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 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 Science &
Technology Fund, managed by USAA Investment Management Company (IMCO). It may be
used as sales literature only when preceded or accompanied by a current
prospectus which gives further details about the Fund.
USAA with the eagle is registered in the U.S. Patent & Trademark Office.
(Copyright)1999, USAA. All rights reserved.
USAA Family of Funds Summary
Fund Minimum
Type/Name Volatility Investment
- --------------------------------------------------------------------------------
CAPITAL APPRECIATION
- --------------------------------------------------------------------------------
Aggressive Growth Very high $3,000
Emerging Markets 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
As we rapidly approach the year 2000, an interesting market picture is emerging.
Many of our shareholders have had questions about the "year 2000 problem," and
we have spent a lot of time, energy, and money on it. We believe that we -- and
your funds -- are in good shape because we have treated the problem seriously.
We also believe that we -- and your funds -- are not alone in that effort. I
always like to look at what the market tells us about such things.
Many dire predictions have been around for years now. Last summer, I asked some
business associates for the names of some systems people at major financial
firms to whom I could speak about Y2K. One of these was the head of the effort
at a major credit card institution. He was more dire in his outlook than anyone
else I spoke to. One prediction was, "By the second quarter of 1999, the federal
government will intervene in the financial markets and the banking system
because of the spreading panic." It is mid-September. The financial markets are
choppy because Fed Chairman Greenspan keeps talking about inflation, but so far,
no panic. Not even a hint. As for other predictions, we find that the Y2K
problem is being taken very seriously by firms with which we do business or with
whom we invest. We cannot assure that nothing will go wrong, but we are quite
sure that these firms have made a serious effort to confront it, just as we
have. As an added safeguard, we've developed, and continue to test, contingency
plans designed to help ensure continuous service in the event of a Y2K problem.
Early January will be very interesting. I have cancelled all employee vacations
from mid-December through mid-January. 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. With patience, because we expect heavy phone
traffic in general, you should be able to reach us. We will also have our 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 SCIENCE & TECHNOLOGY FUND
OBJECTIVE: Long-term capital appreciation.
TYPES OF INVESTMENTS: Invests principally in equity securities of companies
expected to benefit from the development and use of scientific and technological
advances and improvements.
- --------------------------------------------------------------------------------
7/31/98 7/31/99
- --------------------------------------------------------------------------------
Net Assets $111.3 Million $258.0 Million
Net Asset Value Per Share $11.17 $15.18
- --------------------------------------------------------------------------------
Average Annual Total Returns as of 7/31/99
- --------------------------------------------------------------------------------
1 Year Since Inception on 8/1/97
35.90% 23.21%
- --------------------------------------------------------------------------------
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 Science & Technology Fund, the S&P
500 Index, and the Lipper Science & Technology Funds Average for the period of
08/01/97 through 07/31/99. The data points from the graph are as follows:
USAA Science & S&P 500 Lipper Science &
Technology Fund Index Tech Funds Avg.
--------------- ------- ----------------
08/01/97 $10,000 $10,000 $10,000
08/97 9,380 9,440 10,004
09/97 9,800 9,957 10,547
10/97 9,200 9,625 9,564
11/97 9,240 10,070 9,457
12/97 9,070 10,243 9,185
01/98 9,450 10,356 9,407
02/98 10,540 11,102 10,470
03/98 10,660 11,670 10,732
04/98 11,020 11,790 11,159
05/98 10,390 11,588 10,363
06/98 11,170 12,058 11,160
07/98 11,170 11,931 10,978
08/98 9,240 10,207 8,761
09/98 10,100 10,861 9,888
10/98 10,870 11,743 10,536
11/98 11,660 12,455 11,936
12/98 13,300 13,172 13,909
01/99 14,360 13,723 16,110
02/99 13,550 13,296 14,656
03/99 14,340 13,828 16,339
04/99 14,450 14,364 16,897
05/99 14,320 14,025 16,586
06/99 15,740 14,803 18,534
07/99 15,180 14,341 18,155
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 Science & Technology Fund to the S&P 500 Index and the Lipper Science &
Technology Funds Average, an average performance level of all science and
technology funds, as reported by Lipper Analytical Services, Inc., an
independent organization that monitors the performance of mutual funds. The S&P
500 Index is an unmanaged index representing the weighted average performance of
a group of 500 widely held, publicly traded stocks. It is not possible to invest
in the S&P 500 Index.
Message from the Manager
[Photograph of the Portfolio Manager, Curt Rohrman, CFA, appears here.]
STRATEGY
Computer technology and the Internet are changing the way people and businesses
around the world operate, communicate, and transact. But technological advances
that improve our lives are not restricted to computers and electronics. Our
lives are being enhanced and extended by rapid advances in such areas as
pharmaceuticals, medical devices, biotechnology, agriculture, and oil field
service. For this reason, your USAA Science & Technology Fund invests in a broad
spectrum of companies benefiting from the development and use of scientific and
technological advances.
We believe a broad-based approach to technology may provide long-term
performance returns comparable to the return of funds focused on traditional
computer technology -- but with lower volatility due to greater diversification.
In fact, over the past 30 years, based upon our research, health care and
technology stocks have posted nearly identical performance: 12.1% per year
versus 12.2% per year, respectively. Yet monthly returns for the two sectors
have a relatively low correlation, highlighting the diversification benefits of
combining health care and technology in a single portfolio.
PERFORMANCE
From July 31, 1998, to July 31, 1999, your USAA Science & Technology Fund's
total return was 35.90%, versus the Lipper Science & Technology Funds Average
return of 66.42%. Our heavy weightings in semiconductors and semiconductor
capital equipment stocks such as Analog Devices, Applied Materials, Linear
Technology, Teradyne, and Texas Instruments helped performance. Other positions
posting strong gains include America Online, Cisco Systems, First Data,
Hewlett-Packard, and Rational Software. However, our exposure to health care
held back performance. During the year, technology stocks outperformed health
care stocks by an incredible 51.5 percentage points. We believe such a disparity
will not continue.
OUTLOOK
Our near-term outlook for the overall stock market is more cautious than normal
as we believe steady declines in inflation may be over. Without additional
reductions in inflation, price/earnings ratios (P/Es) are unlikely to expand
further, and may even contract. We do not anticipate a material rise in
inflation, simply a stabilization of inflation rates near current levels.
Our long-term outlook for the overall stock market remains bullish. U.S.
competitiveness has never been stronger. Examples are clear leadership in
computer technology, communications equipment, pharmaceuticals, and medical
devices.
Our long-term outlook specific to the technology and health care industries is
as bullish as ever. We see no credible threat on the horizon to corporate
America's dominance in innovation and knowledge capital. Rewards for successful
innovation in this country are unmatched and central to sustained leadership in
technology and health care. Advances in software, networking, semiconductors,
and the Internet are driving persistent improvements in productivity and
profitability. Demographics, research efficiencies, expedited approval
processes, and global harmonization of approval processes provide an outstanding
environment for pharmaceuticals and medical devices.
Our near-term outlook for the technology and health care industries is
relatively cautious for several reasons. First, valuations of many technology
stocks seem to discount better than best-case earnings growth. We do not
typically obsess over any one company's or sector's valuation per se. But we do
become concerned when high P/Es seem to reflect widespread confidence that a
company or sector can continually beat earnings expectations by a material
amount. Semiconductor stocks trading at 35 to 65 times the earnings estimates
for the year 2000 fit such a description.
Second, technology stocks have had an incredible run. Although past performance
is no guarantee of future results, the technology portion of the S&P 500 Index
has soared 92.7% since the market's low point on October 8, 1998. Investors will
normally take some profits after such an increase.
Third, Y2K remains a concern over the next six to nine months. Domestic
corporations have made considerable progress in Y2K remediation. However,
foreign corporations have been much more complacent in addressing the issue, and
even the most prepared corporation is likely to reduce spending on computer
systems and software code during the last couple of months of the year.
Last, concerns about pharmaceutical pricing pressure build as the federal
government explores options for providing pharmaceutical coverage to the
elderly. We still find significant price controls unlikely. Price controls will
only serve to hamper development spending within the industry, eventually
causing an inadvertent reduction in new pharmaceuticals -- a result in no one's
best interest.
Past performance is no guarantee of future results.
Refer to the bottom of page 4 for the Lipper Average definition.
- -----------------------------------
Top 10 Equity Holdings
(% of Net Assets)
- -----------------------------------
Microsoft 3.6
Hewlett-Packard 3.3
America Online 3.2
Texas Instruments 3.2
Oracle 3.0
Cisco Systems 3.0
LM Ericsson Telephone Co. ADR 3.0
Pfizer 3.0
MCI WorldCom 2.9
First Data 2.9
- -----------------------------------
- -----------------------------------
Top 10 Industries
(% on Net Assets)
- -----------------------------------
Computer Software & Service 12.8
Electronics-Semiconductors 10.5
Health Care-Diversified 9.3
Drugs 7.5
Communication Equipment 6.8
Computer-Hardware 5.5
Retail-Drugs 5.0
Medical Products & Supplies 4.5
Equipment-Semiconductors 3.9
Internet Services 3.6
- -----------------------------------
See page 9 for a complete listing of the Portfolio of Investments.
Independent Auditors' Report
KPMG
The Shareholders and Board of Directors
USAA SCIENCE & TECHNOLOGY FUND:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments of the USAA Science & Technology 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 Science & Technology 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 SCIENCE & TECHNOLOGY FUND
PORTFOLIO OF INVESTMENTS
July 31, 1999
Market
Number Value
of Shares Security (000)
- --------------------------------------------------------------------------------
Common Stocks (91.1%)
Communication Equipment (6.8%)
240,000 LM Ericsson Telephone Co. ADR $ 7,695
91,000 Lucent Technologies, Inc. 5,921
62,000 Tellabs, Inc.* 3,817
- --------------------------------------------------------------------------------
17,433
- --------------------------------------------------------------------------------
Computer - Hardware (5.5%)
135,000 Dell Computer Corp.* 5,518
82,000 Hewlett-Packard Co. 8,584
- --------------------------------------------------------------------------------
14,102
- --------------------------------------------------------------------------------
Computer - Networking (3.0%)
126,000 Cisco Systems, Inc.* 7,828
- --------------------------------------------------------------------------------
Computer Software & Service (12.8%)
88,000 America Online, Inc.* 8,371
109,000 Microsoft Corp.* 9,354
205,700 Oracle Corp.* 7,829
157,000 Rational Software Corp.* 5,240
39,000 Synopsys, Inc.* 2,347
- --------------------------------------------------------------------------------
33,141
- --------------------------------------------------------------------------------
Distributions - Food/Health (0.3%)
80,000 PSS World Med, Inc.* 825
- --------------------------------------------------------------------------------
Diversified - Chemicals (1.6%)
106,000 Monsanto Co. 4,147
- --------------------------------------------------------------------------------
Drugs (7.5%)
36,000 Eli Lilly & Co. 2,362
226,000 Pfizer, Inc. 7,670
137,000 Schering-Plough Corp. 6,713
45,000 SmithKline Beecham plc ADR "A" 2,703
- --------------------------------------------------------------------------------
19,448
- --------------------------------------------------------------------------------
Electronics - Semiconductors (10.5%)
166,000 Analog Devices, Inc.* 7,159
93,000 Intel Corp. 6,417
86,000 Linear Technology Corp. 5,278
58,000 Texas Instruments, Inc. 8,352
- --------------------------------------------------------------------------------
27,206
- --------------------------------------------------------------------------------
Equipment - Semiconductors (3.9%)
89,000 Applied Materials, Inc.* 6,403
50,000 Teradyne, Inc.* 3,728
- --------------------------------------------------------------------------------
10,131
- --------------------------------------------------------------------------------
Health Care - Diversified (9.3%)
98,000 American Home Products Corp. 4,998
106,000 Bristol-Myers Squibb Co. 7,049
76,000 Johnson & Johnson, Inc. 7,001
75,000 Warner-Lambert Co. 4,950
- --------------------------------------------------------------------------------
23,998
- --------------------------------------------------------------------------------
Hospitals (1.2%)
125,000 Health Management Associates, Inc.* 1,031
201,000 LifePoint Hospitals, Inc.* 1,985
- --------------------------------------------------------------------------------
3,016
- --------------------------------------------------------------------------------
Insurance - Multi-Line Companies (2.6%)
58,000 American International Group, Inc. 6,735
- --------------------------------------------------------------------------------
Internet Services (3.6%)
12,000 Amazon.com, Inc.* 1,201
18,000 Ask Jeeves, Inc.* 792
84,000 drkoop.com, Inc.* 1,869
38,000 eToys Inc.* 1,518
33,000 Marimba, Inc.* 864
10,000 Priceline.com, Inc.* 755
17,000 Yahoo! Inc.* 2,319
- --------------------------------------------------------------------------------
9,318
- --------------------------------------------------------------------------------
Major Regional - Banks (1.1%)
86,000 Mellon Bank Corp. 2,903
- --------------------------------------------------------------------------------
Medical Products & Supplies (4.5%)
84,000 Guidant Corp.* 4,919
91,000 Medtronic, Inc. 6,558
- --------------------------------------------------------------------------------
11,477
- --------------------------------------------------------------------------------
Oil & Gas - Drilling/Equipment (2.0%)
83,000 Schlumberger Ltd. 5,027
- --------------------------------------------------------------------------------
Retail - Drugs (5.0%)
147,000 CVS Corp. 7,313
175,700 Duane Reade, Inc.* 5,579
- --------------------------------------------------------------------------------
12,892
- --------------------------------------------------------------------------------
Services - Computer Systems (1.3%)
114,000 SunGard Data Systems, Inc.* 3,263
- --------------------------------------------------------------------------------
Services - Data Processing (2.9%)
151,000 First Data Corp. 7,484
- --------------------------------------------------------------------------------
Telecommunications - Long Distance (2.9%)
92,000 MCI WorldCom, Inc.* 7,590
- --------------------------------------------------------------------------------
Telephones (2.8%)
124,000 SBC Communications Corp. 7,091
- --------------------------------------------------------------------------------
Total common stocks (cost: $173,172) 235,055
- --------------------------------------------------------------------------------
Principal
Amount
(000)
- ------------
SHORT-TERM (9.6%)
U.S. Government & Agency Issue
$24,683 Federal Home Loan Mortgage Corp., 4.97%, 8/02/1999
(cost: $24,676) 24,676
- --------------------------------------------------------------------------------
Total investments (cost: $197,848) $259,731
================================================================================
USAA SCIENCE & TECHNOLOGY 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.
Investments in foreign securities were 6.0% of net assets at July 31, 1999.
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 SCIENCE & TECHNOLOGY FUND
STATEMENT OF ASSETS AND LIABILITIES
(IN THOUSANDS)
July 31, 1999
ASSETS
Investments in securities, at market value
(identified cost of $197,848) $ 259,731
Cash 358
Receivables:
Capital shares sold 879
Dividends 97
Securities sold 718
-----------
Total assets 261,783
-----------
LIABILITIES
Securities purchased 3,390
Capital shares redeemed 137
USAA Investment Management Company 159
USAA Transfer Agency Company 32
Accounts payable and accrued expenses 73
-----------
Total liabilities 3,791
-----------
Net assets applicable to capital shares outstanding $ 257,992
===========
REPRESENTED BY:
Paid-in capital $ 195,495
Accumulated net realized gain on investments 614
Net unrealized appreciation of investments 61,883
-----------
Net assets applicable to capital shares outstanding $ 257,992
===========
Capital shares outstanding 16,997
===========
Authorized shares of $.01 par value 105,000
===========
Net asset value, redemption price, and offering price per share $ 15.18
===========
See accompanying notes to financial statements.
USAA SCIENCE & TECHNOLOGY FUND
STATEMENT OF OPERATIONS
(IN THOUSANDS)
Year ended July 31, 1999
Net investment loss:
Income:
Dividends (net of foreign taxes withheld of $15) $ 791
Interest 678
---------
Total income 1,469
---------
Expenses:
Management fees 1,287
Transfer agent's fees 692
Custodian's fees 72
Postage 84
Shareholder reporting fees 25
Directors' fees 3
Registration fees 80
Professional fees 34
Other 3
---------
Total expenses 2,280
---------
Net investment loss (811)
---------
Net realized and unrealized gain on investments:
Net realized gain 1,987
Change in net unrealized appreciation/depreciation 49,484
---------
Net realized and unrealized gain 51,471
---------
Increase in net assets resulting from operations $ 50,660
=========
See accompanying notes to financial statements.
USAA SCIENCE & TECHNOLOGY FUND
STATEMENTS OF CHANGES IN NET ASSETS
(IN THOUSANDS)
Years ended July 31,
1999 1998
-------------------
From operations:
Net investment loss $ (811) $ (478)
Net realized gain (loss) on investments 1,987 (562)
Change in net unrealized appreciation/depreciation of
investments 49,484 12,399
-------------------
Increase in net assets resulting from operations 50,660 11,359
-------------------
From capital share transactions:
Proceeds from shares sold 185,201 120,796
Cost of shares redeemed (89,187) (20,837)
-------------------
Increase in net assets from capital share transactions 96,014 99,959
-------------------
Net increase in net assets 146,674 111,318
Net assets:
Beginning of period 111,318 -
-------------------
End of period $257,992 $111,318
===================
Change in shares outstanding:
Shares sold 13,761 11,974
Shares redeemed (6,725) (2,013)
-------------------
Increase in shares outstanding 7,036 9,961
===================
See accompanying notes to financial statements.
USAA SCIENCE & TECHNOLOGY 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
Science & Technology Fund (the Fund). The Fund's primary investment objective is
long-term capital appreciation. USAA Investment Management Company (the Manager)
seeks to achieve this objective by investing at least 80% of the Fund's assets
in equity securities that are expected to benefit from the development and use
of scientific and technological advances and improvements.
A. Security valuation - The value of each security is determined (as of the
close of trading on the New York Stock Exchange on each business day the
Exchange is open) as set forth below:
1. Portfolio securities, except as otherwise noted, traded primarily on a
domestic securities exchange are valued at the last sales price on that
exchange.
2. Over-the-counter securities are priced at the last sales price or, if not
available, at the average of the bid and asked prices.
3. Securities purchased with maturities of 60 days or less are stated at
amortized cost which approximates market value.
4. Securities which cannot be valued by the methods set forth above, and all
other assets, are valued in good faith at fair value, using methods determined
by the Manager under the general supervision of the Board of Directors.
B. Federal taxes - The Fund's policy is to comply with the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its income to its shareholders. Therefore, no
federal income or excise tax provision is required. 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 $811,000 and decrease
accumulated net realized gain on investments by $811,000.
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 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 $145.2 million and $70.3
million, respectively.
Gross unrealized appreciation and depreciation of investments, as of July 31,
1999, was $65.8 million and $3.9 million, respectively.
(5) TRANSACTIONS WITH MANAGER
A. Management fees - USAA Investment Management Company carries out the Fund's
investment policies and manages the Fund's portfolio. The Fund's management fees
are computed at .75% of its annual average net assets.
B. Transfer agent's fees - USAA Transfer Agency Company, d/b/a USAA Shareholder
Account Services, an affiliate of the Manager, provides transfer agent services
to the Fund based on an annual charge of $26 per shareholder account plus
out-of-pocket expenses.
C. Underwriting services - The Manager provides exclusive underwriting and
distribution of the Fund's shares on a continuing best efforts basis. The
Manager receives no commissions or fees for this service.
D. Brokerage services - USAA Brokerage Services, a discount brokerage service
of the Manager, may execute portfolio transactions for the Fund. The amount of
brokerage commissions paid to USAA Brokerage Services, during the year ended
July 31, 1999, was $30,000.
(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 each period
is as follows:
Year Ended July 31,
--------------------------------
1999 1998*
--------------------------------
Net asset value at beginning of period $ 11.17 $ 10.00
Net investment loss (.06)(a) (.07)(a)
Net realized and unrealized gain 4.07 1.24
--------------------------------
Net asset value at end of period $ 15.18 $ 11.17
================================
Total return (%) 35.90 11.70
Net assets at end of period (000) $ 257,992 $ 111,318
Ratio of expenses to average net assets (%) 1.33 1.42
Ratio of net investment loss to average
net assets (%) (.47) (.69)
Portfolio turnover (%) 44.39 76.31
* Fund commenced operations August 1, 1997.
(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
