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 12
Statement of Assets and Liabilities 13
Statement of Operations 14
Statements of Changes in Net Assets 15
Notes to Financial Statements 16
Important Information
Through our ongoing efforts to reduce expenses and respond to shareholder
requests, your annual and semiannual report mailings are "streamlined." One copy
of each report is sent to each address, rather than to every registered owner.
For many shareholders and their families, this eliminates duplicate copies,
saving paper and postage costs to the Fund.
If you are the primary shareholder on at least one account, prefer not to
participate in streamlining, and would like to continue receiving one report per
registered account owner, you may request this in writing to:
USAA Investment Management Company
Attn: Report Mail
9800 Fredericksburg Road
San Antonio, TX 78284-8916
or phone a Mutual Fund Representative at 1-800-531-8448 during business hours.
This report is for the information of the shareholders and others who have
received a copy of the currently effective prospectus of the USAA Income 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 INCOME FUND
OBJECTIVE: Maximum current income without undue risk to principal.
TYPES OF INVESTMENTS: Primarily income-producing securities selected for their
high yields relative to the risk involved.
- --------------------------------------------------------------------------------
7/31/98 1/31/99
================================================================================
Net Assets $1,751.6 Million $1,733.3 Million
Net Asset Value Per Share $12.88 $12.57
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS AS OF 1/31/99
================================================================================
7/31/98 to 1/31/99 1 Year 5 Years 10 Years
4.52%(+) 8.01% 7.59% 9.80%
- --------------------------------------------------------------------------------
(+) 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, the Lehman Brothers
Aggregate Bond Index, and the Lipper Corporate Debt A Rated Average for the
period of 01/31/89 through 01/31/99. The data points from the graph are as
follows:
USAA Income Lehman Brothers Lipper Corp. Debt
Fund Aggregate Bond Index A Rated Average
------------- -------------------- ------------------
01/89 $10,000 $10,000 $10,000
07/89 11,092 10,993 10,888
01/90 11,274 11,156 10,940
07/90 11,806 11,771 11,465
01/91 12,407 12,454 11,976
07/91 13,258 13,030 12,580
01/92 14,390 14,077 13,686
07/92 15,489 14,956 14,639
01/93 16,266 15,621 15,288
07/93 17,346 16,477 16,308
01/94 17,657 17,049 16,938
07/94 16,760 16,492 16,128
01/95 17,140 16,654 16,206
07/95 18,711 18,159 17,725
01/96 20,781 19,476 19,117
07/96 19,792 19,165 18,636
01/97 21,012 20,112 19,582
07/97 22,197 21,228 20,736
01/98 23,569 22,268 21,684
07/98 24,354 22,898 22,258
01/99 25,464 24,067 23,174
Data from 1/31/89 through 1/31/99
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, Inc.,
an independent organization that monitors the performance of mutual funds.
Message from the Manager
[PORTFOLIO MANAGER: JOHN W. SAUNDERS, JR., CFA, APPEARS HERE]
MARKET CONDITIONS AND PERFORMANCE
The high volatility in the bond market during this reporting period can be seen
in the chart below showing interest yields for the 30-year U.S. Treasury
bond.(1)
30-YEAR U.S. TREASURY BOND YIELD
A chart in the form of a line graph appears here, illustrating the performance
of a 30-year U.S. Treasury Bond Yield for the period 07/31/98 through 01/31/99.
The data points from the graph are as follows:
07/31/98 5.71%
08/17/98 5.60%
08/31/98 5.35%
09/15/98 5.35%
09/30/98 5.12%
10/05/98 4.85%
10/15/98 5.12%
10/30/98 5.27%
11/16/98 5.42%
11/30/98 5.25%
12/15/98 5.26%
12/31/98 5.31%
01/15/99 5.33%
01/29/99 5.27%
Beginning with the Russian government bond default in mid-August, a "flight to
quality" started a strong rally in U. S. Treasury bonds moving interest yields
lower. This rally accelerated when some highly leveraged hedge funds(2)
collapsed. The result was unsustainably lower interest yields on U. S. Treasury
bonds while liquidity in the rest of the bond market vanished when its dealers
refused to bid for bonds. This lack of liquidity caused interest rates in the
rest of the bond market to move sharply higher. A rally in the Japanese yen in
October caused several hedge funds to sell U.S. Treasury bonds reversing the
diverging trend and forcing Treasury bond yields higher. As the dust has
settled, interest rates are lower on balance but not as low as they were in
early October. Average maturities in the Fund's bond portfolio were shortened to
reduce price volatility in this turbulent period. For the 1-year period ending
January 31, 1999, your Fund ranked 27 out of 154 funds in the Lipper Corporate
Debt A Rated Bond Fund category in which the Fund's performance is measured.(3)
The average return for all funds in the category was 6.92%.
(1) The 30-year U.S. Treasury bond is generally considered the benchmark for
U.S. long-term interest rates.
(2) A private investment pool for wealthy investors that, unlike a mutual fund,
is exempt from SEC regulation.
(3) For the 5- and 10- year periods ending January 31, 1999, the Fund ranked 6
out of 81 and 3 out of 42 funds in the Corporate Debt-A Rated Bond Fund
category respectively. Fund rankings awarded by Lipper Analytical Services,
Inc., are based on total returns.
PORTFOLIO
As of January 31, 1999, the Fund's portfolio mix as percentages of net assets
was 5.2% U.S. Treasury bonds, 8.1% U.S. Government Agency bonds, 50.1% agency
mortgage pass-through securities, 27.3% corporate bonds, and 8.4% preferred
stocks.
OUTLOOK
The Federal Reserve has overtly announced an "easing" in monetary policy with
its three reductions since late September in both the Fed Funds target rate and
its own discount window rate. We would not expect any additional easing for a
while because the economy is continuing to do quite well. The first quarter for
1999 is showing similar strength to that seen in the past three years. Interest
rates have stabilized in a trading range of 5% to 5.4% on the current 30-year
U.S. Treasury bond. This relative stability should continue through the first
quarter. We continue to focus on maintaining a high level of income in the Fund
to enhance the compounding of potential returns that accrue through reinvestment
of income. These compounding returns have the greatest impact in a tax-deferred
retirement account such as an IRA. Over half of the Income Fund's accounts are
retirement accounts.
Past performance is no guarantee of future results.
------------------------------------------------------------
TOP 10 SECURITIES
(% OF NET ASSETS)
------------------------------------------------------------
Coupon Rate % % Of Net Assets
------------- ---------------
Federal Home Loan Bank 5.575 5.9
U.S. Treasury Bond 7.875 5.2
GNMA 6.00 5.2
GNMA 7.50 2.2
FNMA MTN 5.65 2.2
GNMA 7.50 2.0
GNMA 6.50 1.9
GNMA 6.00 1.9
GNMA 7.50 1.8
GNMA 7.50 1.5
------------------------------------------------------------
See page 8 for a complete listing of the Portfolio of Investments.
<TABLE>
USAA INCOME FUND
PORTFOLIO OF INVESTMENTS
January 31, 1999
(Unaudited)
<CAPTION>
Market
Number Value
of Shares Security (000)
- -----------------------------------------------------------------------------------------
<C> <S> <C>
PREFERRED STOCKS (8.4%)
57,846 Archstone Communities Trust depositary shares "B",
9.00% cumulative redeemable $ 1,475
483,800 Avalon Bay Communities, Inc., "C", 8.50% cumulative redeemable 11,944
421,240 Avalon Bay Communities, Inc., "D", 8.00% cumulative redeemable 10,347
103,107 Avalon Bay Communities, Inc., "F", 9.00% cumulative redeemable 2,603
444,526 Avalon Bay Communities, Inc., "G", 8.96% cumulative redeemable 11,335
211,268 Duke Realty Investments, Inc. depositary shares "A",
9.10% cumulative redeemable 5,651
332,655 Equity Office Properties Trust depositary shares "A",
8.98% cumulative redeemable 8,379
40,000 Equity Residential Properties Trust depositary shares "B",
9.125% cumulative redeemable 1,040
575,000 Equity Residential Properties Trust depositary shares "C",
9.125% cumulative redeemable 15,058
142,500 Equity Residential Properties Trust depositary shares "F",
8.29% cumulative redeemable 7,267
115,300 Equity Residential Properties Trust depositary shares "F",
9.65% cumulative redeemable 2,991
452,600 First Industrial Realty Trust, Inc. depositary shares "B",
8.75% cumulative redeemable 10,636
412,000 Gables Residential Trust "A", 8.30% cumulative redeemable 9,965
250,000 Post Properties, Inc. "A", 8.50% cumulative redeemable 12,969
46,060 Prologis Trust, Inc. "A", 9.40% cumulative redeemable 1,163
338,500 Prologis Trust, Inc. "C", 8.54% cumulative redeemable 16,586
200,000 Shurgard Storage Centers, Inc. "B", 8.80% cumulative redeemable 5,213
46,075 United Dominion Realty Trust, Inc. depositary shares "A",
9.25% cumulative redeemable 1,129
400,000 United Dominion Realty Trust, Inc. depositary shares "B",
8.60% cumulative redeemable 10,400
- ----------------------------------------------------------------------------------------
Total preferred stocks (cost: $146,902) 146,151
- ----------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CORPORATE OBLIGATIONS (27.3%)
Principal Market
Amount Coupon Value
(000) Security Rate Maturity (000)
- -----------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$ 9,000 Aluminum Co. of America, Notes 5.75% 2/01/2001 9,104
1,500 American General Finance Corp., Senior Notes 5.88 7/01/2000 1,510
15,000 American General Finance Corp., Senior Notes 5.88 7/15/2001 15,165
10,000 Associates Corp. of North America, Senior Notes 5.90 6/23/2000 10,074
8,000 Associates Corp. of North America, Senior Notes 6.25 11/01/2008 8,342
20,000 AT&T Capital Corp., MTN 7.50 11/15/2000 20,392
15,000 Avco Financial Services, Inc., Senior Notes 6.00 8/15/2002 15,245
20,000 BankBoston N.A., MTN 6.38 4/15/2008 20,184
5,000 Caliber Systems, Inc., Notes 7.80 8/01/2006 5,362
10,000 Caterpillar Financial Services Corp.,
MTN, Series F 5.83 10/16/2000 10,047
10,000 Chase Manhattan Corp., Subordinated Notes 6.13 10/15/2008 10,281
15,000 Chase Manhattan Corp., Subordinated Notes 7.13 2/01/2007 16,313
14,000 Chrysler Financial Corp., MTN 6.05 3/06/2001 14,151
10,000 Comdisco, Inc., MTN, Series G 6.02 6/26/2000 9,983
4,900 Consolidated Rail Corp., Debentures 9.75 6/15/2020 6,526
20,000 Cummins Engine Co., Inc., MTN, Series A 6.45 3/01/2005 19,592
10,000 Finova Capital Corp., MTN 6.00 1/07/2004 10,021
15,000 First Union Corp., Subordinated Notes 7.50 7/15/2006 16,667
15,000 Ford Motor Credit Co. 6.25 11/08/2000 15,204
4,875 Ford Motor Credit Co., MTN 5.99 2/27/2001 4,932
10,000 General Electric Capital Corp., MTN, Series A 5.72 7/16/2001 10,104
10,000 General Electric Credit Corp., MTN 5.73 6/19/2000 10,065
11,560 General Motors Acceptance Corp., MTN 5.95 4/20/2001 11,681
15,000 Heller Financial, Inc., MTN 5.93 7/24/2000 14,999
20,000 Household Finance Corp., Notes 7.25 5/15/2006 21,723
20,000 IBM, Corp., MTN 5.76 7/10/2000 20,190
15,000 John Deere Capital Corp., MTN 5.75 7/13/2000 15,007
10,000 MBNA Corp. 6.75 3/15/2008 10,032
10,000 Mellon Financial Co., Senior Notes 6.30 6/01/2000 10,122
20,000 Merrill Lynch & Co., MTN, Series B 6.00 10/11/2005 20,197
10,000 Nationsbank Charlotte NC, N.A., Notes 5.86 5/26/2000 10,043
5,000 Newell Co., MTN 6.18 7/11/2000 5,053
6,500 Provident Bank, Bank Notes 6.13 12/15/2000 6,559
10,000 Province of Quebec, Debentures 6.50 1/17/2006 10,501
15,000 Province of Quebec, Global Debentures 7.00 1/30/2007 16,302
15,000 Waste Management, Inc., Notes 7.00 10/15/2006 15,862
15,000 Weingarten Realty Investors, MTN, Series A 6.00 8/10/2001 14,942
9,000 Wells Fargo & Co., Subordinated Notes 6.88 4/01/2006 9,687
- -----------------------------------------------------------------------------------------------
Total corporate obligations (cost: $455,832) 472,164
- -----------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Principal Market
Amount Value
(000) Security (000)
- -------------------------------------------------------------------------------
<C> <S> <C>
U.S. GOVERNMENT & AGENCY ISSUES (63.4%)
Federal Home Loan Bank Bond (5.9%)
$ 101,570 5.575%, 6/22/2000 $ 102,310
- -------------------------------------------------------------------------------
Federal National Mortgage Assn. (10.2%)
54,588 7.00%, 9/01/2022 - 9/01/2023 55,882
117,480 7.50%, 2/01/2022 - 2/01/2023 121,269
- ------------------------------------------------------------------------------
177,151
- ------------------------------------------------------------------------------
Federal National Mortgage Assn., MTN (2.2%)
37,560 5.65%, 6/12/2000 37,863
- ------------------------------------------------------------------------------
Government National Mortgage Assn. (39.9%)
194,485 6.00%, 7/15/2028 - 10/15/2028 193,348
99,337 6.50%, 6/15/2023 - 5/15/2028 100,657
75,750 7.00%, 5/15/2023 - 3/15/2026 77,866
308,354 7.50%, 9/15/2022 - 5/15/2027 319,468
- ------------------------------------------------------------------------------
691,339
- ------------------------------------------------------------------------------
U.S. Treasury Bonds (5.2%)
68,444 7.875%, 2/15/2021 90,539
- ------------------------------------------------------------------------------
Total U.S. government & agency issues
(cost: $1,059,753) 1,099,202
- ------------------------------------------------------------------------------
Total investments (cost: $1,662,487) $1,717,517
==============================================================================
</TABLE>
PORTFOLIO SUMMARY BY INDUSTRY
-----------------------------
U.S. Government 63.4%
Real Estate Investment Trusts 9.3
Finance - Consumer 5.8
Finance - Diversified 4.2
Banks - Major Regional 3.3
Banks - Money Center 3.1
Foreign Government 1.5
Machinery - Diversified 1.4
Investment Banks / Brokerage 1.2
Computer - Hardware 1.2
Heavy Duty Trucks & Parts 1.1
Other 3.6
----
99.1%
====
USAA INCOME 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.
PORTFOLIO DESCRIPTION ABBREVIATION
MTN Medium-Term Note
See accompanying notes to financial statements.
<TABLE>
USAA INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES
(IN THOUSANDS)
January 31, 1999
(Unaudited)
<S> <C>
ASSETS
Investments in securities, at market value (identified cost of $1,662,487) $1,717,517
Cash 265
Receivables:
Capital shares sold 625
Dividends and interest 16,023
----------
Total assets 1,734,430
----------
LIABILITIES
Capital shares redeemed 566
USAA Investment Management Company 360
USAA Transfer Agency Company 162
Accounts payable and accrued expenses 65
----------
Total liabilities 1,153
----------
Net assets applicable to capital shares outstanding $1,733,277
==========
REPRESENTED BY:
Paid-in capital $1,680,246
Accumulated undistributed net investment income (1,509)
Accumulated net realized loss on investments (490)
Net unrealized appreciation of investments 55,030
----------
Net assets applicable to capital shares outstanding $1,733,277
==========
Capital shares outstanding 137,869
==========
Authorized shares of $.01 par value 270,000
==========
Net asset value, redemption price, and offering price per share $ 12.57
==========
See accompanying notes to financial statements.
</TABLE>
USAA INCOME FUND
STATEMENT OF OPERATIONS
(IN THOUSANDS)
Six-month period ended January 31, 1999
(Unaudited)
Net investment income:
Income:
Dividends $ 6,298
Interest 52,951
------------
Total income 59,249
------------
Expenses:
Management fees 2,165
Transfer agent's fees 879
Custodian's fees 121
Postage 64
Shareholder reporting fees 27
Directors' fees 2
Registration fees 58
Professional fees 18
Other 15
------------
Total expenses 3,349
------------
Net investment income 55,900
------------
Net realized and unrealized gain (loss) on investments:
Net realized gain 42,464
Change in net unrealized appreciation/depreciation (19,449)
------------
Net realized and unrealized gain 23,015
------------
Increase in net assets resulting from operations $ 78,915
============
See accompanying notes to financial statements.
<TABLE>
USAA INCOME 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 $ 55,900 $ 113,310
Net realized gain on investments 42,464 31,778
Change in net unrealized appreciation/depreciation of
investments (19,449) 14,142
-------------------------
Increase in net assets resulting from operations 78,915 159,230
-------------------------
Distributions to shareholders from:
Net investment income (58,072) (112,714)
-------------------------
Net realized gains (63,044) -
-------------------------
From capital share transactions:
Proceeds from shares sold 134,365 192,405
Shares issued for dividends reinvested 102,962 91,639
Cost of shares redeemed (213,423) (241,967)
-------------------------
Increase in net assets from capital share
transactions 23,904 42,077
-------------------------
Net increase (decrease) in net assets (18,297) 88,593
Net assets:
Beginning of period 1,751,574 1,662,981
-------------------------
End of period $1,733,277 $ 1,751,574
=========================
Undistributed net investment income included in net assets:
End of period $ (1,509) $ 663
=========================
Change in shares outstanding:
Shares sold 10,464 15,116
Shares issued for dividends reinvested 8,102 7,216
Shares redeemed (16,690) (18,992)
-------------------------
Increase in shares outstanding 1,876 3,340
=========================
See accompanying notes to financial statements.
</TABLE>
USAA INCOME 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 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 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 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. 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.
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 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 $382.0 million
and $421.5 million, respectively.
Gross unrealized appreciation and depreciation of investments as of January 31,
1999 was $60.2 million and $5.2 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 .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 $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
(including related employee benefit plans) owned 17.4 million shares (12.6%) 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 $ 12.88 $ 12.54 $ 11.97 $ 12.11 $ 11.67 $ 13.28
Net investment income .41 .85 .83 .83 .84 .72
Net realized and
unrealized gain (loss) .16 .33 .57 (.13) .45 (1.30)
Distributions from net
investment income (.42) (.84) (.83) (.84) (.85) (.78)
Distributions of realized
capital gains (.46) - - - - (.25)
------------------------------------------------------------------------------------------
Net asset value at
end of period $ 12.57 $ 12.88 $ 12.54 $ 11.97 $ 12.11 $ 11.67
==========================================================================================
Total return (%)* 4.52 9.72 12.15 5.78 11.64 (4.52)
Net assets at
end of period (000) $1,733,277 $1,751,574 $1,662,981 $1,737,306 $1,755,171 $1,718,934
Ratio of expenses to
average net assets (%) .37(a) .38 .39 .40 .41 .41(a)
Ratio of net investment
income to average net
assets (%) 6.20(a) 6.62 6.76 6.64 7.27 6.98(a)
Portfolio turnover (%) 21.76 47.35(b) 57.50(b) 81.26(b) 30.86b 25.36(b)
* 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.
(b) At times, before the current period, 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>
<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> <S> <C> <C> <C> <C> <C>
Portfolio turnover (%) NA 42.11 22.07 44.69 9.09 16.79
Purchases and sales of
this type are as follows:
Purchases (000) NA $ 88,811 $593,587 $648,396 $360,943 $155,322
Sales (000) NA $ 88,915 $594,283 $649,193 $361,366 $155,497
</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 Trademark)
(from Touchtone phones only)
For account balance, last transaction or fund prices
1-800-531-8777, (in San Antonio) 498-8777
