Table of Contents
USAA Family of Funds 1
Message from the President 2
Investment Review 4
Message from the Manager 5
Financial Information:
Statement of Assets and Liabilities 8
Portfolio of Investments in Securities 9
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)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 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 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,
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
"We are now ready to move to another plateau."
Back in 1980 we began to craft a family of mutual funds that would allow an
investor to create a diversified portfolio suited to an individual's appetite
for risk. In 1984 we started a brokerage service because we thought some
members might want that. The two have grown beyond our dreams. Our fund family
now offers 35 investment choices and our Brokerage Service has become a very
significant presence in its industry. We are now ready to move to another
plateau.
As I write this message, the USAA Investment Management Company is in the
process of ending our long and mutually rewarding relationship with BHC
Securities, and taking on all of the responsibilities of running our Brokerage
Service. The term for this is "self-clearing." It includes our own seat on the
Chicago Stock Exchange. Shortly after we achieve self-clearing, we shall also
move our mutual fund accounts off of an internal system and onto the facilities
of DST Systems, a Kansas City company that processes very much of the mutual
fund industry's transactions. These two moves will greatly improve our ability
to offer you better service.
Our goal is to give you a single investment account which can hold, track and
report to you on almost any type of investment you wish to make. It will offer
features such as low-cost loans based upon your investments,(1) easy movement of
funds,(2) and a single statement. It will also be tied to other USAA services
such as banking, fixed and variable annuities and property and casualty and life
insurance. We will make this the only investment account you will need. You'll
be hearing more on this in coming months.
Sincerely,
Michael J.C. Roth, CFA
President and
Vice Chairman of the Board
[Photograph of the President and Vice Chairman of the Board, Michael J. C. Roth,
appears here.]
For more complete information about the mutual funds managed and distributed by
USAA Investment Management Company (IMCO), including charges and expenses,
please call for a prospectus. Read it carefully before you invest.
USAA Brokerage Services is a discount brokerage service of USAA IMCO, a member
of the NASD.
(1) Margin borrowing allows you to buy securities using funds that we will loan
you for payment. It can serve as a low-interest loan which can be used for any
purpose. Not all securities can be margined, however. Margin borrowing involves
additional risks.
(2) An investor should consider the fluctuating values of securities.
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.
================================================================================
7/31/97 1/31/98
Net Assets $2,186.3 Million $2,373.7 Million
Net Asset Value Per Share $19.01 $19.23
================================================================================
Average Annual Total Returns As Of 1/31/98
7/31/97 to 1/31/98 1 Year 5 Years 10 Years
8.88%+ 21.61% 15.89% 14.83%
================================================================================
+ Total returns for periods of less than one year are not annualized. This six-
month return is cumulative.
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 to the S&P 500
Index and the Lipper Mixed Equity - Income Funds Average from 01/31/88 to
01/31/98. The data points from the graph are as follows:
LIPPER MIXED
USAA INCOME S&P 500 EQUITY - INCOME
STOCK FUND INDEX FUNDS AVERAGE
---------- -------- -------------
01/31/88 10,000 10,000 10,000
06/88 10,509 10,815 10,814
12/88 10,971 11,186 11,253
06/89 12,528 13,034 12,791
12/89 13,948 14,724 13,650
06/90 13,552 15,178 13,522
12/90 13,750 14,267 12,519
06/91 15,111 16,297 14,132
12/91 17,507 18,604 15,841
06/92 17,898 18,479 16,206
12/92 18,872 20,019 17,368
06/93 20,485 20,993 18,785
12/93 21,052 22,032 19,914
06/94 20,214 21,287 19,273
12/94 20,904 22,322 19,528
06/95 24,158 26,828 22,570
12/95 26,887 30,700 25,353
06/96 28,802 33,797 27,227
12/96 31,916 37,744 30,035
06/97 34,785 45,518 34,380
12/97 40,530 50,332 37,860
01/31/98 39,866 50,888 37,867
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, 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,
publicly traded stocks. It is not possible to invest directly in the S&P 500
Index.
Message from the Manager
[Photograph of the Portfolio Manager, Harry W. Miller, CFA, appears here.]
PERFORMANCE
Your Fund's total return was 8.88% for the six months ended January 31, 1998.
This compares to the 3.56% total return for the S&P 500 Index(1) during the same
period. Net assets were $2.37 billion, up from $2.18 billion on July 31, 1997.
Since our last report of July 31, 1997, the stock market has had a correction
but has come back and is selling at a higher level than six months ago.
International markets, particularly Asia, took a much harder drop. The portfolio
had no foreign holdings but held some multi-national securities during that
period.
New names:
Bell Atlantic (telephone) merged with NYNEX
Boston Properties (REIT)
Equity Office Properties (REIT) merged with Beacon Properties
Fleet Financial Group (banks)
Lyondell Petrochemical (chemicals) from conversion of Atlantic Richfield
exchangeable notes
Med Partners, convertible (healthcare)
New Centuries Energy (electric power) merged with Public Service Co. of Colorado
and Southwestern Public Service and renamed the company
Quantum, convertible (computers-peripherals)
Deleted names:
Chateau Communities and Glimcher Realty (both REITs)
Deluxe Corp. (specialty printing)
James River, convertible (paper & forest products)
MascoTech (auto parts)
NYNEX (telephone) merged into Bell Atlantic
Public Service Co. of Colorado and Southwestern Public Service (both electrical
power)
(1) The S&P 500 Index is an unmanaged index representing the performance of a
group of 500 widely held, publicly traded stocks. It is not possible to invest
directly in the S&P 500 Index.
Best Performers:
Ford Motor (autos)
PNC Bank (banking)
Mack California Realty and First Industrial Realty (REIT)
American Home Products and Bristol-Myers Squibb (healthcare - diversified)
Unisys, convertible (computer systems)
Continental Airlines, convertible (airlines)
Airtouch Communications, convertible, Bell Atlantic, GTE, Sprint, and US West
Communications (telephones)
Central Hudson Gas & Electric, Houston Industries, IES Industries, and Texas
Utilities (electric power)
Worst Performers:
Aetna, convertible (insurance)
Chrysler (autos)
Deere (machinery-diversified)
Philip Morris (tobacco)
Storage USA (REIT)
Texaco (oil)
OUTLOOK AND PERSPECTIVE
The Fund's dividend for 1997 equalled that of 1996 at $.78 per share. Our
ability to maintain, much less increase, the Fund's dividend is being affected
by lower interest rates and yields as well as a trend of companies' reluctance
to raise their common stock dividends.
The character of the Fund has been maintained with a total return of 27% and a
dividend yield of 4% for calendar 1997.(2)
The economy remains strong with low interest rates, low inflation, and good
earnings reports. Even though the Asian situation casts a shadow over the U.S.
stock market, we remain optimistic but do not expect the same return in 1998 as
in 1997.
We remain overweighted in automobiles, banks, REITs, healthcare, and telephones.
(2) Past performance is not a guarantee of future results. Yields and returns
will fluctuate.
The Fund's total returns for the 1-, 5- and 10-year periods ended December 31,
1997, were 26.99%, 16.52% and 16.00%, respectively.
============================================
TOP 10 EQUITY HOLDINGS
(% OF NET ASSETS)
Ford Motor 5.2
Bristol-Myers Squibb 4.4
GTE 4.1
Bankers Trust New York 3.8
Bell Atlantic 3.7
American Home Products 3.6
RJR Nabisco 3.6
Allegheny Energy 3.5
Chrysler 2.9
PNC Bank 2.8
=============================================
=============================================
TOP 10 INDUSTRIES
(% OF NET ASSETS)
Real Estate Investment Trusts 14.5
Telephones 10.3
Electric 10.2
Automobiles 8.1
Healthcare - Diversified 8.0
Tobacco 6.4
Natural Gas 5.4
Banks - Money Center 3.8
Banks - Major Regional 3.7
Oil - Domestic Integrated 3.5
=============================================
See page 9 for a complete listing of the Portfolio of Investments in Securities.
INCOME STOCK FUND
STATEMENT OF ASSETS AND LIABILITIES
(IN THOUSANDS)
January 31, 1998
(Unaudited)
ASSETS
Investments in securities, at market value
(identified cost of $1,771,854) $2,376,999
Cash 497
Receivables:
Capital shares sold 1,561
Dividends and interest 6,672
Securities sold 522
----------
Total assets 2,386,251
----------
LIABILITIES
Securities purchased 10,392
Capital shares redeemed 806
USAA Investment Management Company 998
USAA Transfer Agency Company 229
Accounts payable and accrued expenses 166
----------
Total liabilities 12,591
----------
Net assets applicable to capital shares outstanding $2,373,660
==========
REPRESENTED BY:
Paid-in capital $1,760,361
Accumulated undistributed net investment income 5,196
Accumulated net realized gain on investments 2,958
Net unrealized appreciation of investments 605,145
----------
Net assets applicable to capital shares outstanding $2,373,660
==========
Capital shares outstanding 123,448
==========
Net asset value, redemption price, and offering price per share $ 19.23
==========
See accompanying notes to financial statements.
INCOME STOCK FUND
PORTFOLIO OF INVESTMENTS IN SECURITIES
January 31, 1998
(Unaudited)
Market
Number Value
of Shares Security (000)
- --------- -------- -----
COMMON STOCKS (82.5%)
Automobiles (8.1%)
2,000,000 Chrysler Corp. $ 69,625
2,400,000 Ford Motor Co. 122,400
- -------------------------------------------
192,025
- -------------------------------------------
Banks - Major Regional (3.7%)
277,000 Fleet Financial Group,
Inc. 19,840
1,300,000 PNC Bank Corp. 67,031
- -------------------------------------------
86,871
- -------------------------------------------
Banks - Money Center (3.8%)
875,000 Bankers Trust
New York Corp. 91,273
- -------------------------------------------
Chemicals (2.0%)
1,881,760 Lyondell
Petrochemical Co. 47,985
- -------------------------------------------
Chemicals - Diversified (1.1%)
600,000 B.F. Goodrich Co. 25,163
- -------------------------------------------
Electric (10.2%)
2,700,000 Allegheny Energy, Inc. 82,688
400,000 Central Hudson
Gas & Electric Corp. 15,925
1,000,000 Houston Industries, Inc. 26,125
1,100,000 IES Industries, Inc. 40,356
622,750 New Century Energies,
Inc. 28,374
1,200,000 Texas Utilities Co. 49,350
- -------------------------------------------
242,818
- -------------------------------------------
Healthcare - Diversified (8.0%)
900,000 American Home
Products Corp. 85,894
1,050,000 Bristol-Myers Squibb Co. 104,672
- -------------------------------------------
190,566
- -------------------------------------------
Machinery - Diversified (1.3%)
600,000 Deere & Co. 31,650
- -------------------------------------------
Natural Gas (5.4%)
1,383,600 National Fuel Gas Co. 63,645
1,390,500 NICOR, Inc. 55,968
242,800 Peoples Energy Corp. 9,166
- -------------------------------------------
128,779
- -------------------------------------------
Oil - Domestic Integrated (3.5%)
600,000 Atlantic Richfield Co. 44,625
1,500,000 Occidental Petroleum
Corp. 38,250
- -------------------------------------------
82,875
- -------------------------------------------
Oil - International
Integrated (2.4%)
1,100,000 Texaco, Inc. 57,269
- -------------------------------------------
Real Estate Investment
Trusts (14.5%)
610,000 Arden Realty Group, Inc. 17,233
400,000 Avalon Properties, Inc. 11,775
500,000 Boston Properties, Inc. 17,781
700,000 Brandywine Realty Trust 16,800
990,000 Burnham Pacific
Properties, Inc. 14,788
275,000 Chelsea GCA Realty, Inc. 10,484
400,000 Developers Diversified
Realty Corp. 15,875
395,200 Duke Realty
Investments, Inc. 9,386
703,150 Equity Office
Properties Trust 21,314
561,000 Felcor Suite Hotels, Inc. 20,932
600,000 First Industrial
Realty Trust, Inc. 21,525
300,000 Gables Residential Trust 8,194
250,000 Highwoods
Properties, Inc. 9,047
1,200,000 Liberty Property Trust 32,550
400,000 Mack California
Reality Corp. 16,125
400,000 Mills Corp. 10,250
510,007 Patriot American
Hospitality, Inc. 13,069
350,000 Post Properties, Inc. 13,453
600,000 Prentiss Properties Trust 16,350
605,000 Shurgard Storage
Centers, Inc. 17,280
400,000 Storage USA, Inc. 15,625
266,629 United Dominion
Realty Trust, Inc. 3,700
325,000 Weeks Corp. 10,136
- -------------------------------------------
343,672
- -------------------------------------------
Telecommunications -
Long Distance (1.8%)
700,000 Sprint Corp. 41,563
- -------------------------------------------
Telephones (10.3%)
960,000 Bell Atlantic Corp. 88,860
1,800,000 GTE Corp. 98,212
1,200,000 US West
Communications Group 57,750
- -------------------------------------------
244,822
- -------------------------------------------
Tobacco (6.4%)
1,600,000 Philip Morris
Companies, Inc. 66,400
2,700,000 RJR Nabisco
Holdings Corp. 85,050
- -------------------------------------------
151,450
- -------------------------------------------
Total common stocks
(cost: $1,373,020) 1,958,781
- -------------------------------------------
PREFERRED STOCKS (13.0%)
Computer Software
& Service (2.6%)
1,325,000 Unisys Corp. depositary
shares "A", $3.75
cumulative convertible 61,447
- -------------------------------------------
Healthcare - Specialized
Services (0.8%)
1,500,000 Medpartners, Inc. 6.50%
cumulative convertible 20,062
- -------------------------------------------
Insurance - Life/Health (2.4%)
750,000 Aetna, Inc., Class C, 6.25%
cumulative convertible 56,766
- -------------------------------------------
Iron & Steel (0.5%)
250,000 USX Corp., 6.50%
cumulative convertible 12,047
- -------------------------------------------
Oil & Gas -
Refining/Manufacturing (2.2%)
1,525,000 Sun Company, Inc.
depositary shares "A",
$1.80 cumulative
convertible 53,184
- -------------------------------------------
Photography - Imaging (1.1%)
350,000 IKON Office Solutions, Inc.
depositary shares "BB",
6.50% cumulative
convertible 25,572
- -------------------------------------------
Publishing/Newspapers (0.5%)
1,000,000 Hollinger International,
Inc., PRIDES, 9.75%,
cumulative convertible 12,625
- -------------------------------------------
Telecommunications -
Cellular/Wireless (1.6%)
1,000,000 AirTouch Communications,
Inc., Class B, 6.00%
cumulative convertible 37,500
- -------------------------------------------
Waste Management (1.3%)
950,000 Browning-Ferris
Industries, Inc., 7.25%
automatic exchangeable 30,697
- -------------------------------------------
Total preferred stocks
(cost: $294,002) 309,900
- -------------------------------------------
Principal Market
Amount Value
(000) Security (000)
- --------- -------- -----
CONVERTIBLE BONDS (2.7%)
$ 15,000 Continental Airlines, Inc.,
6.75%, 4/15/06 $ 24,450
20,000 Quantum Corp.,
7.00%, 8/01/04 19,475
20,000 Micron Technology, Inc.,
7.00%, 7/01/04 19,875
- -------------------------------------------
Total bonds (cost: $60,314) 63,800
- -------------------------------------------
SHORT-TERM (1.9%)
Commercial Paper
44,532 Household Finance Corp.,
5.60%, 2/02/98
(cost: $44,518) 44,518
- -------------------------------------------
Total investments (cost:
$1,771,854) $ 2,376,999
===========================================
INCOME STOCK FUND
NOTES TO PORTFOLIO OF INVESTMENTS IN SECURITIES
January 31, 1998
(Unaudited)
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.
INCOME STOCK FUND
STATEMENT OF OPERATIONS
(IN THOUSANDS)
Six-month period ended January 31, 1998
(Unaudited)
Net investment income:
Income:
Dividends $ 50,586
Interest 2,551
--------
Total income 53,137
--------
Expenses:
Management fees 5,727
Transfer agent's fees 1,345
Custodian's fees 122
Postage 149
Shareholder reporting fees 41
Directors' fees 2
Registration fees 87
Professional fees 18
Other 36
--------
Total expenses 7,527
--------
Net investment income 45,610
--------
Net realized and unrealized gain on investments:
Net realized gain 42,316
Change in net unrealized appreciation/depreciation 105,075
--------
Net realized and unrealized gain 147,391
--------
Increase in net assets resulting from operations $193,001
========
See accompanying notes to financial statements.
INCOME STOCK FUND
STATEMENTS OF CHANGES IN NET ASSETS
(IN THOUSANDS)
Six-month period ended January 31, 1998
and Year ended July 31, 1997
(Unaudited)
1/31/98 7/31/97
------- -------
From operations:
Net investment income $ 45,610 $ 91,552
Net realized gain on investments 42,316 111,015
Change in net unrealized appreciation/depreciation
of investments 105,075 326,818
---------- ----------
Increase in net assets resulting from operations 193,001 529,385
---------- ----------
Distributions to shareholders from:
Net investment income (45,274) (89,087)
---------- ----------
Net realized gains (118,394) (80,728)
---------- ----------
From capital share transactions:
Proceeds from shares sold 135,515 260,043
Dividend reinvestments 152,984 158,556
Cost of shares redeemed (130,501) (302,609)
---------- ----------
Increase in net assets from capital share
transactions 157,998 115,990
---------- ----------
Net increase in net assets 187,331 475,560
Net assets:
Beginning of period 2,186,329 1,710,769
---------- ----------
End of period $2,373,660 $2,186,329
========== ==========
Undistributed net investment income included in net
assets:
End of period $ 5,196 $ 4,860
========== ==========
Change in shares outstanding:
Shares sold 7,078 15,238
Shares issued for dividends reinvested 8,170 9,566
Shares redeemed (6,820) (17,704)
---------- ----------
Increase in shares outstanding 8,428 7,100
========== ==========
Authorized shares of $.01 par value 135,000 135,000
========== ==========
See accompanying notes to financial statements.
INCOME STOCK FUND
NOTES TO FINANCIAL STATEMENTS
January 31, 1998
(Unaudited)
(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 semiannual 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. 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 six-month period ended January 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
Purchases and sales of securities, excluding short-term securities, for the
six-month period ended January 31, 1998 were $190,366,170 and $126,223,670,
respectively.
Gross unrealized appreciation and depreciation of investments as of January 31,
1998 was $618,568,626 and $13,424,323, 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
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 six-month
period ended January 31, 1998 was $5,512.
(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 January 31, 1998, the Association and its affiliates
owned 3,671,121 shares (3.0%) 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>
Six-Month Ten-Month
Period Ended Period Ended Year Ended
January 31, Year Ended July 31, July 31, September 30,
--------------------------------
1998 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net asset value at
beginning of period $ 19.01 $ 15.85 $ 14.96 $ 13.50 $ 14.95 $ 13.42
Net investment income .37 .81 .77 .74 .60 .71
Net realized and
unrealized gain (loss) .38 3.88 1.16 1.69 (1.12) 1.62
Distributions from net
investment income (.20) (.79) (.77) (.75) (.74) (.71)
Distributions of realized
capital gains (.33) (.74) (.27) (.22) (.19) (.09)
---------- ---------- --------- ---------- ---------- ----------
Net asset value at
end of period $ 19.23 $ 19.01 $ 15.85 $ 14.96 $ 13.50 $ 14.95
========== ========== ========= ========== ========== ==========
Total return (%) * 8.88 31.46 13.21 18.83 (3.53) 18.05
Net assets at
end of period (000) $2,373,660 $2,186,329 $1,710,769 $1,408,371 $1,190,024 $1,043,686
Ratio of expenses to
average net assets (%) .66(a) .68 .72 .75 .73(a) .70
Ratio of net investment
income to average
net assets (%) 3.97(a) 4.73 4.84 5.34 5.25(a) 5.43
Portfolio turnover (%) 5.67 34.95 32.38 34.94 24.82 26.98
Average commission
rate paid per share+ $ .0498 $ .0499 $ .0500
*Assumes reinvestment of all dividend income and capital gain distributions during the period.
+Calculated by aggregating all commissions paid on the purchase and sale of securities and dividing by the
actual number of shares purchased or sold for which commissions were charged.
(a)Annualized. The ratio is not necessarily indicative of 12 months of operations.
</TABLE>
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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
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
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