TABLE OF CONTENTS
USAA Family of Funds 1
Message from the President 2
Investment Review 4
Message from the Manager 5
Financial Information:
Statement of Assets and Liabilities 8
Portfolio of Investments in Securities 9
Notes to Portfolio of Investments in Securities 13
Statement of Operations 14
Statements of Changes in Net Assets 15
Notes to Financial Statements 16
===============================================================================
IMPORTANT INFORMATION
Through our ongoing efforts to reduce expenses and respond to shareholder
requests, your annual and semiannual report mailings are "streamlined." One copy
of each report is sent to each address, rather than 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)1997, 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 December 31, 1996.
<S> <C> <C> <C> <C> <C>
Average Annual Total Return(%)*
Investment Inception Since
Objective Date 1 yr 5 yrs 10 yrs Inception
CAPITAL APPRECIATION
=========================================================================================================
Aggressive Growth 10/19/81 16.47 11.45 13.12 -
Emerging Markets (1) 11/7/94 16.59 - - 4.84
Gold (1) 8/15/84 0.00 6.57 .93 -
Growth 4/5/71 17.80 13.69 13.24 -
Growth & Income 6/1/93 23.04 - - 16.24
International (1) 7/11/88 19.15 13.09 - 10.60
S&P 500 Index (4) 5/1/96 - - - 16.83+
World Growth (1) 10/1/92 19.08 - - 13.66
ASSET ALLOCATION
============
Balanced Strategy 9/1/95 13.45 - - 12.49
Cornerstone Strategy (1) 8/15/84 17.87 12.69 10.70 -
Growth and Tax Strategy (2)** 1/11/89 11.12 9.64 - 9.97
Growth Strategy (1) 9/1/95 22.13 - - 21.47
Income Strategy 9/1/95 3.00 - - 9.72
INCOME TAXABLE
=========
GNMA 2/1/91 2.94 6.43 - 7.66
Income 3/4/74 1.33 7.33 9.25 -
Income Stock 5/4/87 18.70 12.76 - 12.78
Short-Term Bond 6/1/93 6.31 - - 5.60
INCOME - TAX EXEMPT
========
Long-Term (2)** 3/19/82 4.47 6.87 7.37 -
Intermediate-Term (2)** 3/19/82 4.49 6.89 7.09 -
Short-Term (2)** 3/19/82 4.44 4.94 5.45 -
California Bond (2)** 8/1/89 5.39 7.29 - 7.65
Florida Tax-Free Income (2)** 10/1/93 4.38 - - 3.69
New York Bond (2)** 10/15/90 3.73 6.61 - 8.35
Texas Tax-Free Income (2)** 8/1/94 5.25 - - 9.44
Virginia Bond (2)** 10/15/90 5.06 7.09 - 8.18
MONEY MARKET
========
Money Market (3) 2/2/81 5.24 4.37 5.84 -
Tax Exempt Money Market (2,3)** 2/6/84 3.34 3.04 4.21 -
Treasury Money Market Trust (3) 2/1/91 5.10 4.16 - 4.32
California Money Market (2,3)** 8/1/89 3.27 2.93 - 3.64
Florida Tax-Free Money Market (2,3)** 10/1/93 3.24 - - 3.01
New York Money Market (2,3)** 10/15/90 3.20 2.79 - 3.07
Texas Tax-Free Money Market (2,3)** 8/1/94 3.25 - - 3.32
Virginia Money Market (2,3)** 10/15/90 3.17 2.87 - 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.
+ Cumulative total return since inception, including account maintenance fee.
MESSAGE FROM THE PRESIDENT
I have been at USAA for 19 years. The first eight were one heck of a lot of
fun. I was a portfolio manager and I also got to do a lot of trading. Since 1986
I have been a manager of people, and sometime in the future I will write about
the relative degree of fun between those two pursuits. In my eight years as a
money manager I got to know how it feels when your fund isn't working, and I
also know how it feels to be on top of the world. By the same token, some
people wrote about me snidely and some others put nice pictures of me in
national magazines. This is all background for the following comments on
fund performance.
According to the Investment Company Institute there are now about 6,000 mutual
funds in the U.S. Why isn't there one; the one with the best performance? To
answer that question you ask questions. Best performance over one year? . . .
Three years? . . . Five years? Shouldn't we differentiate between growth funds
and money market funds?. . . Between taxable bonds and tax-exempt bonds? There
are obvious reasons to look beyond just one fund.
But then there are other questions. Was the best stock fund for the last 10
years also the best stock fund in 1996? I'd be surprised if it were. And here
is a great question. Do you know anyone who beat the best stock fund for
the past 10 years by moving money each year into the fund that would turn
into that year's best? I'd be more surprised if you did.
I think that most people choose a mutual fund company because of trust. At USAA
we give you a lot to foster that trust. The expenses of our funds are very low
compared to their competitors. We have never had any loads on our funds. The
array of features we offer, from guidance from our reps to TouchLine(Registered
Trademark) and computer access, is world class. And our funds have
established a proud tradition of performance. It is not possible to have the
top performing fund every year, but since 1986 we have been recognized 19
times by Lipper Analytical Services for having funds that were the best in
their category, both for one year and over longer periods. Four of these
were awarded in 1996. They went to the Cornerstone Strategy Fund, Tax Exempt
Short-Term Fund, and the Texas Tax-Free Income Fund.(1)
Performance, service, ease of doing business and trust. That's how I buy a
mutual fund.
Sincerely,
Michael J.C. Roth, CFA
PRESIDENT AND
VICE CHAIRMAN OF THE BOARD
[Photograph of Michael J.C. Roth, CFA, President and Vice Chairman of the
Board appears here]
For more complete information about the mutual funds managed and distributed by
USAA IMCO, including charges and expenses, please call for a prospectus. Read it
carefully before you invest.
Performance Achievement Certificates
(1) Fund rankings awarded by Lipper Analytical Services on cumulative total
returns:
USAA Texas Tax-Free Income Fund was ranked #1 out of 20 in the Texas Municipal
Debt Funds category for the 1-year period ended 12/31/96 in Lipper's Fixed
Income Fund Performance Analysis. Average annual total returns for the 1-year
period ended 12/31/96 and the 8/1/94 to 12/31/96 period were 5.25% and 9.44%
respectively.
USAA Tax Exempt Short-Term Fund was ranked #1 out of 5, #1 out of 7, and #4
out of 30 in the Short Municipal Debt Funds category for the 10-,5-, and
1-year periods ended 12/31/96 in Lipper's Fixed Income Fund Performance
Analysis. Average annual total returns for the 10-, 5-, and 1-year periods
ended 12/31/96 were 5.45%, 4.94%, and 4.44%, respectively.
USAA Cornerstone Strategy Fund was ranked #1 out of 5, #3 out of 13, and #5
out of 71 in the Global Flexible Portfolio Funds category for the 10-, 5-,
and 1-year periods ended 12/31/96 in Lipper's Equity Fund Performance Analysis.
Average annual total returns for the 10-, 5-, and 1-year periods ended 12/31/96
were 10.70%, 12.69%, and 17.87%, respectively.
The performance data quoted represent past performance and is no guarantee of
future results. The investment return and principal value of an investment
will fluctuate so that an investor's shares, when redeemed, may be worth
more or less than their original cost.
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 1/31/97
Net Assets................. $1,710.8 MILLION $1,987.9 MILLION
Net Asset Value Per Share.. $15.85 $17.41
AVERAGE ANNUAL TOTAL RETURNS AS OF 1/31/97
July 31, 1996 to January 31, 1997............................17.70%+
1 Year.......................................................19.48%
5 Years......................................................13.42%
Since inception on May 4, 1987...............................12.98%
+ Total returns for periods of less than one year are not annualized.
This six-month return is cumulative.
[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 1/31/97 with dividends and
capital gains reinvested. The ending value of each item graphed is as
follows: USAA Income Stock Fund - $32,910 and the S&P 500 Index - $36,569.]
The graph illustrates the comparison of a $10,000 hypothetical investment in the
USAA Income Stock Fund to the S&P 500 Index, 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.
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 Harry W. Miller, CFA, Portfolio Manager, appears here.]
Performance
As of January 31, 1997, your Fund had net assets of $1.988 billion as compared
to $1.711 billion at the time of our last report on July 31, 1996. During the
same time period your fund had a total return of 17.70%.
Real estate investment trusts (REITs) were the outstanding performers in the
portfolio over the six-month period, such as, Patriot American Hospitality,
Cali Realty, Beacon Properties, Public Storage, Weeks Corp, Glimcher Realty,
Duke Realty, and Liberty Property to name a few. The only negative REIT was
Horizon Group. Those that specialized in office space and hotels did best.
Your Fund currently has 15% of its net assets invested in this industry. Other
outstanding performers that were large holdings in the portfolio during the
period were Bristol-Myers Squibb, Chrysler, and Texaco. Lastly, our
convertible positions in Unisys, Mascotech, James River, Browning-Ferris,
and IKON Office Solutions all outperformed the stock market. These
convertibles provide the Fund with broad diversification and a greater
potential of appreciation.
Electric utility and telephone sectors underperformed the stock market. In the
electric utility area we cut back our holdings and now hold only those
securities which we believe will do well in the new competitive environment. A
great deal of uncertainty was created by the telephone legislation passed in
early 1996. Telephone stocks underperformed the market, despite earnings that
were above expectations. We believe this has been fully discounted in the
market, and we intend to maintain our current positions.
INCREASING DIVIDENDS
Annual Income
Calendar Dividend Per
Year Share
--------- ----------------
1987 $.19*
1988 .48
1989 .57
1990 .65
1991 .68
1992 .70
1993 .71
1994 .75
1995 .77
1996 .78
*From inception on May 4, 1987.
The dividend to shareholders for calendar 1996 was $.78 as compared to $.77 in
the previous year. The Fund has continued producing a growing stream of income
as it has every year since its inception in 1987. (1)
Outlook
Despite the outstanding returns (1) of the stock market in the last two years,
we believe as long as the current economy enjoys low interest rates, low
inflation, and modest growth in corporate earnings, the stock market will
produce historical returns.
Based on our economic discussion and our bottoms up approach, we believe the
following industries are likely to perform above the average in 1997:
distribution & pipelines, healthcare, oil, and REITs.
(1) Past performance is no guarantee of future results. Yields and returns
will fluctuate.
Top 10 Equity Holdings
(% of Net Assets)
Philip Morris Companies 4.5
GTE 4.3
Bankers Trust New York 4.2
Bristol-Meyers Squibb 4.2
Allegheny Power System 3.9
Dow Chemical 3.8
Chrysler 3.5
NYNEX 3.2
Aetna, Preferred 3.0
National Fuel Gas 2.9
Top 10 Industries
(% of Net Assets)
Real Estate Investment Trusts 15.0
Oil Related 10.7
Telecommunications 9.1
Electric Power 8.8
Tobacco 8.7
Bank Related 6.8
Healthcare - Diversified 6.1
Distribution & Pipelines 5.6
Chemicals 3.8
Automobiles 3.5
See page 9 for a complete listing of the Portfolio of Investments in Securities.
<TABLE>
Income Stock Fund
Statement of Assets and Liabilities
(In Thousands)
<CAPTION>
January 31, 1997
(Unaudited)
<S> <C>
Assets
Investments in securities, at market value (identified cost of $1,589,507) $ 1,978,403
Cash 404
Receivables:
Capital shares sold 1,579
Dividends and interest 5,987
Securities sold 9,007
- ---------------------------------------------------------------------------------------------------------
Total assets 1,995,380
- ---------------------------------------------------------------------------------------------------------
Liabilities
Securities purchased 4,702
Capital shares redeemed 1,581
USAA Investment Management Company 835
USAA Transfer Agency Company 233
Accounts payable and accrued expenses 135
- ---------------------------------------------------------------------------------------------------------
Total liabilities 7,486
- ---------------------------------------------------------------------------------------------------------
Net assets applicable to capital shares outstanding $ 1,987,894
=========================================================================================================
Represented by:
Paid-in capital $ 1,588,483
Accumulated undistributed net investment income 5,378
Accumulated net realized gain on investments 5,137
Net unrealized appreciation of investments 388,896
- ---------------------------------------------------------------------------------------------------------
Net assets applicable to capital shares outstanding $ 1,987,894
=========================================================================================================
Capital shares outstanding 114,176
=========================================================================================================
Net asset value, redemption price, and offering price per share $ 17.41
=========================================================================================================
See accompanying notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
Income Stock Fund
Portfolio of Investments in Securities
<C> <S> <C>
Common Stocks (79.2%)
Aerospace/Defense (1.2%)
600,000 B.F. Goodrich Co. $ 24,600
- ---------------------------------------------------------------------------------------------------------
Aluminum (2.3%)
750,300 Reynolds Metals Co. 45,300
- ---------------------------------------------------------------------------------------------------------
Automobiles (3.5%)
2,000,000 Chrysler Corp. 69,750
- ---------------------------------------------------------------------------------------------------------
Bank Holding Companies - Major Regional (2.6%)
1,300,000 PNC Bank Corp. 51,675
- ---------------------------------------------------------------------------------------------------------
Bank Holding Companies - Money Center (4.2%)
975,000 Bankers Trust New York Corp. 82,875
- ---------------------------------------------------------------------------------------------------------
Chemicals (3.8%)
975,000 Dow Chemical Co. 75,197
- ---------------------------------------------------------------------------------------------------------
Distribution & Pipelines (5.6%)
1,383,600 National Fuel Gas Co. 58,457
1,360,500 NICOR, Inc. 49,148
114,500 Peoples Energy Corp. 3,807
- ---------------------------------------------------------------------------------------------------------
111,412
- ---------------------------------------------------------------------------------------------------------
Electric Power (8.8%)
2,500,000 Allegheny Power System, Inc. 76,562
400,000 Central Hudson Gas & Electric Corp. 12,550
1,000,000 Houston Industries, Inc. 22,625
900,000 IES Industries, Inc. 27,563
300,000 Portland General Corp. 11,775
200,000 Public Service Co. of Colorado 7,800
445,000 Southwestern Public Service Co. 16,020
- ---------------------------------------------------------------------------------------------------------
174,895
- ---------------------------------------------------------------------------------------------------------
Healthcare - Diversified (6.1%)
600,000 American Home Products Corp. 38,025
650,000 Bristol-Myers Squibb Co. 82,550
- ---------------------------------------------------------------------------------------------------------
120,575
- ---------------------------------------------------------------------------------------------------------
Machinery - Diversified (1.3%)
600,000 Deere & Co. 25,650
- ---------------------------------------------------------------------------------------------------------
Oil - Domestic (3.9%)
300,000 Atlantic Richfield Co. 39,675
1,500,000 Occidental Petroleum Corp. 38,250
- ---------------------------------------------------------------------------------------------------------
77,925
- ---------------------------------------------------------------------------------------------------------
Oil - International (2.9%)
550,000 Texaco, Inc. 58,231
- ---------------------------------------------------------------------------------------------------------
Real Estate Investment Trusts (15.0%)
300,000 Arden Realty Group, Inc. 8,025
400,000 Avalon Properties, Inc. 11,050
500,000 Beacon Properties Corp. 17,875
709,000 Burnham Pacific Properties, Inc. 10,458
400,000 Cali Realty Corp. 13,200
275,000 Chelsea GCA Realty, Inc. 9,453
400,000 Developers Diversified Realty Corp. 14,300
400,000 Duke Realty Investments, Inc. 15,850
300,000 Evans Withycombe Residential, Inc. 6,300
600,000 First Industrial Realty Trust, Inc. 17,400
300,000 Gables Residential Trust 7,988
500,000 Glimcher Realty Trust 10,750
200,000 Health Care Property Investors, Inc. 7,000
250,000 Highwoods Properties, Inc. 8,750
400,000 Horizon Group, Inc. 6,800
650,000 Kimco Realty Corp. 21,288
375,000 Liberty Property Trust 9,656
400,000 Nationwide Health Properties, Inc. 9,150
255,000 Patriot American Hospitality, Inc. 11,985
350,000 Post Properties, Inc. 14,525
350,000 Prentiss Properties Trust 9,406
600,000 Public Storage, Inc. 17,550
87,100 ROC Communities, Inc. 2,265
150,000 Shurgard Storage Centers, Inc. 4,181
400,000 Storage USA, Inc. 15,150
100,000 Tanger Factory Outlet Centers, Inc. 2,575
134,329 United Dominion Realty Trust, Inc. 2,082
200,000 Weeks Corp. 7,225
140,000 Weingarten Realty Investors, Inc. 6,020
- ---------------------------------------------------------------------------------------------------------
298,257
- ---------------------------------------------------------------------------------------------------------
Retail - General Merchandising (2.1%)
902,100 J.C. Penney Company, Inc. 42,737
- ---------------------------------------------------------------------------------------------------------
Specialty Printing (0.3%)
200,000 Deluxe Corp. 6,150
- ---------------------------------------------------------------------------------------------------------
Telephones (9.1%)
1,800,000 GTE Corp. 84,600
1,250,000 NYNEX Corp. 63,281
1,000,000 U S West Communications Group 32,875
- ---------------------------------------------------------------------------------------------------------
180,756
- ---------------------------------------------------------------------------------------------------------
Tobacco (6.5%)
750,000 Philip Morris Companies, Inc. 89,156
1,200,000 RJR Nabisco Holdings Corp. 39,300
- ---------------------------------------------------------------------------------------------------------
128,456
- ---------------------------------------------------------------------------------------------------------
Total common stocks (cost: $1,203,162) 1,574,441
- ---------------------------------------------------------------------------------------------------------
Preferred Stocks (15.8%)
Auto Parts (0.6%)
700,000 Mascotech, Inc., $1.20 cumulative convertible 12,425
- ---------------------------------------------------------------------------------------------------------
Computer Systems (2.5%)
1,325,000 Unisys Corp. depositary shares "A",
$3.75 cumulative convertible 49,191
- ---------------------------------------------------------------------------------------------------------
Insurance - Multi-Line Companies (2.9%)
750,000 Aetna, Inc., Class C, 6.25% cumulative convertible 58,687
- ---------------------------------------------------------------------------------------------------------
Office Equipment & Supplies (1.2%)
250,400 IKON Office Solutions, Inc. depositary shares "BB",
6.50% cumulative convertible 24,915
- ---------------------------------------------------------------------------------------------------------
Oil - Domestic (1.6%)
1,170,500 Sun Company, Inc. depositary shares "A",
$1.80 cumulative convertible 31,750
- ---------------------------------------------------------------------------------------------------------
Paper & Forest Products (2.4%)
1,617,700 James River Corp. depositary shares "P",
9.00% cumulative convertible 48,531
- ---------------------------------------------------------------------------------------------------------
Pollution Control (1.6%)
950,000 Browning-Ferris Industries, Inc.,
7.25% automatic exchangeable 31,350
- ---------------------------------------------------------------------------------------------------------
Publishing/Newspapers (0.6%)
1,000,000 Hollinger International, Inc., PRIDES,
9.75%, cumulative convertible 11,250
- ---------------------------------------------------------------------------------------------------------
Steel (0.2%)
69,300 USX Corp., 6.50% cumulative convertible 3,162
- ---------------------------------------------------------------------------------------------------------
Tobacco (2.2%)
6,500,000 RJR Nabisco Holdings Corp. depositary shares "C",
$.60 cumulative exchangeable 43,062
- ---------------------------------------------------------------------------------------------------------
Total preferred stocks (cost: $293,178) 314,323
- ---------------------------------------------------------------------------------------------------------
Bonds (2.6%)
Principal
Amount Coupon
(000) Rate Maturity
$ 1,900 Atlantic Richfield Co. Exchangeable Notes 9.00% 9/15/97 43,700
6,810 Cooper Industries, Inc. Convertible Debentures 7.05 1/01/15 7,287
- ---------------------------------------------------------------------------------------------------------
Total bonds (cost: $54,515) 50,987
- ---------------------------------------------------------------------------------------------------------
Short-Term (1.9%)
Commercial Paper
38,664 Household Finance Corp. (cost: $38,652) 5.50 2/03/97 38,652
- ---------------------------------------------------------------------------------------------------------
Total investments (cost: $1,589,507) $ 1,978,403
=========================================================================================================
</TABLE>
Income Stock Fund
Notes to Portfolio of Investments in Securities
January 31, 1997
(Unaudited)
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.
<TABLE>
Income Stock Fund
Statement of Operations
(In Thousands)
<CAPTION>
Six-month period ended January 31, 1997
(Unaudited)
<S> <C>
Net investment income:
Income:
Dividends $ 51,493
Interest 1,268
- ---------------------------------------------------------------------------------------------------------
Total income 52,761
- ---------------------------------------------------------------------------------------------------------
Expenses:
Management fees 4,644
Transfer agent's fees 1,377
Custodian's fees 118
Postage 140
Shareholder reporting fees 57
Directors' fees 2
Registration fees 66
Audit fees 15
Legal fees 2
Other 23
- ---------------------------------------------------------------------------------------------------------
Total expenses 6,444
- ---------------------------------------------------------------------------------------------------------
Net investment income 46,317
- ---------------------------------------------------------------------------------------------------------
Net realized and unrealized gain on investments:
Net realized gain 37,116
Change in net unrealized appreciation/depreciation 215,644
- ---------------------------------------------------------------------------------------------------------
Net realized and unrealized gain 252,760
- ---------------------------------------------------------------------------------------------------------
Increase in net assets resulting from operations $ 299,077
=========================================================================================================
See accompanying notes to financial statements.
</TABLE>
<TABLE>
Income Stock Fund
Statement of Changes in Net Assets
(In Thousands)
<CAPTION>
Six-month period ended January 31, 1997
and year ended July 31, 1996
(Unaudited)
<S> <C> <C>
1/31/97 7/31/96
From operations:
Net investment income $ 46,317 $ 78,374
Net realized gain on investments 37,116 54,444
Change in net unrealized appreciation/depreciation of
investments 215,644 57,966
-------------- --------------
Increase in net assets resulting from operations 299,077 190,784
-------------- --------------
Distributions to shareholders from:
Net investment income (43,334) (78,768)
-------------- --------------
Net realized gains (80,728) (26,302)
-------------- --------------
From capital share transactions:
Proceeds from shares sold 140,914 319,925
Shares issued for dividends reinvested 116,795 96,884
Cost of shares redeemed (155,599) (200,125)
-------------- --------------
Increase in net assets from capital share transactions 102,110 216,684
-------------- --------------
Net increase in net assets 277,125 302,398
Net assets:
Beginning of period 1,710,769 1,408,371
-------------- --------------
End of period $ 1,987,894 $ 1,710,769
============== ==============
Undistributed net investment income included in net assets:
Beginning of period $ 2,395 $ 2,689
============== ==============
End of period $ 5,378 $ 2,395
============== ==============
Change in shares outstanding:
Shares sold 8,451 20,238
Shares issued for dividends reinvested 7,188 6,184
Shares redeemed (9,383) (12,616)
-------------- --------------
Increase in shares outstanding 6,256 13,806
============== ==============
Authorized shares of $.01 par value 135,000 135,000
============== ==============
See accompanying notes to financial statements.
</TABLE>
Income Stock Fund
Notes to Financial Statements
January 31, 1997
(Unaudited)
(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 semiannual 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.
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 13, 1998, one with USAA
Capital Corporation (CAPCO), 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 which only 5% may be borrowed from
CAPCO, 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
six-month period ended January 31, 1997.
(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.
(4) Investment Transactions
Purchases and sales of securities, excluding short-term securities, for the
six-month period ended January 31, 1997 were $311,808,080 and $294,682,603,
respectively.
Gross unrealized appreciation and depreciation of investments as of January 31,
1997 was $410,163,857 and $21,268,313, 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 based on an annual charge per shareholder account plus out-of-pocket
expenses.
C. Underwriting services -- The Manager provides exclusive underwriting and
distribution of the Fund's shares on a continuing best efforts basis. The
Manager receives no commissions or fees for this service.
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
six-month period ended January 31, 1997 was $12,000.
(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 January 31, 1997, the Association and its affiliates
owned 3,298,091 shares (2.9%) of the Fund.
Certain directors and officers of the Fund are also directors, officers, and/or
employees of the Manager. None of the affiliated directors or Fund officers
received any compensation from the Fund.
<TABLE>
<CAPTION>
(7) Financial Highlights
Per share operating performance for a share outstanding throughout each period
is as follows:
Six-Month Ten-Month
Period Ended Period Ended Year Ended
January 31, Year Ended July 31, July 31, September 30,
1997 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C> <C>
Net asset value at
beginning of period $ 15.85 $ 14.96 $ 13.50 $ 14.95 $ 13.42 $ 12.63
Net investment income .41 .77 .74 .60 .71 .71
Net realized and
unrealized gain (loss) 2.28 1.16 1.69 (1.12) 1.62 .78
Distributions from net
investment income (.39) (.77) (.75) (.74) (.71) (.70)
Distributions of realized
capital gains (.74) (.27) (.22) (.19) (.09) -
------------- -------------- ------------- -------------- ----------- -------------
Net asset value at
end of period $ 17.41 $ 15.85 $ 14.96 $ 13.50 $ 14.95 $ 13.42
============ ============= ============== ============== =========== =============
Total return (%) * 17.70 13.21 18.83 (3.53) 18.05 12.14
Net assets at end
of period (000) $ 1,987,894 $ 1,710,769 $ 1,408,371 $ 1,190,024 $ 1,043,686 $ 480,733
Ratio of expenses
to average net
assets (%) .69(a) .72 .75 .73(a) .70 .74
Ratio of net investment
income to average
net assets (%) 4.99 (a) 4.84 5.34 5.25(a) 5.43 5.99
Portfolio turnover (%) 16.35 32.38 34.94 24.82 26.98 15.79
Average commission
rate paid per share+ $ .050 $ .050
</TABLE>
(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.
+ Calculated by aggregating all commissions paid on the purchase and sale of
securities and dividing by the actual number of shares purchased or sold for
which commissions were charged.
