Table of Contents
USAA Family of Funds 1
Message from the President 2
Investment Review 4
Message from the Manager 5
Financial Information:
Independent Auditors' Report 8
Portfolio of Investments 9
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 Gold 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)1998, 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
USAA 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 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 neither insured nor guaranteed by
the U.S. Government, and there is no assurance that any of the funds will
be able to maintain a stable net asset value of $1 per share.
(5) This Fund may be more volatile than a fund that diversifies across many
industries.
* The InveStart (Registered Trademark) program is available for investors
without the $3,000 initial investment required to open an IMCO mutual fund
account. A mutual fund account can be opened with no initial investment if
you elect to have monthly automatic investments of at least $50 from a bank
account. InveStart is not available on tax-exempt funds or the S&P 500
Index Fund. The minimum initial investment for IRAs is $250, except for the
$2,000 minimum required for the S&P 500 Index Fund. IRAs are not available
for tax-exempt funds. The Growth and Tax Strategy Fund is not available as
an investment for your IRA because the majority of its income is tax
exempt.
** California, Florida, New York, Texas, and Virginia funds available to
residents only.
Non-deposit investment products are not insured by the FDIC, are not deposits or
other obligations of, or guaranteed by, USAA Federal Savings Bank, and are
subject to investment risks, and may lose value.
For more complete information about the mutual funds managed and distributed by
USAA IMCO, including charges and expenses, please call 1-800-531-8181 for a
prospectus. Read it carefully before you invest.
Message from the President
A year ago my message to you sent a cautionary note about a market that had
risen very high for a long time:
"It would not be unusual if the market were to finish 1997 with a return
well below that of '95 and '96."
Of course, 1997's stock market did not perform poorly, and we are still
pondering when a correction might come. This situation is tailor-made for a
discussion of risk.
There has long been a difference between what most investors perceive as risk
and what academics mean by risk. To the individual investor risk means losing
money. To the student risk means variability of returns, both up and down. The
difference can be quite important.
To a person who perceives risk as only the possibility of loss, timing becomes a
rather attractive proposition. You know with certainty when the market has
provided an exceptional return for a given period. If your chief goal is to
avoid a loss, then a movement to safety following such a period could make
sense. But look at the experience of 1995, 1996 and 1997. Even 1998 is testimony
to the frailty of forecasting and also to an academic definition of risk.
[PHOTOGRAPH OF THE PRESIDENT AND VICE CHAIRMAN OF THE BOARD, MICHAEL J. C. ROTH,
CFA, APPEARS HERE.]
If market risk means variability of return, and if that risk is describable
in scope but not in direction or timing of movement, then timing becomes
dangerous. That is because the variability of returns may help you as well as
hurt you. To put this plainly, a person who got out of the market in 1995 or
1996 is still looking for a chance to come back in.
The Asset Strategy funds of the Investment Trust show a good way to confront
this real risk. They offer various asset allocations which are attuned to
different risk tolerances. And we keep those allocations for you. You will be
exposed to risk in a way that, hopefully, is tolerable and that exposure will be
there if the risk takes you down, or up.
Sincerely,
Michael J.C. Roth, CFA
President and
Vice Chairman of the Board
For more information about mutual funds managed and distributed by USAA IMCO,
including charges and expenses, please call for a prospectus. Read it carefully
before investing.
Investment Review
USAA GOLD FUND
OBJECTIVE: Long-term capital appreciation for the purpose of protecting the
purchasing power of capital from inflation. Current income is a secondary
objective.
TYPES OF INVESTMENTS: At least 80% of the Fund's assets are invested in gold
stocks. The remainder may be invested in common stocks of companies engaged in
other precious metal and mineral mining.
================================================================================
5/31/98 5/31/97
Net Assets $93.2 Million $121.2 Million
Net Asset Value Per Share $5.87 $8.09
================================================================================
AVERAGE ANNUAL TOTAL RETURNS AS OF 5/31/98
================================================================================
1 Year 5 Years 10 Years
-27.44% -8.34% -3.62%
================================================================================
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 Gold Fund, S&P 500 Index, London
Gold Bullion Index, and the Philadelphia Gold & Silver Index for the period of
5/31/88 to 05/31/98. The data points from the graph are as follows:
USAA Gold S&P 500 Gold
Fund Index Bullion Philadelphia
----------------- ---------------- ------------ ------------
5/31/88 10,000 10,000 10,000 10,000
06/88 10,166 10,459 9,584 10,082
12/88 9,235 10,817 9,004 8,497
06/89 9,089 12,605 8,189 9,027
12/89 10,899 14,239 8,804 11,712
06/90 8,443 14,677 7,732 9,907
12/90 8,010 13,796 8,479 9,477
06/91 7,883 15,759 8,087 8,805
12/91 7,654 17,990 7,753 7,890
06/92 7,433 17,870 7,539 7,668
12/92 7,046 19,359 7,308 6,963
06/93 10,816 20,301 8,308 11,371
12/93 11,156 21,306 8,600 12,882
06/94 9,922 20,585 8,524 11,255
12/94 10,110 21,586 8,414 10,677
06/95 10,605 25,943 8,509 11,737
12/95 10,519 29,688 8,496 11,760
06/96 11,379 32,683 8,386 12,086
12/96 10,519 36,500 8,106 11,401
06/97 8,847 44,018 7,345 9,336
12/97 6,502 48,673 6,371 7,245
05/98 6,915 55,064 6,446 7,296
Data from 5/31/88 through 5/31/98
The graph illustrates the comparison of a $10,000 hypothetical investment in the
USAA Gold Fund; the S&P 500 Index, which is an unmanaged index representing the
average performance of a group of 500 widely held, publicly traded stocks (it
is not possible to invest directly in the S&P 500 Index); the Philadelphia Gold
& Silver Index, representing nine holdings in the gold & silver sector,
typically referred to as the XAU; and London Gold, a traditional Gold Bullion
index that is readily available.
Message from the Manager
[PHOTOGRAPH OF THE PORTFOLIO MANAGER, MARK W. JOHNSON, CFA, APPEARS HERE.]
THE GOLD MARKET
Gold prices began the fiscal year at $345.60 but declined relentlessly through
the year, finally hitting bottom at $278.90 on January 12, 1998. Major factors
behind this decline were the Asian currency crisis [Decimated demand
and led to distress selling], large scale selling by European central banks
in advance of the European Monetary Union [Net central bank sales in calendar
1997 rose 48% to 406 metric tonnes according to Gold Field Mineral Services],
more normal levels of producer hedging compared to a dearth of hedging activity
in 1996 [513 tonnes versus 131 tonnes], increased net sales by private
investors [261 tonnes versus 106 tonnes], and a 4.5% increase in global mine
production to 2464 metric tonnes. These factors overwhelmed strong consumer
demand outside of Asia. It was a market that drowned in its own liquidity.
Gold rallied after the January 12 low to $313.15 on April 24 because of comments
made by European bankers that implied future European central bank sales would
be at greatly reduced levels compared to 1997. However, the subsequent failure
of the European authorities to commit to a specific level of gold reserves
coupled with the recent worsening of the Asian currency crisis, the testing of
nuclear weapons by India (the probable imposition of economic sanctions on this
major gold consumer implies reduced demand), and continued movement by
Switzerland to change its laws in a way that would allow it to sell about half
of its gold reserves caused gold to reverse course once again. Gold ended the
May 31, 1998, fiscal year at $293.60, a decline of 15.05% from May 31, 1997, and
a decline of 24.82% from the May 31, 1996, price of $390.55.
FUND PERFORMANCE AND STRATEGY
Total return for the Gold Fund was -27.44% for fiscal 1998. Prices of gold
mining common stocks suffered a more dramatic fall than the gold price itself
because of the high degree of operating leverage at the mining companies. This
leverage cuts both ways. Although the absolute performance of the Fund has been
disappointing, it should be noted that according to Lipper Analytical Services
(1) the USAA Gold Fund ranked in the top 15% or 4th out of 39 funds for
cumulative total return in the Gold Oriented category for the 1-year period
ending May 31, 1998.(2)
Top performing stocks for the year were Stillwater Mining (+4.3%) and
Euro-Nevada Mining (+8.2%). Stillwater, the only U.S. producer of platinum and
palladium, benefited from dramatically higher prices related to Russia's
inability to ship palladium. Euro-Nevada reported a 58% increase in the mineable
reserve at the high grade Ken Snyder mine, which is under construction. Once
operational it may produce gold at a cash cost of less than $100 per ounce net
of silver by-product credits. The worst performers included Dayton Mining
(-72.9%) and Golden Knight Resources (-61.4%). The former was hurt by management
turmoil and the latter by financing difficulties.
Our strategy is to emphasize low-cost producers with good production or reserve
growth potential that sell at reasonable valuations on a risk-adjusted basis. We
endeavor to improve the Fund's quality and growth prospects by redeploying
assets from stocks that no longer meet the above criteria to ones that do. In
that regard, five positions(3) were sold in the course of the fiscal year with
three new positions established. These include Lihir Gold, which operates a new
long-life mine in Papua New Guinea. This mine has a sub $200 per ounce cash cost
of production and good potential to increase production over the next several
years. Gencor is a major South African producer of gold and platinum that is
engaged in a restructuring designed to drive down costs and maximize the value
of its historically poorly managed assets. Aber Resources is developing a mine
in Canada that has the potential to be a major low cost diamond producer.
Non-gold precious metals and minerals companies such as Aber now constitute
11.3% of the Fund's assets versus 6.6% a year ago.
(1) Lipper Analytical Services is an independent organization that monitors the
performance of mutual funds. Fund rankings awarded by Lipper are based on
cumulative total returns. The Fund's ranking for the 5-, and 10-year peiods
ended May 31, 1998, were 14/25 and 13/19, respectively.
(2) Past performance is no guarantee of future results and the value of your
investment may vary according to the Fund's performance.
(3) Newcrest Mining, Pioneer Group, Resolute, Southvaal Holdings, and
Viceroy Resource.
TOP 10 EQUITY HOLDINGS
(% OF NET ASSETS)
- ---------------------------------------
Barrick Gold 7.2
Stillwater Mining 6.5
Euro-Nevada Mining 5.1
Compania De Minas Buenaventura 5.1
Freeport-McMoRan Copper & Gold "A" 5.0
Ashanti Goldfields GDS 4.7
Franco-Nevada Mining 4.7
Lihir Gold 4.5
Gold Fields of South Africa ADR 4.4
Agnico Eagle Mines 4.4
Foreign investing is subject to additional risks which are discussed in the
Fund's prospectus. Gold mining stocks involve additional risk because of gold's
price volatility.
See page 9 for a complete listing of the Portfolio of Investments in Securities.
Independent Auditors' Report
The Shareholders and Board of Trustees
USAA GOLD FUND:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments of the USAA Gold Fund, a series of USAA Investment
Trust, as of May 31, 1998 and the related statement of operations for the year
then ended, the statements of changes in net assets for each of the years in the
two-year period then ended, and financial highlights, presented in note 8 to the
financial statements, for each of the years or periods in the five-year period
then ended. These financial statements and financial highlights are the
responsibility of the Trust'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 and financial highlights. Our procedures included confirmation of
securities owned as of May 31, 1998, 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 Gold Fund as of May 31, 1998, the results of its operations for the year
then ended, the changes in its net assets for each of the years in the two-year
period then ended, and the financial highlights for each of the years or periods
in the five-year period then ended, in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
San Antonio, Texas
July 2, 1998
USAA GOLD FUND
PORTFOLIO OF INVESTMENTS
May 31, 1998
Market
Number Value
of Shares Security (000)
- --------------------------------------------------------------------------------
COMMON STOCKS (95.6%)
African Gold Companies (11.7%)
475,000 Ashanti Goldfields Co. Ltd. GDR $ 4,394
1,250,000 Gencor Ltd. 2,451
275,000 Gold Fields of South Africa Ltd. ADR 4,073
- --------------------------------------------------------------------------------
10,918
- --------------------------------------------------------------------------------
Australian Gold Companies (11.0%)
2,500,000 Acacia Resources Ltd. 3,116
3,250,000 Lihir Gold Ltd. * 4,172
1,250,000 Ranger Minerals NL * 2,975
- --------------------------------------------------------------------------------
10,263
- --------------------------------------------------------------------------------
North American Gold Companies (56.5%)
625,000 Agnico-Eagle Mines Ltd. 4,063
350,000 Barrick Gold Corp. 6,738
625,000 Dayton Mining Corp. * 742
300,000 Euro Nevada Mining Corp. Ltd. 4,788
200,000 Franco Nevada Mining Corp. Ltd. 4,379
300,000 Freeport-McMoRan Copper & Gold, Inc. "A" 4,650
200,000 Getchell Gold Corp. * 3,800
700,000 Goldcorp, Inc. "A" * 3,628
535,600 Golden Knight Resources, Inc. * 478
200,000 Greenstone Resources Ltd. * 899
225,000 Homestake Mining Co. 2,400
100,000 Newmont Gold Co. 2,606
125,000 Newmont Mining Corp. 3,117
300,000 Placer Dome, Inc. 3,731
500,000 Rio Narcea Gold Mines Ltd. * 1,338
300,000 SAMAX Gold, Inc. * 1,287
1,000,000 TVX Gold, Inc. * 3,250
800,000 Vengold, Inc. * 785
- --------------------------------------------------------------------------------
52,679
- --------------------------------------------------------------------------------
North American Precious Metals and Minerals Companies (11.3%)
200,000 Aber Resources Ltd. * 2,027
150,000 Dia Met Minerals Ltd. "A" * 2,445
250,000 Stillwater Mining Co. * 6,062
- --------------------------------------------------------------------------------
10,534
- --------------------------------------------------------------------------------
South American Gold Companies (5.1%)
300,000 Compania de Minas Buenaventura ADR 4,706
- --------------------------------------------------------------------------------
Total common stocks (cost: $119,273) 89,100
- --------------------------------------------------------------------------------
Principal
Amount
(000)
- --------------------------------------------------------------------------------
U.S. GOVERNMENT & AGENCY ISSUES (4.6%)
Discount Note
$ 4,331 Federal Home Loan Bank, 5.38%, 6/01/98 (cost: $4,330) 4,330
- -------------------------------------------------------------------------------
Total investments (cost: $123,603) $93,430
===============================================================================
- -----------------------
* Non-income producing.
USAA GOLD FUND
NOTES TO PORTFOLIO OF INVESTMENTS
May 31, 1998
GENERAL NOTES
Market values of securities are determined by procedures and practices discussed
in note 1 to the financial statements.
The cost of securities for federal income tax purposes is approximately the same
as that reported in the financial statements.
The percentages shown represent the percentage of the investments to net assets.
ADR - American Depositary Receipts are receipts issued by a U.S. bank evidencing
ownership of foreign shares. Dividends are paid in U.S. dollars.
GDR - Global Depositary Receipts are receipts issued by a non-U.S. bank
evidencing ownership of foreign shares. Dividends are paid in U.S. dollars.
See accompanying notes to financial statements.
USAA GOLD FUND
STATEMENT OF ASSETS AND LIABILITIES
(IN THOUSANDS)
May 31, 1998
ASSETS
Investments in securities, at market value (identified cost
of $123,603) $ 93,430
Cash 8
Cash denominated in foreign currencies (identified cost of $112) 108
Receivables:
Capital shares sold 150
Dividends and interest 59
Securities sold 236
Unrealized appreciation on foreign currency contracts held,
at value 2
--------
Total assets 93,993
--------
LIABILITIES
Securities purchased 556
Unrealized depreciation on foreign currency contracts held,
at value 2
Capital shares redeemed 47
USAA Investment Management Company 63
USAA Transfer Agency Company 12
Accounts payable and accrued expenses 87
--------
Total liabilities 767
--------
Net assets applicable to capital shares outstanding $ 93,226
========
REPRESENTED BY:
Paid-in capital $162,140
Accumulated net investment loss (4)
Accumulated net realized loss on investments (38,733)
Net unrealized depreciation of investments (30,173)
Net unrealized depreciation on foreign currency translations (4)
--------
Net assets applicable to capital shares outstanding $ 93,226
========
Capital shares outstanding, unlimited number of shares authorized,
no par value 15,871
========
Net asset value, redemption price, and offering price per share $ 5.87
========
See accompanying notes to financial statements.
USAA GOLD FUND
STATEMENT OF OPERATIONS
(IN THOUSANDS)
Year ended May 31, 1998
Net investment income:
Income (net of foreign taxes withheld of $40):
Dividends $ 847
Interest 184
--------
Total income 1,031
--------
Expenses:
Management fees 744
Transfer agent's fees 479
Custodian's fees 69
Postage 35
Shareholder reporting fees 10
Trustees' fees 4
Registration fees 68
Professional fees 31
Other 9
--------
Total expenses 1,449
--------
Net investment loss (418)
--------
Net realized and unrealized loss on investments and foreign currency:
Net realized loss on:
Investments (4,994)
Foreign currency transactions (3)
Change in net unrealized appreciation/depreciation of:
Investments (27,241)
Foreign currency translations (4)
--------
Net realized and unrealized loss (32,242)
--------
Decrease in net assets resulting from operations $(32,660)
========
See accompanying notes to financial statements.
USAA GOLD FUND
STATEMENTS OF CHANGES IN NET ASSETS
(IN THOUSANDS)
Years ended May 31,
1998 1997
---------------------
From operations:
Net investment loss $ (418) $ (150)
Net realized loss on investments (4,994) (8,394)
Net realized loss on foreign currency transactions (3) (5)
Change in net unrealized appreciation/depreciation of:
Investments (27,241) (35,962)
Foreign currency translations (4) -
--------------------
Decrease in net assets resulting from operations (32,660) (44,511)
--------------------
From capital share transactions:
Proceeds from shares sold 91,011 95,026
Cost of shares redeemed (86,294) (96,413)
--------------------
Increase (decrease) in net assets from capital share
transactions 4,717 (1,387)
--------------------
Net decrease in net assets (27,943) (45,898)
Net assets:
Beginning of period 121,169 167,067
--------------------
End of period $ 93,226 $121,169
====================
Undistributed net investment income (loss) included in
net assets:
Beginning of period $ 256 $ (5)
====================
End of period $ (4) $ 256
====================
Change in shares outstanding:
Shares sold 14,007 10,594
Shares redeemed (13,118) (10,630)
--------------------
Increase (decrease) in shares outstanding 889 (36)
====================
See accompanying notes to financial statements.
USAA GOLD FUND
NOTES TO FINANCIAL STATEMENTS
May 31, 1998
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USAA INVESTMENT TRUST (the Trust), registered under the Investment Company Act
of 1940, as amended, is a diversified, open-end management investment company
organized as a Massachusetts business trust consisting of eleven separate funds.
The information presented in this annual report pertains only to the USAA Gold
Fund (the Fund). The Fund's primary investment objective is to seek long-term
capital appreciation and to protect the purchasing power of shareholders'
capital against inflation. Current income is a secondary objective. USAA
Investment Management Company (the Manager) seeks to achieve this objective by
investing at least 80% of the Fund's assets in common stocks, preferred stocks
or securities which are convertible into or which carry the right to buy common
stocks of companies principally engaged in gold exploration, mining, or
processing. The Fund concentrates its investments in securities of companies
principally engaged in gold exploration, mining, or processing and therefore may
be exposed to more risk than portfolios with a broader industry diversification.
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. Portfolio securities traded primarily on foreign securities exchanges
are generally valued at the closing values of such securities on the exchange
where primarily traded. If no sale is reported, the average of the bid and asked
prices is generally used depending upon local custom or regulation.
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 Trustees.
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
were made to the statement of assets and liabilities at May 31, 1998 to decrease
paid-in capital by $41.7 million, to increase accumulated net realized loss on
investments by $41.6 million, and to increase accumulated net investment loss by
$.1 million.
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. Foreign currency translations - The assets of the Fund may be invested in the
securities of foreign issuers. Since the accounting records of the Fund are
maintained in U.S. dollars, foreign currency amounts are translated into U.S.
dollars on the following basis:
1. Market value of securities, other assets, and liabilities at the mean between
the bid and asked translation rates of such currencies against U.S. dollars on a
daily basis.
2. Purchases and sales of securities, income, and expenses at the rate of
exchange obtained from an independent pricing service on the respective dates of
such transactions.
Net realized and unrealized foreign currency gains/losses occurring during the
holding period of investments are a component of realized gain/loss on
investments and unrealized appreciation/depreciation on investments,
respectively.
Net realized foreign currency gains/losses arise from sales of foreign currency,
currency gains/losses realized between the trade and settlement dates on
security transactions, and the difference between amounts of dividends,
interest, and foreign withholding taxes recorded on the Fund's books and
the U.S. dollar equivalent of the amounts received. Net realized foreign
currency gains/losses have been reclassified from accumulated net realized
gain/loss to accumulated undistributed net investment income on the statement of
assets and liabilities as such amounts are treated as ordinary income/loss
for tax purposes. Net unrealized foreign currency exchange gains/losses
arise from changes in the value of assets and liabilities other than
investments in securities resulting from changes in the exchange rate.
E. 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 two joint short-term revolving
loan agreements totaling $850 million, one with USAA Capital Corporation
(CAPCO), an affiliate of the Manager ($750 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 its agreement with CAPCO, the Fund may borrow
from CAPCO an amount up to 5% of its 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 agreement, does not exceed 25% of its total assets
at NationsBank's borrowing rate plus a markup. During the year ended May 31,
1998, the Fund had no borrowings under either of these agreements.
(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 May 31, 1998
the Fund had capital loss carryovers for federal income tax purposes of
approximately $34.0 million which will expire in 1999 - 2007. It is unlikely
that the Trust's Board of Trustees will authorize a distribution of capital
gains realized in the future until the capital loss carryovers have been
utilized or expire. Capital loss carryovers of $41.3 million expired on May 31,
1998 and have been charged against paid-in capital on the accompanying statement
of assets and liabilities.
(4) INVESTMENT TRANSACTIONS
Cost of purchases and proceeds from sales of securities, excluding short-term
securities, for the year ended May 31, 1998 were $21.4 million and $19.1
million, respectively.
Gross unrealized appreciation and depreciation of investments at May 31, 1998
was $4.1 million and $34.3 million, respectively.
(5) FOREIGN CURRENCY CONTRACTS
A forward currency contract (currency contract) is a commitment to purchase or
sell a foreign currency at a specified date, at a negotiated price. The Fund
currently enters into currency contracts only in connection with the purchase or
sale of a security denominated in a foreign currency. These contracts allow the
Fund to "lock in" the U.S. dollar price of the security. Currency contracts are
valued on a daily basis using foreign currency exchange rates obtained from an
independent pricing service. Risks of entering into currency contracts include
the potential inability of the counterparty to meet the terms of the contract
and the Fund giving up the opportunity for potential profit.
At May 31, 1998, the terms of open foreign currency contracts were as follows
(in thousands):
<TABLE>
- ------------------------------------------------------------------------------------------
<CAPTION>
U.S. Dollar U.S. Dollar Unrealized
Exchange Currency to be Value as of Currency to be Value as of Appreciation
Date Delivered 5/31/98 Received 5/31/98 (Depreciation)
- ------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C>
6/01/98 5 $ 3 3 $ 3 $ -
Canadian Dollar U.S. Dollar
6/03/98 373 234 232 232 (2)
Austrian Dollar U.S. Dollar
6/03/98 200 200 322 201 1
U.S. Dollar Austrian Dollar
6/04/98 101 101 162 102 1
U.S. Dollar Austrian Dollar
- ------------------------------------------------------------------------------------------
$ 538 $ 538 $ -
==========================================================================================
</TABLE>
(6) TRANSACTIONS WITH MANAGER
A. Management fees - The investment policies of the Fund and management of the
Fund's portfolio are carried out by USAA Investment Management Company. 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 $23.50 per shareholder account plus
out-of-pocket expenses.
C. Underwriting services - The Manager provides exclusive underwriting and
distribution of the Fund's shares on a continuing best efforts basis. The
Manager receives no commissions or fees for this service.
(7) TRANSACTIONS WITH AFFILIATES
Certain trustees and officers of the Fund are also directors, officers, and/or
employees of the Manager. None of the affiliated trustees or Fund officers
received any compensation from the Fund.
(8) FINANCIAL HIGHLIGHTS
Per share operating performance for a share outstanding throughout each period
is as follows:
Eight-month
Period Ended
Year Ended May 31, May 31,
- --------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------
Net asset value at
beginning of period $ 8.09 $ 11.12 $ 9.00 $ 8.83 $ 7.95
Net investment income (loss) (.03)(b) (.01)(b) (.02) .01 .01
Net realized and
unrealized gain (loss) (2.19) (3.02) 2.15 .17 .88
Distributions from net
investment income - - (.01) (.01) (.01)
- ------------------------------------------------------------------------------
Net asset value at
end of period $ 5.87 $ 8.09 $ 11.12 $ 9.00 $ 8.83
==============================================================================
Total return (%) * (27.44) (27.25) 23.66 2.05 11.19
Net assets at end of
period (000) $93,226 $121,169 $167,067 $ 160,223 $176,527
Ratio of expenses to
average net assets (%) 1.46 1.31 1.33 1.28 1.26(a)
Ratio of net investment
income (loss) to average
net assets (%) (.42) (.11) (.14) .10 .15(a)
Portfolio turnover (%) 19.62 26.40 16.48 34.76 34.75
Average commission rate
paid per share + $ .0124 $ .0195 $ .0292
* Assumes reinvestment of all dividend income and capital gain distributions
during the period.
+ Calculated by aggregating all commissions paid on the purchase and sale of
securities and dividing by the actual number of shares purchased or sold for
which commissions were charged.
(a)Annualized. The ratio is not necessarily indicative of 12 months of
operations.
(b)Calculated using weighted average shares.
Trustees
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 8:00 a.m. to 8:00 p.m.
Saturdays 8:30 a.m. to 5:00 p.m.
For Additional Information On Mutual Funds
1-800-531-8181, (in San Antonio)456-7211
For account servicing, exchanges or redemptions
1-800-531-8448, (in San Antonio) 456-7202
Recorded Mutual Fund Price Quotes
24-Hour Service (from any phone)
1-800-531-8066, (in San Antonio) 498-8066
Mutual Fund TouchLine (Registered Trademark)
(from Touchtone phones only)
For account balance, last transaction or fund prices
1-800-531-8777, (in San Antonio) 498-8777
