended July 31, 1995. These financial statements and
the financial highlights information are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements and the financial highlights information based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
the financial highlights information are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. Our procedures
included confirmation of securities owned as of July 31, 1995, by
correspondence with the custodian and brokers. An audit also includes
assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the financial statements and the financial highlights
information referred to above present fairly, in all material respects,
the financial position of the Short-Term Bond Fund of USAA Mutual Fund,
Inc. as of July 31, 1995, the results of its operations for the year
ended July 31, 1995, the changes in its net assets for the year ended
July 31, 1995 and the ten-month period ended July 31, 1994, and the
financial highlights information for each of the periods in the
three-year period ended July 31, 1995, in conformity with generally
accepted accounting principles.
KPMG PEAT MARWICK LLP
San Antonio, Texas
September 5, 1995
Short-Term Bond Fund
Statement of Assets and Liabilities
(In Thousands)
July 31, 1995
Assets
Investments in securities, at market value
(identified cost of $74,984) $ 74,978
Cash 347
Receivables:
Capital shares sold 304
Interest 975
--------
Total assets 76,604
--------
Liabilities
Capital shares redeemed 302
USAA Transfer Agency Company 14
Accounts payable and accrued expenses 47
Dividends on capital shares 51
--------
Total liabilities 414
--------
Net assets applicable to capital shares outstanding $ 76,190
========
Represented by:
Paid-in capital $ 76,753
Accumulated net realized loss on investments (557)
Net unrealized depreciation of investments (6)
--------
Net assets applicable to capital shares outstanding $ 76,190
========
Capital shares outstanding 7,722
========
Net asset value, redemption price, and offering
price per share $ 9.87
========
See accompanying notes to financial statements.
Short-Term Bond Fund
Categories and Definitions
Portfolio of Investments in Securities
July 31, 1995
This year's Portfolio of Investments in Securities has a new format. The
securities are now divided into three categories - fixed rate
instruments, variable rate demand notes, and cash equivalents. We hope
this presentation enhances your understanding of the securities held in
the fund.
Fixed Rate Instruments - consist of bonds and notes. The coupon rate is
constant to maturity. Prior to maturity, the price of a fixed-rate
instrument generally varies inversely to the movement of interest rates. At
maturity, the security pays face value.
Variable Rate Demand Notes (VRDN) - provide the right, on any business
day, to demand, or put, the security for redemption at face value on
either that day or in seven days. The interest rate is adjusted at the
stipulated daily, weekly, or monthly interval to a rate that reflects
current market conditions. The VRDN's effective maturity is the next
put date. Most VRDNs possess a credit enhancement.
Cash Equivalents - consist of short-term obligations issued by banks,
corporations, and U.S. Government Agencies. The coupon rate is constant
to maturity. At maturity, the security pays face value.
Credit Enhancement (CRE) - adds the financial strength of the provider
to support the underlying obligor's debt service obligations and/or the put
option. The enhancement may be provided by either a high quality bank,
insurance company, or other corporation, or a collateral trust. Typically,
the rating agencies evaluate the security based upon the credit standing
of the credit enhancement.
Short-Term Bond Fund
Portfolio of Investments in Securities
(In Thousands)
July 31, 1995
<TABLE>
<CAPTION>
Principal Coupon Market
Amount Security Rate Maturity Value
------ -------- ---- -------- -----
Fixed Rate Instruments (55.3%)
Auto Parts
<S> <C> <C> <C> <C>
$ 2,500 Arvin Industries, Inc., Notes 6.88% 2/15/01 $ 2,425
--------
Banks
2,500 Capital One Bank, Bank Notes 8.13 2/27/98 2,580
2,500 Corporacion Andina de Foento,
Global Bonds 7.38 7/21/00 2,479
2,000 Summit Bank, Subordinated Notes 6.75 6/15/03 1,901
--------
6,960
--------
Beverages - Alcoholic
2,000 Fomento Economico Mexicano S.A.
de C.V., Notes 9.50 7/22/97 1,944(a)
--------
Broadcasters
1,500 Tele-Communications, Inc., Notes 9.88 4/01/98 1,604
--------
Electrical Equipment
3,000 Westinghouse Electric Corp.,
Global Notes 8.88 6/01/01 3,102
--------
Entertainment
3,000 Time Warner, Inc., Global Notes 7.45 2/01/98 3,035
--------
Finance - Business/Commercial
1,500 Great Lakes Power, Inc., Notes 8.90 12/01/99 1,573
--------
Healthcare - Miscellaneous
2,500 Caremark International, Inc.,
Notes 6.88 8/15/03 2,340
--------
Real Estate Investment Trusts
3,000 Developers Diversified Realty Corp.,
Senior Notes 7.63 5/15/00 2,993
3,000 Nationwide Health Properties, Inc.,
MTN 8.61 3/01/02 3,154
--------
6,147
--------
Retail Stores - Department Stores
2,000 K Mart Corp., MTN 7.76 7/01/02 2,013
--------
Retail Stores - General Merchandising
3,000 Woolworth Corp., Global Notes 7.00 6/01/00 2,960
--------
Textiles - Products
2,000 Fruit of the Loom, Inc., Senior
Notes 7.88 10/15/99 2,074
--------
Tobacco
2,000 Empresas La Moderna S.A. de C.V.,
Notes 10.25 11/12/97 1,932(a)
2,000 RJR Nabisco, Inc., Notes 8.00 7/15/01 2,000
--------
3,932
--------
Transportation - Miscellaneous
2,000 Kirby Corp., MTN 7.25 6/01/00 2,003
--------
Total fixed rate instruments (cost: $42,118) 42,112
--------
Variable Rate Demand Notes (39.5%)
Automobiles
3,000 Alabama IDA RB, Series 1994,
(CRE) 6.10 11/01/14 3,000(a)
--------
Buildings
3,000 Erie Funding I, Notes, (CRE) 6.10 11/01/16 3,000
2,650 KMS Research Laboratories, RB,
(CRE) 6.15 2/01/13 2,650
1,685 Scottsboro, AL, Industrial Development
Board RB, Series 1995, (CRE) 6.15 10/01/10 1,685
--------
7,335
--------
Entertainment
3,000 Denver, CO, Urban Renewal Auth. Tax
Increment RB, Series 1992B,
(CRE) 6.10 9/01/11 3,000
--------
Heavy Duty Trucks & Parts
3,340 Missouri Economic Development Export
IDA RB, Series 1993B, (CRE) 6.50 6/01/08 3,340
--------
Hotel/Motel
1,500 Birmingham, AL, Historical Preservation
Auth. Taxable RB, Series 1993,
(CRE) 6.57 5/01/18 1,500
2,100 Ramada Hotel Downtown, San Diego, CA,
DEB, (CRE) 6.35 2/01/96 2,100
3,000 Rockside Road Properties, Notes,
Series 1995, (CRE) 6.10 7/01/10 3,000
--------
6,600
--------
Housing - Multi/Family
640 Bartlett, IL, MFH RB, Series 1995,
(CRE) 6.45 3/01/25 640
3,450 Continental Valorem Corp., DEB,
Series 1988, (CRE) 6.65 6/01/13 3,450
--------
4,090
--------
Real Estate
2,750 Wynrose, Inc., Notes, Series 1995A,
(CRE) 6.15 11/01/05 2,750
--------
Total variable rate demand notes (cost: $30,115) 30,115
--------
Cash Equivalents (3.6%)
Finance - Consumer
2,751 General Motors Acceptance Corp.
(cost: $2,751) 5.90 8/01/95 2,751
--------
Total investments (cost: $74,984) $ 74,978
========
</TABLE>
Short-Term Bond Fund
Portfolio of Investments in Securities (continued)
July 31, 1995
Portfolio Summary By Industry
Buildings 9.6%
Banks 9.1
Hotel/Motel 8.7
Real Estate Investment Trusts 8.1
Entertainment 7.9
Housing - Multi/Family 5.4
Tobacco 5.2
Heavy Duty Trucks & Parts 4.4
Electrical Equipment 4.1
Automobiles 3.9
Retail Stores - General Merchandising 3.9
Finance - Consumer 3.6
Real Estate 3.6
Auto Parts 3.2
Healthcare - Miscellaneous 3.1
Textiles - Products 2.7
Retail Stores - Department Stores 2.6
Transportation - Miscellaneous 2.6
Beverages - Alcoholic 2.5
Broadcasters 2.1
Finance - Business/Commercial 2.1
-----
Total 98.4%
=====
Short-Term Bond Fund
Notes to Portfolio of Investments
July 31, 1995
General Notes
Market values of securities are determined by procedures and practices
discussed in note 1 to the financial statements.
The cost of securities for federal income tax purposes is approximately
the same as that reported in the financial statements.
The percentages shown represent the percentage of the investments to net
assets.
Portfolio Description Abbreviations
CRE Credit Enhanced
DEB Debentures
IDA Industrial Development Authority/Agency
MFH Multi-Family Housing
MTN Medium-Term Note
RB Revenue Bond
Specific Notes
(a) Securities hich are exempt from registration by Rule 144A under the
Securities Act of 1933 and when purchased were determined to be liquid.
Any resale of these securities in the United States will occur in an
exempt transaction to a qualified institutional buyer.
See accompanying notes to financial statements.
Short-Term Bond Fund
Statement of Operations
(In Thousands)
Year ended July 31, 1995
Net investment income:
Interest income $ 3,899
----------
Expenses:
Management fees 137
Transfer agent's fees 124
Custodian's fees 53
Postage 18
Shareholder reporting fees 10
Directors' fees 3
Registration fees 40
Audit fees 26
Legal fees 5
Other 6
----------
Total expenses before reimbursement 422
Expenses reimbursed (136)
----------
Total expenses after reimbursement 286
----------
Net investment income 3,613
----------
Net realized and unrealized gain (loss) on investments:
Net realized loss (205)
Change in net unrealized appreciation/depreciation
1,174
----------
Net realized and unrealized gain 969
----------
Increase in net assets resulting from operations $ 4,582
==========
See accompanying notes to financial statements.
Short-Term Bond Fund
Statements of Changes in Net Assets
(In Thousands)
Year ended July 31, 1995
and Ten-month period ended July 31, 1994
1995 1994
---- ----
From operations:
Net investment income $ 3,613 $ 1,621
Net realized loss on investments (205) (342)
Change in net unrealized appreciation/depreciation of
investments 1,174 (1,207)
--------- ---------
Increase in net assets resulting from operations 4,582 72
--------- ---------
Distributions to shareholders from:
Net investment income (3,613) (1,621)
--------- ---------
Net realized gains - (33)
--------- ---------
From capital share transactions:
Shares sold 61,901 63,856
Shares issued for dividends reinvested 3,174 1,469
Shares redeemed (38,082) (41,194)
-------- --------
Increase in net assets from capital share
transactions 26,993 24,131
---------- ----------
Net increase in net assets 27,962 22,549
Net assets:
Beginning of period 48,228 25,679
---------- ----------
End of period $ 76,190 $ 48,228
========== ==========
Change in shares outstanding:
Shares sold 6,373 6,420
Shares issued for dividends reinvested 327 149
Shares redeemed (3,927) (4,167)
---------- ---------
Increase in shares outstanding 2,773 2,402
========== =========
Authorized shares of $.01 par value 25,000 25,000
========== =========
See accompanying notes to financial statements.
Short-Term Bond Fund
Notes to Financial Statements
(In Thousands)
July 31, 1995
(1) Summary of Significant Accounting Policies
USAA MUTUAL FUND, INC. (the Company), registered under the Investment
Company Act of 1940, is a diversified, open-end management investment
company incorporated under the laws of Maryland consisting of seven
separate funds. The information presented in this annual report pertains
only to the Short-Term Bond Fund (the Fund).
On November 8, 1993, the Board of Directors of the Company voted to
change the Fund's fiscal year end from September 30 to July 31. The
financial information for the ten-month period ended July 31, 1994
reflects this change.
A. Security valuation - The value of each security is determined (as of
the close of trading on the New York Stock Exchange on each business
day the Exchange is open) as set forth below:
1. Over-the-counter securities are priced at the last sales price or, if
not available, at the average of the bid and asked prices.
2. Securities purchased with maturities of 60 days or less are stated at
amortized cost which approximates market value.
3. Other debt and government securities are valued each business day by
a pricing service (the Service) approved by the Fund's Board of Directors.
The Service uses the mean between quoted bid and asked prices or the last
sale price to price securities when, in the Service's judgement, these
prices are readily available and are representative of the securities'
market values. For many securities, such prices are not readily available.
The Service generally prices these securities based on methods which include
consideration of yields or prices of securities of comparable quality,
coupon, maturity and type, indications as to values from dealers in
securities, and general market conditions.
4. Securities which cannot be valued by the methods set forth above, and
all other assets, are valued in good faith at fair value, using methods
determined by the Manager under the general supervision of the Board of
Directors.
B. Federal taxes - The Fund's policy is to comply with the requirements
of the Internal Revenue Code applicable to regulated investment
companies and to distribute substantially all of its income to its
shareholders. Therefore, no federal income or excise tax provision is
required.
C. Investments in securities - As is common in the industry, security
transactions are accounted for on the date the securities are purchased
or sold (trade date). Gain or loss from sales of investment securities
is computed on the identified cost basis. Interest income is recorded
on the accrual basis. Discounts and premiums on securities are amortized
over the life of the respective securities.
(2) Line of Credit
The Fund participates with other USAA funds in a joint $150 million
short-term revolving loan agreement (the Agreement) through January 15,
1996, for temporary or emergency purposes, including the meeting of
redemption requests that might otherwise require the untimely
disposition of securities. Subject to availability under this Agreement,
the Fund may borrow up to 5% of the market value of its assets or 10% of
the Fund's assets taken at cost at the time of the borrowing, whichever
amount is less. Borrowings under this Agreement will bear interest at
.125% over the Federal Funds Rate as published by the Federal Reserve
Bank of New York or at .125% over the London Interbank Offered Rate. The
Fund had no borrowings under this Agreement during the year ended July
31, 1995.
(3) Distributions
Net investment income is accrued daily as dividends and distributed to
shareholders monthly. All net investment income available for
distribution was distributed at July 31, 1995. Distributions of realized
gains from security transactions not offset by capital losses are made
in the succeeding fiscal year. At July 31, 1995, the Fund had capital
loss carryovers for federal income tax purposes of approximately $557
which, if not offset by subsequent capital gains will expire in or
before 2003. It is unlikely that the Board of Directors of the Fund will
authorize a distribution of capital gains realized in the future until
the capital loss carryovers have been utilized or expire.
(4) Investment Transactions
Purchases and sales of securities, excluding short-term securities, for
the year ended July 31, 1995 were $85,652 and $53,552, respectively.
Gross unrealized appreciation and depreciation of investments as of July
31, 1995 was $428 and $434, respectively.
(5) Transactions with Manager
A. Management fees - The investment policy of the Fund and the
management of the Fund's portfolio is carried out by USAA Investment
Management Company (the Manager). The Fund's management fees are
computed at .24% of its annual average net assets.
The Manager has voluntarily agreed to limit the annual expenses of the
Fund to .50% of its annual average net assets.
B. Transfer agent's fees - USAA Transfer Agency Company, d/b/a USAA
Shareholder Account Services, an affiliate of the Manager, provides
transfer agent services to the Fund. Shareholder accounting service fees
are based on an annual charge per shareholder account plus out-of-pocket
expenses.
C. Underwriting agreement - The Company has an agreement with the
Manager for exclusive underwriting and distribution of the Fund's shares
on a continuing best efforts basis. This agreement provides that the
Manager will receive no fee or other remuneration for such services.
(6) Financial Highlights
Per share operating performance for a share outstanding throughout each
period is as follows:
<TABLE>
<CAPTION>
Ten-month Four-month
Year Ended Period Ended Period Ended
July 31, July 31, September 30,
1995 1994 1993**
---- ---- ----
<S> <C> <C> <C>
Net asset value at beginning of period $ 9.74 $ 10.08 $ 10.00
Net investment income .61 .37 .14
Net realized and unrealized gain (loss) .13 (.33) .08
Distributions from net investment income (.61) (.37) (.14)
Distributions of realized capital gains - (.01) -
-------- --------- --------
Net asset value at end of period $ 9.87 $ 9.74 $ 10.08
======== ========= ========
Total return (%)* 7.90 .39 2.19
Net assets at end of period (000) $ 76,190 $ 48,228 $ 25,679
Ratio of expenses to average net
assets (%) .50(b) .50(a,b) .50(a,b)
Ratio of net investment income to
average net assets (%) 6.34(b) 4.51(a,b) 4.21(a,b)
Portfolio turnover (%) 103.02 142.08 32.49
</TABLE>
* Assumes reinvestment of all dividend income and capital gain
distributions during the period.
** Fund commenced operations June 1, 1993.
(a) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
(b) The information contained in the above table is based on actual
expenses for the period, after giving effect to reimbursements of
expenses by the Manager. Absent such reimbursements the Fund's ratios
would have been:
<TABLE>
<CAPTION>
Ten-month Four-month
Year Ended Period Ended Period Ended
July 31, July 31, September 30,
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Ratio of expenses to average net
assets (%) .74 .87(a) 1.57(a)
Ratio of net investment income
to average net assets (%) 6.10 4.14(a) 3.14(a)
</TABLE>
