Table of Contents
USAA Family of Funds 1
Message from the President 2
Investment Review 4
Message from the Manager 5
Financial Information:
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 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)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 IMCO, including charges and expenses, please call 1-800-531-8181 for a
prospectus. Read it carefully before you invest.
Message from the President
[Photograph of the President and Vice Chairman of the Board, Michael J. C. Roth,
CFA, appears here.]
The Income Stock Fund has a three-pronged objective: high current income, a
growing dividend stream, and capital appreciation. These three parts do not
always fit together easily. In fact, our last three messages have spoken about
this challenge. High yielding stocks do not usually have rapidly growing
earnings. Rapidly growing companies may raise their dividends generously, but
seldom have high dividend yields. And growth of earnings and dividends is a key
to capital appreciation. For much of the Income Stock Fund's history, periodic
market dips offered the opportunity to buy growing companies at attractive
yields. But since 1995, the stock market has driven steadily upward to the point
where the yield on the S&P 500(1) currently stands well under 2%. This has
accentuated our challenge.
As indicated in our previous messages, we believe the best course for the Fund
is a balance among the three parts of its objective. As we go forward, this will
entail a drop in its dividend. We believe, however, that this strategy will move
us toward the Fund's objective in this way:
1. Maintaining a dividend yield well above that of the S&P 500.
2. Resuming the growth pattern of the Fund's dividend as the companies we
own increase their dividends.
3. Achieving a total return closer to that of the S&P 500.
Of course we cannot assure that the Fund will achieve its objective, but we
strongly believe that the concept behind the Income Stock Fund is a sound one.
I have owned it for years, and will continue to do so.
Sincerely,
Michael J.C. Roth, CFA
President and
Vice Chairman of the Board
(1) The S&P 500 Index is an unmanaged index representing the weighted 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.
The performance data quoted represents past performance; the investment return
and principal value of an investment will fluctuate so that an investor's
shares, when redeemed, may be worth more or less than their original cost.
For more complete information about the mutual funds managed and distributed by
USAA Investment Management Company (IMCO), including charges and operating
expenses, please call for a prospectus. Read it carefully before you invest.
Investment Review
USAA INCOME STOCK FUND
OBJECTIVE: Current income with the prospect of increasing dividend income and
the potential for capital appreciation.
TYPES OF INVESTMENTS: Common stocks of well-established, large companies with
above-average dividend yields.
- --------------------------------------------------------------------------------
7/31/98 1/31/99
- --------------------------------------------------------------------------------
Net Assets $2,496.6 Million $2,469.8 Million
Net Asset Value Per Share $19.65 $19.71
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS AS OF 1/31/99
- --------------------------------------------------------------------------------
7/31/98 to 1/31/99 1 Year 5 Years 10 Years
6.38(+) 10.68% 15.31% 14.44%
- --------------------------------------------------------------------------------
(+) 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, the Lipper
Mixed Equity-Income Funds Average, and the S&P 500 Index for the period of
01/31/89 through 01/31/99. The data points from the graph are as follows:
USAA Income Lipper Mixed Equity-
Stock Fund S&P 500 Index Income Funds Average
----------- ------------- --------------------
01/89 $10,000 $10,000 $10,000
07/89 11,675 11,837 11,481
01/90 11,512 11,443 11,017
07/90 11,782 12,603 11,431
01/91 12,312 12,401 11,114
07/91 13,798 14,208 12,570
01/92 15,254 15,209 13,538
07/92 16,314 16,022 14,330
01/93 16,651 16,816 15,104
07/93 17,940 17,417 16,123
01/94 18,905 18,977 17,446
07/94 18,080 18,314 16,773
01/95 18,632 19,077 16,883
07/95 21,485 23,089 19,608
01/96 23,959 26,443 22,163
07/96 24,323 26,911 22,442
01/97 28,627 33,405 26,645
07/97 31,974 40,934 31,308
01/98 34,814 42,391 32,508
07/98 36,221 48,837 34,886
01/99 38,533 56,173 36,759
Data from 1/31/89 through 1/31/99
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 Lipper Mixed Equity - 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 weighted 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, Stephan J. Klaffke, CFA, appears here.]
1998 was a significant year for the USAA Income Stock Fund. On August 28, 1998,
Harry Miller retired from USAA. Harry guided the Fund for the past ten years and
achieved a steady performance record. He not only proved to be an outstanding
investment manager, but was also instrumental in the growth of the USAA equity
department. Harry will be sorely missed.
Michael J.C. Roth's letter to investors outlines the three parts of the Fund's
objective. We will continue to seek an above average dividend yield, while
pursuing stocks with good capital appreciation potential and with an ability to
raise their dividend. To that end, several modifications have been made over the
past six months. We lowered the weighting of several industries of which two
were: real estate investment trusts (REITs) from 13.7% to 5.5% and electric
utilities from 12.8% to 8.2%. The proceeds were opportunistically reinvested in
banks, technology, basic materials, capital goods and consumer staples during
the market sell-off in August.
PERFORMANCE
For the six months ending January 31, 1999, the stock market was ruled by
volatility. The global economic crisis entered its second year, and yet, the S&P
500 Index(1) was up 15.02%, primarily in response to three separate interest
rate reductions by the Federal Reserve. This market environment has not favored
funds paying an above average dividend yield. The six-month total return for the
Fund was 6.38%, compared to the Lipper Income category total return of 3.52%.(2)
(1) The S&P 500 Index is an unmanaged index representing the weighted 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.
(2) The performance data quoted represents past performance; the investment
return and principal value of an investment will fluctuate so that an investor's
shares, when redeemed, may be worth more or less than their original cost.
Since our last report of July 31, 1998, the best performing sectors for the Fund
were telecommunication services and technology. The investment in
telecommunication services made the biggest contribution to the Fund's
performance over the past six months. They offered above average dividend
yields, had little exposure to foreign markets, and had increased earnings. The
Fund's investment in technology is small, but what the Fund owned performed
well. The sell-off of technology companies in August created an opportunity to
increase the Fund's exposure in these companies with a growing dividend stream
and strong fundamentals.
The underperforming sectors for the Fund were energy and REIT stocks. The global
economic problems and commodity deflation had a devastating impact on energy
stock prices. We view the current energy stock valuations as a buying
opportunity. These stocks have demonstrated three attributes we are looking for:
above average yields, growing dividend streams, and strong balance sheets. REITs
underperformed the market averages as investors continued to question whether
the industry has the financial resources to sustain growth at the same rapid
pace that it has historically enjoyed. The August market correction created
compelling buying opportunities. As previously mentioned, we reduced our REIT
weighting to fund the new purchases.
OUTLOOK AND PERSPECTIVE
There is no doubt that these are extraordinary times as the S&P 500 completes
four consecutive years of 20%+ returns. During 1998, the 20 largest companies,
which currently represent a 29% weighting of the S&P 500 index, outperformed the
average S&P 500 stock by 27%. This flight to the largest capitalization stocks
has been going on for the past four years, as a strong economic environment has
given way to concerns of a global economic meltdown. As long as investors gain
confidence that the economy is still healthy, a broader recovery will occur. We
believe employing our three-prong approach -- of selecting stocks with a growing
dividend stream, using a fundamental discipline to uncover stocks with a good
capital appreciation potential, and maintaining an above average portfolio yield
- -- will position us for the future.
- ------------------------------
TOP 10 EQUITY HOLDINGS
(% OF NET ASSETS)
- ------------------------------
Bristol-Myers Squibb 5.4
Ford Motor 5.0
GTE 4.3
American Home Products 4.3
Bell Atlantic 4.3
DaimlerChrysler 4.2
Bankers Trust 3.5
Texas Utilities 3.4
Airtouch Communications 3.2
US West 3.0
- ------------------------------
- ----------------------------------
TOP 10 INDUSTRIES
(% OF NET ASSETS)
- ----------------------------------
Telephones 11.6
Healthcare-Diversified 9.7
Automobiles 9.2
Banks-Money Center 8.4
Electric Utilities 8.2
Real Estate Investment Trusts 5.5
Natural Gas Utilities 5.4
Telecommunications -
Cellular/Wireless 3.7
Oil-International Integrated 3.3
Computer Software & Services 3.0
- ----------------------------------
See page 8 for a complete listing of the Portfolio of Investments.
USAA INCOME STOCK FUND
PORTFOLIO OF INVESTMENTS
January 31, 1999
(Unaudited)
Market
Number Value
of Shares Security (000)
- --------------------------------------------------------------------------------
COMMON STOCKS (86.3%)
Automobiles (9.2%)
997,600 DaimlerChrysler AG $ 103,314
2,000,000 Ford Motor Co. 122,875
- --------------------------------------------------------------------------------
226,189
- --------------------------------------------------------------------------------
Auto Parts (0.6%)
1,000,000 Tomkins plc ADR 14,875
- --------------------------------------------------------------------------------
Banks - Major Regional (2.8%)
554,000 Fleet Financial Group, Inc. 24,549
890,000 PNC Bank Corp. 45,557
- --------------------------------------------------------------------------------
70,106
- --------------------------------------------------------------------------------
Banks - Money Center (8.4%)
700,000 BankAmerica Corp. 46,812
1,000,000 Bankers Trust Corp. 87,000
350,000 Chase Manhattan Corp. 26,928
500,000 Citigroup, Inc. 28,031
550,000 Westpac Banking Corp. Ltd. ADR 19,388
- --------------------------------------------------------------------------------
208,159
- --------------------------------------------------------------------------------
Beverages - Nonalcoholic (0.4%)
250,000 PepsiCo, Inc. 9,766
- --------------------------------------------------------------------------------
Chemicals (0.8%)
175,000 Du Pont (E. I.) De Nemours & Co. 8,958
700,000 Lyondell Petrochemical Co. 10,456
- --------------------------------------------------------------------------------
19,414
- --------------------------------------------------------------------------------
Chemicals - Diversified (1.3%)
600,000 B.F. Goodrich Co. 20,400
400,000 Hercules Inc. 10,775
- --------------------------------------------------------------------------------
31,175
- --------------------------------------------------------------------------------
Communication Equipment (1.0%)
400,000 Northern Telecom Ltd. 25,250
- --------------------------------------------------------------------------------
Computer - Hardware (2.5%)
800,000 Hewlett-Packard Co. 62,700
- --------------------------------------------------------------------------------
Computer Software & Service (0.2%)
158,170 Unisys Corp. 5,239
- --------------------------------------------------------------------------------
Electric Utilities (8.2%)
1,327,500 Allegheny Energy, Inc. 41,982
326,300 Central Hudson Gas & Electric Corp. 13,154
1,254,000 Interstate Energy Corp. 36,053
622,750 New Century Energies, Inc. 27,401
1,900,000 Texas Utilities Co. 83,481
- --------------------------------------------------------------------------------
202,071
- --------------------------------------------------------------------------------
Electrical Equipment (1.7%)
400,000 General Electric Co. 41,950
- --------------------------------------------------------------------------------
Electronics - Semiconductors (0.6%)
100,000 Intel Corp. 14,094
- --------------------------------------------------------------------------------
Entertainment (0.4%)
300,000 Walt Disney Co. 9,900
- --------------------------------------------------------------------------------
Foods (0.3%)
200,000 Kellogg Co. 8,175
- --------------------------------------------------------------------------------
Healthcare - Diversified (9.7%)
1,800,000 American Home Products Corp. 105,637
1,050,000 Bristol-Myers Squibb Co. 134,597
- --------------------------------------------------------------------------------
240,234
- --------------------------------------------------------------------------------
Household Products (0.7%)
200,000 Procter & Gamble Co. 18,175
- --------------------------------------------------------------------------------
Leisure Time (1.0%)
1,000,000 Brunswick Corp. 24,687
- --------------------------------------------------------------------------------
Machinery - Diversified (0.8%)
600,000 Deere & Co. 19,538
- --------------------------------------------------------------------------------
Manufacturing - Diversified Industries (0.7%)
140,000 AlliedSignal, Inc. 5,460
100,000 United Technologies Corp. 11,944
- --------------------------------------------------------------------------------
17,404
- --------------------------------------------------------------------------------
Natural Gas Utilities (5.1%)
1,433,200 National Fuel Gas Co. 60,642
1,500,000 NICOR, Inc. 57,844
239,400 Peoples Energy Corp. 8,259
- --------------------------------------------------------------------------------
126,745
- --------------------------------------------------------------------------------
Oil - Domestic Integrated (2.3%)
600,000 Atlantic Richfield Co. 34,425
1,500,000 Occidental Petroleum Corp. 22,594
- --------------------------------------------------------------------------------
57,019
- --------------------------------------------------------------------------------
Oil - International Integrated (3.3%)
150,000 Chevron Corp. 11,213
1,500,000 Texaco, Inc. 71,062
- --------------------------------------------------------------------------------
82,275
- --------------------------------------------------------------------------------
Paper & Forest Products (0.1%)
63,000 Georgia-Pacific Corp. 1,418
- --------------------------------------------------------------------------------
Personal Care (0.5%)
280,200 International Flavors & Fragrances Inc. 12,224
- --------------------------------------------------------------------------------
Publishing/Newspapers (0.5%)
920,000 Hollinger International Inc. 12,075
- --------------------------------------------------------------------------------
Real Estate Investment Trusts (5.5%)
500,000 Avalon Bay Communities, Inc. 16,031
500,000 Boston Properties, Inc. 16,250
879,200 Brandywine Realty Trust 14,507
275,000 Chelsea GCA Realty, Inc. 8,989
450,000 Felcor Lodging Trust, Inc. 9,816
600,000 First Industrial Realty Trust, Inc. 15,412
250,000 Highwoods Properties, Inc. 6,031
500,000 Liberty Property Trust 11,812
200,000 Mack California Realty Corp. 5,975
247,000 Mills Corp. 4,678
600,000 Patriot American Hospitality, Inc. 3,225
500,000 Post Properties, Inc. 18,625
205,000 Shurgard Storage Centers, Inc. 5,215
- --------------------------------------------------------------------------------
136,566
- --------------------------------------------------------------------------------
Retail - Department Stores (1.4%)
900,000 J.C. Penney Company, Inc. 35,269
- --------------------------------------------------------------------------------
Services - Data Processing (0.7%)
450,000 First Data Corp. 17,241
- --------------------------------------------------------------------------------
Telecommunications - Cellular/Wireless (0.5%)
350,000 Sprint PCS* 11,156
- --------------------------------------------------------------------------------
Telecommunications - Long Distance (2.4%)
700,000 Sprint Corp. 58,712
- --------------------------------------------------------------------------------
Telephones (11.6%)
1,750,000 Bell Atlantic Corp. 105,000
1,590,000 GTE Corp. 107,325
1,200,000 US West, Inc. 74,025
- --------------------------------------------------------------------------------
286,350
- --------------------------------------------------------------------------------
Waste Management (1.1%)
950,000 Browning-Ferris Industries, Inc. 26,125
- --------------------------------------------------------------------------------
Total common stocks (cost: $1,483,584) 2,132,276
- --------------------------------------------------------------------------------
PREFERRED STOCKS (10.8%)
Chemicals (0.4%)
190,000 Monsanto Co., 6.50% cumulative convertible 9,286
- --------------------------------------------------------------------------------
Computer Software & Service (2.8%)
1,230,319 Unisys Corp., depositary shares "A",
$3.75 cumulative convertible 69,974
- --------------------------------------------------------------------------------
Insurance - Life/Health (2.4%)
750,000 Aetna, Inc., Class C, 6.25% cumulative convertible 60,094
- --------------------------------------------------------------------------------
Iron & Steel (0.5%)
250,000 USX Corp., 6.50% cumulative convertible 12,156
- --------------------------------------------------------------------------------
Investment Companies (0.4%)
240,000 Dollar General Corp., 8.50% cumulative convertible 9,120
- --------------------------------------------------------------------------------
Machinery - Diversified (0.8%)
800,000 Ingersoll-Rand Co., 6.75%, cumulative convertible 19,700
- --------------------------------------------------------------------------------
Natural Gas Utilities (0.3%)
149,200 El Paso Energy Corp., 4.75% cumulative convertible 7,162
- --------------------------------------------------------------------------------
Telecommunications - Cellular/Wireless (3.2%)
1,000,000 AirTouch Communications, Inc., Class B, 6.00%
cumulative convertible 78,375
- --------------------------------------------------------------------------------
Total preferred stocks (cost: $192,987) 265,867
- --------------------------------------------------------------------------------
Principal
Amount
(000)
- ---------
CONVERTIBLE BONDS (1.1%)
$ 15,000 Continental Airlines, Inc., 6.75%, 4/15/2006 18,281
165 Ralston Purina Co., 7.00%, 8/01/2000 8,209
- --------------------------------------------------------------------------------
Total convertible bonds (cost: $28,630) 26,490
- --------------------------------------------------------------------------------
SHORT-TERM (1.6%)
Commercial Paper
40,837 General Electric Capital Corp., 4.81%, 2/01/1999
(cost: $40,826) 40,826
- --------------------------------------------------------------------------------
Total investments (cost: $1,746,027) $2,465,459
================================================================================
USAA INCOME STOCK 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.
ADR - American Depositary Receipts are receipts issued by a U.S. bank evidencing
ownership of foreign shares. Dividends are paid in U.S. dollars.
SPECIFIC NOTES
* Non-income producing
See accompanying notes to financial statements.
USAA INCOME STOCK FUND
STATEMENT OF ASSETS AND LIABILITIES
(IN THOUSANDS)
January 31, 1999
(Unaudited)
ASSETS
Investments in securities, at market value
(identified cost of $1,746,027) $ 2,465,459
Cash 421
Receivables:
Capital shares sold 400
Dividends and interest 7,223
Securities sold 229
------------
Total assets 2,473,732
------------
LIABILITIES
Capital shares redeemed 2,471
USAA Investment Management Company 1,047
USAA Transfer Agency Company 236
Accounts payable and accrued expenses 135
------------
Total liabilities 3,889
------------
Net assets applicable to capital shares outstanding $ 2,469,843
============
REPRESENTED BY:
Paid-in capital $ 1,794,275
Accumulated undistributed net investment income 6,277
Accumulated net realized loss on investments (50,141)
Net unrealized appreciation of investments 719,432
------------
Net assets applicable to capital shares outstanding $ 2,469,843
============
Capital shares outstanding 125,335
============
Authorized shares of $.01 par value 250,000
============
Net asset value, redemption price, and offering price per share $ 19.71
============
See accompanying notes to financial statements.
USAA INCOME STOCK FUND
STATEMENT OF OPERATIONS
(IN THOUSANDS)
Six-month period ended January 31, 1999
(Unaudited)
Net investment income:
Income:
Dividends (net of foreign taxes withheld of $5) $ 45,817
Interest 4,736
----------
Total income 50,553
----------
Expenses:
Management fees 6,023
Transfer agent's fees 1,445
Custodian's fees 134
Postage 172
Shareholder reporting fees 32
Directors' fees 2
Registration fees 45
Professional fees 16
Other 24
----------
Total expenses 7,893
----------
Net investment income 42,660
----------
Net realized and unrealized gain on investments:
Net realized loss (50,134)
Change in net unrealized appreciation/depreciation 154,433
----------
Net realized and unrealized gain 104,299
----------
Increase in net assets resulting from operations $ 146,959
==========
See accompanying notes to financial statements.
USAA INCOME STOCK FUND
STATEMENTS OF CHANGES IN NET ASSETS
(IN THOUSANDS)
Six-month period ended January 31, 1999
and Year ended July 31, 1998
(Unaudited)
1/31/99 7/31/98
--------------------------
From operations:
Net investment income $ 42,660 $ 93,097
Net realized gain (loss) on investments (50,134) 131,080
Change in net unrealized appreciation/depreciation
of investments 154,433 64,929
--------------------------
Increase in net assets resulting from operations 146,959 289,106
--------------------------
Distributions to shareholders from:
Net investment income (42,307) (92,033)
--------------------------
Net realized gains (91,729) (118,394)
--------------------------
From capital share transactions:
Proceeds from shares sold 123,734 382,576
Shares issued for dividends reinvested 124,479 195,544
Cost of shares redeemed (287,863) (346,558)
--------------------------
Increase (decrease) in net assets from
capital share transactions (39,650) 231,562
--------------------------
Net increase (decrease) in net assets (26,727) 310,241
Net assets:
Beginning of period 2,496,570 2,186,329
--------------------------
End of period $2,469,843 $2,496,570
==========================
Undistributed net investment income included in net
assets:
End of period $ 6,277 $ 5,924
==========================
Change in shares outstanding:
Shares sold 6,584 19,195
Shares issued for dividends reinvested 7,010 10,251
Shares redeemed (15,287) (17,438)
--------------------------
Increase (decrease) in shares outstanding (1,693) 12,008
==========================
See accompanying notes to financial statements.
USAA INCOME STOCK 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, 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
USAA Income Stock Fund (the Fund). The Fund's investment objective is current
income with the prospect of increasing dividend income and the potential for
capital appreciation. USAA Investment Management Company (the Manager) seeks to
achieve this objective by investing the Fund's assets primarily in equity
securities of well-established, large companies with above-average dividend
yields and in real estate investment trusts (REITs).
A. Security valuation - The value of each security is determined (as of the
close of trading on the New York Stock Exchange on each business day the
Exchange is open) as set forth below:
1. Portfolio securities, except as otherwise noted, traded primarily on a
domestic securities exchange are valued at the last sales price on that
exchange.
2. Over-the-counter securities are priced at the last sales price or, if not
available, at the average of the bid and asked prices.
3. Securities purchased with maturities of 60 days or less are stated at
amortized cost which approximates market value.
4. Securities which cannot be valued by the methods set forth above, and all
other assets, are valued in good faith at fair value, using methods determined
by the Manager under the general supervision of the Board of Directors.
B. Federal taxes - The Fund's policy is to comply with the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its income to its shareholders. Therefore, no
federal income or excise tax provision is required.
C. Investments in securities - Security transactions are accounted for on the
date the securities are purchased or sold (trade date). Gain or loss from sales
of investment securities is computed on the identified cost basis. Dividend
income is recorded on the ex-dividend date; interest income is recorded on the
accrual basis. Discounts and premiums on short-term securities are amortized
over the life of the respective securities. Amortization of market discounts on
long-term securities is recognized as interest income upon disposition of the
security to the extent there is a gain on disposition.
D. Use of estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that may affect the reported amounts in the
financial statements.
(2) LINES OF CREDIT
The Fund participates with other USAA funds in 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 the CAPCO agreements,
the Fund may borrow from CAPCO an amount under both agreements combined of 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
Distributions of net investment income are made quarterly. Distributions of
realized gains from security transactions not offset by capital losses are made
in the succeeding fiscal year or as otherwise required to avoid the payment of
federal taxes.
(4) INVESTMENT TRANSACTIONS
Cost of purchases and proceeds from sales of securities, excluding short-term
securities, for the six-month period ended January 31, 1999 were $424.9 million
and $484.3 million, respectively.
Gross unrealized appreciation and depreciation of investments as of January 31,
1999 was $776.6 million and $57.2 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 .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 $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, 1999 was $57,000.
(6) TRANSACTIONS WITH AFFILIATES
USAA Investment Management Company is indirectly wholly owned by United Services
Automobile Association (the Association), a large, diversified financial
services institution. At January 31, 1999, the Association and its affiliates
owned 6.4 million shares (5.1%) 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) 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 of the Fund from this
problem.
(8) 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
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 $ 19.65 $ 19.01 $ 15.85 $ 14.96 $ 13.50 $ 14.95
Net investment income .34 .75 .81 .77 .74 .60
Net realized and
unrealized gain (loss) .78 1.66 3.88 1.16 1.69 (1.12)
Distributions from net
investment income (.33) (.75) (.79) (.77) (.75) (.74)
Distributions of realized
capital gains (.73) (1.02) (.74) (.27) (.22) (.19)
----------------------------------------------------------------------------
Net asset value at
end of period $ 19.71 $ 19.65 $ 19.01 $ 15.85 $ 14.96 $ 13.50
============================================================================
Total return (%) * 6.38 13.28 31.46 13.21 18.83 (3.53)
Net assets at
end of period (000) $2,469,843 $2,496,570 $2,186,329 $1,710,769 $1,408,371 $1,190,024
Ratio of expenses to
average net assets (%) .66(a) .65 .68 .72 .75 .73(a)
Ratio of net investment
income to average
net assets (%) 3.54(a) 3.85 4.73 4.84 5.34 5.25(a)
Portfolio turnover (%) 18.73 22.34 34.95 32.38 34.94 24.82
* 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 TouchLine(Registered Trademark)
(from Touchtone phones only)
For account balance, last transaction or fund prices
1-800-531-8777, (in San Antonio) 498-8777
