TABLE OF CONTENTS
USAA Family of Funds 1
Message from the President 2
Investment Review 4
Message from the Manager 5
Financial Information:
Distributions to Shareholders 7
Independent Auditors' Report 8
Statement of Assets and Liabilities 9
Portfolio of Investments in Securities 10
Notes to Portfolio of Investments in Securities 12
Statement of Operations 13
Statements of Changes in Net Assets 14
Notes to Financial Statements 15
IMPORTANT INFORMATION
Through our ongoing efforts to reduce expenses and respond to shareholder
requests, your annual and semiannual report mailings are "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 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
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, 1997.
<CAPTION>
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 -1.72 18.38 10.88 -
Emerging Markets(1) 11/7/94 15.35 - - 10.25
Gold(1) 8/15/84 -22.26 3.54 -4.75 -
Growth 4/5/71 21.60 16.94 11.97 -
Growth & Income 6/1/93 31.29 - - 18.53
International(1) 7/11/88 21.81 15.39 - 11.77
S&P 500 Index(4)+ 5/1/96 34.59 - - 33.24
World Growth(1) 10/1/92 21.85 - - 15.50
Asset Allocation
=========================================================================================================
Balanced Strategy(1) 9/1/95 22.38 - - 15.48
Cornerstone Strategy(1) 8/15/84 20.45 14.33 9.22 -
Growth and Tax Strategy(2)** 1/11/89 15.72 11.23 - 10.45
Growth Strategy(1) 9/1/95 15.37 - - 21.37
Income Strategy 9/1/95 14.48 - - 10.36
Income - Taxable
=========================================================================================================
GNMA 2/1/91 9.37 6.85 - 7.67
Income 3/4/74 8.21 7.44 9.45 -
Income Stock 5/4/87 20.77 14.21 12.89 -
Short-Term Bond 6/1/93 7.71 - - 5.69
Income - Tax Exempt
=========================================================================================================
Long-Term(2)** 3/19/82 9.22 6.71 8.09 -
Intermediate-Term(2)** 3/19/82 8.20 6.76 7.54 -
Short-Term(2)** 3/19/82 5.50 4.80 5.59 -
California Bond(2)** 8/1/89 8.90 7.13 - 7.58
Florida Tax-Free Income(2)** 10/1/93 9.79 - - 4.29
New York Bond(2)** 10/15/90 8.86 6.46 - 8.31
Texas Tax-Free Income(2)** 8/1/94 10.37 - - 9.24
Virginia Bond(2)** 10/15/90 8.50 6.93 - 8.08
Money Market
=========================================================================================================
Money Market(3) 2/2/81 5.28 4.48 5.80 -
Tax Exempt Money Market(2),(3)** 2/6/84 3.36 3.04 4.15 -
Treasury Money Market Trust(3) 2/1/91 5.13 4.28 - 4.38
California Money Market(2),(3)** 8/1/89 3.29 2.94 - 3.62
Florida Tax-Free Money Market(2),(3)** 10/1/93 3.26 - - 3.04
New York Money Market(2),(3)** 10/15/90 3.21 2.82 - 3.08
Texas Tax-Free Money Market(2),(3)** 8/1/94 3.31 - - 3.33
Virginia Money Market(2),(3)** 10/15/90 3.22 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 return 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.
+ Includes the $10 annual account maintenance fee through December 31, 1996.
MESSAGE FROM THE PRESIDENT
[PHOTOGRAPH OF PRESIDENT, MICHAEL J.C. ROTH APPEARS HERE]
The last two and one-half
years have been a remarkable
time in the stock market.
These 30 months have witnessed an over 100%(1) rise in the value of equity
indices which has translated into greatly increased wealth for many
investors.(2) But now it is easy to sense that investors are looking over their
shoulders.
This rise in the prices of stocks has had solid underpinnings. The economy has
grown, and continues to grow at a robust, but not excessive rate. Inflation has
remained well in check, even as employment has risen strongly. Interest rates
have remained below the levels they reached in 1994, and, compared to the rate
of inflation are probably still a bit high. Perhaps most surprising of all is
the fact that we are coming quite close to balancing the federal budget.
Many commentators look at these factors and conclude that the stock market looks
reasonable. But others note simply that the market is at or near all-time record
levels and is therefore "too high."
The numbers which define the level of the Dow Jones Industrial Average or the
S&P 500 Stock Index are not particularly meaningful by themselves. What is
meaningful is the relationship of those numbers to numbers which describe the
companies in those averages; such as earnings, dividends and growth rates. These
relationships are the things that help investors decide whether a stock is cheap
or expensive. Only one thing can make the price of a stock go up. The next buyer
must make a decision that paying more for a share of that company than did the
previous buyer makes sense. Such a decision can be made if a buyer believes that
the relationship of price to earnings or growth rate is reasonable. That next
buyer is not obligated either. He or she has options. The money could go to
bonds, to the money markets, to real estate or to pay off debt.
Invariably, investors will begin to make those alternative decisions. We can be
very certain that the stock market will not rise 100% in the next 30 months.
That does not mean it will crash. It does mean that the market will find a way
to return closer to its historic valuation. It last did that in 1994 when it was
essentially flat for a year while corporate earnings grew substantially.
I have been telling investors not to extrapolate 100% every 30 months. Enjoy
it, but remember your risk tolerance and your asset allocation. Those are the
things that will guide you well through all kinds of markets.
Sincerely,
Michael J.C. Roth, CFA
President and
Vice Chairman of the Board
(1) Source: Lipper Analytical Services, Inc.
(2) Past performance is no guarantee of future results. Yields and returns will
fluctuate.
INVESTMENT REVIEW
INCOME FUND
OBJECTIVE: Maximum current income without undue risk to principal.
TYPES OF INVESTMENTS: Income-producing securities selected for their high yields
relative to the risk involved.
7/31/96 7/31/97
Net Assets............................... $1,737.3 MILLION $1,663.0 MILLION
Net Asset Value Per Share................ $11.97 $12.54
Average Annual Total Returns as of 7/31/97
1 Year....................................................... 12.15%
5 Years...................................................... 7.46%
10 Years..................................................... 9.80%
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.
_______________________________________________________________________________
CUMULATIVE PERFORMANCE COMPARISON
_______________________________________________________________________________
A chart in the form of a line graph appears here, illustrating the growth of a
$10,000 Investment. The data points from the graph are as follows:
USAA INCOME FUND
Year Amount
- -----------------------
7/31/87 10,000
7/31/88 10,878
7/31/89 12,726
7/31/90 13,546
7/31/91 15,211
7/31/92 17,774
7/31/93 19,905
7/31/94 19,235
7/31/95 21,474
7/31/96 22,715
7/31/97 25,475
Lehman Brothers Aggregate Bond Index
Year Amount
- -----------------------
7/31/87 10,000
7/31/88 10,757
7/31/89 12,393
7/31/90 13,269
7/31/91 14,689
7/31/92 16,859
7/31/93 18,574
7/31/94 18,591
7/31/95 20,470
7/31/96 21,604
7/31/97 23,930
Lipper Corporate Debt A Rated Average
Year Amount
- -----------------------
7/31/87 10,000
7/31/88 10,694
7/31/89 12,259
7/31/90 12,900
7/31/91 14,169
7/31/92 16,530
7/31/93 18,479
7/31/94 18,218
7/31/95 20,062
7/31/96 21,103
7/31/97 23,506
The graph illustrates the comparison of a $10,000 hypothetical investment in the
USAA Income Fund to the broad-based Lehman Brothers Aggregate Bond Index and the
Lipper Corporate Debt A Rated Average. The Lehman Brothers Aggregate Bond Index
is an unmanaged index made up of the government/corporate index, the
mortgage-backed securities index, and the asset-backed securities index. The
Lipper Corporate Debt A Rated Average is the average performance level of all
corporate debt funds A rated, as reported by Lipper Analytical Services, an
independent organization that monitors the performance of mutual funds.
MESSAGE FROM THE MANAGER
[PHOTOGRAPH OF PORTFOLIO MANAGER, JOHN W. SAUNDERS, JR., CFA IS HERE]
Market Conditions
Rising interest rates and bond market volatility continue to frustrate bond
investors. The fluctuating path of long-term interest rates in the Fund's past
fiscal year can be seen in the following chart which shows daily yields for the
30-year U.S. Treasury bond.(1) There have been two cyclical moves in interest
rates, from highs in the 7.20 - 7.25% level to lows in the 6.30 - 6.40% level.
On July 31, 1997, interest rates were at the lowest level of this reporting
period. The resulting up and down bond value changes are not easily ignored;
however, the income continues and is reinvested at the varying bond prices.
Reinvesting this income produces a compounding of returns. This compounding of
returns thus leads to capital accumulation. Is this a benefit to investors? Yes.
For many years, approximately half of the Fund's shareholder accounts have been
in tax-deferred accounts, such as an IRA or 401k plan. The benefit of
compounding is enhanced even more in the tax-deferred environment.
A chart in the form of a line graph appears here, illustrating the yield of a
30-Year U.S. Treasury Bond. The data points from the graph are as follows:
30-Year U.S. Treasury Bond Yield
07/31/96 6.97%
08/30/96 7.12
09/30/96 6.92
10/31/96 6.64
11/29/96 6.35
12/31/96 6.64
01/31/97 6.79
02/28/97 6.8
03/31/97 7.1
04/30/97 6.96
05/30/97 6.91
06/30/97 6.78
7/31/97 6.3
(1) Treasury bonds are non-callable, extremely liquid, and settle on a cash
basis. You can buy and pay for them or sell and receive payment for them
on the same day.
Portfolio
We have made adjustments which should reduce some of the volatility without
reducing income. We reduced U.S. Treasury bonds in favor of some intermediate
maturity corporate bonds and additional GNMA mortgage pass-through securities.
We also reduced common stocks but increased preferred stocks. Currently, the
Income Fund's investment mix, as percentages of net assets, is 18.1% in U.S.
Treasury bonds, 62.1% in agency mortgage pass-through securities, 7.7% in
corporate bonds, 5.9% in high yield common stocks, and 5.1% in preferred stocks.
Dividends
We instituted a stabilized 7(cent) per month dividend in July 1996 to facilitate
monthly income budgeting for our shareholders who take their dividends in cash.
This dividend was based on accrued interest and expected dividends from common
and preferred stocks. However, at fiscal year end, we must adjust for any
accumulated shortfall in income. July is the month for the adjustment, and the
dividend was 6.25(cent). We expect to resume stabilized dividends again in
August.
Outlook
Continued strength in the economy plus the Federal Reserve Board's tightening
action in March are the causes of the ongoing volatility in the bond market.
Although further tightening by the Federal Reserve seems unlikely in the short
run, convincing evidence that the economy is slowing will be required before we
can expect any further decline in interest rates. Meanwhile, we continue to
concentrate on trying to produce a high level of income for the Fund.
Top 10 Securities
(% of Net Assets)
Coupon % of
Rate % Net Assets
------ ----------
GNMA 7.5 27.4
U.S. Treasury Bond 7.9 18.1
FNMA 7.5 11.5
GNMA 7.0 5.8
GNMA 6.5 4.8
FNMA 7.0 4.6
GNMA 8.0 3.1
FNMA 8.0 2.6
Allegheny Power System - 2.1
FHLMC 8.0 2.1
See page 10 for a complete listing of the Portfolio of Investments in
Securities.
DISTRIBUTIONS TO SHAREHOLDERS
The following per share information describes the federal tax treatment of
distributions made during the fiscal year ended July 31, 1997. These figures are
provided for information purposes only and should not be used for reporting to
federal or state revenue agencies. Distributions for the calendar year will be
reported to you on Form 1099-DIV in January 1998.
Ordinary income $ .8325*
=======
12.37% of ordinary income distributions qualify for deduction by corporations.
* Includes distribution of short-term capital gains, if any, which are taxable
as ordinary income.
INDEPENDENT AUDITORS' REPORT
The Shareholders and Board of Directors
USAA MUTUAL FUND, INC.:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments in securities of the Income Fund, a portfolio of
USAA Mutual Fund, Inc. as of July 31, 1997, and 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 presented in note 7 to the financial statements for each of the years
or periods in the ten-year period then ended. These financial statements and
financial highlights are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights 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 financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights. Our procedures included confirmation of
securities owned as of July 31, 1997, 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 financial highlights referred to
above present fairly, in all material respects, the financial position of the
Income Fund, a portfolio of USAA Mutual Fund, Inc. as of July 31, 1997, 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 for each of the years or periods in the ten-year period then ended,
in conformity with generally accepted accounting principles.
KPMG Peat Marwick, LLP
San Antonio, Texas
September 3, 1997
<TABLE>
Income Fund
Statement of Assets and Liabilities
(In Thousands)
July 31, 1997
<S> <C>
Assets
Investments in securities, at market value (identified cost of $1,585,823) $ 1,646,160
Cash 91
Receivables:
Capital shares sold 260
Dividends and interest 18,082
Securities sold 38,759
------------
Total assets 1,703,352
------------
Liabilities
Securities purchased 38,365
Capital shares redeemed 1,348
USAA Investment Management Company 337
USAA Transfer Agency Company 150
Accounts payable and accrued expenses 171
------------
Total liabilities 40,371
------------
Net assets applicable to capital shares outstanding $ 1,662,981
============
Represented by:
Paid-in capital $ 1,614,272
Accumulated undistributed net investment income 62
Accumulated net realized loss on investments (11,690)
Net unrealized appreciation of investments 60,337
------------
Net assets applicable to capital shares outstanding $ 1,662,981
============
Capital shares outstanding 132,653
============
Net asset value, redemption price, and offering price per share $ 12.54
============
See accompanying notes to financial statements.
</TABLE>
<TABLE>
Income Fund
Portfolio of Investments in Securities
July 31, 1997
<CAPTION>
Market
Number Value
of Shares Security (000)
- --------- -------- -----
<C> <S> <C>
Common Stocks (5.9%)
1,200,000 Allegheny Power System, Inc. $ 35,175
1,300,000 Houston Industries, Inc. 27,219
480,000 Ohio Edison Co. 10,680
1,000,000 Public Service Enterprise Group, Inc. 24,750
- --------------------------------------------------------------------------------------------------------
Total common stocks (cost: $93,314) 97,824
- --------------------------------------------------------------------------------------------------------
Preferred Stocks (5.1%)
412,000 Avalon Properties, Inc. "B", 8.96% cumulative redeemable 10,635
320,000 Bay Apartment Communities, Inc. "C", 8.50% cumulative redeemable 8,200
120,000 Duke Realty Investments, Inc. depositary shares "A", 9.10% cumulative redeemable 3,210
575,000 Equity Residential Properties Trust depositary shares "C", 9.125% cumulative
redeemable 15,309
142,500 Merry Land and Investments Co., Inc. "D", 8.29% cumulative redeemable 7,419
250,000 Post Properties, Inc. "A", 8.5% cumulative redeemable 13,250
205,000 Security Capital Industrial Trust "C", 8.54% cumulative redeemable 11,057
200,000 Shurgard Storage Centers, Inc. "B", 8.8% cumulative redeemable 5,200
400,000 United Dominion Realty Trust, Inc. "B", 8.60% cumulative redeemable 10,425
- --------------------------------------------------------------------------------------------------------
Total preferred stocks (cost: $79,916) 84,705
- --------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Coupon
(000) Rate Maturity
----- ---- --------
<C> <S> <C> <C> <C>
Corporate Obligations (7.7%)
$ 15,000 Avco Financial Services Inc., Senior Notes 6.00% 8/15/02 14,799
5,000 Caliber Systems, Inc., Notes 7.80 8/01/06 5,321
15,000 Chase Manhattan Corp., Subordinated Notes 7.13 2/01/07 15,476
4,900 Consolidated Rail Corp., Debentures 9.75 6/15/20 6,275
15,000 First Union Corp., Subordinated Notes 7.50 7/15/06 15,822
20,000 Household Finance Corp., Notes 7.25 5/15/06 20,739
10,000 Province of Quebec, Debentures 6.50 1/17/06 9,975
15,000 Province of Quebec, Global Debentures 7.00 1/30/07 15,462
15,000 Waste Management, Inc., Notes 7.00 10/15/06 15,396
9,000 Wells Fargo & Co., Subordinated Notes 6.88 4/01/06 9,127
- --------------------------------------------------------------------------------------------------------
Total corporate obligations (cost: $120,358) 128,392
- --------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Principal Market
Amount Value
(000) Security (000)
----- -------- -----
U.S. Government & Agency Issues (80.2%)
<C> <S> <C>
Federal Home Loan Mortgage Corp. (2.4%)
$ 4,707 7.50%, 10/01/19 $ 4,801
33,467 8.00%, 3/01/17 - 1/01/21 34,656
- --------------------------------------------------------------------------------------------------------
39,457
- --------------------------------------------------------------------------------------------------------
Federal National Mortgage Assn. (18.7%)
76,129 7.00%, 9/01/22 - 9/01/23 76,591
187,504 7.50%, 2/01/22 - 2/01/23 191,965
41,254 8.00%, 5/01/21 - 12/01/22 42,895
- --------------------------------------------------------------------------------------------------------
311,451
- --------------------------------------------------------------------------------------------------------
Government National Mortgage Assn. (41.0%)
80,543 6.50%, 6/15/23 - 4/15/26 79,601
95,441 7.00%, 5/15/23 - 3/15/26 96,066
445,752 7.50%, 9/15/22 - 5/15/27 455,051
49,780 8.00%, 3/15/22 - 5/15/24 51,680
- --------------------------------------------------------------------------------------------------------
682,398
- --------------------------------------------------------------------------------------------------------
U.S. Treasury Bond (18.1%)
254,092 7.875%, 2/15/21 300,067
- --------------------------------------------------------------------------------------------------------
Total U.S. Government & agency issues (cost: $1,290,369) 1,333,373
- --------------------------------------------------------------------------------------------------------
Short-Term (0.1%)
Commercial Paper
1,866 Heller Financial, Inc., 5.87%, 8/01/97 (cost: $1,866) 1,866
- --------------------------------------------------------------------------------------------------------
Total investments (cost: $1,585,823) $ 1,646,160
========================================================================================================
</TABLE>
Income Fund
Notes to Portfolio of Investments in Securities
July 31, 1997
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 Fund
Statement of Operations
(In Thousands)
Year ended July 31, 1997
<S> <C>
Net investment income:
Income:
Dividends $ 14,158
Interest 106,970
----------
Total income 121,128
----------
Expenses:
Management fees 4,060
Transfer agent's fees 2,015
Custodian's fees 262
Postage 146
Shareholder reporting fees 50
Directors' fees 4
Registration fees 44
Audit fees 29
Legal fees 4
Other 65
----------
Total expenses 6,679
----------
Net investment income 114,449
----------
Net realized and unrealized gain (loss) on investments:
Net realized loss (7,337)
Change in net unrealized appreciation/depreciation 87,179
----------
Net realized and unrealized gain 79,842
----------
Increase in net assets resulting from operations $ 194,291
==========
See accompanying notes to financial statements.
</TABLE>
<TABLE>
Income Fund
Statements of Changes in Net Assets
(In Thousands)
Years ended July 31,
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
From operations:
Net investment income $ 114,449 $ 119,691
Net realized loss on investments (7,337) (4,198)
Change in net unrealized appreciation/depreciation of
investments 87,179 (15,764)
----------- ------------
Increase in net assets resulting from operations 194,291 99,729
----------- ------------
Distributions to shareholders from:
Net investment income (114,688) (121,610)
----------- ------------
From capital share transactions:
Proceeds from shares sold 114,260 202,369
Shares issued for dividends reinvested 93,216 99,177
Cost of shares redeemed (361,404) (297,530)
----------- ------------
Increase (decrease) in net assets from capital share
transactions (153,928) 4,016
----------- ------------
Net decrease in net assets (74,325) (17,865)
Net assets:
Beginning of period 1,737,306 1,755,171
----------- ------------
End of period $ 1,662,981 $ 1,737,306
=========== ============
Undistributed net investment income included in net assets:
Beginning of period $ 301 $ 2,021
=========== ============
End of period $ 62 $ 301
=========== ============
Change in shares outstanding:
Shares sold 9,339 16,317
Shares issued for dividends reinvested 7,653 8,028
Shares redeemed (29,529) (24,069)
----------- ------------
Increase (decrease) in shares outstanding (12,537) 276
=========== ============
Authorized shares of $.01 par value 200,000 200,000
=========== ============
See accompanying notes to financial statements.
</TABLE>
Income Fund
Notes to Financial Statements
July 31, 1997
(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 ten separate
funds. The information presented in this annual report pertains only to the
Income Fund (the Fund). The Fund's investment objective is maximum current
income without undue risk to principal.
A. Security valuation -- The value of each security is determined (as of the
close of trading on the New York Stock Exchange on each business day the
Exchange is open) as set forth below:
1. 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.
2. Portfolio securities, except as otherwise noted, traded primarily on a
domestic securities exchange are valued at the last sales price on that
exchange.
3. Over-the-counter securities are priced at the last sales price or, if not
available, at the average of the bid and asked prices.
4. Securities purchased with maturities of 60 days or less are stated at
amortized cost which approximates market value.
5. Securities which cannot be valued by the methods set forth above, and all
other assets, are valued in good faith at fair value, using methods determined
by the Manager under the general supervision of the Board of Directors.
B. Federal taxes -- The Fund's policy is to comply with the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its income to its shareholders. Therefore, no
federal income or excise tax provision is required.
C. Investments in securities -- 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 NationsBank of Texas, N.A. ($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 its agreement with
CAPCO, the Fund may borrow from CAPCO an amount up to 5% of the Fund's total
assets at CAPCO's borrowing rate with no markup. Subject to availability under
its agreement with NationsBank, the Fund may borrow from NationsBank an amount
which, when added to outstanding borrowings under the CAPCO agreement, does not
exceed 25% of the Fund's total assets at NationsBank's borrowing rate plus a
markup. The Fund had no borrowings under either of these agreements during the
year ended July 31, 1997.
(3) Distributions
Distributions of net investment income are made monthly. Distributions of
realized gains from security transactions not offset by capital losses are made
in the succeeding fiscal year or as otherwise required to avoid the payment of
federal taxes. At July 31, 1997, the Fund had capital loss carryovers for
federal income tax purposes of approximately $10,600,000 which, if not offset by
subsequent capital gains will expire between 2003 - 2006. It is unlikely that
the Board of Directors of the Fund will authorize a distribution of capital
gains 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, 1997 were $963,245,608 and $1,107,130,525, respectively.
Gross unrealized appreciation and depreciation of investments as of July 31,
1997 was $72,397,839 and $12,061,454, respectively.
(5) Transactions with Manager
A. Management fees -- The investment policies of the Fund and management of the
Fund's portfolio are carried out by USAA Investment Management Company (the
Manager). The Fund's management fees are computed at .24% of its annual average
net assets.
B. Transfer agent's fees -- USAA Transfer Agency Company, d/b/a USAA Shareholder
Account Services, an affiliate of the Manager, provides transfer agent services
to the Fund 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.
(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, 1997, the Association and its affiliates
(including related employee benefit plans) owned 20,618,181 shares (15.5%) 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 compensation from the Fund.
(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
Year Ended July 31, July 31, September 30,
------------------------------------------ -------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net asset value at
beginning of period $ 11.97 $ 12.11 $ 11.67 $ 13.28 $ 12.76
Net investment income .83 .83 .84 .72 .90
Net realized and
unrealized gain (loss) .57 (.13) .45 (1.30) .52
Distributions from net
investment income (.83) (.84) (.85) (.78) (.90)
Distributions of realized
capital gains - - - (.25) -
---------- ---------- ---------- ---------- ----------
Net asset value at
end of period $ 12.54 $ 11.97 $ 12.11 $ 11.67 $ 13.28
========== ========== ========== ========== ==========
Total return (%)* 12.15 5.78 11.64 (4.52) 11.58
Net assets at end
of period (000) $1,662,981 $1,737,306 $1,755,171 $1,718,934 $1,932,064
Ratio of expenses to
average net assets (%) .39 .40 .41 .41(a) .41
Ratio of net investment
income to average
net assets (%) 6.76 6.64 7.27 6.98(a) 7.00
Portfolio turnover (%) 57.50(b) 81.26(b) 30.86(b) 25.36(b) 44.82
Average commission rate
paid per share + $ .0500 $ .0469
Year Ended September 30,
-----------------------------------------------------------------------------------
1992 1991 1990 1989 1988
---- ---- ---- ---- ----
Net asset value at
beginning of period $ 12.11 $ 11.03 $ 11.50 $ 11.20 $ 10.89
Net investment income .95 .98 1.03 1.05 1.06
Net realized and
unrealized gain (loss) .64 1.09 (.44) .30 .57
Distributions from net
investment income (.93) (.99) (1.03) (1.05) (1.06)
Distributions of realized
capital gains (.01) - (.03) - (.26)
---------- ---------- ---------- ---------- ----------
Net asset value at
end of period $ 12.76 $ 12.11 $ 11.03 $ 11.50 $ 11.20
========== ========== ========== ========== ==========
Total return (%)* 13.72 19.64 5.28 12.78 15.87
Net assets at end
of period (000) $1,359,721 $ 827,505 $ 434,705 $ 332,140 $ 284,639
Ratio of expenses to
average net assets (%) .42 .47 .53 .57 .61
Ratio of net investment
income to average
net assets (%) 7.78 8.61 9.19 9.36 9.57
Portfolio turnover (%) 21.78 15.45 12.07 13.79 10.66
Average commission rate
paid per share +
</TABLE>
* 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.
(a) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
(b) At times, the Fund has simultaneously purchased and sold the same
securities. These transactions sometimes were high in volume and were
dissimilar to other trade activity within the Fund. If these transactions
were excluded from the calculation, the portfolio turnover rate would have
been as follows:
Ten-Month
Year Ended July 31, Period Ended
------------------------------ July 31,
1997 1996 1995 1994
---- ---- ---- ----
Portfolio turnover (%) 22.07 44.69 9.09 16.79
Purchases and sales of this
type are as follows:
Purchases (000) $593,587 $648,396 $360,943 $155,322
Sales (000) $594,283 $649,193 $361,366 $155,497
