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 First Start
Growth 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 the President and Vice Chairman of the Board, Michael J. C. Roth,
CFA, appears here.]
Since my last letter to you in July 1998, the stock market had many ups and
downs - like a roller coaster ride. But, we had a plan and stuck to it. We
didn't let the market scare us into making any quick decisions.
When it comes to investing, you should have a plan. Having a plan makes it
easier to reach the goals you set for yourself. The great thing about the USAA
First Start Growth Fund (Registered Trademark) is that it's part of a program
that will teach you about the world of investing. As you learn more about the
stock market and how it works, you'll understand why it's important to stick to
your plan. Invest consistently - weekly, monthly, whichever you choose to do.
Now, when you get your allowance or when you get special gifts from relatives,
you have a place to invest for your future.
I am proud to announce that we have added another grandchild to our family! Adam
Roth Bethel was born to my daughter Marnie and her husband Jeff on December 4,
1998. Like his four older cousins, Adam has an InveStart (Registered
Trademark)-type account that we've set up.(1) His is in the USAA First Start
Growth Fund. We opened the account with $100 and have been putting in a planned
amount each month. This is called investing systematically and is a great way to
invest because you have a "system" that helps you to stick to your plan. Adam
is, of course, very bright, and I am sure that in years to come he will enjoy
learning about investments through the USAA First Start Growth Fund.
We are very proud of this program and as of January 31, 1999, there are over
29,000 shareholder accounts in the USAA First Start Growth Fund. We hope you
enjoy being part of USAA and the USAA First Start Program.
Sincerely,
Michael J.C. Roth, CFA
President and
Vice Chairman of the Board
(1) Systematic investment plans do not assure a profit or protect against loss
in declining markets.
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 FIRST START GROWTH FUND
OBJECTIVE: Long-term capital appreciation.
TYPES OF INVESTMENTS: Primarily equity securities of companies that provide
goods or services we believe are familiar to young people.
- --------------------------------------------------------------------------------
7/31/98 1/31/99
- --------------------------------------------------------------------------------
Net Assets $45.3 Million $87.8 Million
Net Asset Value Per Share $12.27 $14.58
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS AS OF 1/31/99
- --------------------------------------------------------------------------------
7/31/98 to 1/31/99 1 Year Since Inception on 8/1/97
19.75%(+) 43.35% 29.24%
- --------------------------------------------------------------------------------
(+) 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 First Start Growth Fund, the
S&P 500 Index, and the Lipper Growth Funds Average for the period of 08/01/97
through 01/31/99. The data points from the graph are as follows:
USAA First Start S&P 500 Lipper Growth
Growth Fund Index Funds Average
----------------- ------------- ----------------
08/01/97 $10,000 $10,000 $10,000
08/31/97 9,470 9,440 9,662
09/30/97 9,930 9,957 10,192
10/31/97 9,590 9,625 9,809
11/30/97 9,860 10,070 9,981
12/31/97 9,980 10,243 10,079
01/31/98 10,250 10,356 10,135
02/28/98 11,300 11,102 10,900
03/31/98 11,630 11,670 11,383
04/30/98 12,000 11,790 11,520
05/31/98 11,590 11,588 11,189
06/30/98 12,280 12,058 11,604
07/31/98 12,270 11,931 11,339
08/31/98 10,300 10,207 9,481
09/30/98 10,773 10,861 10,056
10/31/98 11,851 11,743 10,754
11/30/98 12,668 12,455 11,414
12/31/98 14,018 13,172 12,354
01/31/99 14,693 13,723 12,890
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 First Start Growth Fund to the S&P 500 Index and the Lipper Growth Funds
Average, an average performance level of all growth 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 the Portfolio Manager, Curt Rohrman, appears here.]
When Mom or Dad are driving the car down the street, do they look out the front
windshield or the back window?
Silly question, huh? Of course they look out the front windshield because they
want to see what's in front of them. Sure, they glance in the mirrors once in a
while to make sure everything behind them is okay. But they make all their
decisions on when to turn, when to go faster, and when to stop based on what's
ahead.
Your parents have a game plan when they drive - you should have one when you
invest. Coming up with one is easy. Include what you're investing for,[Like a
car or college five or more years from now] how much you can invest, and how
often you want to invest [weekly... monthly...]. Then, stick to your game plan
regardless of what the stock market is doing.(1) Stay focused on your investment
objectives ahead of you.
(1) Systematic investment plans do not assure a profit or protect against loss
in declining markets.
Six months ago, the stock market looked pretty bad - and it got even worse in
October. At the time, we said, "stick to your game plan." Know what? Stock
prices not only recovered, but went on to set all-time records. Right now the
Internet is hot and Internet stock prices are zooming. So, is it time to put
some "extra" cash in the market?
We still say, "stick to your game plan". The reason is that over time, stock
prices tend to rise {since 1926, stock prices have risen an average of 11.2% per
year(2)}, not soar straight up. Just as you shouldn't let a lousy stock market
scare you off your game plan, neither should you let a great stock market
encourage you to go crazy with your investments.
(2) Used with permission. (Copyright)1999 Ibbotson Associates, Inc. All rights
reserved. [Certain portions of this work were derived from copyrighted works of
Roger G. Ibbotson and Rex Sinquefield.]
STRATEGY
The USAA First Start Growth Fund has a game plan and we stick to it. We buy the
stock of companies that make products, or provide services that we believe are
familiar to you. We try not to buy a bunch of companies that all make the same
thing. Instead, the stocks we own are spread across three primary areas:
consumer products, technology, and healthcare. We like companies that are really
good at what they do and have built, or are building, leadership positions.
Companies we buy have to be growing faster than the average company - this means
they have to sell a lot more products each and every year.
FUND PERFORMANCE
Over the past six months, the stock market and the USAA First Start Growth Fund
did well. From July 31, 1998, to January 31, 1999, your Fund's cumulative total
return was 19.75% while the S&P 500 Index's total return was 15.02%.(3) Why did
we have such a big increase? Technology stocks, such as America Online,
Microsoft, and Intel were a big part of the gain. But consumer stocks like Gap,
Keebler Foods and Dayton Hudson helped too. Our focus on bigger companies
helped, too. These stocks didn't get hit as hard when the market looked so bad
and their prices recovered really well when the market went back up.
(3) The Fund's average total return since inception is 29.24%.
OUTLOOK
We think the stock market will do well during the next several years and our
reasons are unchanged. Companies in the U.S. in general are the most competitive
on the globe. We believe U.S. companies make better, more innovative products at
lower cost than companies anywhere else. People around the world want U.S.
products. Whether it's Internet services, hamburgers, cosmetics, computers,
pharmaceuticals, or financial products, our market share advantage is widening.
This is important if U.S. companies are going to continue to grow rapidly.
- --------------------------------- ----------------------------------
TOP 10 EQUITY HOLDINGS TOP 10 INDUSTRIES
(% OF NET ASSETS) (% OF NET ASSETS)
- --------------------------------- ----------------------------------
America Online 4.0 Electronics-Semiconductors 7.0
General Electric 3.2 Foods 5.7
Microsoft 3.2 Computer Software & Service 5.5
Procter & Gamble 3.1 Drugs 4.7
Clear Channel Communications 3.1 Communication Equipment 4.4
Newell 3.1 U.S. Government 4.2
Dayton Hudson 3.0 Internet Services 4.1
Johnson & Johnson 3.0 Retail-Drug 3.6
PepsiCo 2.9 Electrical Equipment 3.2
Avon Products 2.9 Finance Diversified 3.2
- --------------------------------- ----------------------------------
You will find a complete list of the securities that the Fund owns on pages
8-11.
USAA FIRST START GROWTH FUND
PORTFOLIO OF INVESTMENTS
January 31, 1999
(Unaudited)
Market
Number Value
of Shares Security (000)
- --------------------------------------------------------------------------------
COMMON STOCKS (97.2%)
Auto Parts (2.4%)
53,000 Lear Corp.* $ 2,087
- --------------------------------------------------------------------------------
Beverages - Nonalcoholic (2.9%)
66,000 PepsiCo, Inc. 2,578
- --------------------------------------------------------------------------------
Broadcasting - Radio & TV (3.1%)
44,000 Clear Channel Communications, Inc.* 2,722
- --------------------------------------------------------------------------------
Chemicals (1.8%)
33,000 Monsanto Co. 1,570
- --------------------------------------------------------------------------------
Communication Equipment (4.4%)
17,000 Lucent Technologies, Inc. 1,914
23,000 Tellabs, Inc.* 1,972
- --------------------------------------------------------------------------------
3,886
- --------------------------------------------------------------------------------
Computer - Hardware (2.5%)
28,000 Hewlett-Packard Co. 2,195
- --------------------------------------------------------------------------------
Computer - Networking (2.6%)
20,500 Cisco Systems, Inc.* 2,287
- --------------------------------------------------------------------------------
Computer Software & Service (5.5%)
16,000 Microsoft Corp.* 2,800
32,000 Network Associates, Inc.* 1,676
8,000 Pixar, Inc.* 316
- --------------------------------------------------------------------------------
4,792
- --------------------------------------------------------------------------------
Drugs (4.7%)
18,000 Pfizer, Inc. 2,315
34,000 Schering-Plough Corp. 1,853
- --------------------------------------------------------------------------------
4,168
- --------------------------------------------------------------------------------
Electrical Equipment (3.2%)
27,000 General Electric Co. 2,832
- --------------------------------------------------------------------------------
Electronics - Semiconductors (7.0%)
73,000 Analog Devices, Inc.* 2,172
14,000 Intel Corp. 1,973
20,000 Texas Instruments, Inc. 1,977
- --------------------------------------------------------------------------------
6,122
- --------------------------------------------------------------------------------
Entertainment (2.5%)
13,000 AMC Entertainment, Inc. 228
60,000 Walt Disney Co. 1,980
- --------------------------------------------------------------------------------
2,208
- --------------------------------------------------------------------------------
Equipment - Semiconductors (2.6%)
36,000 Applied Materials, Inc.* 2,275
- --------------------------------------------------------------------------------
Finance - Diversified (3.2%)
31,000 Federal Home Loan Mortgage Corp. 1,922
10,000 Morgan Stanley, Dean Witter, Discover & Co. 868
- --------------------------------------------------------------------------------
2,790
- --------------------------------------------------------------------------------
Foods (5.7%)
38,000 Hershey Foods Corp. 2,138
63,100 Keebler Foods Co.* 2,287
6,000 Tootsie Roll Industries, Inc. 270
3,000 William Wrigley Jr., Co. 281
- --------------------------------------------------------------------------------
4,976
- --------------------------------------------------------------------------------
Healthcare - Diversified (3.0%)
31,000 Johnson & Johnson, Inc. 2,635
- --------------------------------------------------------------------------------
Household Products (3.1%)
30,000 Procter & Gamble Co. 2,726
- --------------------------------------------------------------------------------
Housewares (3.1%)
65,000 Newell Co. 2,702
- --------------------------------------------------------------------------------
Internet Services (4.1%)
20,000 America Online, Inc.* 3,514
1,800 Ticketmaster Online-CitySearch, Inc. "B"* 113
- --------------------------------------------------------------------------------
3,627
- --------------------------------------------------------------------------------
Leisure Time (3.0%)
102,000 Mattel, Inc. 2,314
4,000 Sony Corp. ADR 292
- --------------------------------------------------------------------------------
2,606
- --------------------------------------------------------------------------------
Major Regional Banks (2.5%)
24,000 Fleet Financial Group, Inc. 1,064
17,000 Mellon Bank Corp. 1,139
- --------------------------------------------------------------------------------
2,203
- --------------------------------------------------------------------------------
Medical Products & Supplies (2.6%)
29,000 Medtronic, Inc. 2,311
- --------------------------------------------------------------------------------
Oil & Gas - Drilling/Equipment (1.0%)
18,000 Schlumberger Ltd. 857
- --------------------------------------------------------------------------------
Paper & Forest Products (0.5%)
7,100 Georgia Pacific Corp. 458
- --------------------------------------------------------------------------------
Personal Care (2.9%)
69,000 Avon Products, Inc. 2,549
- --------------------------------------------------------------------------------
Restaurants (0.4%)
4,000 McDonald's Corp. 315
- --------------------------------------------------------------------------------
Retail - Drugs (3.6%)
32,000 CVS Corp. 1,752
50,000 Duane Reade, Inc. * 1,394
- --------------------------------------------------------------------------------
3,146
- --------------------------------------------------------------------------------
Retail - General Merchandising (3.0%)
42,000 Dayton Hudson Corp. 2,678
- --------------------------------------------------------------------------------
Retail - Specialty (0.3%)
30,000 PETsMART, Inc.* 270
- --------------------------------------------------------------------------------
Retail - Specialty Apparel (2.9%)
33,000 Gap, Inc. 2,118
59,000 Genesco, Inc. * 439
- --------------------------------------------------------------------------------
2,557
- --------------------------------------------------------------------------------
Services - Commercial & Consumer (2.4%)
20,000 Applied Graphics Technologies, Inc.* 288
73,000 Harte-Hanks Communications, Inc. 1,843
- --------------------------------------------------------------------------------
2,131
- --------------------------------------------------------------------------------
Services - Data Processing (2.4%)
54,900 First Data Corp. 2,103
- --------------------------------------------------------------------------------
Shoes (0.2%)
3,000 Timberland Co.* 135
- --------------------------------------------------------------------------------
Telecommunications - Long Distance (2.1%)
23,000 MCI WorldCom, Inc.* 1,834
- --------------------------------------------------------------------------------
Total common stocks (cost: $66,758) 85,331
- --------------------------------------------------------------------------------
Principal
Amount
(000)
- -----------
SHORT-TERM (4.2%)
U.S. Government & Agency Issue
$ 3,741 Federal Home Loan Mortgage Corp., 4.62%, 2/01/1999
(cost: $3,740) 3,740
- --------------------------------------------------------------------------------
Total investments (cost: $70,498) $89,071
================================================================================
USAA FIRST START GROWTH 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 foreign shares held by a U.S. bank which
issues a receipt evidencing ownership. Dividends are paid in U.S. dollars.
SPECIFIC NOTES
*Non-income producing.
See accompanying notes to financial statements.
USAA FIRST START GROWTH FUND
STATEMENT OF ASSETS AND LIABILITIES
(IN THOUSANDS)
January 31, 1999
(Unaudited)
ASSETS
Investments in securities, at market value
(identified cost of $70,498) $ 89,071
Cash 159
Receivables:
Capital shares sold 251
Dividends 51
Securities sold 1,774
---------
Total assets 91,306
---------
LIABILITIES
Securities purchased 3,427
Capital shares redeemed 5
USAA Transfer Agency Company 63
---------
Total liabilities 3,495
---------
Net assets applicable to capital shares outstanding $ 87,811
=========
REPRESENTED BY:
Paid-in capital $ 68,871
Accumulated net investment loss (136)
Accumulated net realized gain on investments 503
Net unrealized appreciation of investments 18,573
---------
Net assets applicable to capital shares outstanding $ 87,811
=========
Capital shares outstanding 6,024
=========
Authorized shares of $.01 par value 95,000
=========
Net asset value, redemption price, and offering price per share $ 14.58
=========
See accompanying notes to financial statements.
USAA FIRST START GROWTH FUND
STATEMENT OF OPERATIONS
(IN THOUSANDS)
Six-month period ended January 31, 1999
(Unaudited)
Net investment loss:
Income:
Dividends $ 251
Interest 82
---------
Total income 333
---------
Expenses:
Management fees 216
Transfer agent's fees 259
Custodian's fees 27
Postage 28
Shareholder reporting fees 3
Directors' fees 2
Registration fees 20
Professional fees 15
Other 1
---------
Total expenses before reimbursement 571
Expenses reimbursed (102)
---------
Total expenses after reimbursement 469
---------
Net investment loss (136)
---------
Net realized and unrealized gain on investments:
Net realized gain 519
Change in net unrealized appreciation/depreciation 13,127
---------
Net realized and unrealized gain 13,646
---------
Increase in net assets resulting from operations $ 13,510
=========
See accompanying notes to financial statements.
USAA FIRST START GROWTH 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 $ (136) $ (228)
Net realized gain on investments 519 557
Change in net unrealized appreciation/depreciation
of investments 13,127 5,446
------------------------
Increase in net assets resulting from operations 13,510 5,775
------------------------
Distributions to shareholders from:
Net realized gains (345) -
------------------------
From capital share transactions:
Proceeds from shares sold 33,551 41,997
Shares issued for dividends reinvested 179 -
Cost of shares redeemed (4,428) (2,428)
------------------------
Increase in net assets from capital share
transactions 29,302 39,569
------------------------
Net increase in net assets 42,467 45,344
Net assets:
Beginning of period 45,344 -
------------------------
End of period $ 87,811 $ 45,344
========================
Undistributed net investment loss included in
net assets:
End of period $ (136) -
========================
Change in shares outstanding:
Shares sold 2,672 3,917
Shares issued for dividends reinvested 17 -
Shares redeemed (361) (221)
------------------------
Increase in shares outstanding 2,328 3,696
========================
See accompanying notes to financial statements.
USAA FIRST START GROWTH 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 First Start Growth 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 the Fund's assets in
equity securities of companies that provide goods or services that it believes
are familiar to young people.
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 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 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.
(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 $38.4 million
and $10.5 million, respectively.
Gross unrealized appreciation and depreciation of investments as of January 31,
1999 was $21.0 million and $2.4 million, respectively.
(5) TRANSACTIONS WITH MANAGER
A. Management fees - USAA Investment Management Company carries out the Fund's
investment policies and manages the Fund's portfolio. The Fund's management fees
are computed at .75% of its annual average net assets.
The Manager has voluntarily agreed to limit the annual expenses of the Fund to
1.65% of its average net assets, and accordingly has waived a portion of its
management fees.
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 $13,000.
(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 2.0 million shares (33.2%) 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 $ 12.27 $ 10.00
Net investment loss (.03)(a) (.10)(a)
Net realized and unrealized gain 2.42 2.37
Distributions of realized capital gains (.08) -
---------------------------------
Net asset value at end of period $ 14.58 $ 12.27
=================================
Total return (%) 19.75 22.70
Net assets at end of period (000) $ 87,811 $ 45,344
Ratio of expenses to
average net assets (%) 1.65(b) 1.65
Ratio of expenses to
average net assets
excluding reimbursement (%) 1.97(b) -
Ratio of net investment
loss to average net assets (%) (.47)(b) (.83)
Portfolio turnover (%) 18.79 52.11
* 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
