____________________________________________________
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 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 Income Stock
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
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*
<CAPTION>
______________________________________________________________________________________
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 Stock Fund
OBJECTIVE: Current income with the prospect of increasing dividend income and
the potential for capital appreciation.
Types of Investments: Common stocks of well-established, large companies with
above-average dividend yields.
________________________________________________________________
7/31/96
Net Assets $1,710.8 Million
Net Asset Value Per Share $15.85
________________________________________________________________
Average Annual Total Returns as of 7/31/96
1 Year 13.21%
5 Years 12.01%
Since inception on May 4, 1987 11.74%
________________________________________________________________
[A graph is shown here which is a comparison of the change in value of a
$10,000 investment, for the period of 5/4/87 to 7/31/96, with dividends
and capital gains reinvested. The ending value of each item graphed is as
follows: USAA Income Stock Fund - $27,962 and the S&P 500 Index - $29,462.]
The chart compares the change in value of a $10,000 hypothetical investment
in the Income Stock Fund and the broad-based S&P 500 Index which is an
unmanaged index representing the performance of a group of 500 widely held
publicly traded stocks. It is not possible to invest directly in the S&P
500 Index.
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
[Photo of the Portfolio Manager, Harry W. Miller, appears here.]
Performance
Your Fund, as of July 31, 1996, had net assets of $1.711 billion, as compared
to $1.644 billion at the time of our last report on January 31, 1996, and
$1.408 billion on July 31, 1995. The stock market, as represented by the S&P
500 Index(1), topped out in late May, was flat in June and dipped 4.4% in
July. Your Fund acted similarly, but was down 3.3% in July, demonstrating the
defensive nature of the portfolio.
The following holdings had outstanding performance in the last half of the
fiscal year: Portland General (electric power), Bankers Trust (banks), Philip
Morris (tobacco), Pacific Telesis (telephones), and Burnham Pacific Properties,
Developers Diversified, and Post Properties (real estate investment trusts).
The worst underperformers were: GTE, NYNEX and U.S. West Communications
(telephones), Unisys convertible preferred (computer systems), and Dun &
Bradstreet (publishing). Delta Airlines convertible and Time Warner convertible
were called. Other positions eliminated: Pennzoil (oil), Merryland & Investment
(REITs), Allstate (insurance), and Kaiser Aluminum (aluminum). New positions:
Browning Ferris convertible preferred (pollution control), Peoples Energy
(distribution & pipelines), Reckson Associates, Duke Realty and Evans
Withycombe (REITs), and Deluxe (specialty printing).
(1) The S&P 500 is an unmanaged index representing the average performance
of a group of 500 widely held, publicly traded stocks. It is not possible
to invest directly in the S&P 500 Index.
OUTLOOK
We will continue pursuing the increasing dividend trend for the calendar year
ending December 31, 1996, as we have every year since the inception of the
Fund in 1987.
___________________________________________
Increasing Dividends
Calendar Annual Income
Year Dividend per Share
--------- -------------------
1987 $.19*
1988 .48
1989 .57
1990 .65
1991 .68
1992 .70
1993 .71
1994 .75
1995 .77
1996 .39**
___________________________________________
* From inception on May 4, 1987
** Through June 30, 1996
We do not see overall inflation getting out of control as worker productivity
continues to remain high. We believe U.S. companies will continue to produce
positive earnings reports throughout 1996 as the economy moves forward. We
will continue to overweight the portfolio in electric power, telephones, money
center banks, oils and real estate investment trusts.
Top 10 Equity Holdings
(% of Net Assets)
__________________________________________
BRISTOL-MYERS SQUIBB CO. 4.6
PHILIP MORRIS COMPANIES, INC. 3.7
GTE CORP. 3.6
ALLEGHENY POWER SYSTEM, INC. 3.5
DOW CHEMICAL CO. 3.5
BANKERS TRUST
NEW YORK CORP. 3.4
CHRYSLER CORP. 3.3
NYNEX CORP. 3.3
OCCIDENTAL PETROLEUM
CORP. 3.3
J.C. PENNEY COMPANY, INC. 3.2
___________________________________________
Top 10 Industries
(% of Net Assets)
__________________________________________
REAL ESTATE
INVESTMENT TRUSTS 13.7
ELECTRIC POWER 12.3
TELEPHONES 9.9
TOBACCO 8.1
OIL - DOMESTIC 6.9
HEALTHCARE - DIVERSIFIED 6.5
BANK HOLDING COMPANIES -
MONEY CENTER 5.5
DISTRIBUTION & PIPELINES 3.7
CHEMICALS 3.5
AUTOMOBILES 3.3
__________________________________________
See page 10 for a complete listing of the Portfolio of Investments in
Securities.
Distributions to Shareholders
USAA Income Stock 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 short-term and long-term
capital gains 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) $ .7493
Dividend income - domestic (non-qualifying) .0207
Short-term capital gain
(treated as ordinary income) .0805
Long-term capital gain .4313
_________
TOTAL DISTRIBUTIONS $1.2818
=========
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 Stock 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 Stock 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
Income Stock Fund
Statement of Assets and Liabilities
(In Thousands)
July 31, 1996
<TABLE>
<CAPTION>
<S> <C>
Assets
Investments in securities, at market value (identified cost of
$1,533,703) $ 1,706,955
Cash 241
Receivables:
Capital shares sold 306
Dividends and interest 5,002
-----------
Total assets 1,712,504
-----------
Liabilities
Capital shares redeemed 584
USAA Investment Management Company 732
USAA Transfer Agency Company 215
Accounts payable and accrued expenses 204
-----------
Total liabilities 1,735
-----------
Net assets applicable to capital shares outstanding $ 1,710,769
===========
Represented by:
Paid-in capital $ 1,486,373
Accumulated undistributed net investment income 2,395
Accumulated net realized gain on investments 48,749
Net unrealized appreciation of investments 173,252
----------
Net assets applicable to capital shares outstanding $ 1,710,769
==========
Capital shares outstanding 107,920
==========
Net asset value, redemption price, and offering price per share $ 15.85
==========
See accompanying notes to financial statements.
</TABLE>
Income Stock Fund
Portfolio of Investments in Securities
July 31, 1996
Market
Number Value
of Shares Security (000)
- ---------- -------- --------
Common Stocks (79.6%)
Aerospace/Defense (1.3%)
600,000 B.F. Goodrich Co. $ 21,750
-------
Automobiles (3.3%)
2,000,000 Chrysler Corp. 56,750
-------
Bank Holding Companies - Major Regional (1.7%)
1,000,000 PNC Bank Corp. 29,125
-------
Bank Holding Companies - Money Center (3.4%)
800,000 Bankers Trust New York Corp. 57,500
-------
Chemicals (3.5%)
800,000 Dow Chemical Co. 59,500
-------
Distribution & Pipelines (3.7%)
1,010,000 National Fuel Gas Co. 34,087
1,000,000 NICOR, Inc. 28,375
42,600 Peoples Energy Corp. 1,326
--------
63,788
--------
Electric Power (12.3%)
2,050,000 Allegheny Power System, Inc. 59,962
503,300 Central Hudson Gas & Electric Corp. 14,973
1,500,000 Houston Industries, Inc. 33,938
426,100 IES Industries, Inc. 12,570
738,700 Portland General Corp. 26,224
400,000 Public Service Co. of Colorado 14,150
445,000 Southwestern Public Service Co. 14,129
800,000 Texas Utilities Co. 33,600
---------
209,546
---------
Healthcare - Diversified (6.5%)
600,000 American Home Products Corp. 34,050
900,000 Bristol-Myers Squibb Co. 77,962
----------
112,012
----------
Machinery - Diversified (1.3%)
600,000 Deere & Co. 21,450
----------
Oil - Domestic (5.3%)
300,000 Atlantic Richfield Co. 34,800
2,500,000 Occidental Petroleum Corp. 55,937
----------
90,737
----------
Oil - International (2.7%)
550,000 Texaco, Inc. 46,750
----------
Publishing (1.0%)
300,000 Dun & Bradstreet Corp. 17,250
----------
Real Estate Investment Trusts (13.7%)
400,000 Avalon Properties, Inc. 9,000
500,000 Beacon Properties Corp. 13,125
709,000 Burnham Pacific Properties, Inc. 8,242
275,000 Chelsea GCA Realty, Inc. 7,941
400,000 Developers Diversified Realty Corp. 12,550
400,000 Duke Realty Investments, Inc. 11,900
300,000 Evans Withycombe Residential, Inc. 6,112
600,000 First Industrial Realty Trust, Inc. 14,100
300,000 Gables Residential Trust 7,050
500,000 Glimcher Realty Trust 8,312
300,000 Health Care Property Investors, Inc. 10,125
250,000 Highwoods Properties, Inc. 6,906
400,000 Horizon Group, Inc. 8,300
650,000 Kimco Realty Corp. 18,119
375,000 Liberty Property Trust 7,453
724,800 Nationwide Health Properties, Inc. 16,127
250,000 Patriot American Hospitality, Inc. 7,094
350,000 Post Properties, Inc. 12,119
600,000 Public Storage, Inc. 12,825
20,000 Reckson Associates Realty Corp. 678
87,100 ROC Communities, Inc. 2,014
150,000 Shurgard Storage Centers, Inc. 3,544
124,000 South West Property Trust, Inc. 1,581
75,000 Starwood Lodging Trust 2,550
400,000 Storage USA, Inc. 13,400
100,000 Tanger Factory Outlet Centers, Inc. 2,350
200,000 Weeks Corp. 5,275
140,000 Weingarten Realty Investors, Inc. 5,635
---------
234,427
---------
Retail - General Merchandising (3.2%)
1,100,000 J.C. Penney Company, Inc. 54,725
---------
Savings & Loan Holding Companies (0.6%)
450,000 Great Western Financial Corp. 10,688
---------
Specialty Printing (0.4%)
200,000 Deluxe Corp. 7,375
---------
Telephones (9.9%)
1,500,000 GTE Corp. 61,875
1,250,000 NYNEX Corp. 56,094
1,075,000 Pacific Telesis Group 36,147
500,000 U S West Communications Group 15,187
---------
169,303
---------
Tobacco (5.8%)
600,000 Philip Morris Companies, Inc. 62,775
1,200,000 RJR Nabisco Holdings Corp. 36,900
---------
99,675
---------
Total common stocks (cost: $1,173,945) 1,362,351
----------
Preferred Stocks (14.5%)
Aluminum (1.6%)
600,000 Reynolds Metals Co., $3.31 cumulative convertible 27,075
----------
Auto Parts (0.6%)
700,000 Mascotech, Inc., $1.20 cumulative convertible 9,975
----------
Bank Holding Companies - Money Center (2.1%)
550,000 First Chicago NBD Corp. depositary shares "B",
5.75% cumulative convertible 35,957
---------
Computer Systems (2.0%)
1,150,000 Unisys Corp. depositary shares "A",
$3.75 cumulative convertible 33,781
----------
Office Equipment & Supplies (1.1%)
230,400 Alco Standard Corp. depositary shares "BB",
6.50% cumulative convertible 19,123
---------
Oil - Domestic (1.6%)
1,000,000 Sun Company, Inc. depositary shares "A",
$1.80 cumulative convertible 26,375
---------
Paper & Forest Products (2.3%)
1,617,700 James River Corp. depositary shares "P",
9.00% cumulative convertible 39,229
---------
Pollution Control (0.9%)
600,000 Browning-Ferris Industries, Inc.,
7.25% automatic exchangeable 15,975
---------
Tobacco (2.3%)
6,500,000 RJR Nabisco Holdings Corp. depositary shares "C",
$.60 cumulative exchangeable 39,813
---------
Total preferred stocks (cost: $258,201) 247,303
---------
Bonds (3.5%)
<TABLE>
<CAPTION>
Principal
Amount Coupon
(000) Rate Maturity
- ---------- ------ ----------
<C> <S> <C> <C> <C>
$ 1,520 Atlantic Richfield Co. Exchangeable Notes 9.00% 9/15/97 34,770
6,810 Cooper Industries, Inc. Convertible Debentures 7.05 1/01/15 7,151
19,053 Quanex Corp. Convertible Subordinated Debentures 6.88 6/30/07 18,290
-------
Total bonds (cost: $64,467) 60,211
--------
Short-Term (2.2%)
Discount Note
37,090 Federal Farm Credit Bank (cost: $37,090) 5.55 8/01/96 37,090
-----------
Total investments (cost: $1,533,703) $1,706,955
===========
</TABLE>
Income Stock 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.
See accompanying notes to financial statements.
Income Stock Fund
Statement of Operations
(In Thousands)
Year ended July 31, 1996
Net investment income:
Income:
Dividends $ 86,342
Interest 3,673
---------
Total income 90,015
---------
Expenses:
Management fees 8,097
Transfer agent's fees 2,679
Custodian's fees 233
Postage 365
Shareholder reporting fees 84
Directors' fees 5
Registration fees 108
Audit fees 27
Legal fees 5
Other 38
----------
Total expenses 11,641
----------
Net investment income 78,374
----------
Net realized and unrealized gain on investments:
Net realized gain 54,444
Change in net unrealized appreciation/depreciation 57,966
----------
Net realized and unrealized gain 112,410
-----------
Increase in net assets resulting from operations $ 190,784
===========
See accompanying notes to financial statements.
Income Stock Fund
Statements of Changes in Net Assets
(In Thousands)
Years ended July 31,
<TABLE>
<CAPTION>
1996 1995
------ -----
<S> <C> <C>
From operations:
Net investment income $ 78,374 $ 66,825
Net realized gain on investments 54,444 23,904
Change in net unrealized appreciation/depreciation of
investments 57,966 129,417
--------- --------
Increase in net assets resulting from operations 190,784 220,146
--------- --------
Distributions to shareholders from:
Net investment income (78,768) (67,497)
--------- ---------
Net realized gains (26,302) (19,454)
--------- ---------
From capital share transactions:
Proceeds from shares sold 319,925 236,760
Shares issued for dividends reinvested 96,884 80,246
Cost of shares redeemed (200,125) (231,854)
--------- ---------
Increase in net assets from capital share transactions 216,684 85,152
--------- ---------
Net increase in net assets 302,398 218,347
Net assets:
Beginning of period 1,408,371 1,190,024
---------- ----------
End of period $ 1,710,769 $1,408,371
============ ==========
Undistributed net investment income included in net assets:
Beginning of period $ 2,689 $ 3,361
============ ==========
End of period $ 2,395 $ 2,689
============ ==========
Change in shares outstanding:
Shares sold 20,238 17,039
Shares issued for dividends reinvested 6,184 5,811
Shares redeemed (12,616) (16,857)
------------ ----------
Increase in shares outstanding 13,806 5,993
============ ==========
Authorized shares of $.01 par value 135,000 135,000
============ ==========
See accompanying notes to financial statements.
</TABLE>
Income Stock 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 Stock Fund (the Fund). The Fund's investment objective is current
income with the prospect of increasing dividend income and the potential for
capital appreciation.
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. 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 decrease accumulated net
realized gain on investments by approximately $100,000.
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 quarterly. 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. Distributions of a short-term capital gain of
$.0463 per share and a long-term capital gain of $.4087 per share, declared
and paid in September 1996 are not reflected in the accompanying financial
statements.
(4) Investment Transactions
Purchases and sales of securities, excluding short-term securities, for the
year ended July 31, 1996 were $692,008,029 and $511,547,929, respectively.
Gross unrealized appreciation and depreciation of investments as of July 31,
1996 was $219,921,111 and $46,669,002, respectively.
(5) Transactions with Manager
A. Management fees - The investment policies of the Fund and management of the
Fund's portfolio is carried out by USAA Investment Management Company (the
Manager). The Fund's management fees are computed at .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.
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 $8,000.
(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 owned 4,818,329 shares (4.5%) of the Fund.
Income Stock Fund
Notes to Financial Statements (continued)
July 31, 1996
(7) Financial Highlights
Per share operating performance for a share outstanding throughout each period
is as follows:
<TABLE>
<CAPTION>
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 $ 14.96 $ 13.50 $ 14.95 $13.42 $ 12.63
Net investment income .77 .74 .60 .71 .71
Net realized and
unrealized gain (loss) 1.16 1.69 (1.12) 1.62 .78
Distributions from net
investment income (.77) (.75) (.74) (.71) (.70)
Distributions of realized
capital gains (.27) (.22) (.19) (.09) -
------- --------- -------- -------- -------
Net asset value at
end of period $ 15.85 $ 14.96 $ 13.50 $14.95 $13.42
======== ========= ======== ======== ========
Total return (%) * 13.21 18.83 (3.53) 18.05 12.14
Net assets at
end of period (000) $1,710,769 $1,408,371 $1,190,024 $1,043,686 $480,733
Ratio of expenses to
average net assets (%) .72 .75 .73(a) .70 .74
Ratio of net investment
income to average net
assets (%) 4.84 5.34 5.25(a) 5.43 5.99
Portfolio turnover (%) 32.38 34.94 24.82 26.98 15.79
Average commission
rate paid per share $ .050
(a) Annualized. The ratio is not necessarily indicative of 12 months
of operations.
* Assumes reinvestment of all dividend income and capital gain
distributions during the period.
</TABLE>
