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 7
Portfolio of Investments in Securities 8
Notes to Portfolio of Investments in Securities 10
Statement of Operations 11
Statements of Changes in Net Assets 12
Notes to Financial Statements 13
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 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 FUND
OBJECTIVE: Maximum current income without undue risk to principal.
TYPES OF INVESTMENTS: Income-producing securities selected for their high yields
relative to the risk involved.
================================================================================
7/31/97 1/31/98
Net Assets $1,663.0 Million $1,738.3 Million
Net Asset Value Per Share $12.54 $12.88
================================================================================
AVERAGE ANNUAL TOTAL RETURNS AS OF 1/31/98
7/31/97 to 1/31/98 1 Year 5 Years 10 Years
6.18%+ 12.17% 7.70% 9.76%
================================================================================
+ 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 Fund to the Lehman
Brothers Aggregate Bond Index Fund and the Lipper Corporate Debt A Rated Average
from 01/31/88 to 01/31/98. The data points from the graph are as follows:
LEHMAN BROTHERS LIPPER CORPORATE
USAA INCOME AGGREGATE BOND DEBT A RATED
FUND INDEX AVERAGE
---------- -------- -------
01/31/88 10,000 10,000 10,000
06/88 10,209 10,142 10,142
12/88 10,593 10,422 10,469
06/89 11,618 11,381 11,371
12/89 12,319 11,937 11,808
06/90 12,534 12,274 12,035
12/90 13,266 13,006 12,605
06/91 13,972 13,588 13,217
12/91 15,837 15,087 14,806
06/92 16,195 15,496 15,192
12/92 17,163 16,204 15,968
06/93 18,512 17,321 17,294
12/93 18,868 17,784 17,858
06/94 17,542 17,096 16,905
12/94 17,885 17,265 16,998
06/95 20,186 19,241 19,020
12/95 22,261 20,455 20,314
06/96 21,422 20,206 19,878
12/96 22,557 21,197 20,872
06/97 23,181 21,853 21,473
12/97 25,050 23,244 22,823
01/31/98 25,384 23,542 23,103
The graph illustrates the comparison of a $10,000 hypothetical investment in the
USAA Income Fund to the broad-based Lehman Brothers Aggregate Bond Index and
the Lipper Corporate Debt A Rated Average. The Lehman Brothers Aggregate Bond
Index is an unmanaged index made up of the government/corporate index, the
mortgage-backed securities index, and the asset-backed securities index. The
Lipper Corporate Debt A Rated Average is the average performance level of all
corporate debt funds A rated, as reported by Lipper Analytical Services, an
independent organization that monitors the performance of mutual funds.
Message from the Manager
[Photograph of the Portfolio Manager, John W. Saunders, Jr., CFA, appears here.]
MARKET CONDITIONS AND PERFORMANCE
This past six months reporting period ending January 31, 1998, includes the best
bond market we have seen in the past two years. Interest rates for the 30-year
U.S. Treasury bond,(1) as shown on the chart below, declined from 6.30% on
July 31, 1997, to 5.86% on January 30, 1998. I am pleased to report that your
Fund has performed very well for this period. In fact, for the latest twelve
months ending January 31, 1998, your Fund's total return of 12.17% ranked number
9 out of 140 funds in the Lipper(2) Corporate Debt A-Rated Bond Fund category in
which the Fund's performance is measured.(3)
PORTFOLIO
The Federal Reserve appears comfortable with the outlook that inflation will
remain low, and this has calmed the bond market. In this more hospitable
environment, we made some changes in the portfolio. Our common stock holdings,
primarily electric utilities which are sensitive to changes in interest rates,
were sold when their appreciating prices made their dividend yields fall well
below those available in bonds and preferred stocks. Additional investments
were made in Real Estate Investment Trust (REIT) preferred stocks at very
attractive dividend yields. We also increased our position in long U.S.
Treasury bonds while reducing our holdings in agency mortgage pass-through
securities (FHLMC, FNMA, and GNMA). As of January 31, 1998, the portfolio mix,
as percentages of the net assets, was 29.6% in U.S. Treasury bonds, 54.5% in
agency mortgages pass-through securities, 7.5% in corporate bonds, and 7.6% in
preferred stocks.
- ---------------------------------
30-YEAR U.S TREASURY BOND YIELD
- ---------------------------------
A chart in the form of a line graph appears here, illustrating the yield of the
30-Year U.S. Treasury Bond from 7/31/97 to 1/30/98. The data points from the
graph are as follows:
30 YEAR U.S. TREASURY BOND YIELD
7/31/97 6.30%
8/15/97 6.58%
8/29/97 6.64%
9/15/97 6.60%
9/30/97 6.43%
10/15/97 6.43%
10/31/97 6.18%
11/14/97 6.18%
11/28/97 6.12%
12/15/97 6.05%
12/31/97 5.99%
1/15/98 5.79%
1/30/98 5.86%
(1) The 30-year U.S. Treasury Bond is generally considered the benchmark for
U.S. long-term interest rates.
(2) Lipper Analytical Services is an independent organization that monitors
the performance of mutual funds.
(3) For the 5- and 10-year periods ending January 31, 1998, the Fund ranked 11
out of 60 and 3 out of 36, respectively. Returns for the one, five, and ten-
year periods ending January 31, 1998, respectively, are listed on page 4.
OUTLOOK
The financial press is full of predictions about the expected negative impact on
the U.S. economy which will result from the currency and financial market woes
in Asia. The Asian deflation makes imports to the U.S. less costly, in contrast
with now higher priced U.S. exports to Asia, thus aggravating our balance of
trade deficit. Implications for the bond market are positive. A deepening U.S.
trade deficit, together with a shrinking U.S. budget deficit, produces an
interesting supply/demand relationship for U.S. Treasury securities. If there
are more U.S. dollars in Asian hands, and less of a need by the U.S. Treasury to
issue securities, then this could cause prices for U.S. Treasury securities to
rise (declining interest rates) because of strong demand versus smaller supply.
Inflation in the U.S. continues in a downtrend, and this can also lower interest
rates. In any event, the potential for rising interest rates appears to be low
for the time being. We will continue to seek a high level of income for the Fund
to enhance the compounding of potential returns which accrue through
reinvestment of income.
TOP 10 SECURITIES
(% OF NET ASSETS)
------------------------------------------------------------
Coupon Rate% % of Net Assets
------------ ---------------
GNMA 7.50 25.1
U.S. Treasury Bond 7.875 18.8
FNMA 7.50 10.4
U.S. Treasury Bond 6.125 9.8
GNMA 7.00 5.3
GNMA 6.50 4.4
FNMA 7.00 4.2
GNMA 8.00 2.8
FNMA 8.00 2.3
Household Finance 7.25 1.2
See page 8 for a complete listing of the Portfolio of Investments in Securities.
INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES
(IN THOUSANDS)
January 31, 1998
(Unaudited)
ASSETS
Investments in securities, at market value (identified cost
of $1,633,960) $1,724,009
Cash 503
Receivables:
Capital shares sold 612
Interest 20,094
Securities sold 612
----------
Total assets 1,745,830
----------
LIABILITIES
Securities purchased 5,944
Capital shares redeemed 882
USAA Investment Management Company 354
USAA Transfer Agency Company 160
Accounts payable and accrued expenses 164
----------
Total liabilities 7,504
----------
Net assets applicable to capital shares outstanding $1,738,326
==========
REPRESENTED BY:
Paid-in capital $1,642,709
Accumulated undistributed net investment income 772
Accumulated net realized gain on investments 4,796
Net unrealized appreciation of investments 90,049
----------
Net assets applicable to capital shares outstanding $1,738,326
==========
Capital shares outstanding 134,925
==========
Net asset value, redemption price, and offering price per share $ 12.88
==========
See accompanying notes to financial statements.
INCOME FUND
PORTFOLIO OF INVESTMENTS IN SECURITIES
January 31, 1998
(Unaudited)
Market
Number Value
of Shares Security (000)
--------- -------- -----
PREFERRED STOCKS (7.6%)
103,107 Avalon Properties, Inc. "A", 9% cumulative redeemable $ 2,797
444,526 Avalon Properties, Inc. "B", 8.96% cumulative redeemable 11,863
483,800 Bay Apartment Communities, Inc. "C", 8.50% cumulative
redeemable 12,639
421,240 Bay Apartment Communities, Inc. "D", 8% cumulative
redeemable 10,636
164,400 Duke Realty Investments, Inc. depositary shares "A",
9.10% cumulative redeemable 4,480
40,000 Equity Residential Properties Trust depositary shares "B",
9.125% cumulative redeemable 1,100
575,000 Equity Residential Properties Trust depositary shares "C",
9.125% cumulative redeemable 15,776
115,300 Equity Residential Properties Trust depositary shares "F",
9.65% cumulative redeemable 3,063
331,200 First Industrial Realty Trust, Inc. depositary shares "B",
8.75% cumulative redeemable 8,653
412,000 Gables Residential Trust "A", 8.3% cumulative redeemable 10,480
142,500 Merry Land and Investments Co., Inc. "D",
8.29% cumulative redeemable 7,642
250,000 Post Properties, Inc. "A", 8.5% cumulative redeemable 14,000
205,000 Security Capital Industrial Trust "C", 8.54% cumulative
redeemable 11,839
200,000 Shurgard Storage Centers, Inc. "B", 8.8% cumulative
redeemable 5,300
400,000 United Dominion Realty Trust, Inc. "B", 8.60% cumulative
redeemable 10,900
- --------------------------------------------------------------------------------
Total preferred stocks (cost: $122,588) 131,168
- --------------------------------------------------------------------------------
Principal
Amount Coupon
(000) Rate Maturity
----- ---- --------
CORPORATE OBLIGATIONS (7.5%)
$ 15,000 Avco Financial Services, Inc.,
Senior Notes 6.00% 8/15/02 14,914
5,000 Caliber Systems, Inc., Notes 7.80 8/01/06 5,431
15,000 Chase Manhattan Corp.,
Subordinated Notes 7.13 2/01/07 15,760
4,900 Consolidated Rail Corp.,
Debentures 9.75 6/15/20 6,599
15,000 First Union Corp., Subordinated
Notes 7.50 7/15/06 16,105
20,000 Household Finance Corp., Notes 7.25 5/15/06 21,018
10,000 Province of Quebec, Debentures 6.50 1/17/06 10,161
15,000 Province of Quebec, Global
Debentures 7.00 1/30/07 15,771
15,000 Waste Management, Inc., Notes 7.00 10/15/06 15,463
9,000 Wells Fargo & Co., Subordinated
Notes 6.88 4/01/06 9,340
- --------------------------------------------------------------------------------
Total corporate obligations (cost: $120,359) 130,562
- --------------------------------------------------------------------------------
U.S. GOVERNMENT & AGENCY ISSUES (84.1%)
Federal National Mortgage Assn. (16.9%)
72,076 7.00%, 9/01/22 - 9/01/23 73,518
174,253 7.50%, 2/01/22 - 2/01/23 180,077
38,047 8.00%, 5/01/21 - 12/01/22 39,738
- --------------------------------------------------------------------------------
293,333
- --------------------------------------------------------------------------------
Government National Mortgage Assn. (37.6%)
76,821 6.50%, 6/15/23 - 4/15/26 76,824
90,993 7.00%, 5/15/23 - 3/15/26 92,657
423,271 7.50%, 9/15/22 - 5/15/27 436,950
45,712 8.00%, 3/15/22 - 5/15/24 47,818
- --------------------------------------------------------------------------------
654,249
- --------------------------------------------------------------------------------
U.S. Treasury Bonds (29.6%)
162,665 6.125%, 11/15/27 169,934
16,770 6.375%, 8/15/27 18,017
262,249 7.875%, 2/15/21 326,746
- --------------------------------------------------------------------------------
514,697
- --------------------------------------------------------------------------------
Total U.S. Government & agency issues (cost: $1,391,013) 1,462,279
- --------------------------------------------------------------------------------
Total investments (cost: $1,633,960) $1,724,009
================================================================================
INCOME 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 FUND
STATEMENT OF OPERATIONS
(IN THOUSANDS)
Six-month period ended January 31, 1998
(Unaudited)
Net investment income:
Income:
Dividends $ 7,004
Interest 53,131
--------
Total income 60,135
--------
Expenses:
Management fees 2,046
Transfer agent's fees 949
Custodian's fees 115
Postage 56
Shareholder reporting fees 26
Directors' fees 2
Registration fees 41
Professional fees 18
Other 23
--------
Total expenses 3,276
--------
Net investment income 56,859
--------
Net realized and unrealized gain on investments:
Net realized gain 16,485
Change in net unrealized appreciation/depreciation 29,712
--------
Net realized and unrealized gain 46,197
--------
Increase in net assets resulting from operations $103,056
========
See accompanying notes to financial statements.
INCOME 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 $ 56,859 $ 114,449
Net realized gain (loss) on investments 16,485 (7,337)
Change in net unrealized appreciation/depreciation
of investments 29,712 87,179
---------- ----------
Increase in net assets resulting from
operations 103,056 194,291
---------- ----------
Distributions to shareholders from:
Net investment income (56,154) (114,688)
---------- ----------
From capital share transactions:
Proceeds from shares sold 104,864 114,260
Dividend reinvestments 45,621 93,216
Cost of shares redeemed (122,042) (361,404)
---------- ----------
Increase (decrease) in net assets from capital
share transactions 28,443 (153,928)
---------- ----------
Net increase (decrease) in net assets 75,345 (74,325)
Net assets:
Beginning of period 1,662,981 1,737,306
---------- ----------
End of period $1,738,326 $1,662,981
========== ==========
Undistributed net investment income included in
net assets:
End of period $ 772 $ 62
========== ==========
Change in shares outstanding:
Shares sold 8,307 9,339
Shares issued for dividends reinvested 3,617 7,653
Shares redeemed (9,652) (29,529)
---------- ----------
Increase (decrease) in shares outstanding 2,272 (12,537)
========== ==========
Authorized shares of $.01 par value 200,000 200,000
========== ==========
See accompanying notes to financial statements.
INCOME 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 Fund (the Fund). The Fund's investment objective is maximum current
income without undue risk to principal. USAA Investment Management Company (the
Manager) seeks to achieve this objective by investing the Fund's assets
primarily in U.S. dollar-denominated securities that have high yields relative
to the risk involved.
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 Company'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. Portfolio securities, except as otherwise noted, traded primarily on a
domestic securities exchange are valued at the last sales price on that
exchange.
3. Over-the-counter securities are priced at the last sales price or, if not
available, at the average of the bid and asked prices.
4. Securities purchased with maturities of 60 days or less are stated at
amortized cost which approximates market value.
5. 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 decrease paid-in
capital by $6,773, increase accumulated undistributed net investment income by
$4,880, and increase accumulated net realized gain on investments by $1,893.
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 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
Purchases and sales of securities, excluding short-term securities, for the
six-month period ended January 31, 1998 were $382,581,699 and $349,423,456,
respectively.
Gross unrealized appreciation and depreciation of investments as of January 31,
1998 was $92,948,051 and $2,898,734, 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.
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.
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 $19,200.
(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
(including related employee benefit plans) owned 23,512,237 shares (17.4%) 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 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 $ 12.54 $ 11.97 $ 12.11 $ 11.67 $ 13.28 $ 12.76
Net investment income .43 .83 .83 .84 .72 .90
Net realized and
unrealized gain (loss) .33 .57 (.13) .45 (1.30) .52
Distributions from net
investment income (.42) (.83) (.84) (.85) (.78) (.90)
Distributions of realized
capital gains - - - - (.25) -
---------- ---------- ---------- --------- --------- ----------
Net asset value at
end of period $ 12.88 $ 12.54 $ 11.97 $ 12.11 $ 11.67 $ 13.28
========== ========== ========== ========== ========== ==========
Total return (%) * 6.18 12.15 5.78 11.64 (4.52) 11.58
Net assets at
end of period (000) $1,738,326 $1,662,981 $1,737,306 $1,755,171 $1,718,934 $1,932,064
Ratio of expenses to
average net assets (%) .38(a) .39 .40 .41 .41(a) .41
Ratio of net investment
income to average
net assets (%) 6.67(a) 6.76 6.64 7.27 6.98(a) 7.00
Portfolio turnover (%) 20.85(b) 57.50(b) 81.26(b) 30.86(b) 25.36(b) 44.82
Average commission
rate paid per share+ $ .0513 $ .0500 $ .0469
* 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.
(b) At times, the Fund has simultaneously purchased and sold the same securities. These transactions
sometimes were high in volume and were dissimilar to other trade activity within the Fund. If these
transactions were excluded from the calculation, the portfolio turnover rate would have been as follows:
</TABLE>
Six-Month Ten-Month
Period Ended Period Ended
January 31, Year Ended July 31, July 31,
--------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Portfolio turnover (%) 15.54 22.07 44.69 9.09 16.79
Purchases and sales of
this type are as
follows:
Purchases (000) $ 88,811 $593,587 $648,396 $360,943 $155,322
Sales (000) $ 88,915 $594,283 $649,193 $361,366 $155,497
================================================================================
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
================================================================================
