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
Portfolio of Investments 9
Notes to Portolio of Investments 12
Statement of Assets and Liabilities 13
Statement of Operations 14
Statements of Changes in Net Assets 15
Notes to Financial Statements 16
Important Information
Through our ongoing efforts to reduce expenses and respond to shareholder
requests, your annual and semiannual report mailings are "streamlined." One copy
of each report is sent to each address, rather than to every registered owner.
For many shareholders and their families, this eliminates duplicate copies,
saving paper and postage costs to the Fund.
If you are the primary shareholder on at least one account, prefer not to
participate in streamlining, and would like to continue receiving one report per
registered account owner, you may request this in writing to:
USAA Investment Management Company
Attn: Report Mail
9800 Fredericksburg Road
San Antonio, TX 78284-8916
or phone a Mutual Fund Representative at 1-800-531-8448 during business hours.
This report is for the information of the shareholders and others who have
received a copy of the currently effective prospectus of the USAA Income Stock
Fund, managed by USAA Investment Management Company (IMCO). It may be used as
sales literature only when preceded or accompanied by a current prospectus which
gives further details about the Fund.
USAA with the eagle is registered in the U.S. Patent & Trademark Office.
(Copyright)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
USAA 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 INCOME STOCK FUND
OBJECTIVE: Current income with the prospect of increasing dividend income and
the potential for capital appreciation.
TYPES OF INVESTMENTS: Common stocks of well-established, large companies with
above-average dividend yields.
- --------------------------------------------------------------------------------
7/31/97 7/31/98
- --------------------------------------------------------------------------------
Net Assets $2,186.3 Million $2,496.6 Million
Net Asset Value Per Share $19.01 $19.65
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS AS OF 7/31/98
- --------------------------------------------------------------------------------
1 Year 5 Years 10 Years
13.28% 15.09% 14.57%
- --------------------------------------------------------------------------------
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 Income Stock Fund, the Lipper
Mixed Equity-Income Funds Average, and the S&P 500 Index for the period of
07/31/88 through 07/31/98. The data points from the graph are as follows:
USAA Income Lipper Mixed Equity-
Stock Fund Income Funds Average S&P 500 Index
----------- -------------------- -------------
07/88 $10,000 $10,000 $10,000
12/88 10,306 10,420 10,383
06/89 11,769 11,857 12,098
12/89 13,103 12,675 13,667
06/90 12,731 12,594 14,088
12/90 12,917 11,641 13,242
06/91 14,195 13,218 15,126
12/91 16,446 14,834 17,267
06/92 16,813 15,159 17,151
12/92 17,728 16,258 18,581
06/93 19,244 17,493 19,485
12/93 19,777 18,505 20,450
06/94 18,989 17,917 19,758
12/94 19,638 18,175 20,719
06/95 22,695 20,999 24,901
12/95 25,258 23,803 28,495
06/96 27,057 25,588 31,370
12/96 29,982 28,260 35,033
06/97 32,677 32,470 42,249
12/97 38,074 35,857 46,717
06/98 40,432 39,436 54,996
07/98 38,964 38,493 54,415
The graph illustrates the comparison of a $10,000 hypothetical investment in the
USAA Income Stock Fund to the S&P 500 Index and the Lipper Mixed Equity-Income
Funds Average, an average performance level of all mixed equity and income
funds, as reported by Lipper Analytical Services, Inc., an independent
organization that monitors the performance of mutual funds. The S&P 500 Index is
an unmanaged index representing the average performance of a group of 500 widely
held, pubicly traded stocks. It is not possible to invest directly in the S&P
500 Index.
Message from the Manager
PERFORMANCE
The performance of the USAA Income Stock Fund for the period ended July 31,
1998, has been challenging for both you as investors and for us as the Manager
of the Fund. Our investment style has worked well over the past ten years,
returning 14.57% as compared to the 18.46% of the S&P 500 Index, while providing
a significantly higher dividend than the S&P. This investment style has been
less rewarding for the period January 31, 1998 to July 31, 1998, returning 4.04%
as compared to the 15.20% of the Index.(1)
[Photograph of Portfolio Manager, Harry W. Miller, CFA, appears here]
We believe that structural changes in the equity market have been primarily
responsible for this decline in performance. Today's equity market appears to be
willing to pay premiums for only a small group of stocks with large market
capitalizations and high growth rates, e.g. Dell, Microsoft, and Coke. This is
evident for the six-month period ended July 31, 1998, as 73% of the S&P 500's
performance came from the 50 largest capitalization companies in the Index.
For the most part, the Fund has not invested in stocks of these large
capitalization companies because overall they have paid little or no dividends.
The investment style has been to purchase stocks with dividend yields above the
S&P 500 (currently 1.4%) with attractive valuations. Thus, it is not surprising
that maintaining a high dividend yield has hurt our recent relative performance.
Since our last report of January 31, 1998, the two best performing industries
for the Fund were automobiles and healthcare. The continued strong performance
of the U.S. economy was primarily responsible for the favorable results of the
Fund's auto investment. Healthcare has been a strong performer, benefiting from
increased pricing power and a period of rapid new drug introductions.
On the negative side of the ledger, the industries with the poorest performance
were the real estate investment trusts (REITs) and natural gas utilities. REITs
have come under performance pressure as investors questioned whether the
industry has the financial resources to sustain growth at the same rapid pace
that it has enjoyed up until now. We believe natural gas utilities have
underperformed during the period because of their failure to capture investors'
imaginations when the equity market is reaching new highs.
(1)Past performance is no guarantee of future results.
OUTLOOK AND PERSPECTIVE
We reported in last year's annual report that the Fund's dividend could decline.
The reason is the confluence of several factors: the Fund's yield is very high
for an equity fund, interest rates and yields are down, and many companies are
reducing their dividend payouts. The Income Stock Fund has a long-term record of
dividend increases, but in this environment that record must pause. We do remain
committed to providing each shareholder with a yield that exceeds the market's
yield and, over time, an increasing dividend.
The stock market may be vulnerable to a downturn in the short run, as companies
are reporting negative earnings surprises on a more frequent basis. In addition,
the shaky economies of Southeast Asia, Japan, and Russia may have a negative
impact on the earnings of companies in the United States. On the positive side,
low interest rates, inflation, and energy prices should support modest economic
growth in the U.S.
We believe the USAA Income Stock Fund remains an attractive stock investment
during these uncertain and volatile times.
- --------------------------------------------
TOP 10 EQUITY HOLDINGS
(% OF NET ASSETS)
- --------------------------------------------
Bristol-Myers Squibb 4.8
Bankers Trust 4.5
Ford Motor 4.5
GTE 3.9
Chrysler 3.8
American Home Products 3.7
Texaco 3.6
Bell Atlantic 3.5
Texas Utilities 3.1
Allegheny Energy 3.0
- --------------------------------------------
- --------------------------------------------
TOP 10 INDUSTRIES
(% OF NET ASSETS)
- --------------------------------------------
Real Estate Investment Trusts 13.7
Electric Utilities 12.8
Telephones 10.0
Healthcare - Diversified 8.5
Automobiles 8.3
Natural Gas Utilities 6.0
Banks - Money Center 4.5
Oil - International Integrated 3.6
Oil - Domestic Integrated 3.0
Banks - Major Regional 2.9
- --------------------------------------------
See page 9 for a complete listing of the Portfolio of Investments.
Effective August 28, 1998, after 24 years of service with USAA Investment
Management Company, Harry W. Miller, the Fund's portfolio manager, is retiring.
A search is presently under way for a new portfolio manager for the Fund. In the
interim, a team of portfolio managers is responsible for the day-to-day
management of the Fund's portfolio. The members of the team include David G.
Peebles, R. David Ullom, and Stephan J. Klaffke, who collectively have 69 years
investment management experience and currently manage over $4 billion in assets.
The team meets regularly to review the portfolio holdings of the Fund and will
make adjustments when appropriate to keep the Fund in line with its investment
objective and policies.
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 $ .7856 *
Long-term capital gains - 20% .5576
Long-term capital gains - 28% .4252
---------
Total $1.7684
=========
81.89% 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 INCOME STOCK FUND:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments of the USAA Income Stock Fund, a portfolio of USAA
Mutual Fund, Inc., as of July 31, 1998 and there 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 Income Stock 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 INCOME STOCK FUND
PORTFOLIO OF INVESTMENTS
July 31,1998
Market
Number Value
of Shares Security (000)
- --------------------------------------------------------------------------------
COMMON STOCKS (81.1%)
Automobiles (8.3%)
1,600,000 Chrysler Corp. $ 94,700
2,000,000 Ford Motor Co. 113,875
----------------
208,575
----------------
Banks - Major Regional (2.9%)
277,000 Fleet Financial Group, Inc. 23,805
900,000 PNC Bank Corp. 48,543
----------------
72,348
----------------
Banks - Money Center (4.5%)
1,000,000 Bankers Trust Corp. 112,062
----------------
Chemicals (0.7%)
700,000 Lyondell Petrochemical Co. 17,150
----------------
Chemicals - Diversified (1.0%)
600,000 B.F. Goodrich Co. 24,338
----------------
Electric Utilities (12.8%)
2,700,000 Allegheny Energy, Inc. 73,575
400,000 Central Hudson Gas & Electric Corp. 17,250
1,300,000 Dominion Resources, Inc. 52,975
1,254,000 Interstate Energy Corp. 36,758
622,750 New Century Energies, Inc. 25,922
1,100,000 Public Service Enterprise Group, Inc. 35,956
1,900,000 Texas Utilities Co. 76,119
----------------
318,555
----------------
Healthcare - Diversified (8.5%)
1,800,000 American Home Products Corp. 92,700
1,050,000 Bristol-Myers Squibb Co. 119,634
----------------
212,334
----------------
Machinery - Diversified (1.0%)
600,000 Deere & Co. 24,113
----------------
Natural Gas Utilities (5.2%)
1,482,000 National Fuel Gas Co. 61,225
1,500,000 NICOR, Inc. 57,750
299,400 Peoples Energy Corp. 10,479
----------------
129,454
----------------
Oil - Domestic Integrated (3.0%)
600,000 Atlantic Richfield Co. 40,650
1,500,000 Occidental Petroleum Corp. 33,375
----------------
74,025
----------------
Oil - International Integrated (3.6%)
1,500,000 Texaco, Inc. 91,219
----------------
Paper & Forest Products (0.1%)
63,000 Georgia-Pacific Corp. 1,414
----------------
Real Estate Investment Trusts (13.7%)
1,000,000 Avalon Bay Communities, Inc. 35,875
500,000 Boston Properties, Inc. 16,156
1,100,000 Brandywine Realty Trust 21,931
1,200,000 Burnham Pacific Properties, Inc. 16,575
275,000 Chelsea GCA Realty, Inc. 9,969
165,000 Duke Realty Investments, Inc. 3,537
1,000,000 Equity Office Properties Trust 24,875
900,000 Felcor Lodging Trust, Inc. 24,862
600,000 First Industrial Realty Trust, Inc. 16,575
265,000 Gables Residential Trust 7,105
250,000 Highwoods Properties, Inc. 7,734
2,000,000 Liberty Property Trust 50,125
290,000 Mack California Realty Corp. 9,008
400,000 Mills Corp. 9,225
600,000 Patriot American Hospitality, Inc. 11,400
650,000 Post Properties, Inc. 25,797
600,000 Prentiss Properties Trust 14,288
605,000 Shurgard Storage Centers, Inc. 16,638
200,000 Starwood Lodging Trust 8,213
400,000 Storage USA, Inc. 13,050
----------------
342,938
----------------
Telecommunications - Long Distance (2.0%)
700,000 Sprint Corp. 49,000
----------------
Telephones (10.0%)
1,920,000 Bell Atlantic Corp. 87,120
1,800,000 GTE Corp. 97,875
1,200,000 US West, Inc. 64,050
----------------
249,045
----------------
Tobacco (2.5%)
500,000 Philip Morris Companies, Inc. 21,906
1,700,000 RJR Nabisco Holdings Corp. 41,544
----------------
63,450
----------------
Waste Management (1.3%)
950,000 Browning-Ferris Industries, Inc. 33,428
----------------
Total common stocks (cost: $1,451,166) 2,023,448
----------------
PREFERRED STOCKS (11.6%)
Computer Software & Service (2.7%)
1,325,000 Unisys Corp., depositary shares "A",
$3.75 cumulative convertible 68,403
----------------
Healthcare - Specialized Services (0.5%)
1,500,000 Medpartners, Inc., 6.50% cumulative
convertible 12,750
----------------
Insurance - Life/Health (2.1%)
750,000 Aetna, Inc., Class C, 6.25% cumulative
convertible 51,562
----------------
Investment Companies (0.6%)
350,000 Dollar General Corp., 8.50% cumulative
convertible 14,088
----------------
Iron & Steel (0.4%)
250,000 USX Corp., 6.50% cumulative convertible 11,250
----------------
Machinery - Diversified (0.8%)
800,000 Ingersoll-Rand Co., 6.75% cumulative
convertible 19,800
----------------
Natural Gas Utilities (0.8%)
400,000 El Paso Energy Corp., 4.75% cumulative
convertible 20,200
----------------
Photography - Imaging (0.4%)
350,000 IKON Office Solutions, Inc. depositary shares
"BB", $5.04 cumulative convertible 9,538
----------------
Publishing/Newspapers (0.6%)
1,000,000 Hollinger International, Inc., 9.75%
cumulative convertible 14,562
----------------
Services - Commercial & Consumer (0.8%)
600,000 Cendant Corp., 7.50% cumulative convertible 19,725
----------------
Telecommunications - Cellular/Wireless (1.9%)
1,000,000 AirTouch Communications, Inc., Class B, 6.00%
cumulative convertible 48,500
----------------
Total preferred stocks (cost: $303,203) 290,378
----------------
CORPORATE BONDS (2.6%)
15,000 Continental Airlines, Inc., 6.75%, 4/15/06 27,431
20,000 Quantum Corp., 7.00%, 8/01/04 18,600
20,000 Micron Technology, Inc., 7.00%, 7/01/04 19,825
----------------
Total corporate bonds (cost: $60,314) 65,856
----------------
SHORT-TERM (3.0%)
Commercial Paper
74,773 General Electric Capital Corp., 5.66%,
8/03/98 (cost: $74,750) 74,750
----------------
Total investments (cost: $1,889,433) $2,454,432
================
NOTES TO PORTFOLIO OF INVESTMENTS
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.
USAA INCOME STOCK FUND
STATEMENT OF ASSETS AND LIABILITIES
(IN THOUSANDS)
July 31, 1998
ASSETS
Investments in securities, at market value
(identified cost of $1,889,433) $ 2,454,432
Cash 423
Receivables:
Capital shares sold 1,260
Dividends and interest 7,943
Securities sold 35,359
--------------
Total assets 2,499,417
--------------
LIABILITIES
Capital shares redeemed 1,323
USAA Investment Management Company 1,101
USAA Transfer Agency Company 155
Accounts payable and accrued expenses 268
--------------
Total liabilities 2,847
--------------
Net assets applicable to capital shares outstanding $ 2,496,570
==============
REPRESENTED BY:
Paid-in capital $ 1,833,925
Accumulated undistributed net investment income 5,924
Accumulated net realized gain on investments 91,722
Net unrealized appreciation of investments 564,999
--------------
Net assets applicable to capital shares outstanding $ 2,496,570
==============
Capital shares outstanding 127,028
==============
Authorized shares of $.01 par value $ 250,000
==============
Net asset value, redemption price, and offering price
per share $ 19.65
==============
See accompanying notes to financial statements.
USAA INCOME STOCK FUND
STATEMENT OF OPERATIONS
(IN THOUSANDS)
Year ended July 31, 1998
Net investment income:
Income:
Dividends $ 102,739
Interest 6,156
--------------
Total income 108,895
--------------
Expenses:
Management fees 12,164
Transfer agent's fees 2,681
Custodian's fees 263
Postage 329
Shareholder reporting fees 133
Directors'fees 4
Registration fees 142
Professional fees 34
Other 48
--------------
Total expenses 15,798
--------------
Net investment income 93,097
--------------
Net realized and unrealized gain on investments:
Net realized gain 131,080
Change in net unrealized appreciation/depreciation 64,929
--------------
Net realized and unrealized gain 196,009
--------------
Increase in net assets resulting from operations $ 289,106
==============
See accompanying notes to financial statements.
USAA INCOME STOCK FUND
STATEMENTS OF CHANGES IN NET ASSETS
(IN THOUSANDS)
July 31, 1998
1998 1997
-------------------------
From operations:
Net investment income $ 93,097 $ 91,552
Net realized gain on investments 131,080 111,015
Change in net unrealized appreciation/depreciation
of investments 64,929 326,818
-------------------------
Increase in net assets resulting from operations 289,106 529,385
-------------------------
Distributions to shareholders from:
Net investment income (92,033) (89,087)
-------------------------
Net realized gains (118,394) (80,728)
-------------------------
From capital share transactions:
Proceeds from shares sold 382,576 260,043
Shares issued for dividends reinvested 195,544 158,556
Cost of shares redeemed (346,558) (302,609)
-------------------------
Increase in net assets from capital share
transactions 231,562 115,990
-------------------------
Net increase in net assets 310,241 475,560
Net assets:
Beginning of period 2,186,329 1,710,769
-------------------------
End of period $2,496,570 $2,186,329
=========================
Undistributed net investment income included
in net assets:
End of period $ 5,924 $ 4,860
=========================
Change in shares outstanding:
Shares sold 19,195 15,238
Shares issued for dividends reinvested 10,251 9,566
Shares redeemed (17,438) (17,704)
-------------------------
Increase in shares outstanding 12,008 7,100
=========================
See accompanying notes to financial statements.
USAA INCOME STOCK 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
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. USAA Investment Management Company (the Manager) seeks to achieve
this objective by investing the Fund's assets primarily in equity securities of
well-established, large companies with above-average dividend yields and in real
estate investment trusts (REITs).
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, 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
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
Cost of purchases and proceeds from sales of securities, excluding short-term
securities, for the year ended July 31, 1998 were $591.5 million and $525.6
million, respectively.
Gross unrealized appreciation and depreciation of investments as of July 31,
1998 was $643,000 and $78,000, respectively.
(5) TRANNSACTIONS 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
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 of $23.50 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, 1998 was $140,000.
(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, 1998, the Association and its affiliates owned
4.1 million shares (3.3%) 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
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 $ 19.01 $ 15.85 $ 14.96 $ 13.50 $ 14.95
Net investment income .75 .81 .77 .74 .60
Net realized and
unrealized gain (loss) 1.66 3.88 1.16 1.69 (1.12)
Distributions from net
investment income (.75) (.79) (.77) (.75) (.74)
Distributions of realized
capital gains (1.02) (.74) (.27) (.22) (.19)
---------------------------------------------------------------------
Net asset value at
end of period $ 19.65 $ 19.01 $ 15.85 $ 14.96 $ 13.50
=====================================================================
Total return (%) * 13.28 31.46 13.21 18.83 (3.53)
Net assets at end
of period (000) $2,496,570 $2,186,329 $1,710,769 $1,408,371 $1,190,024
Ratio of expenses to
average net assets (%) .65 .68 .72 .75 .73(a)
Ratio of net investment
income to average
net assets (%) 3.85 4.73 4.84 5.34 5.25(a)
Portfolio turnover (%) 22.34 34.95 32.38 34.94 24.82
</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
