Table of Contents
USAA Family of Funds 1
Message from the President 2
Investment Review 4
Message from the Manager 5
Financial Information:
Categories & Definitions 7
Portfolio of Investments 8
Notes to Portfolio of Investments 13
Statement of Assets and Liabilities 14
Statement of Operations 15
Statements of Changes in Net Assets 16
Notes to Financial Statements 17
Important Information
Through our ongoing efforts to reduce expenses and respond to shareholder
requests, your annual and semiannual report mailings are "streamlined." One copy
of each report is sent to each address, rather than to every registered owner.
For many shareholders and their families, this eliminates duplicate copies,
saving paper and postage costs to the Fund.
If you are the primary shareholder on at least one account, prefer not to
participate in streamlining, and would like to continue receiving one report per
registered account owner, you may request this in writing to:
USAA Investment Management Company
Attn: Report Mail
9800 Fredericksburg Road
San Antonio, TX 78284-8916
or phone a Mutual Fund Representative at 1-800-531-8448 during business hours.
This report is for the information of the shareholders and others who have
received a copy of the currently effective prospectus of the USAA Short-Term
Bond Fund, managed by USAA Investment Management Company (IMCO). It may be used
as sales literature only when preceded or accompanied by a current prospectus
which gives further details about the Fund.
USAA with the eagle is registered in the U.S. Patent & Trademark Office.
(Copyright)1999, USAA. All rights reserved.
USAA Family of Funds Summary
Fund Minimum
Type/Name Volatility Investment*
--------- ---------- ----------
CAPITAL APPRECIATION
===============================================================================
Aggressive Growth Very high $3,000
Emerging Markets(1) Very high $3,000
First Start Growth Moderate to high $3,000
Gold(1) Very high $3,000
Growth Moderate to high $3,000
Growth & Income Moderate $3,000
International(1) Moderate to high $3,000
S&P 500 (Registered Trademark)
Index(2) Moderate $3,000
Science & Technology(5) Very high $3,000
World Growth(1) Moderate to high $3,000
ASSET ALLOCATION
===============================================================================
Balanced Strategy(1) Moderate $3,000
Cornerstone Strategy(1) Moderate $3,000
Growth and Tax
Strategy(3) Moderate $3,000
Growth Strategy(1) Moderate to high $3,000
Income Strategy Low to moderate $3,000
INCOME - TAXABLE
===============================================================================
GNMA Low to moderate $3,000
Income Moderate $3,000
Income Stock Moderate $3,000
Short-Term Bond Low $3,000
INCOME - TAX EXEMPT
===============================================================================
Long-Term(3) Moderate $3,000
Intermediate-Term(3) Low to moderate $3,000
Short-Term(3) Low $3,000
State Bond Income(3)** Moderate $3,000
MONEY MARKET
===============================================================================
Money Market(4) Very low $3,000
Tax Exempt
Money Market(3),(4) Very low $3,000
Treasury Money
Market Trust(4) Very low $3,000
State Money Market(3),(4)** Very low $3,000
(1) Foreign investing is subject to additional risks, which are discussed in
the funds' prospectuses.
(2) S&P 500 (Registered Trademark) is a trademark of The McGraw-Hill Companies,
Inc. and has been licensed for use. The Product is not sponsored, sold or
promoted by Standard & Poor's, and Standard & Poor's makes no
representation regarding the advisability of investing in the Product.
(3) Some income may be subject to state or local taxes or the federal
alternative minimum tax.
(4) An investment in a money market fund is not insured or guaranteed by the
FDIC or any other government agency. Although the fund seeks to preserve
the value of your investment at $1 per share, it is possible to lose money
by investing in the fund.
(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 Investment Management Company, including charges and operating expenses,
please call 1-800-531-8181 for a prospectus. Read it carefully before you
invest.
Message from the President
[PHOTOGRAPH OF PRESIDENT AND VICE CHAIRMAN OF THE BOARD, MICHAEL J.C. ROTH, CFA,
APPEARS HERE]
The last half of 1998 was a fascinating time in the financial markets. While the
press, as usual, devoted most of its attention to stock markets, the income
markets were perhaps even more interesting.
The turmoil in foreign debt markets coupled with the problems of a notable hedge
fund, set off an almost incredible wave of events. I use the word "wave" because
it so well describes the reaction that occurred in the U.S. Treasury securities
market. We see this in the chronology of yields on the 30-year Treasury bond:
U.S. Treasury 30-year Yield
------------------------------------------
August 3, 1998 5.66%
September 1, 1998 5.34%
October 1, 1998 4.88%
November 2, 1998 5.24%
December 1, 1998 5.03%
And, as this is being written in early March 1999, the 30-year bond has returned
to the level of August 1998.
These seemingly dry numbers tell a story that is filled with terror. This was a
flight to quality and a flight away from anything that smacked of risk. It is a
reminder that mutual funds are not bank accounts. They are conduits to
securities markets, and those markets must function every day. If the world is
in turmoil, that functioning will be rocky, but that does not mean all is bad.
If you owned Russian or Brazilian bonds it was bad. But if you owned U.S.
Treasuries it was absolutely wonderful.
That is the great lesson here. A tumultuous market produces winners as well as
losers because money must flow somewhere. That's one reason we diversify. That's
one reason we don't pay much attention to doomsayers.
Sincerely,
Michael J.C. Roth, CFA
President and
Vice Chairman of the Board
For more complete information about the mutual funds managed and distributed by
USAA Investment Management Company, including charges and operating expenses,
please call for a prospectus. Read it carefully before investing.
Past performance is no guarantee of future results.
Investment Review
USAA SHORT-TERM BOND FUND
OBJECTIVE: High current income consistent with preservation of principal.
TYPES OF INVESTMENTS: A broad range of investment-grade debt securities.
- ----------------------------------------------------------------------------
7/31/98 1/31/99
============================================================================
Net Assets $181.2 Million $211.2 Million
Net Asset Value Per Share $9.99 $9.88
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS AS OF 1/31/99
============================================================================
7/31/98 to Since Inception
1/31/99 1 Year 5 Years on 6/1/93
2.08%(+) 4.65% 5.84% 5.81%
- -----------------------------------------------------------------------------
(+) 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 Short-Term Bond Fund, the Lehman
Brothers 1-3 Year Government/Corporation Index, and the Lipper Short Investment
Grade Debt Funds Average, for the period of 06/01/93 through 01/31/99. The data
points from the graph are as follows:
USAA Short- Lehman 1-3 Lipper Short Inv Grade
Term Bond Fund Govt/Corp Index Grade Debt Average
-------------- --------------- ----------------------
06/01/93 $10,000 $10,000 $10,000
07/93 10,087 10,099 10,122
01/94 10,372 10,351 10,385
07/94 10,259 10,329 10,306
01/95 10,388 10,483 10,418
07/95 11,070 11,077 10,989
01/96 11,501 11,574 11,492
07/96 11,692 11,690 11,581
01/97 12,234 12,124 12,025
07/97 12,741 12,554 12,451
01/98 13,162 12,994 12,845
07/98 13,494 13,321 13,149
01/99 13,775 13,824 13,504
Data from 6/1/93 through 1/31/99
The graph illustrates the comparison of a $10,000 hypothetical investment in the
USAA Short-Term Bond Fund to the broad-based Lehman Brothers 1-3 Year
Government/Corporate Index and the Lipper Short Investment Grade Debt Funds
Average. The Lehman Index is an unmanaged index made up of government, agency,
and corporate bonds longer than one year and less than three years. The Lipper
Average is the average performance level of all Short Investment Grade Debt
Funds, as reported by Lipper Analytical Services, Inc., an independent
organization that monitors the performance of mutual funds.
Message from the Manager
[PHOTOGRAPH OF PORTFOLIO MANAGER: PAUL LUNDMARK, CFA APPEARS HERE]
THE MARKET
I manage the Short-Term Bond Fund so that income is the primary component
of total return. As of January 31, 1999, the twelve-month dividend yield for the
Fund was 6.07% versus the average of 5.57% for other funds in the Lipper
Short-Term Investment Grade Debt Funds category.(1) While the yield compared
favorably to my peers, the Fund lagged in terms of change in net asset value.
The reason for this underperformance was that at the beginning of 1998,
short-term U.S. Treasury rates (1-5 years) were close to or lower than overnight
rates. In order to keep the Fund's yield up, I invested in corporate bonds and
mortgage and asset-backed securities. Thus I was underweighted in U.S. Treasury
bonds versus my peers. This management style worked well until the recent market
turmoil. The months of August and September saw a "flight to quality" as
investors avoided investments that had any element of risk and scrambled to buy
U.S. Treasury securities at inflated prices. This resulted in all asset classes
underperforming U.S. Treasuries.
In my opinion, the negative market sentiment became overdone which provided
buying opportunities. I purchased Merrill Lynch and AT&T Capital corporate bonds
that have subsequently risen in price.
The best performing bonds in the portfolio were Waste Management and WorldCom.
Waste Management was acquired by USA Waste and WorldCom acquired MCI. These
combinations resulted in financially stronger companies. While positive, the
returns for real estate investment trusts (REIT) corporate bonds and the
collateralized mortgage obligation (CMO) securities fell short of the rally in
treasuries. I am continuing to hold these securities because they are priced
cheap compared to treasuries and could potentially outperform in more normal
market conditions.
(1) Lipper Analytical Services, Inc. is an independent organization that
monitors the performance of mutual funds. Rankings are based on total
return.
Past performance is no guarantee of future results.
This past year has been challenging. While I have made an effort to upgrade the
credit quality of the Fund, in certain market conditions, technical factors such
as liquidity can far outweigh the fundamentals. However, I believe that the
philosophy of maximizing income through credit analysis without timing the
market should work well over time.
PORTFOLIO MIX
A pie chart is shown here depicting the Portfolio Mix as of January 31, 1999 of
the USAA Short-Term Bond Fund to be:
Bonds/Notes - 74.6%*; Variable Rate Demand Notes - 18.2%*; and Commercial Paper
- - 5.6%*.
* Percentages are of the Net Assets in the Portfolio and may or may not equal
100%.
See page 8 for a complete listing of the Portfolio of Investments.
USAA SHORT-TERM BOND FUND
CATEGORIES AND DEFINITIONS
PORTFOLIO OF INVESTMENTS
January 31, 1999
(Unaudited)
Fixed Rate Instruments - consist of bonds and notes. The interest rate is
constant to maturity. Prior to maturity, the market price of a fixed-rate
instrument generally varies inversely to the movement of interest rates.
Variable Rate Demand Notes (VRDN) - provide the right, on any business day, to
sell the security at face value on either that day or within 30 days. The
interest rate is adjusted at a stipulated daily, weekly, or monthly interval to
a rate that reflects current market conditions. In bond funds, the effective
maturity is the next put date.
Cash Equivalents - consist of short-term obligations issued by banks,
corporations, and U.S. Government Agencies. The interest rate is constant to
maturity.
PORTFOLIO DESCRIPTION ABBREVIATIONS
COP Certificate of Participation
IDA Industrial Development Authority/Agency
IDB Industrial Development Board
HFA Housing Finance Authority
MFH Multi-Family Housing
MTN Medium-Term Note
PCRB Pollution Control Revenue Bond
RB Revenue Bond
Credit Enhancements - add the financial strength of the provider of the
enhancement to support the issuer's ability to repay the principal when due. The
enhancement may be provided by either a high quality bank, insurance company, or
other corporation, or a collateral trust.
(LOC) Enhanced by a bank letter of credit.
<TABLE>
USAA SHORT-TERM BOND FUND
PORTFOLIO OF INVESTMENTS
January 31, 1999
(Unaudited)
<CAPTION>
Principal Coupon Market
Amount Security Rate Maturity Value
- ----------------------------------------------------------------------------------------
FIXED RATE INSTRUMENTS (74.6%)
CORPORATE BONDS (54.6%)
<C> <S> <C> <C> <C>
Banks - Major Regional
$ 4,500 Corporacion Andina De Fomento, Global
Bonds 7.38% 7/21/2000 $ 4,498
4,000 Corporacion Andina De Fomento, Global
Bonds 7.10 2/01/2003 3,932
- ----------------------------------------------------------------------------------------
8,430
- ----------------------------------------------------------------------------------------
Finance - Consumer
6,000 Capital One Bank, Bank Notes 5.95 2/15/2001 5,949
3,000 Capital One Bank, Bank Notes 6.15 6/01/2001 2,979
- ----------------------------------------------------------------------------------------
8,928
- ----------------------------------------------------------------------------------------
Finance - Diversified
9,000 AT&T Capital Corp., MTN 7.50 11/15/2000 9,176
- ----------------------------------------------------------------------------------------
Investment Banks/Brokerage
5,000 Merrill Lynch & Co., Inc., Notes 6.00 2/12/2003 5,076
- ----------------------------------------------------------------------------------------
Manufacturing - Diversified Industries
9,000 Edperbrascan Corp., Notes 7.13 12/16/2003 8,961
- ----------------------------------------------------------------------------------------
Real Estate Investment Trusts
3,000 Developers Diversified Realty Corp.,
Senior Notes 7.63 5/15/2000 3,048
7,000 Equity Operating L.P., Notes (a) 6.38 2/15/2002 6,999
7,000 Franchise Finance Corp. of America,
Senior Notes 7.00 11/30/2000 7,016
8,000 Glenborough Property, L.P., Senior Notes (a) 7.63 3/15/2005 7,679
7,000 HRPT Properties Trust, Senior Notes 6.70 2/23/2005 6,834
3,000 Nationwide Health Properties, Inc., MTN 8.61 3/01/2002 3,116
5,000 Oasis Residential, Inc., Notes 6.75 11/15/2001 4,946
4,500 TriNet Corporate Realty Trust, Inc., Notes 7.30 5/15/2001 4,538
- ----------------------------------------------------------------------------------------
44,176
- ----------------------------------------------------------------------------------------
Retail - General Merchandising
3,000 Dayton Hudson Corp., Notes 5.95 6/15/2000 3,026
2,000 Kmart Corp., MTN 7.72 6/25/2002 2,020
2,000 Kmart Corp., MTN 7.76 7/01/2002 2,023
- ----------------------------------------------------------------------------------------
7,069
- ----------------------------------------------------------------------------------------
Retail - Specialty
3,000 MacSaver Financial Services, Inc., Notes 7.40 2/15/2002 2,415
- ----------------------------------------------------------------------------------------
Telecommunications - Long Distance
2,500 WorldCom, Inc., Senior Notes 6.13 8/15/2001 2,545
4,000 WorldCom, Inc., Senior Notes 7.55 4/01/2004 4,352
- ----------------------------------------------------------------------------------------
6,897
- ----------------------------------------------------------------------------------------
Waste Management
8,000 Browning Ferris Industries, Inc. 6.08 1/18/2000 8,004
6,000 Waste Management, Inc., Notes 6.38 12/01/2003 6,114
- ----------------------------------------------------------------------------------------
14,118
- ----------------------------------------------------------------------------------------
Total corporate bonds (cost: $115,381) 115,246
- ----------------------------------------------------------------------------------------
ASSET BACKED SECURITIES (7.1%)
6,000 FirstPlus Home Loan Owner Trust, Series
1997-4, Class A-5 6.62 9/10/2015 6,066
4,000 Firstplus Home Loan Owner Trust, Series
1998-2, Class A-4 6.54 4/10/2015 3,987
5,000 Firstplus Home Loan Owner Trust, Series
1998-4, Class A-3 6.24 5/11/2015 4,954
- ----------------------------------------------------------------------------------------
Total asset backed securities (cost: $14,999) 15,007
- ----------------------------------------------------------------------------------------
COLLATERILIZED MORTGAGE OBLIGATIONS (12.9%)
4,725 Federal Home Loan Mortgage Corp.,
Series 1998-11 M 9.00 2/18/2024 4,977
2,653 Federal Home Loan Mortgage Corp.,
Series 1998-2 GA 8.50 4/18/2025 2,733
6,043 Federal Home Loan Mortgage Corp.,
Series 1998-7 H 9.00 3/18/2025 6,378
5,051 Federal National Mortgage Assn.,
Series 1997-72 CA 9.50 9/18/2023 5,187
3,068 Federal National Mortgage Assn.,
Series 1997-79 U 9.00 11/18/2024 3,164
4,710 Federal National Mortgage Assn.,
Series 1997-89 N 9.50 12/20/2022 4,903
- ----------------------------------------------------------------------------------------
Total collateralized mortgage obligations (cost: $28,446) 27,342
- ----------------------------------------------------------------------------------------
Total fixed rate instruments (cost: $158,826) 157,595
- ----------------------------------------------------------------------------------------
VARIABLE RATE DEMAND NOTES (18.2%)
Appropriated Debt
9,500 City of Gardena, CA, COP, Series 1995 (LOC) 7.20 7/01/2025 9,500
- ----------------------------------------------------------------------------------------
Buildings
2,030 Goson, Notes, Series 1997 (LOC) 5.02 11/01/2017 2,030
2,075 Montgomery, AL, IDB RB, Series 1996C (LOC) 5.10 7/01/2016 2,075
1,485 Scottsboro, AL, IDB RB, Series 1995 (LOC) 5.10 10/01/2010 1,485
- ----------------------------------------------------------------------------------------
5,590
- ----------------------------------------------------------------------------------------
Finance - Diversified
610 New Jersey Economic Development Auth.
Bonds, Series 1996A2 (LOC) 5.05 11/01/2016 610
545 New Jersey Economic Development Auth.
Bonds, Series 1996D2 (LOC) 5.05 11/01/2006 545
- ----------------------------------------------------------------------------------------
1,155
- ----------------------------------------------------------------------------------------
Foods
1,500 Colorado HFA Economic Development RB,
Series 1998B (LOC) 5.05 10/01/2018 1,500
- ----------------------------------------------------------------------------------------
Heavy Duty Trucks & Parts
2,680 Missouri Economic Development Export
IDA RB, Series 1993B (LOC) 4.90 6/01/2008 2,680
- ----------------------------------------------------------------------------------------
Lodging/Hotel
2,540 Birmingham, AL, Historical Preservation
Auth. Taxable RB, Series 1993 (LOC) 5.75 5/01/2018 2,540
- ----------------------------------------------------------------------------------------
Manufacturing - Specialized
4,300 Spencer County Tax PCRB, Series 1998 (LOC) 5.54 9/01/2018 4,300
- ----------------------------------------------------------------------------------------
Multi-Family Housing
155 Bartlett, IL, MFH RB, Series 1995 (LOC) 6.00 3/01/2025 155
- ----------------------------------------------------------------------------------------
Real Estate - Other
1,925 Wynrose, Inc., Notes, Series 1995A (LOC) 5.10 11/01/2005 1,925
- ----------------------------------------------------------------------------------------
Special Assessment/Tax/Fee
7,700 Orange County Special Finance Auth. RB,
Series 1995A (LOC) 6.10 11/01/2014 7,700
- ----------------------------------------------------------------------------------------
Miscellaneous
1,370 Ontario Redevelopment Agency, CA, RB,
Series B (LOC) 5.50 9/01/2027 1,370
- ----------------------------------------------------------------------------------------
Total variable rate demand notes (cost: $38,415) 38,415
- ----------------------------------------------------------------------------------------
CASH EQUIVALENTS (5.6%)
Commercial Paper
2,393 MCN Investment Corp. 5.07 2/01/1999 2,392
9,500 Los Angeles County Metropolitan
Transportation Auth. Notes (LOC) 5.80 2/02/1999 9,500
- ----------------------------------------------------------------------------------------
Total cash equivalents (cost: $11,892) 11,892
- ----------------------------------------------------------------------------------------
Total investments (cost: $209,133) $ 207,902
========================================================================================
</TABLE>
USAA SHORT-TERM BOND FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
January 31, 1999
(Unaudited)
PORTFOLIO SUMMARY BY INDUSTRY
-----------------------------
Real Estate Investment Trusts 20.9%
Collateralized Mortgage Obligations 12.9
Asset Backed Securities 7.1
Waste Management 6.7
Finance - Diversified 4.9
Appropriated Debt 4.5
Sales Tax 4.5
Manufacturing - Diversified Industries 4.2
Finance - Consumer 4.2
Banks - Major Regional 4.0
Special Assessment/Tax/Fee 3.6
Retail - General Merchandising 3.4
Telecommunications - Long Distance 3.3
Buildings 2.7
Investment Banks / Brokerage 2.4
Manufacturing - Specialized 2.0
Heavy Duty Trucks & Parts 1.3
Lodging/Hotel 1.2
Retail - Specialty 1.1
Natural Gas Utilities 1.1
Other 2.4
----
98.4%
====
USAA SHORT-TERM BOND FUND
NOTES TO PORTFOLIO OF INVESTMENTS
January 31, 1999
(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.
SPECIFIC NOTES
(a) Security is exempt from registration under the Securities Act of 1933 and
has been determined to be liquid by the Fund's investment manager. Any resale of
this security in the United States may occur in an exempt transaction to a
qualified institutional buyer as defined by the Rule 144A.
See accompanying notes to financial statements.
<TABLE>
USAA SHORT-TERM BOND FUND
STATEMENT OF ASSETS AND LIABILITIES
(IN THOUSANDS)
January 31, 1999
(Unaudited)
<S> <C>
ASSETS
Investments in securities, at market value (identified cost of $209,133) $207,902
Cash 162
Receivables:
Capital shares sold 1,175
Interest 2,585
--------
Total assets 211,824
--------
LIABILITIES
Capital shares redeemed 479
USAA Transfer Agency Company 31
Accounts payable and accrued expenses 27
Dividends on capital shares 93
--------
Total liabilities 630
--------
Net assets applicable to capital shares outstanding $211,194
========
REPRESENTED BY:
Paid-in capital $212,520
Accumulated net realized loss on investments (95)
Net unrealized depreciation of investments (1,231)
--------
Net assets applicable to capital shares outstanding $211,194
========
Capital shares outstanding 21,375
========
Authorized shares of $.01 par value 120,000
========
Net asset value, redemption price, and offering price per share $ 9.88
========
See accompanying notes to financial statements.
</TABLE>
USAA SHORT-TERM BOND FUND
STATEMENT OF OPERATIONS
(IN THOUSANDS)
Six-month period ended January 31,1999
(Unaudited)
Net investment income:
Interest income $6,262
------
Expenses:
Management fees 238
Transfer agent's fees 163
Custodian's fees 39
Postage 13
Shareholder reporting fees 9
Director's Fees 2
Registration fees 59
Professional fees 19
Other 2
------
Total expenses before reimbursement 544
Expenses reimbursed (54)
------
Total expenses after reimbursement 490
------
Net investment income 5,772
------
Net realized and unrealized loss on investments:
Net realized loss (64)
Change in net unrealized appreciation/depreciation (1,720)
------
Net realized and unrealized loss (1,784)
------
Increase in net assets resulting from operations $3,988
======
See accompanying notes to financial statements.
<TABLE>
USAA SHORT-TERM BOND FUND
STATEMENTS OF CHANGES IN NET ASSETS
(IN THOUSANDS)
Six-month period ended January 31, 1999
and Year ended July 31, 1998
(Unaudited)
<CAPTION>
1/31/99 7/31/98
-------------------------
<S> <C> <C>
From operations:
Net investment income $ 5,772 $ 9,482
Net realized gain (loss) on investments (64) 442
Change in net unrealized appreciation/depreciation of
investments (1,720) (936)
-------------------------
Increase in net assets resulting from operations 3,988 8,988
-------------------------
Distributions to shareholders from:
Net investment income (5,772) (9,472)
-------------------------
Net realized gains (465) --
-------------------------
From capital share transactions:
Proceeds from shares sold 77,471 105,161
Shares issued for dividends reinvested 5,583 8,269
Cost of shares redeemed (50,782) (65,521)
-------------------------
Increase in net assets from capital share transactions 32,272 47,909
-------------------------
Net increase in net assets 30,023 47,425
Net assets:
Beginning of period 181,171 133,746
-------------------------
End of period $211,194 $181,171
=========================
Change in shares outstanding:
Shares sold 7,803 10,515
Shares issued for dividends reinvested 562 827
Shares redeemed (5,121) (6,550)
-------------------------
Increase in shares outstanding 3,244 4,792
=========================
See accompanying notes to financial statements.
</TABLE>
USAA SHORT-TERM BOND FUND
NOTES TO FINANCIAL STATEMENTS
January 31, 1999
(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, openend 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 USAA
Short-Term Bond Fund (the Fund). The Funds investment objective is high current
income consistent with preservation of principal. USAA Investment Management
Company (the Manager) seeks to achieve this objective by investing the Funds
assets primarily in U.S. dollar-denominated debt securities that are
investment-grade at the time of their purchase. The Fund will maintain a
dollar-weighted average portfolio maturity of three years or less.
A. Security valuation - The value of each security is determined (as of the
close of trading on the New York Stock Exchange on each business day the
Exchange is open) as set forth below:
1. Debt and government securities are valued each business day by a pricing
service (the Service) approved by the Fund's Board of Directors. The Service
uses the mean between quoted bid and asked prices or the last sale price to
price securities when, in the Service's judgement, these prices are readily
available and are representative of the securities' market values. For many
securities, such prices are not readily available. The Service generally prices
these securities based on methods which include consideration of yields or
prices of securities of comparable quality, coupon, maturity and type,
indications as to values from dealers in securities, and general market
conditions.
2. Over-the-counter securities are priced at the last sales price or, if not
available, at the average of the bid and asked prices.
3. Securities purchased with maturities of 60 days or less are stated at
amortized cost which approximates market value.
4. Securities which cannot be valued by the methods set forth above, and all
other assets, are valued in good faith at fair value, using methods determined
by the Manager under the general supervision of the Board of Directors.
B. Federal taxes - The Fund's policy is to comply with the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its income to its shareholders. Therefore, no
federal income or excise tax provision is required.
C. Investments in securities - Security transactions are accounted for on the
date the securities are purchased or sold (trade date). Gain or loss from sales
of investment securities is computed on the identified cost basis. Interest
income is recorded on the accrual basis. Discounts and premiums on securities
are amortized over the life of the respective securities.
D. Use of estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that may affect the reported amounts in the financial
statements.
(2) LINES OF CREDIT
The Fund participates with other USAA funds in three joint short-term revolving
loan agreements totaling $850 million, two with USAA Capital Corporation
(CAPCO), an affiliate of the Manager ($250 million committed and $500 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 both agreements 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 agreements, does not
exceed 25% of the Fund's total assets at NationsBank's borrowing rate plus a
markup. The Fund had no borrowings under any of these agreements during the
six-month period ended January 31, 1999.
(3) DISTRIBUTIONS
Net investment income is accrued daily as dividends and distributed to
shareholders monthly. Distributions of realized gains from security transactions
not offset by capital losses are made in the succeeding fiscal year or as
otherwise required to avoid the payment of federal taxes.
(4) INVESTMENT TRANSACTIONS
Cost of purchases and proceeds from sales of securities, excluding short-term
securities, for the six-month period ended January 31, 1999 were $43.0 million
and $5.5 million, respectively.
Gross unrealized appreciation and depreciation of investments as of January 31,
1999 was $1.2 million and $2.4 million, respectively.
(5) TRANSACTIONS WITH MANAGER
A. Management fees - USAA Investment Management Company carries out the Fund's
investment policies and manages the Fund's portfolio. The Fund's management fees
are computed at .24% of its annual average net assets.
The Manager has voluntarily agreed to limit the annual expenses of the Fund to
.50% of its annual average net assets. Because the Fund's annual expenses for
the six-month period ended January 31, 1999 exceeded .50%, the Manager has
waived a portion of its management fee to reduce the Fund's annual expenses to
.50%.
B. Transfer agent's fees - USAA Transfer Agency Company, d/b/a USAA Shareholder
Account Services, an affiliate of the Manager, provides transfer agent services
to the Fund based on an annual charge of $28.50 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.
(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, 1999, the Association and its affiliates
owned .8 million shares (3.5%) 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) YEAR 2000
Like other mutual funds, the Fund could be adversely affected if the computer
systems used by the Manager and the Fund's other service providers are not able
to perform their intended functions effectively after 1999 because of the
inability of computer software to distinguish the year 2000 from the year 1900.
The Manager is taking steps to address this potential year 2000 problem with
respect to the computer systems that they use and to obtain satisfactory
assurances that comparable steps are being taken by the Fund's other major
service providers. At this time, however, there can be no assurance that these
steps will be sufficient to avoid any adverse impact to the Fund from this
problem.
<TABLE>
(8) FINANCIAL HIGHLIGHTS
Per share operating performance for a share outstanding throughout each period
is as follows:
<CAPTION>
Six-month Ten-month
Period Ended Period Ended
January 31, Year ended July 31, July 31,
----------------------------------------------------------------------------
1999 1998 1997 1996 1995 1994
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value at
beginning of period $ 9.99 $ 10.03 $ 9.79 $ 9.87 $ 9.74 $ 10.08
Net investment income .29 .62 .61 .62 .61 .37
Net realized and
unrealized gain (loss) (.09) (.04) .25 (.08) .13 (.33)
Distributions from
net investment income (.29) (.62) (.61) (.62) (.61) (.37)
Distributions of realized
capital gains (.02) - (.01) - - (.01)
--------------------------------------------------------------------------
Net asset value at
end of period $ 9.88 $ 9.99 $ 10.03 $ 9.79 $ 9.87 $ 9.74
==========================================================================
Total return (%)* 2.08 5.91 8.97 5.62 7.90 .39
Net assets at
end of period (000) $211,194 $181,171 $133,746 $101,032 $ 76,190 $ 48,228
Ratio of expenses to
average net assets (%) .50(a) .50 .50 .50 .50 .50(a)
Ratio of expenses to average
net assets excluding
reimbursement (%) .55(a) .56 .61 .66 .74 .87(a)
Ratio of net investment
income to average
net assets (%) 5.81(a) 6.16 6.14 6.29 6.34 4.51(a)
Portfolio turnover (%) 3.97 48.24 27.85 66.81 103.02 142.08
* 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.
</TABLE>
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 7:30 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 USAA TouchLine(Service Mark)
(from Touchtone phones only)
For account balance, last transaction or fund prices
1-800-531-8777, (in San Antonio) 498-8777
