Table of Contents
USAA Family of Funds 1
Message from the President 2
Investment Review 4
Message from the Manager 5
Financial Information:
Distributions to Shareholders 7
Independent Auditors' Report 8
Statement of Assets and Liabilities 9
Portfolio of Investments in Securities 10
Notes to Portfolio of Investments in Securities 12
Statement of Operations 13
Statements of Changes in Net Assets 14
Notes to Financial Statements 15
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 Income 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) 1996, USAA. All rights reserved.
<TABLE>
USAA Family of Funds Performance Summary
<CAPTION>
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 33
funds by investment objective as of June 30, 1996.
Average Annual Total Return*
Investment Inception Since
Objective Date 1 yr 5 yrs 10 yrs Inception
<S> <C> <C> <C> <C> <C>
Capital Appreciation
Aggressive Growth 10/19/81 54.74 19.89 11.69 -
Emerging Markets(1) 11/7/94 13.17 - - 7.33
Gold(1) 8/15/84 7.30 7.62 6.05 -
Growth 4/5/71 22.12 15.53 11.13 -
Growth & Income 6/1/93 23.95 - - 14.68
International(1) 7/11/88 19.63 14.36 - 10.57
S&P 500 Index(4) 5/1/96 - - - 4.58
World Growth(1) 10/1/92 20.11 - - 13.87
Asset Allocation
Balanced Strategy 9/1/95 - - - 6.48
Cornerstone Strategy(1) 8/15/84 17.19 12.44 11.56 -
Growth and Tax Strategy(2)** 1/11/89 15.43 10.31 - 9.77
Growth Strategy(1) 9/1/95 - - - 23.85
Income Strategy 9/1/95 - - - 4.68
Income - Taxable
GNMA 2/1/91 4.23 7.63 - 7.36
Income 3/4/74 6.13 8.92 9.42 -
Income Stock 5/4/87 19.22 13.77 - 12.26
Short-Term Bond 6/1/93 5.51 - - 5.05
Income - Tax Exempt
Long-Term(2)** 3/19/82 6.74 7.36 7.74 -
Intermediate-Term(2)** 3/19/82 6.19 7.25 7.29 -
Short-Term(2)** 3/19/82 5.19 5.18 5.55 -
California Bond(2)** 8/1/89 8.36 7.59 - 7.39
Florida Tax-Free Income(2)** 10/1/93 6.48 - - 2.37
New York Bond(2)** 10/15/90 6.19 7.40 - 8.22
Texas Tax-Free Income(2)** 8/1/94 8.20 - - 8.65
Virginia Bond(2)** 10/15/90 6.55 7.65 - 8.00
Money Market
Money Market(3) 2/2/81 5.43 4.41 5.88 -
Tax Exempt Money Market(2,3)** 2/6/84 3.53 3.16 4.26 -
Treasury Money Market Trust(3) 2/1/91 5.27 4.17 - 4.24
California Money Market(2,3)** 8/1/89 3.45 3.04 - 3.67
Florida Tax-Free Money Market(2,3)** 10/1/93 3.39 - - 2.96
New York Money Market(2,3)** 10/15/90 3.44 2.87 - 3.06
Texas Tax-Free Money Market(2,3)** 8/1/94 3.35 - - 3.34
Virginia Money Market(2,3)** 10/15/90 3.29 2.98 - 3.20
</TABLE>
Non-deposit investment products offered by USAA Investment Management Company
are not insured by the FDIC, are not deposits or other obligations of, or
guaranteed by, USAA Federal Savings Bank, and are subject to investment risks,
including possible loss of the principal amount invested.
For more complete information about the mutual funds managed and distributed
by USAA IMCO, including charges and expenses, please call 1-800-531-8181 for a
prospectus. Read it carefully before you invest.
1 Foreign investing is subject to additional risks, which are discussed in the
funds' prospectuses.
2 Some income may be subject to state or local taxes or the federal
alternative minimum tax.
3 An investment in a money market fund is neither insured nor guaranteed by
the U.S. government and there is no assurance that any of the funds will be
able to maintain a stable net asset value of $1 per share.
4 S&P 500(registered trademark) is a trademark of The McGraw-Hill Companies,
Inc., and has been licensed for use. The product is not sponsored, sold or
promoted by Standard & Poor's, and Standard & Poor's makes no representation
regarding the advisability of investing in the product.
* 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 represent past
performance and are 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.
** IRAs are not available for tax-exempt funds. The Growth and Tax Strategy
Fund is not available as an investment for your IRA because the majority of
its income is tax exempt. California, Florida, New York, Texas, and Virginia
funds available to residents only.
Message from the President
"You are the master of your portfolio.
Tailor it to yourself."
In preparing this letter, I looked back at a "Letter to Shareholders" in an
annual report from the last presidential election season in 1992. At that
time, I was addressing themes that are still familiar - the state of the
economy, the budget deficit and the national debt, and inflation. These are
still current. But there are some interesting updates.
I noted then a mantra of politicians: Unless we balance the budget, the debt
burden will rise, interest rates will soar, and the economy will be weakened.
I also noted that during the '80s, our budget was heavily out of balance, our
debt did soar, but interest rates actually plummeted and the economy expanded
strongly. Now, to borrow from the venerable Paul Harvey, we have "the rest of
the story."
The 1992 letter noted that, "Interest rates are now lower than people can
believe. The 1991 year-end short-term interest rates of 3.5% represented
a 27-year low!" The election yielded a president who was not nearly as
conservative as his two predecessors. The result was a hefty tax hike, a
budget deficit cut in half in one term, a national debt that has quit growing
as a percentage of gross domestic product, and uh-oh, higher interest rates.
The short-term market rose from 3.5% at the end of `91 to over 5% now,
and the 3-year treasury bond's yield is about where it was in `91.
What does all this mean? It means, as I have noted often, the economy and
the markets are never explained simply. Getting the federal budget in balance
is a worthy goal, but it may not bring interest rates down, and it may not
strengthen the economy.
In the '92 letter, I posed a question that was on many minds, "Is a bear
market imminent?" My guidance, in answer to that question, is the same now as
it was then: Structure your portfolio at all times in a way that suits your
own desire for reward and tolerance for risk. For the vast majority of people,
that means a mixture of stocks, bonds and money market investments.
It is my belief that such a mixture would have taken an investor through the
good markets of 1993, the turbulence of 1994, and the super year of 1995.
And it still applies. You are the master of your portfolio. Tailor it to
yourself.
[A photo of Michael J.C. Roth appears here]
Sincerely,
Michael J.C. Roth
President and
Vice Chairman of the Board
INVESTMENT REVIEW
INCOME FUND
OBJECTIVE: Maximum current income without undue risk to principal.
TYPES OF INVESTMENTS: Income-producing securities selected for their high
yields relative to the risk involved.
7/31/96
Net Assets $1,737.3 Million
Net Asset Value Per Share $11.97
Average Annual Total Returns as of 7/31/96
1 Year 5.78%
5 Years 8.35%
10 Years 9.19%
[A graph is shown here which is a comparison of the change in value of a
$10,000 investment, for the period of 7/31/96, with dividends and capital
gains reinvested. The ending value of each item graphed is as follows:
USAA Income Fund - $24,097, Lehman Brothers Aggregate Bond Index - $22,581
and the Lipper Fixed Income Average - $21,512.]
The chart compares the change in value of a $10,000 hypothetical investment in
the Income Fund to the broad-based Lehman Brothers Aggregate Bond Index and
the Lipper Fixed Income Average. The Lehman Brothers Aggregate Bond Index is
an unmanaged index made up of a government/corporate index, a mortgage-backed
securities index, and an asset-backed securities index. The Lipper Fixed Income
Average shows the performance of all fixed-income 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
represent past performance and are 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
[A photo of J.W. Saunders, Jr., Portfolio Manager appears here]
General Discussion
The favorable bond market trend we reported in the semiannual report dated
January 31, 1996, was abruptly reversed by a surprisingly strong employment
report in February. Subsequent periodic reports of economic strength and
hints of potential inflation have sustained a rising trend in interest rates.
The gains in bond values from the decline in interest rates during 1995 have
eroded in the rising interest rate trend. Most of the damage was done
in four trading days with sharp price declines, one each in February, March,
April, and July. The magnitude of change in bond prices on these days has not
been seen in several years.
All bonds decline in price when interest rates rise. Because interest rates
usually increase as maturity lengthens, shorter maturity bonds decline less in
price than long maturity bonds, but income is lower. Our mortgage pass-through
securities with their 8 to 10 year average life have helped to reduce price
declines without giving up income. Our U.S. Treasury bonds, being longer term,
did not help. We have shifted some of these bonds into GNMA mortgage pass-
through securities. Current investment mix as percentages of net assets is
30.8% in U.S. Treasury bonds, 55.0% in agency mortgage pass-through
securities, 11.7% in high yield common stocks, and 1.1% in corporate bonds
and cash equivalents.
We have paid a monthly income dividend for several years, and although the
amount has varied from month to month, it has been fairly stable on a
quarterly basis. I would like to explain why. Interest income is accrued
daily, although it may be paid monthly (mortgage pass-throughs) or
semiannually (bonds). Common stocks pay dividends quarterly, but
this income is not accrued. Because the dividends on common stocks are not
paid evenly from month to month during a quarter, the monthly income available
for distribution has varied. Your board of directors has approved stabilizing
the Fund's monthly dividend by paying the accrued interest and expected
quarterly dividends on common stocks evenly throughout the year. While there
can be no guarantee that dividends will remain constant, monthly income
budgeting should now be simplified for our shareholders who take their
dividends in cash.
Outlook
Interest rates do fluctuate. Bond price volatility has magnified with the
current hypersensitivity to economic reports which show any strength in the
economy or sign of inflation - either of which would put pressure on further
upward movement of interest rates. We do not believe that inflation is on the
rise, so real interest rates (net of inflation) are still high. This should
eventually be recognized in the bond market, and it appears to be stabilizing
now as economic reports are being interpreted to forecast slower growth in the
second half of 1996. In the meantime, pursuing a high level of current income
continues to be our primary emphasis.
See page 10 for a complete listing of the Portfolio of Investments in
Securities
Top 10 Securities
(% of Net Assets)
Coupon % of
Rate % Net Assets
U.S. TREASURY BOND 7.9 22.6
GNMA 7.5 20.5
FNMA 7.5 11.8
U.S. TREASURY BOND 6.9 8.2
GNMA 7.0 5.1
FNMA 7.0 4.6
GNMA 6.5 4.4
GNMA 8.0 3.3
FNMA 8.0 2.7
FHLMC 8.0 2.3
Distributions to Shareholders
USAA Income Fund completed its fiscal year on July 31, 1996. As required by
Federal Law (Internal Revenue Code of 1986, as amended, and the Regulations
thereunder), the following sets forth per share data concerning the portions
of the dividend distributions which represent domestic dividend income
qualifying for the dividends received deduction, and taxable domestic interest
income for the year ended July 31, 1996.
The per share data on this schedule reflects distributions related to earnings
for the fiscal year ended July 31, 1996, including any distributions
subsequent to year end which relate to those earnings. Therefore, the per
share data on this table may not agree with other disclosures concerning
distributions which occurred during the fiscal year.
Dividend income - domestic (qualifying) $.1094
Interest income - taxable .7306
-------
TOTAL DISTRIBUTIONS $.8400
=======
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 Income Fund of USAA Mutual Fund,
Inc. as of July 31, 1996, the related statement of operations for the year
then ended, the statements of changes in net assets for each of the years
in the two-year period then ended, and the financial highlights information
presented in note 7 to the financial statements for each of the periods in
the five-year period then ended. 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, 1996, 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 Income Fund of USAA Mutual Fund, Inc. as of July 31,
1996, the results of its operations for the year then ended, the changes in its
net assets for each of the years in the two-year period then ended, and the
financial highlights information for each of the periods in the five-year
period then ended, in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
San Antonio, Texas
September 6, 1996
<TABLE>
Income Fund
Statement of Assets and Liabilities
(In Thousands)
<CAPTION>
July 31, 1996
<S> <C>
Assets
Investments in securities, at market value (identified cost of $1,739,815) $1,712,973
Cash 183
Receivables:
Capital shares sold 132
Dividends and interest 24,795
Securities sold 49,986
-----------
Total assets 1,788,069
-----------
Liabilities
Securities purchased 49,380
Capital shares redeemed 745
USAA Investment Management Company 353
USAA Transfer Agency Company 153
Accounts payable and accrued expenses 132
-----------
Total liabilities 50,763
-----------
Net assets applicable to capital shares outstanding $1,737,306
===========
Represented by:
Paid-in capital $1,768,200
Accumulated undistributed net investment income 301
Accumulated net realized loss on investments (4,353)
Net unrealized depreciation of investments (26,842)
------------
Net assets applicable to capital shares outstanding $1,737,306
============
Capital shares outstanding 145,190
============
Net asset value, redemption price, and offering price per share $ 11.97
============
</TABLE>
See accompanying notes to financial statements.
Income Fund
Portfolio of Investments in Securities
July 31, 1996
Market
Number Value
of Shares Security (000)
Common Stocks (11.7%)
1,200,000 Allegheny Power System, Inc. $ 35,100
800,000 American Electric Power Co., Inc. 33,200
1,100,000 CINergy Corp. 32,587
1,300,000 Houston Industries, Inc. 29,413
625,000 Long Island Lighting Co. 10,625
1,100,000 Northeast Utilities 13,613
480,000 Ohio Edison Co. 10,080
1,000,000 Public Service Enterprise Group, Inc. 26,125
400,000 Southwestern Public Service Co. 12,700
------------
203,443
------------
Corporate Obligations (0.8%)
Principal
Amount Coupon
(000) Rate Maturity
$ 1 Citibank, N.A. Mortgage Pass-Thru
Certificate, Series 1982A 14.00% 9/01/96 1
4,900 Consolidated Rail Corp. 9.75 6/15/20 5,930
2,000 Dial Corp. 10.50 5/15/06 2,369
3,350 Texas Eastern Transmission Corp. 10.00 10/01/11(a) 3,538
2,500 Texas Eastern Transmission Corp. 10.13 9/01/11(a) 2,634
--------
Total corporate obligations (cost: $13,033) 14,472
--------
U.S. Government & Agency Issues (85.8%)
Federal Home Loan Mortgage Corp. (2.6%)
5,813 7.50%, 10/01/19 5,743
38,716 8.00%, 3/01/17 - 1/01/21 39,093
--------
44,836
--------
Federal National Mortgage Assn. (19.1%)
83,047 7.00%, 9/01/22 - 9/01/23 $ 80,122
206,658 7.50%, 2/01/22 - 2/01/23 204,303
46,579 8.00%, 5/01/21 - 12/01/22 46,936
----------
331,361
----------
Government National Mortgage Assn. (33.3%)
81,798 6.50%, 6/15/23 - 2/15/24 76,446
91,710 7.00%, 5/15/23 - 9/15/23 88,142
361,144 7.50%, 9/15/22 - 7/15/26 355,600
57,248 8.00%, 3/15/22 - 5/15/24 57,716
----------
577,904
----------
U.S. Treasury Bonds (30.8%)
145,545 6.875%, 8/15/25 142,998
360,010 7.875, 2/15/21 392,748
----------
535,746
----------
Total U.S. Government & agency issues (cost: $1,521,053) 1,489,847
----------
Short-Term (0.3%)
Coupon
Rate Maturity
Commercial Paper
1,500 Ford Motor Credit Co. 5.27% 8/01/96 1,500
1,855 Heller Financial, Inc. 5.35 8/05/96 1,854
1,858 Heller Financial, Inc. 5.35 8/06/96 1,857
-----------
Total short-term (cost: $5,211) 5,211
-----------
Total investments (cost: $1,739,815) $1,712,973
===========
Income Fund
Notes to Portfolio of Investments in Securities
July 31, 1996
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.
Specific Notes
(a) Security is a sinking fund debenture.
See accompanying notes to financial statements.
Income Fund
Statement of Operations
(In Thousands)
Year ended July 31, 1996
Net investment income:
Income:
Dividends $ 15,203
Interest 111,674
----------
Total income 126,877
----------
Expenses:
Management fees 4,326
Transfer agent's fees 2,222
Custodian's fees 282
Postage 194
Shareholder reporting fees 43
Directors' fees 5
Registration fees 38
Audit fees 27
Legal fees 5
Other 44
----------
Total expenses 7,186
----------
Net investment income 119,691
----------
Net realized and unrealized loss on investments:
Net realized loss (4,198)
Change in net unrealized appreciation/depreciation (15,764)
-----------
Net realized and unrealized loss (19,962)
-----------
Increase in net assets resulting from operations $ 99,729
===========
See accompanying notes to financial statements.
Income Fund
Statements of Changes in Net Assets
(In Thousands)
Years ended July 31,
1996 1995
From operations:
Net investment income $ 119,691 $ 122,111
Net realized loss on investments (4,198) (204)
Change in net unrealized appreciation/
depreciation of investments (15,764) 62,076
------------ ------------
Increase in net assets resulting from
operations 99,729 183,983
------------ ------------
Distributions to shareholders from:
Net investment income (121,610) (122,518)
------------- ------------
From capital share transactions:
Proceeds from shares sold 202,369 200,959
Shares issued for dividends reinvested 99,177 99,380
Cost of shares redeemed (297,530) (325,567)
------------- -----------
Increase (decrease) in net assets from
capital share transactions 4,016 (25,228)
------------- -----------
Net increase (decrease) in net assets (17,865) 36,237
Net assets:
Beginning of period 1,755,171 1,718,934
------------- ------------
End of period $1,737,306 $1,755,171
============= ============
Undistributed net investment income
included in net assets:
Beginning of period $ 2,021 $ 2,428
============= =============
End of period $ 301 $ 2,021
============= =============
Change in shares outstanding:
Shares sold 16,317 17,308
Shares issued for dividends reinvested 8,028 8,577
Shares redeemed (24,069) (28,218)
------------ -------------
Increase (decrease) in shares outstanding 276 (2,333)
============ =============
Authorized shares of $.01 par value 200,000 200,000
============ =============
See accompanying notes to financial statements.
Income Fund
Notes to Financial Statements
July 31, 1996
(1) Summary of Significant Accounting Policies
USAA MUTUAL FUND, INC. (the Company), registered under the Investment Company
Act of 1940, as amended, is a diversified, open-end management investment
company incorporated under the laws of Maryland consisting of eight separate
funds. The information presented in this annual report pertains only to the
Income Fund (the Fund). The Fund's investment objective is maximum current
income without undue risk to principal.
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. Portfolio securities, except as otherwise noted, traded primarily on a
domestic securities exchange are valued at the last sales price on that
exchange.
2. Over-the-counter securities are priced at the last sales price or, if not
available, at the average of the bid and asked prices.
3. Securities purchased with maturities of 60 days or less are stated at
amortized cost which approximates market value.
4. 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.
5. 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. As a result of certain
permanent differences between book and tax basis accounting, reclassifications
have been made on the statement of assets and liabilities to increase
accumulated undistributed net investment income and increase accumulated net
realized loss on investments by approximately $199,000.
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. Dividend income is recorded on the ex-dividend date;
interest income is recorded on the accrual basis. Discounts and premiums on
short-term securities are amortized over the life of the respective securities.
Amortization of market discounts on long-term securities is recognized as
interest income upon disposition of the security to the extent there is a gain
on disposition.
D. Use of estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that may affect the reported amounts in the
financial statements.
(2) Lines of Credit
The Fund participates with other USAA funds in two joint short-term revolving
loan agreements totaling $850 million through January 14, 1997, one with USAA
Capital Corporation, an affiliate of the Manager ($750 million uncommitted),
and one with an unaffiliated bank ($100 million committed). The purpose of the
agreements is to meet temporary or emergency cash needs, including redemption
requests that might otherwise require the untimely disposition of securities.
Subject to availability under these agreements, the Fund may borrow up to a
maximum of 25% of its total assets at the lending institution's borrowing rate
plus a markup. The Fund had no borrowings under either of these agreements
during the year ended July 31, 1996.
(3) Distributions
Distributions of net investment income are made monthly. Distributions of
realized gains from security transactions not offset by capital losses are
made in the succeeding fiscal year or as otherwise required to avoid the
payment of federal taxes. At July 31, 1996, the Fund had capital loss
carryovers for federal income tax purposes of approximately $4,353,000 which,
if not offset by subsequent capital gains will expire between 2003 - 2005. 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, 1996 were $1,441,682,004 and $1,442,063,872, respectively.
Gross unrealized appreciation and depreciation of investments as of July 31,
1996 was $25,788,555 and $52,630,970, respectively.
(5) Transactions with Manager
A. Management fees - The investment policies of the Fund and management of the
Fund's portfolio are carried out by USAA Investment Management Company (the
Manager). The Fund's management fees are computed at .24% 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.
D. Brokerage services - USAA Brokerage Services, a discount brokerage service
of the Manager, may execute portfolio transactions for the Fund. The amount of
brokerage commissions paid to USAA Brokerage Services during the year ended
July 31, 1996 was $21,200.
(6) Transactions with Affiliates
USAA Investment Management Company is indirectly wholly owned by United
Services Automobile Association (the Association), a large, diversified
financial services institution. At July 31, 1996, the Association and its
affiliates (including related employee benefit plans) owned 18,678,462 shares
(12.9%) of the Fund.
Income Fund
Notes to Financial Statements (continued)
July 31, 1996
<TABLE>
<CAPTION>
(7) Financial Highlights
Per share operating performance for a share outstanding throughout each period
is as follows:
Ten-Month
Period Ended
Year Ended July 31, July 31, Year Ended September 30,
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Net asset value at
beginning of period $ 12.11 $ 11.67 $ 13.28 $ 12.76 $ 12.11
Net investment income .83 .84 .72 .90 .95
Net realized and
unrealized gain (loss) (.13) .45 (1.30) .52 .64
Distributions from net
investment income (.84) (.85) (.78) (.90) (.93)
Distributions of realized
capital gains - - (.25) - (.01)
------------ ------------ ------------ ----------- ------------
Net asset value at
end of period $ 11.97 $ 12.11 $ 11.67 $ 13.28 $ 12.76
============ ============ ============ =========== ============
Total return (%) * 5.78 11.64 (4.52) 11.58 13.72
Net assets at
end of period (000) $1,737,306 $1,755,171 $1,718,934 $1,932,064 $1,359,721
Ratio of expenses to
average net assets (%) .40 .41 .41(a) .41 .42
Ratio of net investment
income to average net
assets (%) 6.64 7.27 6.98(a) 7.00 7.78
Portfolio turnover (%) 81.26(b) 30.86(b) 25.36(b) 44.82 21.78
Average commission
rate paid per share $ .047
</TABLE>
* Assumes reinvestment of all dividend income and capital gain
distributions during the period.
(a) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
Income Fund
Notes to Financial Statements (continued)
July 31, 1996
(b) The Fund may simultaneously purchase and sell the same securities. These
transactions can be high in volume and are dissimilar to other trade activity
within the Fund. If these transactions were excluded from the calculation, the
portfolio turnover rate would be as follows:
Ten-Month
Period Ended
Year Ended July 31, July 31,
1996 1995 1994
Portfolio turnover (%) 44.69 9.09 16.79
Purchases and sales of
this type are as follows:
Purchases (000) $648,396 $360,943 $155,322
Sales (000) $649,193 $361,366 $155,497
