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 15
Statement of Operations 16
Statements of Changes in Net Assets 17
Notes to Financial Statements 18
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 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)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
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 7/31/97
Net Assets....................... $101.0 MILLION $133.7 MILLION
Net Asset Value Per Share........ $9.79 $10.03
The 30-Day SEC Yield, calculated as prescribed by the Securities and Exchange
Commission, was 6.03% based on the July 31, 1997 offering price. On that date,
the weighted average maturity of the portfolio was 2.5 years.
Average Annual Total Returns as of 7/31/97
1 Year............................................. 8.97%
Since inception on June 1, 1993.................... 5.97%
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 Short-Term Bond Fund
Year Amount
- -----------------------------
06/01/93 $10,000
06/30/93 10,073
07/31/93 10,087
07/31/94 10,259
07/31/95 11,070
07/31/96 11,692
07/31/97 12,740
Lehman Brothers 1-3 Year Government/
Corporate Index
Year Amount
- -----------------------------
06/01/93 $10,000
06/30/93 10,076
07/31/93 10,099
07/31/94 10,329
07/31/95 11,077
07/31/96 11,690
07/31/97 12,554
Lipper Short Investment Grade
Debt Funds Average
Year Amount
- -----------------------------
06/01/93 $10,000
06/30/93 10,073
07/31/93 10,113
07/31/94 10,317
07/31/95 10,991
07/31/96 11,582
07/31/97 12,411
The graph illustrates the comparison of a $10,000 hypothetical investment in the
USAA Short-Term Bond Fund to the broad-based Lehman Brothers 1-3 Year
Government/Corporate Index and the Lipper Short Investment Grade Debt Funds
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 is the average performance level of all Short Investment Grade Debt
Funds, as reported by Lipper Analytical Services, an independent organization
that monitors the performance of mutual funds.
MESSAGE FROM THE MANAGER
[PHOTOGRAPH OF PORTFOLIO MANAGER, PAUL H. LUNDMARK, CFA IS HERE]
The Fiscal Year
Investors' changing opinions, relating to the economy, contributed to interest
rate volatility the last half of the fiscal year. Rates rose sharply in
February, March, and April as strong economic numbers caused investors to fear
higher rates of inflation. However, since the end of April, interest rates on
bonds with maturities from one to thirty years have declined below levels
experienced at the beginning of February. Investors are optimistic, even in the
face of economic growth, that inflation will remain tame and that the Federal
Reserve Board won't have to raise overnight rates(1) anytime soon. Even Federal
Reserve Chairman, Alan Greenspan, has called current U.S. economic conditions
exceptional.
Portfolio Strategies
My philosophy towards buying bonds is as follows: no one can consistently
predict whether interest rates are heading up or down over time. As a result, I
will not dramatically change the maturity of the portfolio from one reporting
period to the next. Instead, I constantly look for bonds representing good value
in terms of income and total return no matter where interest rates are headed.
At the present time, the Fund's bond holdings consist primarily of BBB rated
corporates and variable rate demand notes.(2) Investor demand is still strong
for BBB corporate securities because of their higher yields. Variable rate
demand notes provide price stability for the Fund, and because I focus on
smaller size investments, their yields are relatively attractive.
Performance
For the fiscal year ending July 31, 1997, your Fund's total return of 8.97%
ranked 7 out of 99 funds in the Lipper Short Investment Grade Debt Funds
category.(3) Strong performing holdings were Caremark,(4) Developers
Diversified, Franchise Finance, Kmart, and Tektronix.
Outlook
I wish I had a crystal ball that could foretell where interest rates were
headed. Since I don't, the best way that I can provide value is by continuing
with the strategy of finding securities that will provide attractive yields and
returns with minimal price volatility.
(1) An overnight rate is the federal funds rate, or the rate banks charge each
other for overnight loans.
(2) A variable rate demand note represents borrowings payable on demand
and bearing interest tied to a money market rate.
(3) Lipper Analytical Services is an independent organization that monitors
performance of mutual funds.
(4) Sold out prior to the end of the reporting period.
A pie chart is shown here depicting the Portfolio Mix as of July 31, 1997
of the USAA Short-Term Bond Fund to be:
Bonds/Notes - 66.8%*, Commercial Paper - 2.5%*, Variable Rate Demand Notes
- - 30.0%*.
* Percentages are of Net Assets and may or may not be equal to 100%.
See page 11 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 $ .6076*
Long-term capital gains .0046
-------
Total $ .6122
=======
None of the 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 Short-Term Bond 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 five-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
Short-Term Bond 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 five-year period
then ended, in conformity with generally accepted accounting principles.
KPMG Peat Marwick, LLP
San Antonio, Texas
September 3, 1997
<TABLE>
Short-Term Bond Fund
Statement of Assets and Liabilities
(In Thousands)
July 31, 1997
<S> <C>
Assets
Investments in securities, at market value (identified cost of $131,396) $ 132,821
Cash 195
Receivables:
Capital shares sold 94
Interest 2,103
----------
Total assets 135,213
----------
Liabilities
Securities purchased 1,039
Capital shares redeemed 217
USAA Investment Management Company 51
USAA Transfer Agency Company 21
Accounts payable and accrued expenses 53
Dividends on capital shares 86
----------
Total liabilities 1,467
----------
Net assets applicable to capital shares outstanding $ 133,746
==========
Represented by:
Paid-in capital $ 132,339
Accumulated net realized loss on investments (18)
Net unrealized appreciation of investments 1,425
----------
Net assets applicable to capital shares outstanding $ 133,746
==========
Capital shares outstanding 13,339
==========
Net asset value, redemption price, and offering price per share $ 10.03
==========
See accompanying notes to financial statements.
</TABLE>
Short-Term Bond Fund
Categories and Definitions
Portfolio of Investments in Securities
July 31, 1997
Fixed Rate Instruments -- consist of bonds and notes. The interest rate is
constant to maturity. Prior to maturity, the price of a fixed-rate instrument
generally varies inversely to the movement of interest rates.
Variable Rate Demand Notes (VRDN) -- provide the right, on any business day, to
sell the security for 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.
Cash Equivalents -- consist of short-term obligations issued by banks,
corporations, and U.S. Government Agencies. The interest rate is constant to
maturity.
Credit Enhancement (CRE) -- adds the financial strength of the provider of the
enhancement to support the issuer's ability to repay the principal when due. 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 provider of the
credit enhancement, rather than the credit standing of the issuer.
<TABLE>
Short-Term Bond Fund
Portfolio of Investments in Securities
(In Thousands)
July 31, 1997
<CAPTION>
Principal Coupon Market
Amount Security Rate Maturity Value
------ -------- ---- -------- -----
Fixed Rate Instruments (66.8%)
<C> <S> <C> <C> <C>
Bank Holding Companies - Other Major
$ 2,500 Provident Bank, Bank Notes 6.13% 12/15/00 $ 2,485
- ------------------------------------------------------------------------------------------------------
Banks
4,000 Advanta National Bank, Bank Notes 6.45 10/30/00 3,934
5,000 Capital One Bank, Bank Notes 5.95 2/15/01 4,931
4,500 Corporacion Andina De Fomento, Global Bonds 7.38 7/21/00 4,645
- -----------------------------------------------------------------------------------------------------
13,510
- -----------------------------------------------------------------------------------------------------
Broadcasters
5,500 Tele-Communications, Inc., Senior Notes 7.38 2/15/00 5,602
- -----------------------------------------------------------------------------------------------------
Electronics - Instrumentation
4,810 Tektronix, Inc., Notes 7.63 8/15/02 5,018
- -----------------------------------------------------------------------------------------------------
Entertainment
4,500 Time Warner, Inc., Global Notes 7.45 2/01/98 4,535
- -----------------------------------------------------------------------------------------------------
Finance - Business/Commercial
3,500 Great Lakes Power, Inc., Notes 8.90 12/01/99 3,690
- -----------------------------------------------------------------------------------------------------
Finance - Real Estate
3,500 Homeside Lending, Inc., MTN 6.88 5/15/00 3,552
- -----------------------------------------------------------------------------------------------------
Hotel/Motel
5,000 Hilton Hotels Corp., Senior Notes 7.38 6/01/02 5,133
- -----------------------------------------------------------------------------------------------------
Real Estate Investment Trusts
3,000 Developers Diversified Realty Corp.,
Senior Notes 7.63 5/15/00 3,080
4,500 Franchise Finance Corp. of America,
Senior Notes 7.00 11/30/00 4,577
3,000 Nationwide Health Properties, Inc., MTN 8.61 3/01/02 3,241
5,000 Oasis Residential, Inc., Notes 6.75 11/15/01 5,021
4,500 TriNet Corporate Realty Trust, Inc., Notes 7.30 5/15/01 4,604
- -----------------------------------------------------------------------------------------------------
20,523
- -----------------------------------------------------------------------------------------------------
Retail - General Merchandising
2,000 Kmart Corp., MTN 7.72 6/25/02 2,008
2,000 Kmart Corp., MTN 7.76 7/01/02 2,011
- -----------------------------------------------------------------------------------------------------
4,019
- -----------------------------------------------------------------------------------------------------
Retail - Specialty
5,500 MacSaver Financial Services, Inc., Notes 7.40 2/15/02 5,582
- -----------------------------------------------------------------------------------------------------
Special Assessment/Tax/Fee
5,000 New York, Dormitory Auth. Bonds, Series 1996 6.63% 10/01/00 5,062
- -----------------------------------------------------------------------------------------------------
Telecommunications
4,000 WorldCom, Inc., Senior Notes 7.55 4/01/04 4,186
- ------------------------------------------------------------------------------------------------------
Tobacco
1,300 Empresas La Moderna S.A. de C.V., Notes 10.25 11/12/97 1,318(a)
5,000 RJR Nabisco, Inc., Notes 8.00 7/15/01 5,138
- -----------------------------------------------------------------------------------------------------
6,456
- -----------------------------------------------------------------------------------------------------
Total fixed rate instruments (cost: $87,928) 89,353
- -----------------------------------------------------------------------------------------------------
Variable Rate Demand Notes (30.0%)
Buildings
5,375 Erie Funding I, Notes (CRE) 5.75 11/01/16 5,375
2,325 Montgomery, AL, IDB RB, Series 1996C (CRE) 5.75 7/01/16 2,325
675 New Jersey Economic Development Auth. Bonds,
Series 1996A2 (CRE) 6.00 11/01/16 675
600 New Jersey Economic Development Auth. Bonds,
Series 1996D2 (CRE) 6.00 11/01/06 600
1,625 Scottsboro, AL, IDB RB, Series 1995 (CRE) 5.75 10/01/10 1,625
- -----------------------------------------------------------------------------------------------------
10,600
- -----------------------------------------------------------------------------------------------------
Chemicals
2,595 Upper Illinois River Valley Development
Auth. RB, Series 1996B (CRE) 5.80 12/01/21 2,595
- -----------------------------------------------------------------------------------------------------
Electrical Equipment
850 APSCO, Inc., Notes, Series 1996 (CRE) 5.80 9/01/03 850
- -----------------------------------------------------------------------------------------------------
Entertainment
3,880 Denver, CO, Urban Renewal Auth. Tax
Increment RB, Series 1992B (CRE) 5.80 9/01/11 3,880
- -----------------------------------------------------------------------------------------------------
Finance - Receivables
1,000 KBL Capital Fund, Inc., Installment #1 Notes,
Series A (CRE) 5.64 5/01/27 1,000
1,500 KBL Capital Fund, Inc., Installment #2 Notes,
Series A (CRE) 5.64 5/01/27 1,500
- -----------------------------------------------------------------------------------------------------
2,500
- -----------------------------------------------------------------------------------------------------
General Obligations
1,300 Salinas, CA, Public Financing Auth. RB,
Series 1997B (CRE) 5.75 3/01/27 1,300
- -----------------------------------------------------------------------------------------------------
Heavy Duty Trucks & Parts
2,910 Missouri Economic Development Export IDA RB,
Series 1993B (CRE) 6.00 6/01/08 2,910
- -----------------------------------------------------------------------------------------------------
Hotel/Motel
2,640 Birmingham, AL, Historical Preservation Auth.
Taxable RB, Series 1993 (CRE) 6.15 5/01/18 2,640
3,145 Rockside Road Properties, Notes, Series
1995 (CRE) 5.75 7/01/10 3,145
- -----------------------------------------------------------------------------------------------------
5,785
- -----------------------------------------------------------------------------------------------------
Housing - Multi-Family
480 Bartlett, IL, MFH RB, Series 1995 (CRE) 6.05 3/01/25 480
4,300 Continental Valorem Corp., DEB,
Series 1988 (CRE) 6.00 6/01/13 4,300
- -----------------------------------------------------------------------------------------------------
4,780
- -----------------------------------------------------------------------------------------------------
Machinery - Diversified
2,500 Huntsville, AL, IDB RB, Series 1997 (CRE) 5.79 5/01/17 2,500
- -----------------------------------------------------------------------------------------------------
Real Estate
2,475 Wynrose, Inc., Notes, Series 1995A (CRE) 5.75 11/01/05 2,475
- -----------------------------------------------------------------------------------------------------
Total variable rate demand notes (cost: $40,175) 40,175
- -----------------------------------------------------------------------------------------------------
Cash Equivalents (2.5%)
Commercial Paper
1,000 AT & T Capital Corp. 5.82 8/04/97 999
2,294 Pacificorp Holdings, Inc. 6.00 8/01/97 2,294
- -----------------------------------------------------------------------------------------------------
Total cash equivalents (cost: $3,293) 3,293
- -----------------------------------------------------------------------------------------------------
Total investments (cost: $131,396) $ 132,821
=====================================================================================================
</TABLE>
Portfolio Summary By Industry
Real Estate Investment Trusts 15.3%
Bank Related 12.0
Hotel/Motel 8.2
Buildings 7.9
Entertainment 6.3
Finance - Business/Commercial 5.2
Tobacco 4.8
Broadcasters 4.2
Retail - Specialty 4.2
Special Assessment/Tax/Fee 3.8
Electronics - Instrumentation 3.7
Housing - Multi-Family 3.6
Telecommunications 3.1
Retail - General Merchandising 3.0
Finance - Real Estate 2.7
Heavy Duty Trucks & Parts 2.2
Chemicals 1.9
Finance - Receivables 1.9
Machinery - Diversified 1.9
Real Estate 1.8
General Obligations 1.0
Electrical Equipment .6
----
Total 99.3%
====
Short-Term Bond 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.
Investments in foreign securities were 7.2% of net assets at July 31, 1997.
Portfolio Description Abbreviations
CRE Credit Enhanced
DEB Debentures
IDA Industrial Development Authority/Agency
IDB Industrial Development Board
MFH Multi-Family Housing
MTN Medium-Term Note
RB Revenue Bond
Specific Notes
(a) Security is exempt from registration under the Securities Act of 1933 and
has been determined to be liquid by the Manager. Any resale of this security
may occur in an exempt transaction in the United States to a qualified
institutional buyer as defined by Rule 144A.
See accompanying notes to financial statements.
<TABLE>
Short-Term Bond Fund
Statement of Operations
(In Thousands)
Year ended July 31, 1997
<S> <C>
Net investment income:
Interest income $ 7,677
-------
Expenses:
Management fees 277
Transfer agent's fees 238
Custodian's fees 61
Postage 21
Shareholder reporting fees 9
Directors' fees 4
Registration fees 54
Audit fees 29
Legal fees 3
Other 9
-------
Total expenses before reimbursement 705
Expenses reimbursed (127)
-------
Total expenses after reimbursement 578
-------
Net investment income 7,099
-------
Net realized and unrealized gain on investments:
Net realized gain 410
Change in net unrealized appreciation/depreciation 2,464
-------
Net realized and unrealized gain 2,874
-------
Increase in net assets resulting from operations $ 9,973
=======
See accompanying notes to financial statements.
</TABLE>
<TABLE>
Short-Term Bond Fund
Statements of Changes in Net Assets
(In Thousands)
Years ended July 31,
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
From operations:
Net investment income $ 7,099 $ 5,732
Net realized gain on investments 410 180
Change in net unrealized appreciation/depreciation
of investments 2,464 (1,033)
--------- ----------
Increase in net assets resulting from operations 9,973 4,879
--------- ----------
Distributions to shareholders from:
Net investment income (7,099) (5,732)
--------- ----------
Net realized gains (51) -
--------- ----------
From capital share transactions:
Proceeds from shares sold 75,807 70,903
Shares issued for dividends reinvested 6,140 4,971
Cost of shares redeemed (52,056) (50,179)
--------- ----------
Increase in net assets from capital share transactions 29,891 25,695
--------- ----------
Net increase in net assets 32,714 24,842
Net assets:
Beginning of period 101,032 76,190
--------- ----------
End of period $ 133,746 $ 101,032
========= ==========
Change in shares outstanding:
Shares sold 7,655 7,189
Shares issued for dividends reinvested 620 505
Shares redeemed (5,259) (5,093)
--------- ----------
Increase in shares outstanding 3,016 2,601
========= ==========
Authorized shares of $.01 par value 25,000 25,000
========= ==========
See accompanying notes to financial statements.
</TABLE>
Short-Term Bond 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
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. 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. 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 -- 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 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
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, 1997. 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 year
ended July 31, 1997 were $42,425,328 and $20,059,989, respectively.
Gross unrealized appreciation and depreciation of investments as of July 31,
1997 was $1,592,537 and $167,553, 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 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
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 Four-Month
Year Ended July 31, Period Ended Period Ended
---------------------------------- July 31, September 30,
1997 1996 1995 1994 1993**
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net asset value at
beginning of period $ 9.79 $ 9.87 $ 9.74 $ 10.08 $ 10.00
Net investment income .61 .62 .61 .37 .14
Net realized and unrealized
gain (loss) .25 (.08) .13 (.33) .08
Distributions from net
investment income (.61) (.62) (.61) (.37) (.14)
Distributions of realized
capital gains (.01) - - (.01) -
---------- ---------- -------- -------- ---------
Net asset value at
end of period $ 10.03 $ 9.79 $ 9.87 $ 9.74 $ 10.08
========== ========== ======== ======== =========
Total return (%) * 8.97 5.62 7.90 .39 2.19
Net assets at end
of period (000) $ 133,746 $ 101,032 $ 76,190 $ 48,228 $ 25,679
Ratio of expenses to
average net assets (%) .50(b) .50(b) .50(b) .50(a,b) .50(a,b)
Ratio of net investment
income to average
net assets (%) 6.14(b) 6.29(b) 6.34(b) 4.51(a,b) 4.21(a,b)
Portfolio turnover (%) 27.85 66.81 103.02 142.08 32.49
* 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) The information contained in the previous 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:
Ten-Month Four-Month
Year Ended July 31, Period Ended Period Ended
---------------------------------- July 31, September 30,
1997 1996 1995 1994 1993 **
---- ---- ---- ---- ----
Ratio of expenses to
average net assets (%) .61 .66 .74 .87(a) 1.57(a)
Ratio of net investment
income to average
net assets (%) 6.03 6.13 6.10 4.14(a) 3.14(a)
</TABLE>
