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 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
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 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.
07/31/96 07/31/97
Net Assets............................... $1,710.8 MILLION $2,186.3 MILLION
Net Asset Value Per Share................ $15.85 $19.01
Average Annual Total Returns as of 7/31/97
1 Year...................................................... 31.46%
5 Years..................................................... 14.41%
10 Years.................................................... 13.23%
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 Stock Fund
Year Amount
- -----------------------------
7/31/87 $10,000
7/31/88 10,072
7/31/89 12,469
7/31/90 12,765
7/31/91 14,950
7/31/92 17,675
7/31/93 19,436
7/31/94 19,589
7/31/95 23,277
7/31/96 26,353
7/31/97 34,642
S&P 500 Index Fund
Year Amount
- ----------------------------
7/31/87 $10,000
7/31/88 8,824
7/31/89 11,639
7/31/90 12,392
7/31/91 13,969
7/31/92 15,753
7/31/93 17,125
7/31/94 18,007
7/31/95 22,702
7/31/96 26,460
7/31/97 40,248
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.
MESSAGE FROM THE MANAGER
[PHOTOGRAPH OF PORTFOLIO MANAGER, HARRY W. MILLER, CFA IS HERE]
Performance
As of July 31, 1997, your Fund had net assets in excess of $2 billion, an
increase of more than 27% from our July 31, 1996, net position.
Since our last report of January 31, 1997, healthcare has been the best
performing industry in the Fund with holdings in American Home Products and
Bristol-Myers Squibb. Other holdings with stellar performance included Deere &
Co. (machinery), Bankers Trust (banking), Ford (automobiles), and our
convertible preferreds such as Sun Company (oil-domestic), James River (paper),
and Aetna (insurance). The real estate investment trust category was the best
performer in the first six months of the fiscal year. However, the category
underperformed for the last six-month period, with the exception of Chateau
Communities. As a result, we restructured the category by selling nine holdings
and replacing them with four new names. Other disappointing holdings were Texas
Utilities (electric utilities), GTE (telephones), and our convertible preferred
IKON Office Solutions (office equipment).
Our convertible holdings in Cooper Industries, MascoTech, and RJR Nabisco were
called for conversion into common stocks and were replaced with convertibles of
Airtouch Communications, Continental Airlines, and Micron Technology.
Outlook and Perspective
The Income Stock Fund has provided investors with a rising dividend stream ever
since its inception in 1987.(1) It is a record of which we are proud, but one
which has never been assured. Interest rates and dividend yields have fallen
during the '90s and this makes it very difficult to maintain, much less
increase, the Fund's dividend. We have given investors a true equity income fund
which in the past twelve months featured a total return over 31% and a yield
over 4%. That yield is exceptional among equity income funds and we believe it
is very important. But the combination of yield and total return is also very
important. We cannot focus on only one or the other; they are linked together in
this kind of fund. Were we to concentrate solely on raising or maintaining the
dividend, that would change the character of the Fund and probably lower its
total return. We do not want to do that. It is unlikely that the Fund's dividend
will rise next year, and it may decline slightly. However, the Fund will
continue to be the kind of investment it has been since inception; one that
places equal importance on dividends and total return.
(1) Past performance is no guarantee of future results. Yields and returns will
fluctuate.
Top 10 Equity Holdings
(% of Net Assets)
Bankers Trust 4.5
Ford 4.5
RJR Nabisco 4.1
Bristol-Myers Squibb 3.8
GTE 3.8
Allegheny Power System 3.6
Aetna, Preferred 3.5
Chrysler 3.4
NYNEX 3.2
Texaco 2.9
Top 10 Industries
(% of Net Assets)
Real Estate Investment Trusts 13.7
Telephones 12.0
Oil Related 11.1
Electric Power 8.9
Automobiles 7.9
Bank Related 7.2
Tobacco 6.5
Healthcare - Diversified 6.0
Distribution & Pipelines 5.5
Insurance - Multi-Line 3.5
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 $ .8642*
Long-term capital gains .6687
-------
Total $1.5329
=======
87.84% 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 Stock 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 Stock 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 Stock Fund
Statement of Assets and Liabilities
(In Thousands)
July 31, 1997
<S> <C>
Assets
Investments in securities, at market value (identified cost of $1,681,420) $ 2,181,490
Cash 379
Receivables:
Capital shares sold 431
Dividends and interest 6,517
Securities sold 676
------------
Total assets 2,189,493
------------
Liabilities
Securities purchased 770
Capital shares redeemed 1,072
USAA Investment Management Company 913
USAA Transfer Agency Company 185
Accounts payable and accrued expenses 224
------------
Total liabilities 3,164
------------
Net assets applicable to capital shares outstanding $ 2,186,329
============
Represented by:
Paid-in capital $ 1,602,363
Accumulated undistributed net investment income 4,860
Accumulated net realized gain on investments 79,036
Net unrealized appreciation of investments 500,070
------------
Net assets applicable to capital shares outstanding $ 2,186,329
============
Capital shares outstanding 115,020
============
Net asset value, redemption price, and offering price per share $ 19.01
============
See accompanying notes to financial statements.
</TABLE>
Income Stock Fund
Portfolio of Investments in Securities
July 31, 1997
Market
Number Value
of Shares Security (000)
- --------- -------- -----
Common Stocks (77.4%)
Aerospace/Defense (1.2%)
600,000 B.F. Goodrich Co. $ 27,112
- ---------------------------------------------------
Auto Parts (0.7%)
668,500 MascoTech, Inc. 14,289
- ---------------------------------------------------
Automobiles (7.9%)
2,000,000 Chrysler Corp. 74,250
2,400,000 Ford Motor Co. 98,100
- ---------------------------------------------------
172,350
- ---------------------------------------------------
Bank Holding Companies -
Major Regional (2.7%)
1,300,000 PNC Bank Corp. 59,475
- ---------------------------------------------------
Bank Holding Companies -
Money Center (4.5%)
975,000 Bankers Trust New York Corp. 98,658
- ---------------------------------------------------
Distribution & Pipelines (5.5%)
1,383,600 National Fuel Gas Co. 58,803
1,390,500 NICOR, Inc. 50,927
242,800 Peoples Energy Corp. 9,318
- ---------------------------------------------------
119,048
- ---------------------------------------------------
Electric Power (8.9%)
2,700,000 Allegheny Power System, Inc. 79,144
400,000 Central Hudson Gas
& Electric Corp. 13,275
1,000,000 Houston Industries, Inc. 20,938
1,100,000 IES Industries, Inc. 33,687
200,000 Public Service Co. of
Colorado 8,325
445,000 Southwestern Public Service
Co. 17,689
600,000 Texas Utilities Co. 21,262
- ---------------------------------------------------
194,320
- ---------------------------------------------------
Healthcare - Diversified (6.0%)
600,000 American Home Products
Corp. 49,463
1,050,000 Bristol-Myers Squibb Co. 82,359
- ---------------------------------------------------
131,822
- ---------------------------------------------------
Machinery - Diversified (1.6%)
600,000 Deere & Co. 34,125
- ---------------------------------------------------
Oil - Domestic (3.8%)
600,000 Atlantic Richfield Co. 44,887
1,500,000 Occidental Petroleum Corp. 37,594
- ---------------------------------------------------
82,481
- ---------------------------------------------------
Oil - International (2.9%)
550,000 Texaco, Inc. 63,834
- ---------------------------------------------------
Real Estate Investment Trusts (13.7%)
610,000 Arden Realty Group, Inc. 16,584
400,000 Avalon Properties, Inc. 11,050
500,000 Beacon Properties Corp. 18,313
350,400 Brandywine Realty Trust 7,840
990,000 Burnham Pacific Properties,
Inc. 14,108
400,000 Cali Realty Corp. 14,625
67,300 Chateau Communities, Inc. 1,947
275,000 Chelsea GCA Realty, Inc. 10,845
400,000 Developers Diversified
Realty Corp. 15,800
174,100 Duke Realty Investments,
Inc. 7,737
400,000 Felcor Suite Hotels, Inc. 15,600
600,000 First Industrial Realty
Trust, Inc. 18,562
300,000 Gables Residential Trust 8,006
500,000 Glimcher Realty Trust 10,438
250,000 Highwoods Properties, Inc. 8,344
775,000 Liberty Property Trust 20,441
400,000 Mills Corp. 10,625
510,007 Patriot American
Hospitality, Inc. 12,718
350,000 Post Properties, Inc. 13,978
600,000 Prentiss Properties Trust 15,600
605,000 Shurgard Storage Centers,
Inc. 17,129
400,000 Storage USA, Inc. 16,500
439,729 United Dominion Realty
Trust, Inc. 6,266
200,000 Weeks Corp. 6,325
- ---------------------------------------------------
299,381
- ---------------------------------------------------
Specialty Printing (0.9%)
600,000 Deluxe Corp. 19,988
- ---------------------------------------------------
Telephones (10.6%)
1,800,000 GTE Corp. 83,700
1,250,000 NYNEX Corp. 69,297
700,000 Sprint Corp. 34,650
1,200,000 U S West Communications Group 43,875
- ---------------------------------------------------
231,522
- ---------------------------------------------------
Tobacco (6.5%)
1,200,000 Philip Morris Companies,
Inc. 54,150
2,700,000 RJR Nabisco Holdings Corp. 88,594
- ---------------------------------------------------
142,744
- ---------------------------------------------------
Total common stocks (cost: $1,250,714) 1,691,149
- ---------------------------------------------------
Preferred Stocks (16.3%)
Computer Systems (2.6%)
1,325,000 Unisys Corp. depositary
shares "A", $3.75
cumulative convertible 56,395
- ---------------------------------------------------
Insurance - Multi-Line
Companies (3.5%)
750,000 Aetna, Inc., Class C, 6.25%
cumulative convertible 75,563
- ---------------------------------------------------
Office Equipment & Supplies (1.2%)
350,000 IKON Office Solutions, Inc.
depositary shares "BB",
6.50% cumulative
convertible 25,813
- ---------------------------------------------------
Oil - Domestic (2.3%)
1,525,000 Sun Company, Inc. depositary
shares "A", $1.80
cumulative convertible 50,039
- ---------------------------------------------------
Paper & Forest Products (2.8%)
1,617,700 James River Corp. depositary
shares "P", 9.00%
cumulative convertible 61,270
- ---------------------------------------------------
Pollution Control (1.5%)
950,000 Browning-Ferris Industries, Inc.,
7.25% automatic
exchangeable 32,419
- ---------------------------------------------------
Publishing/Newspapers (0.5%)
1,000,000 Hollinger International, Inc.,
PRIDES, 9.75%
cumulative convertible 11,625
- ---------------------------------------------------
Steel (0.5%)
250,000 USX Corp., 6.50% cumulative
convertible 12,125
- ---------------------------------------------------
Telephones (1.4%)
1,000,000 AirTouch Communications, Inc.,
Class B, 6.00% cumulative
convertible 31,750
- ---------------------------------------------------
Total preferred stocks (cost: $297,125) 356,999
- ---------------------------------------------------
Principal
Amount
(000)
-----
Convertible Bonds (3.3%)
$ 1,900 Atlantic Richfield Co.
Exchangeable Notes,
9.00%, 9/15/97 46,787
15,000 Continental Airlines, Inc.,
6.75%, 4/15/06 20,588
5,000 Micron Technology Inc.,
7.00%, 7/01/04 5,431
- ---------------------------------------------------
Total bonds (cost: $73,045) 72,806
- ---------------------------------------------------
Short-Term (2.8%)
Commercial Paper (1.5%)
32,005 Household Finance Corp.,
5.68%, 8/01/97
(cost: $32,005) 32,005
- ---------------------------------------------------
Discount Note (1.3%)
28,545 Federal Home Loan Mortgage Corp.,
5.64%, 8/04/97
(cost: $28,531) 28,531
- ---------------------------------------------------
Total short-term (cost: $60,536) 60,536
- ---------------------------------------------------
Total investments (cost: $1,681,420) $2,181,490
===================================================
Income Stock 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 Stock Fund
Statement of Operations
(In Thousands)
Year ended July 31, 1997
<S> <C>
Net investment income:
Income:
Dividends $ 101,994
Interest 2,740
----------
Total income 104,734
----------
Expenses:
Management fees 9,671
Transfer agent's fees 2,677
Custodian's fees 247
Postage 300
Shareholder reporting fees 80
Directors' fees 5
Registration fees 98
Audit fees 29
Legal fees 3
Other 72
----------
Total expenses 13,182
----------
Net investment income 91,552
----------
Net realized and unrealized gain on investments:
Net realized gain 111,015
Change in net unrealized appreciation/depreciation 326,818
----------
Net realized and unrealized gain 437,833
----------
Increase in net assets resulting from operations $ 529,385
==========
See accompanying notes to financial statements.
</TABLE>
<TABLE>
Income Stock Fund
Statements of Changes in Net Assets
(In Thousands)
Years ended July 31,
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
From operations:
Net investment income $ 91,552 $ 78,374
Net realized gain on investments 111,015 54,444
Change in net unrealized appreciation/depreciation
of investments 326,818 57,966
------------ ------------
Increase in net assets resulting from operations 529,385 190,784
------------ ------------
Distributions to shareholders from:
Net investment income (89,087) (78,768)
------------ ------------
Net realized gains (80,728) (26,302)
------------ ------------
From capital share transactions:
Proceeds from shares sold 260,043 319,925
Shares issued for dividends reinvested 158,556 96,884
Cost of shares redeemed (302,609) (200,125)
------------ ------------
Increase in net assets from capital share transactions 115,990 216,684
------------ ------------
Net increase in net assets 475,560 302,398
Net assets:
Beginning of period 1,710,769 1,408,371
------------ ------------
End of period $ 2,186,329 $ 1,710,769
============ ============
Undistributed net investment income included in net assets:
Beginning of period $ 2,395 $ 2,689
============ ============
End of period $ 4,860 $ 2,395
============ ============
Change in shares outstanding:
Shares sold 15,238 20,238
Shares issued for dividends reinvested 9,566 6,184
Shares redeemed (17,704) (12,616)
------------ ------------
Increase in shares outstanding 7,100 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
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 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 -- 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 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 year
ended July 31, 1997 were $677,236,995 and $660,145,952, respectively.
Gross unrealized appreciation and depreciation of investments as of July 31,
1997 was $503,826,786 and $3,756,966, 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 year ended July
31, 1997 was $20,000.
(6) Transactions with Affiliates
USAA Investment Management Company is indirectly wholly owned by United Services
Automobile Association (the Association), a large, diversified financial
services institution. At July 31, 1997, the Association and its affiliates owned
3,369,349 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.
(7) Financial Highlights
Per share operating performance for a share outstanding throughout each period
is as follows:
<TABLE>
<CAPTION>
Ten-Month
Year Ended July 31, Period Ended Year Ended
------------------------------------------- July 31, September 30,
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net asset value at
beginning of period $ 15.85 $ 14.96 $ 13.50 $ 14.95 $ 13.42
Net investment income .81 .77 .74 .60 .71
Net realized and
unrealized gain (loss) 3.88 1.16 1.69 (1.12) 1.62
Distributions from net
investment income (.79) (.77) (.75) (.74) (.71)
Distributions of realized
capital gains (.74) (.27) (.22) (.19) (.09)
---------- ---------- ---------- ---------- ----------
Net asset value at
end of period $ 19.01 $ 15.85 $ 14.96 $ 13.50 $ 14.95
========== ========== ========== ========== ==========
Total return (%)* 31.46 13.21 18.83 (3.53) 18.05
Net assets at end
of period (000) $2,186,329 $1,710,769 $1,408,371 $1,190,024 $1,043,686
Ratio of expenses to
average net assets (%) .68 .72 .75 .73(a) .70
Ratio of net investment
income to average
net assets (%) 4.73 4.84 5.34 5.25(a) 5.43
Portfolio turnover (%) 34.95 32.38 34.94 24.82 26.98
Average commission rate
paid per share + $ .0499 $ .0500
(a) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
* Assumes reinvestment of all dividend income and capital gains
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.
Year Ended September 30,
----------------------------------------------------------------------------
1992 1991 1990 1989 1988
---- ---- ---- ---- ----
Net asset value at
beginning of period $ 12.63 $ 10.27 $ 12.32 $ 10.26 $ 10.74
Net investment income .71 .69 .61 .54 .45
Net realized and
unrealized gain (loss) .78 2.34 (1.47) 2.01 (.49)
Distributions from net
investment income (.70) (.67) (.61) (.49) (.42)
Distributions of realized
capital gains - - (.58) - (.02)
---------- ---------- ---------- ---------- ----------
Net asset value at
end of period $ 13.42 $ 12.63 $ 10.27 $ 12.32 $ 10.26
========== ========== ========== ========== ==========
Total return (%)* 12.14 30.45 (7.73) 25.66 (.10)
Net assets at end
of period (000) $ 480,733 $ 179,339 $ 80,853 $ 55,296 $ 31,241
Ratio of expenses to
average net assets (%) .74 .83 1.00(b) 1.00(b) 1.00(b)
Ratio of net investment
income to average
net assets (%) 5.99 6.30 5.75(b) 5.10(b) 4.72(b)
Portfolio turnover (%) 98 15.79 26.65 49.16 72.30 27.56
Average commission rate
paid per share +
</TABLE>
(b) The information contained in the above table is based on actual
expenses for the period, after giving effect to reimbursement of expenses
by the Manager. Absent such reimbursement the Fund's ratios would have
been:
Ratio of expenses to
average net assets (%) 1.03 1.18 1.50
Ratio of net investment
income to average
net assets (%) 5.72 4.92 4.22
