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 8
Independent Auditors' Report 9
Categories and Definitions 10
Portfolio of Investments 11
Notes to Portfolio of Investments 16
Statement of Assets and Liabilities 17
Statement of Operations 18
Statements of Changes in Net Assets 19
Notes to Financial Statements 20
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)1998, USAA. All rights reserved.
USAA Family of Funds Summary
Fund Minimum
Type/Name Volatility Investment*
--------- ---------- ----------
CAPITAL APPRECIATION
===============================================================================
Aggressive Growth Very high $3,000
Emerging Markets(1) Very high $3,000
First Start Growth Moderate to high $3,000
Gold(1) Very high $3,000
Growth Moderate to high $3,000
Growth & Income Moderate $3,000
International(1) Moderate to high $3,000
S&P 500 (Registered Trademark)
Index(2) Moderate $3,000
Science & Technology(5) Very high $3,000
World Growth(1) Moderate to high $3,000
ASSET ALLOCATION
===============================================================================
Balanced Strategy(1) Moderate $3,000
Cornerstone Strategy(1) Moderate $3,000
Growth and Tax
Strategy(3) Moderate $3,000
Growth Strategy(1) Moderate to high $3,000
Income Strategy Low to moderate $3,000
INCOME - TAXABLE
===============================================================================
GNMA Low to moderate $3,000
Income Moderate $3,000
Income Stock Moderate $3,000
Short-Term Bond Low $3,000
INCOME - TAX EXEMPT
===============================================================================
Long-Term(3) Moderate $3,000
Intermediate-Term(3) Low to moderate $3,000
Short-Term(3) Low $3,000
State Bond Income(3)** Moderate $3,000
MONEY MARKET
===============================================================================
Money Market(4) Very low $3,000
Tax Exempt
Money Market(3),(4) Very low $3,000
Treasury Money
Market Trust(4) Very low $3,000
State Money Market(3),(4)** Very low $3,000
(1) Foreign investing is subject to additional risks, which are discussed in
the funds' prospectuses.
(2) 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.
(3) Some income may be subject to state or local taxes or the federal
alternative minimum tax.
(4) 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.
(5) This Fund may be more volatile than a fund that diversifies across many
industries.
* The InveStart (Registered Trademark) program is available for investors
without the $3,000 initial investment required to open an IMCO mutual fund
account. A mutual fund account can be opened with no initial investment if
you elect to have monthly automatic investments of at least $50 from a bank
account. InveStart is not available on tax-exempt funds or the S&P 500
Index Fund. The minimum initial investment for IRAs is $250, except for the
$2,000 minimum required for the S&P 500 Index Fund. 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.
Non-deposit investment products 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, and may lose value.
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.
Message from the President
On June 14, 1998, my wife attended a baby shower given for her daughter, Andrea.
That evening, in addition to many nice gifts, Andrea had another surprise, a new
baby boy, James Kade Broyles. James was our fourth grandchild to receive an
Investart(Registered Trademark) account. His account is in the USAA Growth &
Income Fund. These accounts point up at this time some things I have long
believed.
[Photograph of Michael J. C. Roth, CFA, President and Vice Chairman of the Board
appears here]
Shortly after we opened James' account, the stock market began to feel the
effects of long-simmering problems. There was the Asian crisis, Russia in
turmoil, a worsening trade deficit, and very high stock valuations. Suddenly,
the mood changed. There were several days of market drops well over 100 points
on the Dow. The August 8 edition of The Economist has a picture of a bear on the
cover under the caption "Grin and bear it." So, how do we feel about the four
InveStart accounts? We feel just fine!
The reason is that we have a match between our objective and our risk tolerance.
These accounts are aimed at events 15 to 17 years from now, college for four
grandchildren. We are certain that between then and now, the market will
fluctuate. I think we're better off to keep adding to the InveStart accounts,
because I believe the risk and potential reward are in harmony.
Whatever your investment situation, I believe it is possible to achieve this
kind of match between risk and potential reward that can help you with your
investment program.
Sincerely,
Michael J.C. Roth, CFA
President and
Vice Chairman of the Board
Past performance is no guarantee of future results.
A systematic plan, such as Investart, does not assure a profit or protect
against loss in declining markets.
For more information about mutual funds managed and distributed by USAA IMCO,
including charges and expenses, please call for a prospectus. Read it carefully
before investing.
Investment Review
USAA SHORT-TERM BOND FUND
OBJECTIVE: High current income consistent with preservation of principal.
TYPES OF INVESTMENTS: A broad range of investment-grade debt securities.
- --------------------------------------------------------------------------------
7/31/97 7/31/98
- --------------------------------------------------------------------------------
Net Assets $133.7 Million $181.2 Million
Net Asset Value Per Share $10.03 $9.99
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS AS OF 7/31/98
- --------------------------------------------------------------------------------
1 Year 5 Years Since Inception on 6/1/93
5.91% 5.99% 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 comparison of
a $10,000 hypothetical investment in the USAA Short-Term Bond Fund, the Lipper
Short Investment Grade Debt Funds Average, and the Lehman Brothers 1-3 Year
Government/Corporation Index for the period of 06/01/93 through 07/31/98. The
data points from the graph are as follows:
USAA Short- Lipper Short Inv Grade Lehman 1-3
Term Bond Fund Grade Debt Average Govt/Corp Index
-------------- ----------------------- ----------------
06/01/93 $10,000 $10,000 $10,000
06/30/93 10,073 10,076 10,076
12/31/93 10,285 10,311 10,285
06/30/94 10,177 10,235 10,236
12/31/94 10,287 10,336 10,342
06/30/95 11,032 10,955 11,033
12/31/95 11,438 11,390 11,476
06/30/96 11,640 11,535 11,645
12/31/96 12,160 11,958 12,066
06/30/97 12,537 12,298 12,416
12/31/97 13,031 12,707 12,870
06/30/98 13,438 13,068 13,259
07/31/98 13,494 13,124 13,321
Data from 6/1/93 through 7/31/98
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, Inc., an independent
organization that monitors the performance of mutual funds.
Message from the Manager
[Photograph of Portfolio Manager, Paul Lundmark, CFA, appears here]
THE MARKET
Since the last report, long-term interest rates (10 through 30 years to
maturity) have fallen. Investors believe that the rate of inflation, the primary
determinant of the general level of interest rates, will continue to move
downward over time. However, short-term rates (1 through 5 years to maturity)
have not fallen due to the Federal Reserve keeping overnight rates unchanged.
Lack of action from the Federal Reserve is due in part to the fear that current
tight labor markets could cause labor costs to increase and revive inflation.
The unknown trump card is Asia. Going forward, the level of interest rates will
be impacted by how significantly the Asian economic downturn affects our
economy.
PORTFOLIO STRATEGIES
As I have said in previous annual and semiannual reports, I do not try to time
the markets because no one has consistently been successful in predicting the
course of interest rates over time. The other reason is that for fixed-income
securities, the primary component of your total return should be derived from
the income that you receive, not from changes in the net asset value.
As shown in the table on the next page, dividend returns for the Fund have been
the dominant component of the respective total returns. This assumes that you
reinvest 100% of your dividends.
Average Annual Compounded Returns with
Reinvestment of Dividends - Periods Ending July 31, 1998
- --------------------------------------------------------------------------------
TOTAL DIVIDEND PRICE
RETURN EQUALS RETURN PLUS CHANGE
- --------------------------------------------------------------------------------
Since 6/1/93 5.97% = 5.96% + 0.01%
5 Years 5.99% = 6.02% + -0.03%
3 Years 6.82% = 6.40% + 0.42%
1 Year 5.91% = 6.31% + -0.40%
- --------------------------------------------------------------------------------
ANNUAL TOTAL RETURNS AND COMPOUNDED DIVIDEND RETURNS
A chart in the form of a bar graph appears here, illustrating the Annual Total
Returns and Compounded Dividend Returns of the USAA Short-Term Bond Fund for
the years ended July 31, 1998.
Total Return for years ended:
- -------------------------------------------------------------------------------
7/31/93 .87% *
7/31/94 1.71%
7/31/95 7.90%
7/31/96 5.62%
7/31/97 8.97%
7/31/98 5.91%
**Compounded Dividend Yield for years ended:
- --------------------------------------------------------------------------------
7/31/93 .67% *
7/31/94 4.40%
7/31/95 6.57%
7/31/96 6.43%
7/31/97 6.47%
7/31/98 6.31%
Change in Share Price:
- --------------------------------------------------------------------------------
7/31/93 .20% *
7/31/94 -2.69%
7/31/95 1.33%
7/31/96 -0.81%
7/31/97 2.50%
7/31/98 -0.40%
* Since inception on 6/1/93
**Compounded Dividend yield calculation includes only income distributions.
Total return equals income return plus share price change and assumes
reinvestment of all dividends and capital gain distributions. Dividend return is
the income dividends received over the period assuming reinvestment of all
dividends. Share price change is the change in net asset value over the period
adjusted for 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.
You will not see dramatic changes in the bond maturities in the portfolio in an
attempt to time the market. My emphasis continues to be looking for bonds that
represent value in terms of risk and total return. The other side of that search
is selling securities in the portfolio that no longer represent value. While
there are no hard and fast rules as to what value means, I feel that the primary
components of value are yield, credit quality, structure (maturity, coupon,
redemption features) and liquidity.
For the 1-, 3-, and 5-year periods ending July 31, 1998, your Fund's total
return of 5.91%, 6.82% and 5.99% ranked 29 out of 103, 8 out of 81, and 7 out of
50, respectively by Lipper, in the Short Investment Grade Debt Funds
category.(1) As you can see, the philosophy of maximizing income and not trying
to time the market has worked very well.(2) I must also credit our seasoned team
of fixed income analysts for helping to identify improving credits and sectors
and to avoid problem situations.
(1) Lipper Anaytical Services, Inc. is an independent organization that monitors
the performance of mutual funds. Rankings are based on total return.
(2) Past performance is no guarantee of future results.
PORTFOLIO MIX
A pie chart is shown here depicting the Portfolio Mix as of July 31, 1998 of the
USAA Short-Term Bond Fund to be:
Fixed Rate Instruments - 67.4%*; Variable Rate Demand Notes - 27.1%*; and
Commercial Paper - 5.4%*.
* Percentages are of the Net Assets in the Portfolio and may or may not equal
100%.
See page 11 for a complete listing of the Portfolio of Investments.
Distributions to Shareholders
The following per share information describes the federal tax treatment of
distributions made during the fiscal year ended July 31, 1998. 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 1999.
Ordinary income $.6153*
=======
* 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 SHORT-TERM BOND FUND:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments of the USAA Short-Term Bond Fund, a portfolio of
USAA Mutual Fund, Inc., as of July 31, 1998 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 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, 1998, 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
USAA Short-Term Bond Fund as of July 31, 1998, 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 4, 1998
USAA SHORT-TERM BOND FUND
CATEGORIES AND DEFINITIONS
PORTFOLIO OF INVESTMENTS
July 31, 1998
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.
PORTFOLIO DESCRIPTION ABBREVIATIONS
COP Certificate of Participation
DEB Debentures
IDA Industrial Development Authority/Agency
IDB Industrial Development Board
MFH Multi-Family Housing
MTN Medium-Term Note
RB Revenue Bond
USAA SHORT-TERM BOND FUND
PORTFOLIO OF INVESTMENTS
(IN THOUSANDS)
July 31, 1998
<TABLE>
<CAPTION>
Principal Coupon Market
Amount Security Rate Maturity Value
- ------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
FIXED RATE INSTRUMENTS (67.4%)
CORPORATE BONDS (40.5%)
Banks - Major Regional
$ 4,500 Corporacion Andina De Fomento, Global Bonds 7.38% 7/21/00 $ 4,589
----------
Finance - Consumer
5,000 Capital One Bank, Bank Notes 5.95 2/15/01 4,976
3,000 Capital One Bank, Bank Notes 6.15 6/01/01 2,998
----------
7,974
----------
Home Furnishings & Appliances
3,000 MacSaver Financial Services, Inc., Notes 7.40 2/15/02 2,928
----------
Real Estate Investment Trusts
3,000 Developers Diversified Realty Corp.,
Senior Notes 7.63 5/15/00 3,070
5,000 Equity Operating L.P., Notes (a) 6.38 2/15/02 5,021
4,500 Franchise Finance Corp. of America,
Senior Notes 7.00 11/30/00 4,562
8,000 Glenborough Property, L.P., Senior Notes (a) 7.63 3/15/05 8,048
7,000 HRPT Properties Trust, Senior Notes 6.70 2/23/05 6,963
3,000 Nationwide Health Properties, Inc., MTN 8.61 3/01/02 3,203
5,000 Oasis Residential, Inc., Notes 6.75 11/15/01 5,067
4,500 TriNet Corporate Realty Trust, Inc., Notes 7.30 5/15/01 4,606
----------
40,540
----------
Retail - General Merchandising
3,000 Dayton Hudson Corp., Notes 5.95 6/15/00 3,002
2,000 Kmart Corp., MTN 7.72 6/25/02 2,042
2,000 Kmart Corp., MTN 7.76 7/01/02 2,044
----------
7,088
----------
Telecommunications - Long Distance
4,000 WorldCom, Inc., Senior Notes 7.55 4/01/04 4,242
----------
Waste Management
6,000 Waste Management, Inc., Notes 6.38 12/01/03 6,010
----------
Total corporate bonds (cost: $72,329) 73,371
----------
ASSET BACKED SECURITIES (8.3%)
6,000 FirstPlus Home Loan Owner Trust,
Series 1997-4, Class A-5 6.62 9/10/15 6,080
4,000 Firstplus Home Loan Owner Trust,
Series 1998, Class A-2 6.54 4/10/15 4,019
5,000 Firstplus Home Loan Owner Trust,
Series 1998, Class A-4 6.24 2/10/14 4,998
----------
Total asset backed securities (cost $14,999) 15,097
----------
COLLATERALIZED MORTGAGE OBLIGATIONS (18.6%)
5,172 Federal Home Loan Mortgage Corp.,
Series 1998-11 M 9.00 2/18/24 5,524
3,501 Federal Home Loan Mortgage Corp.,
Series 1998-2 GA 8.50 4/18/25 3,646
6,741 Federal Home Loan Mortgage Corp.,
Series 1998-7 H 9.00 3/18/25 7,203
6,811 Federal National Mortgage Assn.,
Series 1997-72 CA 9.50 9/18/23 7,240
3,787 Federal National Mortgage Assn.,
Series 1997-79 U 9.00 11/18/24 3,992
5,733 Federal National Mortgage Assn.,
Series 1997-89 N 9.50 12/20/22 6,130
----------
Total collateralized mortgage obligations
(cost: $34,386) 33,735
----------
Total fixed rate instruments (cost: $121,714) 122,203
----------
VARIABLE RATE DEMAND NOTES (27.1%)
Appropriated Debt
1,990 City of Gardena, CA, COP, Series 1995 (CRE) 6.50 7/01/25 1,990
----------
Buildings
2,055 Goson, Notes, Series 1997 (CRE) 5.77 11/01/17 2,055
2,075 Montgomery, AL, IDB RB, Series 1996C (CRE) 5.80 7/01/16 2,075
1,560 Scottsboro, AL, IDB RB, Series 1995 (CRE) 5.80 10/01/10 1,560
----------
5,690
----------
Electrical Equipment
2,960 APSCO, Inc., Notes, Series 1996 (CRE) 5.77 9/01/03 2,960
----------
Entertainment
3,750 Denver, CO, Urban Renewal Auth. Tax
Increment RB, Series 1992B (CRE) 5.76 9/01/11 3,750
----------
Finance - Diversified
645 New Jersey Economic Development Auth.
Bonds, Series 1996A2 (CRE) 5.85 11/01/16 645
600 New Jersey Economic Development Auth.
Bonds, Series 1996D2 (CRE) 5.85 11/01/06 600
----------
1,245
----------
Heavy Duty Trucks & Parts
2,680 Missouri Economic Development Export IDA
RB, Series 1993B (CRE) 5.70 6/01/08 2,680
----------
Leisure Time
3,030 Greenville, SC, Memorial Auditorium District Public
Facilities Corp., (CRE) 5.75 9/01/08 3,030
----------
Lodging/Hotel
2,540 Birmingham, AL, Historical Preservation Auth.
Taxable RB, Series 1993 (CRE) 6.19 5/01/18 2,540
3,010 Rockside Road Properties, Notes,
Series 1995 (CRE) 5.72 7/01/10 3,010
----------
5,550
----------
Multi-Family Housing
155 Bartlett, IL, MFH RB, Series 1995 (CRE) 6.10 3/01/25 155
5,900 Continental Valorem Corp., DEB,
Series 1988 (CRE) 6.05 6/01/13 5,900
----------
6,055
----------
Nursing Care
3,525 Grand Valley Atrium, Inc. Taxable RB (CRE) 5.71 6/01/18 3,525
----------
Real Estate - Other
4,977 Erie Funding I, Notes (CRE) 5.72 11/01/16 4,977
4,000 Katz Capital Corp., Taxable Notes 5.77 6/15/28 4,000
2,200 Wynrose, Inc., Notes, Series 1995A (CRE) 5.80 11/01/05 2,200
----------
11,177
----------
Miscellaneous
1,425 Ontario Redevelopment Agency, CA, RB,
Series B (CRE) 6.24 9/01/27 1,425
----------
Total variable rate demand notes (cost: $49,077) 49,077
----------
CASH EQUIVALENTS (5.4%)
Commercial Paper
2,782 Houghton Mifflin Co. 5.80 8/03/98 2,781
7,000 Los Angeles County Metropolitan
Transportation Auth. Notes 6.20 8/06/98 7,000
----------
Total cash equivalents (cost: $9,781) 9,781
----------
Total investments (cost: $180,572) $181,061
==========
</TABLE>
Portfolio Summary By Industry
Real Estate Investment Trusts 22.4%
Collateralized Mortgage Obligations 18.6
Asset Backed Securities 8.3
Real Estate - Other 6.2
Finance Consumer 4.4
Retail - General Merchandising 3.9
Sales Tax 3.9
Multi-Family Housing 3.3
Waste Management 3.3
Buildings 3.2
Lodging / Hotel 3.1
Banks - Major Regional 2.5
Telecommunications - Long Distance 2.3
Entertainment 2.1
Nursing Care 1.9
Leisure Time 1.7
Electrical Equipment 1.6
Home Furnishings & Appliances 1.6
Publishing 1.5
Heavy Duty Trucks & Parts 1.5
Appropriated Debt 1.1
Other 1.5
-----
99.9%
=====
USAA SHORT-TERM BOND FUND
NOTES TO PORTFOLIO OF INVESTMENTS
July 31, 1998
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.
SPECIFIC NOTES
(a) Security is exempt from registration under the Securities Act of 1933 and
has been determined to be liquid by the Fund's investment manager. Any resale of
this security in the United States may occur in an exempt transaction to a
qualified institutional buyer as defined by the Rule 144A.
See accompanying notes to financial statements.
USAA SHORT-TERM BOND FUND
STATEMENT OF ASSETS AND LIABILITIES
(IN THOUSANDS)
July 31, 1998
ASSETS
Investments in securities, at market value
(identified cost of $180,572) $ 181,061
Cash 190
Receivables:
Capital shares sold 296
Interest 1,992
----------
Total assets 183,539
----------
LIABILITIES
Securities purchased 1,200
Capital shares redeemed 955
USAA Investment Management Company 29
USAA Transfer Agency Company 24
Accounts payable and accrued expenses 59
Dividends on capital shares 101
----------
Total liabilities 2,368
----------
Net assets applicable to capital shares outstanding $ 181,171
==========
REPRESENTED BY:
Paid-in capital $ 180,248
Accumulated net realized gain on investments 434
Net unrealized appreciation of investments 489
----------
Net assets applicable to capital shares outstanding $ 181,171
==========
Capital shares outstanding 18,131
==========
Authorized shares of $.01 par value 120,000
==========
Net asset value, redemption price, and offering price per share $ 9.99
==========
See accompanying notes to financial statements.
USAA SHORT-TERM BOND FUND
STATEMENT OF OPERATIONS
(IN THOUSANDS)
Year ended July 31, 1998
Net investment income:
Interest income $ 10,250
==========
Expenses:
Management fees 370
Transfer agent's fees 271
Custodian's fees 65
Postage 25
Shareholder reporting fees 18
Directors' fees 4
Registration fees 65
Professional fees 37
Other 4
----------
Total expenses before reimbursement 859
Expenses reimbursed (91)
----------
Total expenses after reimbursement 768
----------
Net investment income 9,482
----------
Net realized and unrealized gain (loss) on investments:
Net realized gain 442
Change in net unrealized appreciation/depreciation (936)
----------
Net realized and unrealized loss (494)
----------
Increase in net assets resulting from operations $ 8,988
==========
See accompanying notes to financial statements.
USAA SHORT-TERM BOND FUND
STATEMENTS OF CHANGES IN NET ASSETS
(IN THOUSANDS)
Years ended July 31,
1998 1997
---------------------
From operations:
Net investment income $ 9,482 $ 7,099
Net realized gain on investments 442 410
Change in net unrealized appreciation/depreciation of
investments (936) 2,464
---------------------
Increase in net assets resulting from operations 8,988 9,973
---------------------
Distributions to shareholders from:
Net investment income (9,472) (7,099)
---------------------
Net realized gains -- (51)
---------------------
From capital share transactions:
Proceeds from shares sold 105,161 75,807
Shares issued for dividends reinvested 8,269 6,140
Cost of shares redeemed (65,521) (52,056)
---------------------
Increase in net assets from capital share
transactions 47,909 29,891
---------------------
Net increase in net assets 47,425 32,714
Net assets:
Beginning of period 133,746 101,032
---------------------
End of period $181,171 $133,746
=====================
Change in shares outstanding:
Shares sold 10,515 7,655
Shares issued for dividends reinvested 827 620
Shares redeemed (6,550) (5,259)
---------------------
Increase in shares outstanding 4,792 3,016
=====================
See accompanying notes to financial statements.
USAA SHORT-TERM BOND FUND
NOTES TO FINANCIAL STATEMENTS
July 31, 1998
(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 USAA
Short-Term Bond Fund (the Fund). The Fund's investment objective is high current
income consistent with preservation of principal. USAA Investment Management
Company (the Manager) seeks to achieve this objective by investing the Fund's
assets primarily in U.S. dollar-denominated debt securities that are
investment-grade at the time of their purchase. The Fund will maintain a
dollar-weighted average portfolio maturity of three years or less.
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. As a result of certain
permanent differences between book and tax basis accounting, reclassifications
have been made on the statement of assets and liabilities to increase
accumulated net realized gain on investments by $10,000 and decrease accumulated
undistributed net investment income by $10,000.
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, 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, 1998.
(3) DISTRIBUTIONS
Net investment income is accrued daily as dividends and distributed to
shareholders 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.
(4) INVESTMENT TRANSACTIONS
Cost of purchases and proceeds from sales of securities, excluding short-term
securities, for the year ended July 31, 1998 were $85.1 million and $50.4
million, respectively.
Gross unrealized appreciation and depreciation of investments as of July 31,
1998 was $1,226,000 and $737,000, 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
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. Because the Fund's annual expenses for
the year ended July 31, 1998 exceeded .50%, the Manager has waived a portion of
its management fee to reduce the Fund's annual expenses to .50%.
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 of $26 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
Period Ended
Year Ended July 31, July 31,
------------------------------------------------------------------
1998 1997 1996 1995 1994
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value at
beginning of period $ 10.03 $ 9.79 $ 9.87 $ 9.74 $ 10.08
Net investment income .62 .61 .62 .61 .37
Net realized and
unrealized gain (loss) (.04) .25 (.08) .13 (.33)
Distributions from net
investment income (.62) (.61) (.62) (.61) (.37)
Distributions of realized
capital gains -- (.01) -- -- (.01)
------------------------------------------------------------------
Net asset value at
end of period $ 9.99 $ 10.03 $ 9.79 $ 9.87 $ 9.74
==================================================================
Total return (%) * 5.91 8.97 5.62 7.90 0.39
Net assets at
end of period (000) $ 181,171 $133,746 $101,032 $76,190 $ 48,228
Ratio of expenses to
average net assets (%) .50 .50 .50 .50 .50(a)
Ratio of expenses to average
net assets excluding
reimbursement (%) .56 .61 .66 .74 .87(a)
Ratio of net investment
income to
average net assets (%) 6.16 6.14 6.29 6.34 4.51(a)
Portfolio turnover (%) 48.24 27.85 66.81 103.02 142.08
</TABLE>
* Assumes reinvestment of all dividend income and capital gain distributions
during the period.
(a)Annualized. The ratio is not necessarily indicative of 12 months of
operations.
DIRECTORS
Robert G. Davis, Chairman of the Board
Michael J.C. Roth, President and Vice Chairman of the Board
John W. Saunders, Jr., Vice President
Barbara B. Dreeben
Howard L. Freeman, Jr.
Robert L. Mason
Richard A. Zucker
INVESTMENT ADVISER, UNDERWRITER AND DISTRIBUTOR
USAA Investment Management Company
9800 Fredericksburg Road
San Antonio, Texas 78288
TRANSFER AGENT
USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, Texas 78288
CUSTODIAN
State Street Bank and Trust Company
P.O. Box 1713
Boston, Massachusetts 02105
LEGAL COUNSEL
Goodwin, Procter & Hoar LLP
Exchange Place
Boston, Massachusetts 02109
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP
112 East Pecan, Suite 2400
San Antonio, Texas 78205
Telephone Assistance Hours
Call toll free - Central Time
Monday - Friday 8:00 a.m. to 8:00 p.m.
Saturdays 8:30 a.m. to 5:00 p.m.
For Additional Information On Mutual Funds
1-800-531-8181, (in San Antonio) 456-7211
For account servicing, exchanges or redemptions
1-800-531-8448, (in San Antonio) 456-7202
Recorded Mutual Fund Price Quotes
24-Hour Service (from any phone)
1-800-531-8066, (in San Antonio) 498-8066
Mutual Fund TouchLine(Registered Trademark)
(from Touchtone phones only)
For account balance, last transaction or fund prices
1-800-531-8777, (in San Antonio) 498-8777
