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 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 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) 1996, 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 33
funds by investment objective as of June 30, 1996.
<TABLE>
<CATION>
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
Short-Term Bond Fund
OBJECTIVE: High current income consistent with preservation of principal.
Types of Investments: A broad range of investment-grade debt securities.
7/31/96
Net Assets $101.0 Million
Net Asset Value Per Share $9.79
The 30-Day SEC Yield, calculated as prescribed by the Securities and Exchange
Commission, was 6.63% based on the July 31, 1996, offering price. On that
date, the weighted average maturity of the portfolio was 2.7 years.
Average Annual Total Return as of 7/31/96
1 Year 5.62%
Since inception on June 1, 1993 5.05%
[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 7/31/96, with dividends
and capital gains reinvested. The ending value of each item graphed is as
follows: Lehman Brothers 1-3 Yr. Govt./Corp. Index - $11,690, USAA Short-
Term Bond Fund - $11,692 and the Lipper Short Investment Grade Debt
Avg. - $11,555.]
The chart compares the change in value of a $10,000 hypothetical investment
in the Short-Term Bond Fund to the broad-based Lehman Brothers 1-3 Year
Government/Corporate Index and the Lipper Short Investment Grade Debt Average.
The Lehman Index is an unmanaged index made up of government, agency, and
corporate bonds longer than one year and less than three years. The Lipper
Average shows the performance 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
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 photograph of Paul Lundmark, Portfolio Manager appears here]
The Fiscal Year
In the last half of the fiscal year which ended on July 31, 1996, there has
been a significant widening in the spread between interest rates for overnight
funds and five-year bonds (the predominant investment horizon for the Fund).
Even though inflation is at very low levels, the bond market appears to
believe that recent strong economic statistics could mean inflation is poised
to accelerate. The market has anticipated that the Federal Reserve Board will
have to raise overnight interest rates in an effort to slow economic growth
to a non-inflationary pace. These market perceptions have caused investors
to demand higher yields.
Portfolio Strategies
As the market sentiment turned bearish, I resisted dramatically shortening the
maturity of the portfolio. Interest rates could easily fall as rapidly as
they rose. I have not tried to time the markets, because over time no one has
consistently been successful in predicting the short-term movements in
interest rates.
We continue to hold significant positions of BBB-rated corporate securities in
the Fund for their attractive yields and variable rate demand notes (VRDNs)(1)
for their price stability.
I am pleased to note that the price of our holding in K Mart has rebounded
sharply. Recent developments at the company have resulted in a vastly improved
outlook.
Outlook
Until investors are confident of the Federal Reserve Board's course of action,
there will be uncertainty in the market. This means that the near-term prospects
are good for continued volatility in interest rates. Given this economic envi-
ronment, we believe the Fund is well-positioned to provide minimal price
volatility and high current income.
(1) A variable rate demand note (VRDN) represents borrowings payable on demand
and bearing interest tied to a money market rate.
See page 10 for a complete listing of the Portfolio of Investments in
Securities.
Portfolio Mix
% of Net Assets*
July 31, 1996
[A pie chart is shown here depicting the Portfolio Mix as of July 31, 1996 of
the USAA Short-Term Bond Fund to be: Var. Rate Demand Notes - 30.2%, Bonds/
Notes - 56.1%, U.S. Government Issues - 7.4% and Commercial Paper - 5.1%.]
*Percentages are of the Net Assets in the Portfolio and may or may not be equal
to 100%.
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, 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 6 to the financial statements for each
of the periods in the four-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 andthe 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 Short-Term Bond 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 four-year period then ended, in conformity with
generally accepted accounting principles.
KPMG PEAT MARWICK LLP
San Antonio, Texas
September 6, 1996
Short-Term Bond Fund
Statement of Assets and Liabilities
(In Thousands)
July 31, 1996
Assets
Investments in securities, at market value
(identified cost of $100,861) $ 99,822
Cash 106
Receivables:
Capital shares sold 71
Interest 1,321
-----------
Total assets 101,320
Liabilities -----------
Capital shares redeemed 108
USAA Investment Management Company 35
USAA Transfer Agency Company 19
Accounts payable and accrued expenses 47
Dividends on capital shares 79
-----------
Total liabilities 288
-----------
Net assets applicable to capital
shares outstanding $ 101,032
===========
Represented by:
Paid-in capital $ 102,448
Accumulated net realized loss on investments (377)
Net unrealized depreciation of investments (1,039)
-----------
Net assets applicable to capital
shares outstanding $ 101,032
============
Capital shares outstanding 10,323
============
Net asset value, redemption price, and offering
price per share $ 9.79
============
See accompanying notes to financial statements.
Short-Term Bond Fund
Categories and Definitions
Portfolio of Investments in Securities
July 31, 1996
Fixed Rate Instruments - consist of bonds and notes. The coupon rate isconstant
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 within 30 days. The interest rate is adjusted at a 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.
U.S. Government Issues - consist of negotiable debt obligations of the U.S.
government, secured by its full faith and credit.
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, 1996
Principal Coupon Market
Amount Security Rate Maturity Value
------ -------- ---- -------- -----
Fixed Rate Instruments (56.1%)
Bank Holding Companies - Other Major
$ 4,000 Provident Bank, Bank Notes 6.13% 12/15/00 $ 3,849
--------
Banks
4,000 Advanta National Bank, Bank Notes 6.45 10/30/00 3,883
4,500 Capital One Bank, Bank Notes 5.95 2/15/01 4,268
4,500 Corporacion Andina De Fomento,
Global Bonds 7.38 7/21/00 4,506
--------
12,657
--------
Electronics - Instrumentation
4,000 Tektronix, Inc., Notes 7.63 8/15/02 4,012
--------
Entertainment
4,500 Time Warner, Inc., Global Notes 7.45 2/01/98 4,525
--------
Finance - Business/Commercial
3,500 Great Lakes Power, Inc., Notes 8.90 12/01/99 3,674
--------
Healthcare - Miscellaneous
4,500 Caremark International, Inc.,
Notes 6.88 8/15/03 4,232
--------
Real Estate Investment Trusts
3,000 Developers Diversified Realty Corp.,
Senior Notes 7.63 5/15/00 3,000
4,500 Franchise Finance Corp. of America,
Senior Notes 7.00 11/30/00 4,406
3,000 Nationwide Health Properties,
Inc., MTN 8.61 3/01/02 3,113
4,500 TriNet Corporate Realty Trust,
Inc., Notes 7.30 5/15/01 4,466
--------
14,985
--------
Retail - General Merchandising
2,000 K Mart Corp., MTN 7.72 6/25/02 1,743
2,000 K Mart Corp., MTN 7.76 7/01/02 1,745
--------
3,488
--------
Tobacco
1,300 Empresas La Moderna S.A. de C.V.,
Notes 10.25 11/12/97 1,329(a)
4,000 RJR Nabisco, Inc., Notes 8.00 7/15/01 3,990
-------
5,319
--------
Total fixed rate instruments (cost: $57,779) 56,741
--------
Variable Rate Demand Notes (30.2%)
Automobiles
3,000 Alabama IDA RB, Series 1994 (CRE) 5.65 11/01/14 3,000(a)
-------
Buildings
2,807 Erie Funding I, Notes (CRE) 5.65 11/01/16 2,807
1,550 Montgomery, AL, Industrial Development
Board RB, Series 1996B (CRE) 6.00 7/01/04 1,550
1,685 Scottsboro, AL, Industrial Development
Board RB, Series 1995 (CRE) 6.00 10/01/10 1,685
--------
6,042
--------
Entertainment
4,000 Denver, CO, Urban Renewal Auth. Tax
Increment RB, Series 1992B
(CRE) 5.75 9/01/11 4,000
--------
Foods
1,500 Birmingham, AL, Industrial Development
Board RB, Series B (CRE) 6.10 3/01/06 1,500
--------
Heavy Duty Trucks & Parts
3,110 Missouri Economic Development Export
IDA RB, Series 1993B (CRE) 6.20 6/01/08 3,110
--------
Hotel/Motel
2,640 Birmingham, AL, Historical Preservation
Auth. Taxable RB, Series 1993
(CRE) 5.98 5/01/18 2,640
3,395 Rockside Road Properties, Notes,
Series 1995 (CRE) 5.65 7/01/10 3,395
--------
6,035
--------
Multi-Family Housing
640 Bartlett, IL, MFH RB, Series 1995
(CRE) 6.30 3/01/25 640
3,400 Continental Valorem Corp., DEB,
Series 1988 (CRE) 6.50 6/01/13 3,400
--------
4,040
--------
Real Estate
2,750 Wynrose, Inc., Notes, Series
1995A (CRE) 6.00 11/01/05 2,750
--------
Total variable rate demand notes (cost: $30,477) 30,477
--------
U.S. Government Issues (7.4%)
U.S. Treasury
7,500 U.S. Treasury Notes (cost: $7,473) 6.00 5/31/98 7,472
--------
Cash Equivalents (5.1%)
Commercial Paper
4,000 Banco Latinoamericano de Expor-
taciones, S.A. 5.84 8/19/96 3,988(a)
1,144 Houghton Mifflin Company 5.85 8/01/96 1,144
-------
Total cash equivalents (cost: $5,132) 5,132
--------
Total investments (cost: $100,861) $ 99,822
========
Portfolio Summary by Industry
Real Estate Investment Trusts 14.8%
Banks 12.5
Entertainment 8.4
U.S. Treasury 7.4
Buildings 6.0
Hotel/Motel 6.0
Tobacco 5.3
Commercial Paper 5.1
Healthcare - Miscellaneous 4.2
Electronics - Instrumentation 4.0
Multi-Family Housing 4.0
Bank Holding Companies -
Other Major 3.8
Finance - Business/Commercial 3.6
Retail - General Merchandising 3.4
Heavy Duty Trucks & Parts 3.1
Automobiles 3.0
Real Estate 2.7
Foods 1.5
-----
Total 98.8%
=====
Short-Term Bond 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. Investments in foreign securities were 13.3% of net assets at July
31, 1996.
Portfolio Descriptions 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) Security is exempt from registration by Rule 144A under the Securities
Act of 1933 and has been determined to be liquid by management. Any resale of
this security in the United States may occur in an exempt transaction to a
qualified institutional buyer as defined by the Rule.
See accompanying notes to financial statements.
Short-Term Bond Fund
Statement of Operations
(In Thousands)
Year ended July 31, 1996
Net investment income:
Interest income $ 6,188
----------
Expenses:
Management fees 219
Transfer agent's fees 201
Custodian's fees 57
Postage 22
Shareholder reporting fees 14
Directors' fees 5
Registration fees 46
Audit fees 28
Legal fees 5
Other 5
---------
Total expenses before reimbursement 602
Expenses reimbursed (146)
---------
Total expenses after reimbursement 456
---------
Net investment income 5,732
---------
Net realized and unrealized gain (loss) on investments:
Net realized gain 180
Change in net unrealized appreciation/depreciation (1,033)
---------
Net realized and unrealized loss (853)
---------
Increase in net assets resulting from operations $ 4,879
==========
See accompanying notes to financial statements.
Short-Term Bond Fund
Statements of Changes in Net Assets
(In Thousands)
Years ended July 31,
1996 1995
From operations:
Net investment income $ 5,732 $ 3,613
Net realized gain (loss) on investments 180 (205)
Change in net unrealized appreciation/
depreciation of investments (1,033) 1,174
---------- ----------
Increase in net assets resulting
from operations 4,879 4,582
---------- ----------
Distributions to shareholders from:
Net investment income (5,732) (3,613)
---------- ----------
From capital share transactions:
Proceeds from shares sold 70,903 61,901
Shares issued for dividends reinvested 4,971 3,174
Cost of shares redeemed (50,179) (38,082)
---------- ----------
Increase in net assets from capital
share transactions 25,695 26,993
---------- ----------
Net increase in net assets 24,842 27,962
Net assets:
Beginning of period 76,190 48,228
---------- ----------
End of period $ 101,032 $ 76,190
========== ==========
Change in shares outstanding:
Shares sold 7,189 6,373
Shares issued for dividends reinvested 505 327
Shares redeemed (5,093) (3,927)
--------- ----------
Increase in shares outstanding 2,601 2,773
========= ==========
Authorized shares of $.01 par value 25,000 25,000
========= ==========
See accompanying notes to financial statements.
Short-Term Bond 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
Short-Term Bond Fund (the Fund). The Fund's investment objective is high
current income consistent with preservation of 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. 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.
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
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, 1996 and was entirely derived from taxable interest
income. 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
$377,000 which, if not offset by subsequent capital gains will expire in
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, 1996 were $59,490,154 and $36,455,170, respectively.
Gross unrealized appreciation and depreciation of investments as of July 31,
1996 was $261,324 and $1,300,062, 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.
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
Period-Ended Period Ended
Year Ended July 31, July 31, September 30,
1996 1995 1994 1993**
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net asset value at
beginning of period $ 9.87 $ 9.74 $ 10.08 $ 10.00
Net investment income .62 .61 .37 .14
Net realized and unrealized
gain (loss) (.08) .13 (.33) .08
Distributions from net
investment income (.62) (.61) (.37) (.14)
Distributions of realized
capital gains - - (.01) -
------- ------- -------- --------
Net asset value at end of
period $ 9.79 $ 9.87 $ 9.74 $ 10.08
======= ======= ======== ========
Total return (%) * 5.62 7.90 .39 2.19
Net assets at end of
period (000) $101,032 $76,190 $ 48,228 $ 25,679
Ratio of expenses to
average net assets (%) .50(c) .50(c) .50(a,c) .50(a,c)
Ratio of net investment income
to average net assets (%) 6.29(c) 6.34(c) 4.51(a,c) 4.21(a,c)
Portfolio turnover (%) 66.81(b) 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) Effective for 1996, portfolio turnover rates have been calculated
excluding short-term variable rate securities, which are those with put date
intervals of less than one year.
(c) The information contained in the above table is based on actual expenses
for the period, after giving effect to reimbursement of expenses by the
Manager. Absent such reimbursement the Fund's ratios would have been:
<TABLE>
<CAPTION>
Ten-Month Four-Month
Period Ended Period Ended
Year Ended July 31, July 31, September 30,
1996 1995 1994 1993
---- ---- ---- ----
<S> <C> <C> <C> <C>
Ratio of expenses to average
net assets (%) .66 .74 .87(a) 1.57(a)
Ratio of net investment income
to average net
assets (%) 6.13 6.10 4.14(a) 3.14(a)
</TABLE>
