Table of Contents
USAA Family of Funds 1
Message from the President 2
Investment Review 4
Message from the Manager 5
Financial Information:
Distributions to Shareholders 8
Independent Auditors' Report 9
Portfolio of Investments 10
Notes to Portfolio of Investments 13
Statement of Assets and Liabilities 14
Statement of Operations 15
Statements of Changes in Net Assets 16
Notes to Financial Statements 17
Important Information
Through our ongoing efforts to reduce expenses and respond to shareholder
requests, your annual and semiannual report mailings are "streamlined." One copy
of each report is sent to each address, rather than to every registered owner.
For many shareholders and their families, this eliminates duplicate copies,
saving paper and postage costs to the Fund.
If you are the primary shareholder on at least one account, prefer not to
participate in streamlining, and would like to continue receiving one report per
registered account owner, you may request this in writing to:
USAA Investment Management Company
Attn: Report Mail
9800 Fredericksburg Road
San Antonio, TX 78284-8916
or phone a Mutual Fund Representative at 1-800-531-8448 during business hours.
This report is for the information of the shareholders and others who have
received a copy of the currently effective prospectus of the USAA 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 Very high $3,000
First Start Growth Moderate to high $3,000
Gold Very high $3,000
Growth Moderate to high $3,000
Growth & Income Moderate $3,000
International Moderate to high $3,000
S&P 500(Registered
Trademark) Index Moderate $3,000
Science & Technology Very high $3,000
Small Cap Stock Very high $3,000
World Growth Moderate to high $3,000
- --------------------------------------------------------------------------------
ASSET ALLOCATION
- --------------------------------------------------------------------------------
Balanced Strategy Moderate $3,000
Cornerstone Strategy Moderate $3,000
Growth and Tax Strategy Moderate $3,000
Growth Strategy Moderate to high $3,000
Income Strategy Low to moderate $3,000
- --------------------------------------------------------------------------------
INCOME - TAXABLE
- --------------------------------------------------------------------------------
GNMA Low to moderate $3,000
High-Yield Opportunities High $3,000
Income Moderate $3,000
Income Stock Moderate $3,000
Intermediate-Term Bond Low to moderate $3,000
Short-Term Bond Low $3,000
- --------------------------------------------------------------------------------
INCOME - TAX EXEMPT
- --------------------------------------------------------------------------------
Long-Term Moderate $3,000
Intermediate-Term Low to moderate $3,000
Short-Term Low $3,000
State Bond Income Moderate $3,000
- --------------------------------------------------------------------------------
MONEY MARKET
- --------------------------------------------------------------------------------
Money Market Very low $3,000
Tax Exempt Money Market Very low $3,000
Treasury Money Market
Trust Very low $3,000
State Money Market Very low $3,000
- --------------------------------------------------------------------------------
Foreign investing is subject to additional risks, which are discussed in the
funds' prospectuses.
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.
Some income may be subject to state or local taxes or the federal alternative
minimum tax.
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.
The Science & Technology 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, 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.]
Year 2000 Readiness Disclosure
You may have heard your parents talking about Y2K -- or maybe you've heard about
it on TV. If you have, you may be wondering, along with our other shareholders,
whether it will affect your investment.
Y2K is called "The Year 2000 Problem" because computers -- including ours --
that are used to run businesses all over the world were set up to run only
through the year 1999. And that's a problem! I'm sure you would like to know if
we have done whatever we need to do to our computer systems to keep them working
into the year 2000.
Yes, we certainly have. We have spent a lot of time, energy, and money on it,
and we believe that we -- and your funds -- are in good shape because we have
treated the problem seriously. We believe that we are not alone in this effort.
We have talked to many companies with whom we are connected, and they have
treated this problem seriously also. As an added safeguard, we've developed and
continue to test, back-up plans designed to help us continue to serve you in the
event of a Y2K problem.
Because January 1, 2000, is when our computers will switch over to using the new
2000 date, I have cancelled all employee vacations from mid-December through
mid-January (yes, right during the holidays!) so if there are any problems, we
will be here for you.
Because our computers will be doing the normal year-end processing on Saturday,
January 1, 2000, we probably won't be able to give you year-end figures for your
accounts until sometime that afternoon. We plan to have some employees in from
noon until 6 p.m. CST on New Year's Day, and Sunday, January 2, we will be in
the office from 8 a.m. until 8 p.m. CST. We expect a lot of phone calls from
shareholders, but, with patience, you should be able to reach us. We will also
have our automated phone voice response system (VRS) and Web site up. There may
be some problems, but I expect we will be able to wish you a "Happy New Year."
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.
Investment Review
USAA FIRST START GROWTH FUND
OBJECTIVE: Long-term capital appreciation.
TYPES OF INVESTMENTS: Invests principally in equity securities of companies that
provide goods and services we believe are familiar to young people.
- --------------------------------------------------------------------------------
7/31/98 7/31/99
- --------------------------------------------------------------------------------
Net Assets $45.3 Million $155.8 Million
Net Asset Value Per Share $12.27 $15.44
- --------------------------------------------------------------------------------
Average Annual Total Returns as of 7/31/99
- --------------------------------------------------------------------------------
1 Year Since Inception on 8/1/97
26.81% 24.74%
- --------------------------------------------------------------------------------
Total return equals income yield plus share price change and assumes
reinvestment of all dividends and capital gains distributions. No adjustment has
been made for taxes payable by shareholders on their reinvested income dividends
and capital gains 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 07/31/99. 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
08/97 9,470 9,440 9,660
09/97 9,930 9,957 10,193
10/97 9,590 9,625 9,813
11/97 9,860 10,070 9,987
12/97 9,980 10,243 10,086
01/98 10,250 10,356 10,140
02/98 11,300 11,102 10,909
03/98 11,630 11,671 11,393
04/98 12,000 11,790 11,531
05/98 11,590 11,588 11,200
06/98 12,280 12,058 11,620
07/98 12,270 11,931 11,356
08/98 10,300 10,207 9,489
09/98 10,773 10,861 10,069
10/98 11,851 11,743 10,771
11/98 12,668 12,455 11,437
12/98 14,018 13,172 12,381
01/99 14,693 13,723 12,936
02/99 14,381 13,296 12,408
03/99 15,338 13,828 12,971
04/99 15,389 14,364 13,298
05/99 15,066 14,025 13,040
06/99 16,165 14,803 13,832
07/99 15,560 14,341 13,456
Data since inception on 8/1/97 through 7/31/99
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.]
INTRODUCTION
Do you like to fly kites? My 5-year-old daughter, Sarah, and I love to fly
kites. She thinks it's really cool to go out on a breezy day with our beautiful
unicorn kite attached to the longest spool of string we can find. We let our
kite fly so high we can hardly see it. Sarah has enough kite flying experience
now that she can do it all by herself -- almost. The only thing she needs is the
breeze. Because no matter how good she is at flying kites, her kite just won't
work without the wind.
In some ways, your USAA First Start Growth Fund is like flying a kite. Just
picture the stock market as our tailwind. Let me explain.
We work hard to find stocks that will be good investments for the Fund. And
fortunately the Fund has done well. But we've also had a bunch of help from the
overall stock market. Since we started the Fund in August of 1997, the stock
market has increased 19.8% per year. Wow, that's huge. The stock market usually
rises over time (since 1926, stock prices have increased an average of 11.2% per
year(1)), but not as fast as it has over the past two years. Your Fund has had a
pretty strong tailwind.
What happens if the stock market doesn't go up a lot in the future? Just as
Sarah doesn't expect her kite to go quite as high on a less-breezy day, you
shouldn't expect your Fund to rise quite as fast as it has.
What should you do if the stock market stops going up for a while? Stick to your
investing game plan. Keep investing regularly. Stay focused on your investment
objectives. Remember, the wind will blow again another day, and your stocks
could rise again.
STRATEGY
The USAA First Start Growth Fund buys stocks 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 make the same thing. Instead, the stocks we own are spread
across three primary areas: consumer products, technology, and health care. 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 year, the stock market provided a strong tailwind for the USAA
First Start Growth Fund. From July 31, 1998, to July 31, 1999, your Fund's total
return was 26.81% while the S&P 500 Index's total return was 20.20%. Why did we
have such a big increase? Technology stocks, such as America Online,
Hewlett-Packard, Texas Instruments, and Cisco Systems, played a big part in the
gain. But consumer stocks, like Gap, Dayton-Hudson, and Clear Channel
Communications, helped, too.
OUTLOOK
We think the stock market will do well during the next several years. Companies
in the United States are some of the most competitive on the planet. 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 content, hamburgers, toys, cosmetics, beverages, computers, or
pharmaceuticals, our market share advantage is getting bigger, and that is
important if U.S. companies are going to keep growing rapidly.
(1) 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.]
Past performance is no guarantee of future results.
- --------------------------------------
Top 10 Equity Holdings
(% of Net Assets)
- --------------------------------------
Microsoft 3.0
General Electric 3.0
Clear Channel Communications 3.0
Procter & Gamble 2.9
PepsiCo 2.9
Avon Products 2.8
Gap 2.8
Mattel 2.8
Johnson & Johnson 2.7
America Online 2.6
- --------------------------------------
- --------------------------------------
Top 10 Industries
(% of Net Assets)
- --------------------------------------
Computer Software & Service 8.1
Electronics - Semiconductors 5.5
Beverages - Nonalcoholic 5.3
Foods 4.8
Health Care - Diversified 4.7
Retail - Specialty Apparel 4.4
Drugs 4.0
Computer - Hardware 3.7
Retail - Drugs 3.6
Leisure Time 3.2
- --------------------------------------
You will find a complete list of the securities that the Fund owns on pages
10-12.
Distribution to Shareholders
The following per share information describes the federal tax treatment of
distributions made during the fiscal year ended July 31, 1999. These figures are
provided for information purposes only and should not be used for reporting to
federal or state revenue agencies. Distributions for the calendar year will be
reported to you on Form 1099-DIV in January 2000.
Ordinary income $ .0827 *
=======
* Includes distribution of short-term capital gains, if any, which are taxable
as ordinary income.
Independent Auditors' Report
KPMG
The Shareholders and Board of Directors
USAA FIRST START GROWTH FUND:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments of the USAA First Start Growth Fund, a series of
USAA Mutual Fund, Inc., as of July 31, 1999, and the related statement of
operations for the year then ended, the statements of changes in net assets and
financial highlights, presented in note 8 to the financial statements, for each
of the years in the two-year period then ended. These financial statements and
financial highlights are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of July
31, 1999, by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
USAA First Start Growth Fund as of July 31, 1999, the results of its operations
for the year then ended, the changes in its net assets and the financial
highlights for each of the years in the two-year period then ended, in
conformity with generally accepted accounting principles.
KPMG LLP
San Antonio, Texas
September 3, 1999
USAA FIRST START GROWTH FUND
PORTFOLIO OF INVESTMENTS
July 31, 1999
Market
Number Value
of Shares Security (000)
- --------------------------------------------------------------------------------
COMMON STOCKS (92.0%)
Auto Parts (2.2%)
71,000 Lear Corp.* $ 3,390
- --------------------------------------------------------------------------------
Beverages - Nonalcoholic (5.3%)
164,000 Pepsi Bottling Group, Inc. 3,875
113,000 PepsiCo, Inc. 4,421
- --------------------------------------------------------------------------------
8,296
- --------------------------------------------------------------------------------
Broadcasting - Radio & TV (3.0%)
67,000 Clear Channel Communications, Inc.* 4,661
- --------------------------------------------------------------------------------
Chemicals - Diversified (0.7%)
28,000 Monsanto Co. 1,096
- --------------------------------------------------------------------------------
Communication Equipment (2.0%)
48,000 Lucent Technologies, Inc. 3,123
- --------------------------------------------------------------------------------
Computer - Hardware (3.7%)
53,000 Dell Computer Corp.* 2,166
34,000 Hewlett-Packard Co. 3,560
- --------------------------------------------------------------------------------
5,726
- --------------------------------------------------------------------------------
Computer - Networking (2.0%)
50,000 Cisco Systems, Inc.* 3,106
- --------------------------------------------------------------------------------
Computer Software & Service (8.1%)
43,000 America Online, Inc.* 4,090
55,000 Microsoft Corp.* 4,720
80,300 Oracle Corp.* 3,056
20,000 Pixar, Inc.* 773
- --------------------------------------------------------------------------------
12,639
- --------------------------------------------------------------------------------
Drugs (4.0%)
95,000 Pfizer, Inc. 3,224
60,000 Schering-Plough Corp. 2,940
- --------------------------------------------------------------------------------
6,164
- --------------------------------------------------------------------------------
Electrical Equipment (3.0%)
43,000 General Electric Co. 4,687
- --------------------------------------------------------------------------------
Electronics - Semiconductors (5.5%)
63,000 Analog Devices, Inc.* 2,717
34,000 Intel Corp. 2,346
24,000 Texas Instruments, Inc. 3,456
- --------------------------------------------------------------------------------
8,519
- --------------------------------------------------------------------------------
Entertainment (2.8%)
38,000 AMC Entertainment, Inc. 665
136,000 Walt Disney Co. 3,757
- --------------------------------------------------------------------------------
4,422
- --------------------------------------------------------------------------------
Equipment - Semiconductors (1.5%)
33,000 Applied Materials, Inc.* 2,374
- --------------------------------------------------------------------------------
Finance - Diversified (1.7%)
46,000 Federal Home Loan Mortgage Corp. 2,639
- --------------------------------------------------------------------------------
Foods (4.8%)
62,000 Hershey Foods Corp. 3,596
109,000 Keebler Foods Co.* 3,188
19,000 Tootsie Roll Industries, Inc. 658
- --------------------------------------------------------------------------------
7,442
- --------------------------------------------------------------------------------
Health Care - Diversified (4.7%)
46,000 Bristol-Myers Squibb Co. 3,059
46,000 Johnson & Johnson, Inc. 4,238
- --------------------------------------------------------------------------------
7,297
- --------------------------------------------------------------------------------
Hospitals (0.5%)
76,000 LifePoint Hospitals, Inc.* 751
- --------------------------------------------------------------------------------
Household Products (2.9%)
50,000 Procter & Gamble Co. 4,525
- --------------------------------------------------------------------------------
Housewares (2.2%)
79,000 Newell Rubbermaid, Inc. 3,417
- --------------------------------------------------------------------------------
Internet Services (2.2%)
52,000 drkoop.com, Inc.* 1,157
24,000 eToys Inc.* 958
3,000 MP3.com, Inc.* 110
9,000 Yahoo! Inc.* 1,228
- --------------------------------------------------------------------------------
3,453
- --------------------------------------------------------------------------------
Leisure Time (3.2%)
187,000 Mattel, Inc. 4,394
5,000 Sony Corp. ADR 626
- --------------------------------------------------------------------------------
5,020
- --------------------------------------------------------------------------------
Medical Products & Supplies (1.9%)
42,000 Medtronic, Inc. 3,027
- --------------------------------------------------------------------------------
Oil & Gas - Drilling/Equipment (1.2%)
32,000 Schlumberger Ltd. 1,938
- --------------------------------------------------------------------------------
Personal Care (2.8%)
97,000 Avon Products, Inc. 4,413
- --------------------------------------------------------------------------------
Restaurants (2.1%)
79,000 McDonald's Corp. 3,293
- --------------------------------------------------------------------------------
Retail - Drugs (3.6%)
73,000 CVS Corp. 3,632
62,300 Duane Reade, Inc.* 1,978
- --------------------------------------------------------------------------------
5,610
- --------------------------------------------------------------------------------
Retail - General Merchandising (2.4%)
57,000 Dayton Hudson Corp. 3,687
- --------------------------------------------------------------------------------
Retail - Specialty (0.5%)
103,000 PETsMART, Inc.* 779
- --------------------------------------------------------------------------------
Retail - Specialty Apparel (4.4%)
94,000 Gap, Inc. 4,394
138,000 Genesco, Inc.* 1,665
33,000 The Wet Seal, Inc.* 792
- --------------------------------------------------------------------------------
6,851
- --------------------------------------------------------------------------------
Services - Commercial & Consumer (2.1%)
120,000 Harte-Hanks Communications, Inc. 3,188
- --------------------------------------------------------------------------------
Services - Data Processing (2.3%)
73,000 First Data Corp. 3,618
- --------------------------------------------------------------------------------
Shoes (0.6%)
75,000 Madden Steven, Ltd.* 998
- --------------------------------------------------------------------------------
Telecommunications - Long Distance (2.1%)
39,000 MCI WorldCom, Inc.* 3,217
- --------------------------------------------------------------------------------
Total common stocks (cost: $118,931) 143,366
- --------------------------------------------------------------------------------
Principal
Amount
(000)
- --------------
SHORT-TERM (9.2%)
U.S. Government & Agency Issue
$14,337 Federal Home Loan Mortgage Corp., 4.97%,
8/02/1999 (cost: $14,333) 14,333
- --------------------------------------------------------------------------------
Total investments (cost: $133,264) $ 157,699
================================================================================
USAA FIRST START GROWTH FUND
NOTES TO PORTFOLIO OF INVESTMENTS
July 31, 1999
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)
July 31, 1999
ASSETS
Investments in securities, at market value
(identified cost of $133,264) $ 157,699
Cash 200
Receivables:
Capital shares sold 421
Dividends 38
Securities sold 1,929
-----------
Total assets 160,287
-----------
LIABILITIES
Securities purchased 4,312
Capital shares redeemed 13
USAA Investment Management Company 12
USAA Transfer Agency Company 77
Accounts payable and accrued expenses 71
-----------
Total liabilities 4,485
-----------
Net assets applicable to capital shares outstanding $ 155,802
===========
REPRESENTED BY:
Paid-in capital $ 130,732
Accumulated net realized gain on investments 635
Net unrealized appreciation of investments 24,435
-----------
Net assets applicable to capital shares outstanding $ 155,802
===========
Capital shares outstanding 10,090
===========
Authorized shares of $.01 par value 95,000
===========
Net asset value, redemption price, and offering price per share $ 15.44
===========
See accompanying notes to financial statements.
USAA FIRST START GROWTH FUND
STATEMENT OF OPERATIONS
(IN THOUSANDS)
Year ended July 31, 1999
Net investment loss:
Income:
Dividends $ 574
Interest 461
---------
Total income 1,035
---------
Expenses:
Management fees 685
Transfer agent's fees 699
Custodian's fees 63
Postage 118
Shareholder reporting fees 20
Directors' fees 4
Registration fees 78
Professional fees 34
Other 2
---------
Total expenses before reimbursement 1,703
Expenses reimbursed (212)
---------
Total expenses after reimbursement 1,491
---------
Net investment loss (456)
---------
Net realized and unrealized gain on investments:
Net realized gain 1,107
Change in net unrealized appreciation/depreciation 18,989
---------
Net realized and unrealized gain 20,096
---------
Increase in net assets resulting from operations $ 19,640
=========
See accompanying notes to financial statements.
USAA FIRST START GROWTH FUND
STATEMENTS OF CHANGES IN NET ASSETS
(IN THOUSANDS)
Years ended July 31,
1999 1998
--------------------
From operations:
Net investment loss $ (456) $ (228)
Net realized gain on investments 1,107 557
Change in net unrealized appreciation/depreciation of
investments 18,989 5,446
--------------------
Increase in net assets resulting from operations 19,640 5,775
--------------------
Distributions to shareholders from:
Net realized gains (345) -
--------------------
From capital share transactions:
Proceeds from shares sold 104,645 41,997
Shares issued for dividends reinvested 179 -
Cost of shares redeemed (13,661) (2,428)
--------------------
Increase in net assets from capital share transactions 91,163 39,569
--------------------
Net increase in net assets 110,458 45,344
Net assets:
Beginning of period 45,344 -
--------------------
End of period $155,802 $ 45,344
====================
Change in shares outstanding:
Shares sold 7,343 3,917
Shares issued for dividends reinvested 17 -
Shares redeemed (966) (221)
--------------------
Increase in shares outstanding 6,394 3,696
====================
See accompanying notes to financial statements.
USAA FIRST START GROWTH FUND
NOTES TO FINANCIAL STATEMENTS
July 31, 1999
(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 thirteen separate
funds. The information presented in this annual 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. As a result of certain
permanent differences between book and tax basis accounting, reclassifications
have been made on the statement of assets and liabilities to decrease
accumulated undistributed net investment loss by $456,000 and decrease
accumulated net realized gain on investments by $456,000.
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 Bank of America ($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
Bank of America, the Fund may borrow from Bank of America, at Bank of America's
borrowing rate plus a markup, an amount which, when added to outstanding
borrowings under the CAPCO agreements, does not exceed 25% of the Fund's total
assets. The Fund had no borrowings under any of these agreements during the year
ended July 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 year ended July 31, 1999, were $101.5 million and $22.0
million, respectively.
Gross unrealized appreciation and depreciation of investments, as of July 31,
1999, was $26.6 million and $2.2 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 .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 annual average net assets. Because the Fund's annual expenses for
the year ended July 31, 1999, exceeded 1.65%, the Manager has waived a portion
of its management fee to reduce the Fund's annual expenses to 1.65%.
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 year ended
July 31, 1999, was $34,000.
(6) TRANSACTIONS WITH AFFILIATES
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 (Unaudited)
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 has taken steps to address this potential year 2000 problem with
respect to the computer systems that it uses 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:
Year Ended July 31,
----------------------------
1999 1998*
----------------------------
Net asset value at beginning of period $ 12.27 $ 10.00
Net investment loss (.07)(a) (.10)(a)
Net realized and unrealized gain 3.32 2.37
Distributions of realized capital gains (.08) -
----------------------------
Net asset value at end of period $ 15.44 $ 12.27
============================
Total return (%)** 26.81 22.70
Net assets at end of period (000) $ 155,802 $ 45,344
Ratio of expenses to average net assets (%) 1.65 1.65
Ratio of expenses to average net assets
excluding reimbursement (%) 1.87 -
Ratio of net investment loss to average net assets (%) (.50) (.83)
Portfolio turnover (%) 26.64 52.11
* Fund commenced operations August 1, 1997.
** Assumes reinvestment of all dividend income and capital gain distributions
during the period.
(a) Calculated using weighted average shares.
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 LLP
112 East Pecan, Suite 2400
San Antonio, Texas 78205
Telephone Assistance Hours
Call toll free - Central Time
Monday - Friday 7:00 a.m. to 9:00 p.m.
Saturdays 8:30 a.m. to 5:00 p.m.
Internet Access
www.usaa.com
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 ToughLine(Registered Trademark)
(from Touchtone phones only)
For account balance, last transaction or fund prices
1-800-531-8777, (in San Antonio) 498-8777
