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 11
Statement of Assets and Liabilities 12
Statement of Operations 13
Statements of Changes in Net Assets 14
Notes to Financial Statements 15
Important Information
Through our ongoing efforts to reduce expenses and respond to shareholder
requests, your annual and semiannual report mailings are "streamlined." One copy
of each report is sent to each address, rather than to every registered owner.
For many shareholders and their families, this eliminates duplicate copies,
saving paper and postage costs to the Fund.
If you are the primary shareholder on at least one account, prefer not to
participate in streamlining, and would like to continue receiving one report per
registered account owner, you may request this in writing to:
USAA Investment Management Company
Attn: Report Mail
9800 Fredericksburg Road
San Antonio, TX 78284-8916
or phone a Mutual Fund Representative at 1-800-531-8448 during business hours.
This report is for the information of the shareholders and others who have
received a copy of the currently effective prospectus of the USAA Science &
Technology 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]
Over the past four years I have written many times of our grandchildren. As of
December 4, 1998, we have five. Adam Roth Bethel was born to my daughter,
Marnie, and her husband, Jeff, in Austin, Texas. The best news is that I think
he's incredibly handsome and Jeff's mother thinks he looks like me. As do his
four cousins, Adam has an InveStart (Registered Trademark)-type account that
we've set up. His is in the USAA First Start Growth Fund. Adam is, of course,
extremely bright. I am sure that in years to come he will enjoy learning about
investments through the USAA First Start Program.
Adam's cousins' accounts with us are in four other USAA funds. The oldest of
these accounts is now over four years old and belongs to Karl Joseph Marbach.
When I last checked, its balance was over $4,600. The account is in the Income
Stock Fund and, thus, is subject to all the risks of stocks. Indeed, its value
dropped last August when the stock market declined sharply. But it nevertheless
demonstrates the positive aspects of this kind of investment plan.
My wife and I decided to help with our grandchildren's education. Our monthly
contributions have been the main driver behind Karl's account and those of his
cousins. There will no doubt be future market declines, as there will be market
advances. And Karl's parents no doubt add to this fund on occasion. But the key
thing is that we are providing a systematic plan of adding to this investment
for Karl's higher education. I'll bet such a plan will work for Adam as well.
Sincerely,
Michael J.C. Roth, CFA
President and
Vice Chairman of the Board
Systematic investment plans do not assure a profit or protect against loss in
declining markets.
The USAA Income Stock Fund's average annual total returns for the 1-, 5-, and
10-year periods ending January 31, 1999, were 10.68%, 15.31%, and 14.44%,
respectively.
Past performance is no guarantee of future results; 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, including charges and operating expenses,
please call for a prospectus. Read it carefully before investing.
Investment Review
USAA SCIENCE & TECHNOLOGY FUND
OBJECTIVE: Long-term capital appreciation.
TYPES OF INVESTMENTS: Primarily equity securities of companies expected to
benefit from the development and use of scientific and technological advances
and improvements.
- --------------------------------------------------------------------------------
7/31/98 1/31/99
- --------------------------------------------------------------------------------
Net Assets $111.3 Million $183.9 Million
Net Asset Value Per Share $11.17 $14.36
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS AS OF 1/31/99
- --------------------------------------------------------------------------------
7/31/98 to 1/31/99 1 Year Since Inception on 8/1/97
28.56%(+) 51.96% 27.28%
- --------------------------------------------------------------------------------
(+) 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 Science & Technology Fund, the S&P
500 Index, and the Lipper Science & Technology Funds Average for the period of
08/01/97 through 01/31/99. The data points from the graph are as follows:
USAA Science & S&P 500 Lipper Science &
Technology Fund Index Tech Funds Avg.
--------------- ------- ----------------
08/01/97 $10,000 $10,000 $10,000
08/31/97 9,380 9,440 10,042
09/30/97 9,800 9,957 10,571
10/31/97 9,200 9,625 9,575
11/30/97 9,240 10,070 9,470
12/31/97 9,070 10,243 9,178
01/31/98 9,450 10,356 9,404
02/28/98 10,540 11,102 10,482
03/31/98 10,660 11,670 10,714
04/30/98 11,020 11,790 11,162
05/31/98 10,390 11,588 10,339
06/30/98 11,170 12,058 11,159
07/31/98 11,170 11,931 10,962
08/31/98 9,240 10,207 8,739
09/30/98 10,100 10,861 9,933
10/31/98 10,870 11,743 10,582
11/30/98 11,660 12,455 12,029
12/31/98 13,300 13,172 14,059
01/31/99 14,360 13,723 16,308
Data since inception on 8/1/97 through 1/31/99
The graph illustrates the comparison of a $10,000 hypothetical investment in the
USAA Science & Technology Fund to the S&P 500 Index and the Lipper Science &
Technology Funds Average, an average performance level of all science &
technology funds, as reported by Lipper Analytical Services, Inc., 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
in the S&P 500 Index.
Message from the Manager
[PHOTOGRAPH OF PORTFOLIO MANAGER, CURT ROHRMAN, CFA, APPEARS HERE]
STRATEGY
Your USAA Science & Technology Fund invests in a broad spectrum of companies
benefiting from the development and use of scientific and technological
advances. This extends our strategy beyond the investment objective of most
technology funds that focus on traditional computer technology. It includes
areas such as telecom services, pharmaceuticals, medical devices,
aerospace/defense, and oilfield service. We believe a broad-based approach to
technology has the ability to provide performance returns comparable to
traditional technology funds over time, but with lower volatility due to greater
diversification.
FUND PERFORMANCE
From July 31, 1998 to January 31, 1999, the USAA Science & Technology Fund's
cumulative total return was 28.56%, remarkable yet short of the Lipper Science &
Technology Funds Average return of 48.04%.(1) Our heavy weightings in
semiconductors and semiconductor capital equipment companies, such as Teradyne,
Applied Materials, Texas Instruments, and Intel helped performance. Other
positions posting strong gains included America Online, Seagate, Cisco Systems,
and Microsoft. However, our exposure to healthcare clearly held back
performance. During the period, technology stocks outperformed healthcare stocks
by a difference of 34.3 percentage points. Such a disparity should not persist
and, for reasons highlighted below, may reverse.
OUTLOOK
Our short-term and long-term outlook for the overall stock market is bullish. A
combination of factors - healthy domestic demand, low inflation, strong
productivity gains, and the shift to budget surpluses from budget deficits -
bode well for domestic earnings growth and stable (or even expanding)
price/earnings ratios (P/Es). The international outlook is better as well -
troubled economies in the Far East and Asia have probably reached their lowest
point, problems in Latin American economies are being addressed, and a weaker
dollar has been beneficial to domestic corporations. U.S. competitiveness has
never been stronger. Examples are clear leadership in computer technology,
communications equipment, pharmaceuticals, and medical devices.
Our long-term outlook specific to the technology and healthcare industries is as
bullish as ever. We see no credible threat on the horizon to corporate America's
dominance in innovation and knowledge capital. As we stressed six months ago, it
is "different this time." Advances in software, networking, semiconductors, and,
most recently, the Internet have been critical to the sustainability of this
economic expansion and persistent improvements in productivity and
profitability. Demographics, research efficiencies, expedited approval
processes, and even global harmonization of approvals, provide an outstanding
environment for pharmaceuticals and medical devices.
Our short-term outlook for the technology and healthcare industries is
relatively cautious for several reasons. Although past performance is no
guarantee of future results, technology stocks have moved upward in a straight
line since the market's bottom, with the S&P Technology sector soaring 81.6%
since October 8, 1998. Signs have indeed emerged of accelerating order patterns,
improved supply/demand balances, and expanded profitability in most areas of
technology. But if we are correct to assume stock prices and investor
expectations move in the same direction, the operating environment for
technology companies had better be significantly and substantially better.
Also, Y2K will undoubtedly prove to be the most difficult factor to assess over
the next 18 months. No, we don't believe airplanes will fall from the sky. But
we do believe corporations understand the liability exposure of a Y2K related
accident or shutdown. Regardless of the preparation taken, no one will know if
they are Y2K ready until the calendar turns. As a result, corporations will err
on the side of conservatism - testing code until December 31st and installing no
new applications later this year - even to systems deemed Y2K compliant.
Putting these two concerns together, we believe some of the improved environment
since October 1998 relates to corporate spending in anticipation of "battening
down the Y2K hatches." If our assessment is accurate, the recent recovery in
technology stocks may mirror a mid-1995 surge in technology stock prices. In
mid-1995, a burst of demand for semiconductors and computers proved to be merely
inventory building, and technology stocks fell as rapidly as they had risen once
the underlying weak demand trends became apparent.
Lastly, concerns about pharmaceutical pricing pressure have resurfaced as the
federal government begins exploring options to provide pharmaceutical coverage
for the elderly. Washington's focus on the impeachment trial and Social Security
reduces the probability of any pharmaceutical legislation being enacted this
year. However, discussions may still impact stock prices.
(1) Past performance is no guarantee of future results.
- --------------------------------- ----------------------------------------
TOP 10 EQUITY HOLDINGS TOP 10 INDUSTRIES
(% OF NET ASSETS) (% OF NET ASSETS)
- --------------------------------- ----------------------------------------
America Online 4.2 Electronics-Semiconductors 12.2
Cisco Systems 3.8 Drugs 10.1
Microsoft 3.6 Computer Software & Service 9.2
Applied Materials 3.5 Communication Equipment 7.6
Hewlett-Packard 3.2 Healthcare-Diversified 6.7
Medtronic 3.2 Equipment-Semiconductors 6.6
Pfizer 3.1 Medical Products & Supplies 4.6
Teradyne 3.0 Retail-Drugs 4.4
MCI Worldcom 3.0 Internet Services 4.3
Intel 3.0 Services-Data Processing 4.2
- --------------------------------- ----------------------------------------
See page 8 for a complete listing of the Portfolio of Investments.
USAA SCIENCE & TECHNOLOGY FUND
PORTFOLIO OF INVESTMENTS
January 31, 1999
(Unaudited)
Market
Number Value
of Shares Security (000)
- --------------------------------------------------------------------------------
COMMON STOCKS (96.7%)
Chemicals (2.7%)
106,000 Monsanto Co. $ 5,042
- --------------------------------------------------------------------------------
Communication Equipment (7.6%)
170,000 LM Ericsson Telephone Co. ADR 4,739
40,000 Lucent Technologies, Inc. 4,503
54,000 Tellabs, Inc.* 4,630
- --------------------------------------------------------------------------------
13,872
- --------------------------------------------------------------------------------
Computer - Hardware (3.2%)
76,000 Hewlett-Packard Co. 5,956
- --------------------------------------------------------------------------------
Computer - Networking (3.8%)
63,000 Cisco Systems, Inc.* 7,028
- --------------------------------------------------------------------------------
Computer - Peripherals (0.9%)
41,000 Seagate Technology, Inc.* 1,668
- --------------------------------------------------------------------------------
Computer Software & Service (9.2%)
38,000 Microsoft Corp.* 6,650
86,000 Network Associates, Inc.* 4,504
107,000 Rational Software Corp.* 3,538
37,000 Synopsys, Inc.* 2,148
- --------------------------------------------------------------------------------
16,840
- --------------------------------------------------------------------------------
Drugs (10.1%)
27,000 Eli Lilly & Co. 2,530
44,000 Pfizer, Inc. 5,659
94,000 Schering-Plough Corp. 5,123
45,000 SmithKline Beecham plc ADR "A" 3,052
47,000 Zeneca Group plc ADR 2,209
- --------------------------------------------------------------------------------
18,573
- --------------------------------------------------------------------------------
Electronics - Semiconductors (12.2%)
176,000 Analog Devices, Inc.* 5,236
39,000 Intel Corp. 5,497
34,000 KLA-Tencor Corp.* 1,963
43,000 Linear Technology Corp. 4,375
54,000 Texas Instruments, Inc. 5,339
- --------------------------------------------------------------------------------
22,410
- --------------------------------------------------------------------------------
Equipment - Semiconductors (6.6%)
102,000 Applied Materials, Inc.* 6,445
85,000 Teradyne, Inc.* 5,599
- --------------------------------------------------------------------------------
12,044
- --------------------------------------------------------------------------------
Finance - Diversified (2.3%)
25,000 Federal Home Loan Mortgage Corp. 1,550
31,000 Morgan Stanley, Dean Witter, Discover & Co. 2,691
- --------------------------------------------------------------------------------
4,241
- --------------------------------------------------------------------------------
Healthcare - Diversified (6.7%)
16,000 Abbott Laboratories 743
35,000 Bristol-Myers Squibb Co. 4,487
60,000 Johnson & Johnson, Inc. 5,100
28,000 Warner-Lambert Co. 2,021
- --------------------------------------------------------------------------------
12,351
- --------------------------------------------------------------------------------
Insurance - Multi-Line Companies (2.8%)
49,000 American International Group, Inc. 5,044
- --------------------------------------------------------------------------------
Internet Services (4.3%)
44,000 America Online, Inc.* 7,730
3,700 Ticketmaster Online-CitySearch, Inc. "B"* 232
- --------------------------------------------------------------------------------
7,962
- --------------------------------------------------------------------------------
Major Regional Banks (3.0%)
60,000 Fleet Financial Group, Inc. 2,659
43,000 Mellon Bank Corp. 2,881
- --------------------------------------------------------------------------------
5,540
- --------------------------------------------------------------------------------
Marketing/Advertising (1.6%)
72,700 Snyder Communications, Inc.* 2,908
- --------------------------------------------------------------------------------
Medical Products & Supplies (4.6%)
21,000 Becton, Dickinson & Co. 751
32,000 Guidant Corp. 1,886
73,000 Medtronic, Inc. 5,817
- --------------------------------------------------------------------------------
8,454
- --------------------------------------------------------------------------------
Oil & Gas - Drilling/Equipment (1.0%)
38,000 Schlumberger Ltd. 1,810
- --------------------------------------------------------------------------------
Paper & Forest Products (0.6%)
17,500 Georgia Pacific Corp. 1,129
- --------------------------------------------------------------------------------
Retail - Drugs (4.4%)
85,000 CVS Corp. 4,654
124,000 Duane Reade, Inc.* 3,456
- --------------------------------------------------------------------------------
8,110
- --------------------------------------------------------------------------------
Services - Commercial & Consumer (0.5%)
69,000 Applied Graphics Technologies, Inc.* 992
- --------------------------------------------------------------------------------
Services - Data Processing (4.2%)
124,900 First Data Corp. 4,785
84,000 SunGard Data Systems, Inc.* 3,014
- --------------------------------------------------------------------------------
7,799
- --------------------------------------------------------------------------------
Telecommunications - Long Distance (3.0%)
69,000 MCI WorldCom, Inc.* 5,503
- --------------------------------------------------------------------------------
Telephones (1.4%)
48,000 SBC Communications Corp. 2,592
- --------------------------------------------------------------------------------
Total common stocks (cost: $126,077) 177,868
- --------------------------------------------------------------------------------
Principal
Amount
(000)
- --------------
SHORT-TERM (2.4%)
U.S. Government & Agency Issue
$ 4,353 Federal Home Loan Mortgage Corp., 4.62%,
2/01/1999 (cost: $4,352) 4,352
- --------------------------------------------------------------------------------
Total investments (cost: $130,429) $182,220
================================================================================
USAA SCIENCE & TECHNOLOGY 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.
Investments in foreign securities were 6.4% of net assets at January 31, 1999.
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 SCIENCE & TECHNOLOGY FUND
STATEMENT OF ASSETS AND LIABILITIES
(IN THOUSANDS)
January 31, 1999
(Unaudited)
ASSETS
Investments in securities, at market value
(identified cost of $130,429) $ 182,220
Cash 190
Receivables:
Capital shares sold 928
Dividends 54
Securities sold 2,192
----------
Total assets 185,584
----------
LIABILITIES
Securities purchased 1,187
Capital shares redeemed 252
USAA Investment Management Company 108
USAA Transfer Agency Company 57
Accounts payable and accrued expenses 39
----------
Total liabilities 1,643
----------
Net assets applicable to capital shares outstanding $ 183,941
==========
REPRESENTED BY:
Paid-in capital $ 133,048
Accumulated net investment loss (360)
Accumulated net realized loss on investments (538)
Net unrealized appreciation of investments 51,791
----------
Net assets applicable to capital shares outstanding $ 183,941
==========
Capital shares outstanding 12,805
==========
Authorized shares of $.01 par value 105,000
==========
Net asset value, redemption price, and offering price per share $ 14.36
==========
See accompanying notes to financial statements.
USAA SCIENCE & TECHNOLOGY FUND
STATEMENT OF OPERATIONS
(IN THOUSANDS)
Six-month period ended January 31, 1999
(Unaudited)
Net investment loss:
Income:
Dividends (net of foreign taxes withheld of $2) $ 312
Interest 179
----------
Total income 491
----------
Expenses:
Management fees 484
Transfer agent's fees 257
Custodian's fees 31
Postage 29
Shareholder reporting fees 8
Directors' fees 2
Registration fees 21
Professional fees 17
Other 2
----------
Total expenses 851
----------
Net investment loss (360)
----------
Net realized and unrealized gain on investments:
Net realized gain 24
Change in net unrealized appreciation/depreciation 39,392
----------
Net realized and unrealized gain 39,416
----------
Increase in net assets resulting from operations $ 39,056
==========
See accompanying notes to financial statements
USAA SCIENCE & TECHNOLOGY 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 loss $ (360) $ (478)
Net realized gain (loss) on investments 24 (562)
Change in net unrealized appreciation/
depreciation of investments 39,392 12,399
------------------------
Increase in net assets resulting from operations 39,056 11,359
------------------------
From capital share transactions:
Proceeds from shares sold 73,725 120,796
Cost of shares redeemed (40,158) (20,837)
------------------------
Increase in net assets from capital share
transactions 33,567 99,959
------------------------
Net increase in net assets 72,623 111,318
Net assets:
Beginning of period 111,318 -
------------------------
End of period $183,941 $111,318
========================
Undistributed net investment loss included in
net assets:
End of period $ (360) $ -
========================
Change in shares outstanding:
Shares sold 6,148 11,974
Shares redeemed (3,304) (2,013)
------------------------
Increase in shares outstanding 2,844 9,961
========================
See accompanying notes to financial statements.
USAA SCIENCE & TECHNOLOGY 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 Science & Technology Fund (the Fund). The Fund's primary investment
objective is long-term capital appreciation. USAA Investment Management Company
(the Manager) seeks to achieve this objective by investing at least 80% of the
Fund's assets in equity securities that are expected to benefit from the
development and use of scientific and technological advances and improvements.
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, less foreign taxes, if any, is recorded on the ex-dividend date. If the
ex-dividend date has passed, certain dividends from foreign securities are
recorded upon notification. Interest income is recorded on the accrual basis.
Discounts and premiums on short-term 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
Distributions of net investment income and 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. At July 31,
1998, the Fund had capital loss carryovers for federal income tax purposes of
approximately $470,000 which, if not offset by subsequent capital gains, will
expire in 2006. It is unlikely that the Company's Board of Directors will
authorize a distribution of capital gains realized in the future until the
capital loss carryovers have been utilized or expire.
(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 $64.8 million
and $35.1 million, respectively.
Gross unrealized appreciation and depreciation of investments as of January 31,
1999 was $54.9 million and $3.1 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 .75% 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 $15,000.
(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 1.3 million shares (10.0%) of the Fund.
Certain directors and officers of the Fund are also directors, officers, and/or
employees of the Manager. None of the affiliated directors or Fund officers
received any compensation from the Fund.
(7) 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.
(8) FINANCIAL HIGHLIGHTS
Per share operating performance for a share outstanding throughout the period is
as follows:
Six-month
Period Ended Year Ended
January 31, July 31,
1999 1998*
----------------------------------------
Net asset value at
beginning of period $ 11.17 $ 10.00
Net investment loss (.03)(a) (.07)(a)
Net realized and unrealized gain 3.22 1.24
----------------------------------------
Net asset value at end of period $ 14.36 $ 11.17
========================================
Total return (%) 28.56 11.70
Net assets at end of period (000) $183,941 $111,318
Ratio of expenses to
average net assets (%) 1.31(b) 1.42
Ratio of net investment
loss to average net assets (%) (.55)(b) (.69)
Portfolio turnover (%) 28.32 76.31
* Fund commenced operations August 1, 1997.
(a)Calculated using weighted average shares.
(b)Annualized. The ratio is not necessarily indicative of 12 months of
operations.
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
