Table of Contents
USAA Family of Funds 1
Message from the President 2
Investment Review 4
Message from the Manager 5
Shareholder Voting Results 8
Financial Information
Portfolio of Investments 9
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 Income Stock
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)2000, 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
(Registered Trademark) 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(Registered
Trademark)Trust 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(Registered
Trademark) 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.
Nondeposit 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.]
What an exciting time this is!
The way we do business, the way we communicate with each other, the way we live
our lives is all changing with breathtaking speed. It is fascinating and
sometimes scary. And it creates new investment ideas every day.
As we begin 2000, a challenging investment picture is out there. In the last
half of 1999, especially, investors in growth or technology stocks had wonderful
returns. These came on the heels of four previous years of returns that were
well above average. Those returns in 1999 were the product of the actions of
investors who think on the leading edge: technology, Internet, electronics. For
investors who included bonds or value-based stocks in their portfolios, 1999 was
disappointing. The returns there were largely driven by the Federal Reserve,
which is much more concerned with inflation than with leading-edge thinking. I
do not mean that as a put-down; that's just how it is.
And one last piece of the puzzle: the returns for growth and technology stocks
are coupled with price/earnings ratios that are so far above any common standard
that people are only guessing at what they mean.
So, in a nutshell, 1999 was huge returns on growth and tech stocks coupled with
valuations that were stratospheric and paltry returns on everything else. And,
oh yes, the economy continues to grow in a way that has some economists talking
about eliminating the national debt in just over a decade.
Great opportunities coupled with very interesting risks is a picture that for
many of you will continue to argue for the approach we have counseled. Create a
portfolio that pursues your goals within a level of risk which you can tolerate.
That portfolio can be much more exciting than it was a few years ago. We'd love
to help you create it.
Sincerely,
Michael J.C. Roth, CFA
President and
Vice Chairman of the Board
Past performance is no guarantee of future results.
Investment Review
USAA INCOME STOCK FUND
OBJECTIVE: Current income with the prospect of increasing dividend income and
the potential for capital appreciation.
TYPES OF INVESTMENTS: Invests principally in common stocks of well-established,
large companies with above-average dividend yields.
- --------------------------------------------------------------------------------
7/31/99 1/31/00
- --------------------------------------------------------------------------------
Net Assets $2,484.3 Million $2,131.7 Million
Net Asset Value Per Share $20.69 $17.32
- --------------------------------------------------------------------------------
Average Annual Total Returns as of 1/31/00
- --------------------------------------------------------------------------------
7/31/99 to 1/31/00 1 Year 5 Years 10 Years
-7.01%+ -1.18% 15.37% 12.71%
- --------------------------------------------------------------------------------
+ Total returns for periods of less than one year are not annualized. This
six-month return is cumulative.
Total return equals income yield plus share price change and assumes
reinvestment of all dividends and capital 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 Income Stock Fund, the S&P 500
Index, and the Lipper Mixed Equity-Income Funds Average, for the period of
01/31/90 through 01/31/2000. The data points from the graph are as follows:
USAA Income Lipper Mixed Equity-
Stock Fund S&P 500 Index Income Funds Average
----------- ------------- --------------------
01/31/90 $10,000 $10,000 $10,000
07/31/90 10,235 11,014 10,399
01/31/91 10,695 10,837 10,447
07/31/91 11,986 12,416 11,613
01/31/92 13,250 13,291 12,731
07/31/92 14,171 14,001 13,603
01/31/93 14,464 14,695 14,217
07/31/93 15,583 15,221 15,395
01/31/94 16,422 16,584 16,327
07/31/94 15,705 16,005 15,571
01/31/95 16,185 16,671 15,658
07/31/95 18,663 20,177 17,680
01/31/96 20,812 23,109 19,445
07/31/96 21,128 23,517 19,393
01/31/97 24,867 29,193 22,008
07/31/97 27,774 35,773 24,676
01/31/98 30,241 37,046 25,969
07/31/98 31,463 42,679 27,134
01/31/99 33,472 49,090 28,231
07/31/99 35,571 51,301 29,200
01/31/00 33,078 54,166 28,898
Data from 1/31/90 through 1/31/00
The graph illustrates the comparison of a $10,000 hypothetical investment in the
USAA Income Stock Fund to the S&P 500 Index and the Lipper Mixed Equity - Income
Funds Average, an average performance level of all mixed equity and income
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 directly
in the S&P 500 Index.
Message from the Manager
[PHOTOGRAPH OF THE PORTFOLIO MANAGER, STEPHAN J. KLAFFKE, CFA, APPEARS HERE.]
1999 was a remarkable year for the S&P 500 technology sector with returns
surging 75%. By the end of 1999, 62 of the largest 200 technology companies --
by market capitalization with a U.S. listing -- had been public for less than a
year. Unfortunately, technology stocks as a group do not pay dividends, thus the
USAA Income Stock Fund's weighting was a modest 6% in the sector. A combination
of great technology performance and poor utility/real estate investment trusts
(REITs) returns resulted in a weak performance relative to the S&P 500 Index.
During 1999, we finished our modifications to the Fund's portfolio, lowering the
utility, REITs, and convertible stock sectors from 32% to 22% of the total
portfolio. A consequence of the modifications was a higher-than-normal
distribution of capital gains. Our goal remains to create a portfolio with an
above-average dividend yield and to raise that dividend over time, while
pursuing long-term capital appreciation.
PERFORMANCE
For the six-month period ending January 31, 2000, interest-sensitive stocks
performed poorly as the Federal Reserve reversed its 1998 rate reductions with
three separate rate increases. The rate increases moved the Treasury long bond
from 5.10% at the start of the year to 6.48% at the end of the year -- a 139
basis point increase. This market environment has not favored funds paying an
above-average dividend yield. The Lipper income category average total return
was 0.97% during the period, while the Fund's total return was -7.01%.
Since our last report of July 31, 1999, the best performing sectors for the Fund
were telecommunication services and technology. Our small technology investment
made the biggest contribution to the Fund's performance over the past six
months. The technology companies we invest in offer the Fund exposure to a
growing dividend stream and strong fundamentals but have very minimal dividend
yields. The telecommunication services sector is a heavy weighting in the Fund
and performed in line with the market averages. These companies offer
above-average dividend yields with a growing earnings stream.
The underperforming sectors for the Fund were utility and financial stocks.
While the USAA Income Stock Fund lowered its exposure to the utility sector, the
Fund still has an above-average weighting relative to any market index. The
rising interest rate environment proved to be devastating to utility returns as,
on average, the stocks were down about 20%. The combination of improving
industry fundamentals and potential positive news on the interest rate
environment would help these stocks recover. The financial sector, regional
banks in particular, underperformed the market averages in 1999. Interest rates
were partly responsible, but recent acquisitions and merger activities
complicated matters and resulted in lower corporate earnings. We believe the
acquisition problems have been reflected in their stock price. The stocks
continue to grow their dividends at a significant pace and represent attractive
investments.
OUTLOOK AND PERSPECTIVE
Last year was the fifth consecutive year of 20%-plus returns for the S&P 500
Index. Still, many equity-income investors, in particular income stock
investors, saw modest returns over the same time frame. The returns continue to
come from a very narrow segment of the market. We have been commenting on this
phenomenon for several reports, yet 1999 proved to be the narrowest market to
date. In fact, only 30, mostly technology companies, of the 500 stocks in the
index account for the entire return for the year. Our modifications to the USAA
Income Stock Fund appear to have been unproductive, but without them the Fund's
total return would have been worse.
We are sanguine about 2000 with a difficult start to the year as interest rate
jitters rattle the market and a better second half as investors gain confidence
in the belief that the economy is still healthy. We think this will lead to a
broader recovery in stocks. We also believe in employing our three-prong
approach of selecting stocks with a growing dividend stream, using a fundamental
discipline to uncover stocks with a good capital appreciation potential, and
maintaining an above-average portfolio yield.
Respectfully submitted on February 4, 2000.
Past performance is no guarantee of future results.
- ------------------------------------ -----------------------------------
Top Ten Equity Holdings Top Ten Industries
(% of Net Assets) (% of Net Assets)
- ------------------------------------ -----------------------------------
Bristol-Myers Squibb Co. 4.3 Telephones 11.7
GTE Corp. 4.3 Electric Utilites 8.2
Ford Motor Co. 4.2 Health Care - Diversified 8.0
Bell Atlantic Corp. 4.0 Natural Gas Utilities 6.3
American Home Products Corp. 3.6 Automobiles 5.6
Texaco, Inc. 3.5 Foods 5.2
US West, Inc. 3.4 Banks - Money Center 5.1
Texas Utilities Co. 3.2 Oil - International Integrated 4.7
National Fuel Gas Co. 3.1 Banks - Major Regional 4.4
General Electric Co. 2.5 Oil - Domestic Integrated 3.9
- ------------------------------------ -----------------------------------
See page 9 for a complete listing of the portfolio of investments.
Shareholder Voting Results
On October 15, 1999, a special meeting of shareholders was held to vote on the
following proposals. All proposals were approved by the shareholders. All
shareholders of record on August 19, 1999, were entitled to vote on each
proposal. The number of votes shown below are for the entire series of the USAA
Mutual Fund, Inc. (the Company) for proposals 1 and 2.
1 Proposal to elect Directors as follows:
DIRECTORS VOTES FOR VOTES WITHHELD
Robert G. Davis 1,769,441,834 27,742,867
Michael J.C. Roth 1,769,442,078 27,742,623
Barbara B. Dreeben 1,769,442,172 27,742,529
Robert L. Mason 1,769,442,172 27,742,529
David G. Peebles 1,769,442,078 27,742,623
Michael F. Reimherr 1,769,441,328 27,743,373
Richard A. Zucker 1,769,444,074 27,740,627
John W. Saunders, Jr. and Howard L. Freeman, Jr. did not stand for re-election
to the Board. Their term of office terminated on December 31, 1999.
2 Proposal to ratify the selection by the Board of Directors of KPMG LLP as
auditors for the Company.
NUMBER OF SHARES VOTING
- --------------------------------------------------------------------------------
FOR AGAINST ABSTAIN
1,664,427,712 19,027,937 27,873,822
USAA INCOME STOCK FUND
PORTFOLIO OF INVESTMENTS
January 31, 2000
(Unaudited)
Market
Number Value
of Shares Security (000)
- --------------------------------------------------------------------------------
COMMON STOCKS (90.8%)
Aerospace/Defense (1.3%)
600,000 B.F. Goodrich Co. $ 15,000
700,000 Lockheed Martin Corp. 13,125
- --------------------------------------------------------------------------------
28,125
- --------------------------------------------------------------------------------
Aluminum (1.1%)
350,000 Alcoa, Inc. 24,391
- --------------------------------------------------------------------------------
Automobiles (5.6%)
450,000 DaimlerChrysler AG 29,616
1,800,000 Ford Motor Co. 89,550
- --------------------------------------------------------------------------------
119,166
- --------------------------------------------------------------------------------
Auto Parts (0.9%)
1,500,000 Tomkins plc ADR 18,469
- --------------------------------------------------------------------------------
Banks - Major Regional (4.4%)
1,150,000 Bank One Corp. 34,285
554,000 Fleet Boston Financial Corp. 17,416
890,000 PNC Bank Corp. 42,720
- --------------------------------------------------------------------------------
94,421
- --------------------------------------------------------------------------------
Banks - Money Center (5.1%)
700,000 BankAmerica Corp. 33,906
350,000 Chase Manhattan Corp. 28,153
1,250,000 First Union Corp. 41,953
150,000 Westpac Banking Corp. Ltd. ADR 5,035
- --------------------------------------------------------------------------------
109,047
- --------------------------------------------------------------------------------
Beverages - Nonalcoholic (0.4%)
250,000 PepsiCo, Inc. 8,531
- --------------------------------------------------------------------------------
Chemicals (1.0%)
102,127 Du Pont (E. I.) De Nemours & Co. 6,025
1,400,000 Lyondell Petrochemical Co. 15,138
- --------------------------------------------------------------------------------
21,163
- --------------------------------------------------------------------------------
Chemicals - Specialty (1.1%)
400,000 Hercules Inc. 6,850
450,000 International Flavors & Fragrances, Inc. 16,059
- --------------------------------------------------------------------------------
22,909
- --------------------------------------------------------------------------------
Communication Equipment (2.0%)
450,000 Nortel Networks Corp. 43,031
- --------------------------------------------------------------------------------
Computer - Hardware (1.8%)
350,000 Hewlett-Packard Co. 37,887
- --------------------------------------------------------------------------------
Electric Utilities (8.2%)
1,327,500 Allegheny Energy, Inc. 36,423
1,254,000 Alliant Energy Corp. 37,385
280,100 CH Energy Group, Inc. 8,683
900,000 New Century Energies, Inc. 26,044
1,900,000 Texas Utilities Co. 67,213
- --------------------------------------------------------------------------------
175,748
- --------------------------------------------------------------------------------
Electrical Equipment (2.8%)
400,000 General Electric Co. 53,350
140,000 Honeywell International, Inc. 6,720
- --------------------------------------------------------------------------------
60,070
- --------------------------------------------------------------------------------
Electronics - Semiconductors (0.9%)
200,000 Intel Corp. 19,787
- --------------------------------------------------------------------------------
Entertainment (0.5%)
300,000 Walt Disney Co. 10,894
- --------------------------------------------------------------------------------
Finance - Diversified (2.0%)
750,000 Citigroup, Inc. 43,078
- --------------------------------------------------------------------------------
Foods (3.6%)
1,500,000 ConAgra, Inc. 32,062
1,200,000 H.J. Heinz Co. 44,625
- --------------------------------------------------------------------------------
76,687
- --------------------------------------------------------------------------------
Health Care - Diversified (8.0%)
1,650,000 American Home Products Corp. 77,653
1,400,000 Bristol-Myers Squibb Co. 92,400
- --------------------------------------------------------------------------------
170,053
- --------------------------------------------------------------------------------
Health Care - HMOs (0.8%)
300,000 Aetna, Inc. 15,975
- --------------------------------------------------------------------------------
Household Products (0.9%)
200,000 Procter & Gamble Co. 20,175
- --------------------------------------------------------------------------------
Insurance - Life/Health (0.7%)
361,600 Conseco, Inc. 5,515
250,000 Lincoln National Corp. 9,234
- --------------------------------------------------------------------------------
14,749
- --------------------------------------------------------------------------------
Insurance - Property/Casualty (0.4%)
147,800 Chubb Corp. 8,314
- --------------------------------------------------------------------------------
Manufacturing - Diversified Industries (1.0%)
113,500 Minnesota Mining & Manufacturing Co. 10,626
200,000 United Technologies Corp. 10,588
- --------------------------------------------------------------------------------
21,214
- --------------------------------------------------------------------------------
Natural Gas Utilities (5.9%)
1,500,000 National Fuel Gas Co. 66,844
1,500,000 NICOR, Inc. 51,375
239,400 Peoples Energy Corp. 7,481
- --------------------------------------------------------------------------------
125,700
- --------------------------------------------------------------------------------
Oil - Domestic Integrated (3.9%)
600,000 Atlantic Richfield Co. 46,200
315,000 Conoco, Inc. CL B 7,422
1,500,000 Occidental Petroleum Corp. 29,813
- --------------------------------------------------------------------------------
83,435
- --------------------------------------------------------------------------------
Oil - International Integrated (4.7%)
300,000 Chevron Corp. 25,069
1,400,000 Texaco, Inc. 74,025
- --------------------------------------------------------------------------------
99,094
- --------------------------------------------------------------------------------
Paper & Forest Products (0.9%)
500,000 Mead Corp. 18,625
- --------------------------------------------------------------------------------
Photography - Imaging (1.8%)
1,800,000 Xerox Corp. 37,575
- --------------------------------------------------------------------------------
Publishing/Newspapers (0.5%)
920,000 Hollinger International, Inc. 11,672
- --------------------------------------------------------------------------------
Real Estate Investment Trusts (3.6%)
625,000 Boston Properties, Inc. 18,750
700,000 First Industrial Realty Trust, Inc. 18,812
400,000 Highwoods Properties, Inc. 9,100
335,000 Mack California Realty Corp. 8,522
330,000 Post Properties, Inc. 12,664
355,000 Shurgard Storage Centers, Inc. 7,899
- --------------------------------------------------------------------------------
75,747
- --------------------------------------------------------------------------------
Retail - Department Stores (0.8%)
900,000 J.C. Penney Company, Inc. 17,662
- --------------------------------------------------------------------------------
Savings & Loan Holding Co. (1.4%)
1,200,000 Washington Mutual, Inc. 30,450
- --------------------------------------------------------------------------------
Telecommunications - Cellular/Wireless (1.1%)
400,000 Vodafone Group plc ADR 22,400
- --------------------------------------------------------------------------------
Telephones (11.7%)
1,377,000 Bell Atlantic Corp. 85,288
1,250,000 GTE Corp. 91,641
1,100,000 US West, Inc. 73,150
- --------------------------------------------------------------------------------
250,079
- --------------------------------------------------------------------------------
Total common stocks (cost: $1,589,805) 1,936,323
- --------------------------------------------------------------------------------
PREFERRED STOCKS (3.9%)
Chemicals - Diversified (0.6%)
350,000 Monsanto Co., 6.50%, cumulative convertible 11,550
- --------------------------------------------------------------------------------
Foods (1.6%)
1,100,000 Ralston Purina Co., 7.00%, cumulative convertible 34,444
- --------------------------------------------------------------------------------
Machinery - Diversified (0.9%)
800,000 Ingersoll-Rand Co., 6.75%, cumulative convertible 18,550
- --------------------------------------------------------------------------------
Natural Gas Utilities (0.4%)
200,000 El Paso Energy Corp., 4.75%, cumulative convertible 9,150
- --------------------------------------------------------------------------------
Oil & Gas - Exploration & Production (0.4%)
250,000 Apache Corp., 6.50%, cumulative convertible 8,734
- --------------------------------------------------------------------------------
Total preferred stocks (cost: $105,244) 82,428
- --------------------------------------------------------------------------------
Principal
Amount
(000)
- -------------
SHORT-TERM (4.1%)
Commercial Paper
$ 37,033 Ford Motor Credit, 5.51%, 2/01/2000 37,033
50,001 Household Finance Corp., 5.60%, 2/02/2000 49,993
- --------------------------------------------------------------------------------
Total short-term (cost: $87,026) 87,026
- --------------------------------------------------------------------------------
Total investments (cost: $1,782,075) $2,105,777
================================================================================
USAA INCOME STOCK FUND
NOTES TO PORTFOLIO OF INVESTMENTS
January 31, 2000
(Unaudited)
GENERAL NOTES
Market values of securities are determined by procedures and practices discussed
in note 1 to the financial statements.
The cost of securities for federal income tax purposes is approximately the same
as that reported in the financial statements.
The percentages shown represent the percentage of the investments to net assets.
Investments in foreign securities were 5.56% of net assets at January 31, 2000.
ADR - American Depositary Receipts are receipts issued by a U.S. bank evidencing
ownership of foreign shares. Dividends are paid in U.S. dollars.
See accompanying notes to financial statements.
USAA INCOME STOCK FUND
STATEMENT OF ASSETS AND LIABILITIES
(IN THOUSANDS)
January 31, 2000
(Unaudited)
ASSETS
Investments in securities, at market value
(identified cost of $1,782,075) $2,105,777
Cash 279
Receivables:
Capital shares sold 192
Dividends and interest 6,813
Securities sold 24,028
-----------
Total assets 2,137,089
-----------
LIABILITIES
Capital shares redeemed 3,850
USAA Investment Management Company 933
USAA Transfer Agency Company 252
Accounts payable and accrued expenses 325
-----------
Total liabilities 5,360
-----------
Net assets applicable to capital shares outstanding $2,131,729
===========
REPRESENTED BY:
Paid-in capital $1,743,518
Accumulated undistributed net investment income 6,585
Accumulated net realized gain on investments 57,924
Net unrealized appreciation of investments 323,702
-----------
Net assets applicable to capital shares outstanding $2,131,729
===========
Capital shares outstanding 123,085
===========
Authorized shares of $.01 par value 250,000
===========
Net asset value, redemption price, and offering price per share $ 17.32
===========
See accompanying notes to financial statements.
USAA INCOME STOCK FUND
STATEMENT OF OPERATIONS
(IN THOUSANDS)
Six-month period ended January 31, 2000
(Unaudited)
Net investment income:
Income:
Dividends (net of foreign taxes withheld of $139) $ 39,074
Interest 3,761
----------
Total income 42,835
----------
Expenses:
Management fees 5,916
Transfer agent's fees 1,501
Custodian's fees 136
Postage 296
Shareholder reporting fees 56
Directors' fees 3
Registration fees 76
Professional fees 77
Other 45
----------
Total expenses 8,106
----------
Net investment income 34,729
----------
Net realized and unrealized gain (loss) on investments:
Net realized gain 172,855
Change in net unrealized appreciation/depreciation (378,314)
----------
Net realized and unrealized loss (205,459)
----------
Decrease in net assets resulting from operations $(170,730)
==========
See accompanying notes to financial statements.
USAA INCOME STOCK FUND
STATEMENTS OF CHANGES IN NET ASSETS
(IN THOUSANDS)
Six-month period ended January 31, 2000,
and year ended July 31, 1999
(Unaudited)
1/31/00 7/31/99
------------------------
From operations:
Net investment income $ 34,729 $ 74,570
Net realized gain on investments 172,855 85,527
Change in net unrealized appreciation/depreciation
of investments (378,314) 137,017
------------------------
Increase (decrease) in net assets resulting
from operations (170,730) 297,114
------------------------
Distributions to shareholders from:
Net investment income (36,127) (72,510)
------------------------
Net realized gains (200,451) (91,729)
------------------------
From capital share transactions:
Proceeds from shares sold 78,278 217,500
Shares issued for dividends reinvested 220,306 151,834
Cost of shares redeemed (243,843) (514,483)
------------------------
Increase (decrease) in net assets from
capital share transactions 54,741 (145,149)
------------------------
Net decrease in net assets (352,567) (12,274)
Net assets:
Beginning of period 2,484,296 2,496,570
------------------------
End of period $2,131,729 $2,484,296
========================
Undistributed net investment income included
in net assets:
End of period $ 6,585 $ 7,983
========================
Change in shares outstanding:
Shares sold 4,113 11,175
Shares issued for dividends reinvested 12,120 8,360
Shares redeemed (13,191) (26,520)
------------------------
Increase (decrease) in shares outstanding 3,042 (6,985)
========================
See accompanying notes to financial statements.
USAA INCOME STOCK FUND
NOTES TO FINANCIAL STATEMENTS
January 31, 2000
(Unaudited)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USAA MUTUAL FUND, INC. (the Company), registered under the Investment Company
Act of 1940, as amended, is a diversified, open-end management investment
company incorporated under the laws of Maryland consisting of 13 separate funds.
The information presented in this semiannual report pertains only to the USAA
Income Stock Fund (the Fund). The Fund's investment objective is current income
with the prospect of increasing dividend income and the potential for capital
appreciation. USAA Investment Management Company (the Manager) seeks to achieve
this objective by investing the Fund's assets principally in common stocks of
well-established, large companies with above-average dividend yields.
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 that cannot be valued by the methods set forth above, and all
other assets, are valued in good faith at fair value, using methods determined
by the Manager under the general supervision of the Board of Directors.
B. Federal taxes - The Fund's policy is to comply with the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its income to its shareholders. Therefore, no
federal income or excise tax provision is required.
C. Investments in securities - Security transactions are accounted for on the
date the securities are purchased or sold (trade date). Gain or loss from sales
of investment securities is computed on the identified cost basis. Dividend
income is recorded on the ex-dividend date; interest income is recorded on the
accrual basis. Discounts and premiums on short-term securities are amortized
over the life of the respective securities. Amortization of market discounts on
long-term securities is recognized as interest income upon disposition of the
security to the extent there is a gain on disposition.
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. Each committed line of credit is also subject to a facility fee. CAPCO
charges an annual facility fee of up to .08% of the committed facility, and Bank
of America charges an annual facility fee of .09% of the committed facility. The
Fund had no borrowings under any of these agreements during the six-month period
ended January 31, 2000.
(3) DISTRIBUTIONS
Distributions of net investment income are made quarterly. Distributions of
realized gains from security transactions not offset by capital losses are made
in the succeeding fiscal year or as otherwise required to avoid the payment of
federal taxes.
(4) INVESTMENT TRANSACTIONS
Cost of purchases and proceeds from sales of securities, excluding short-term
securities, for the six-month period ended January 31, 2000, were $185.0 million
and $391.3 million, respectively.
Gross unrealized appreciation and depreciation of investments as of January 31,
2000, were $550.6 million and $226.9 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 .50% 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 Fund did
not utilize these services during the six-month period ended January 31, 2000.
(6) TRANSACTIONS WITH AFFILIATES
USAA Investment Management Company is indirectly wholly owned by United Services
Automobile Association (the Association), a large, diversified financial
services institution. At January 31, 2000, the Association and its affiliates
owned 7.1 million shares (5.8%) of the Fund.
Certain directors and officers of the Fund are also directors, officers, and/or
employees of the Manager. None of the affiliated directors or Fund officers
received any compensation from the Fund.
(7) FINANCIAL HIGHLIGHTS
Per share operating performance for a share outstanding throughout each period
is as follows:
<TABLE>
<CAPTION>
Six-month
Period Ended
January 31, Year Ended July 31,
----------------------------------------------------------------------------------------
2000 1999 1998 1997 1996 1995
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value at
beginning of period $ 20.69 $ 19.65 $ 19.01 $ 15.85 $ 14.96 $ 13.50
Net investment income .28 .60 .75 .81 .77 .74
Net realized and
unrealized gain (loss) (1.69) 1.75 1.66 3.88 1.16 1.69
Distributions from net
investment income (.30) (.58) (.75) (.79) (.77) (.75)
Distributions of realized
capital gains (1.66) (.73) (1.02) (.74) (.27) (.22)
----------------------------------------------------------------------------------------
Net asset value at
end of period $ 17.32 $ 20.69 $ 19.65 $ 19.01 $ 15.85 $ 14.96
========================================================================================
Total return (%) * (7.01) 13.05 13.28 31.46 13.21 18.83
Net assets at
end of period (000) $2,131,729 $2,484,296 $2,496,570 $2,186,329 $1,710,769 $1,408,371
Ratio of expenses to
average net assets (%) .68(a) .65 .65 .68 .72 .75
Ratio of net investment
income to average net
assets (%) 2.93(a) 3.06 3.85 4.73 4.84 5.34
Portfolio turnover (%) 8.37 34.20 22.34 34.95 32.38 34.94
</TABLE>
* Assumes reinvestment of all dividend income and capital gains distributions
during the period.
(a) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
Directors
Robert G. Davis, Chairman of the Board
Michael J.C. Roth, Vice Chairman of the Board
Barbara B. Dreeben
Robert L. Mason
David G. Peebles
Michael F. Reimherr
Richard A. Zucker
Investment Adviser, Underwriter, and Distributor
USAA Investment Management Company
9800 Fredericksburg Road
San Antonio, Texas 78288
Transfer Agent Legal Counsel
USAA Shareholder Account Services Goodwin, Procter & Hoar LLP
9800 Fredericksburg Road Exchange Place
San Antonio, Texas 78288 Boston, Massachusetts 02109
Custodian Independent Auditors
State Street Bank and Trust Company KPMG LLP
P.O. Box 1713 112 East Pecan, Suite 2400
Boston, Massachusetts 02105 San Antonio, Texas 78205
Telephone Assistance Hours Internet Access
Call toll free - Central Time usaa.com(Service Mark)
Monday - Friday 7:00 a.m. to 9:00 p.m.
Saturdays 8:30 a.m. to 5:00 p.m.
Sundays 11:30 a.m. to 8:00 p.m.
For Additional Information on Mutual Funds
1-800-531-8181, (in San Antonio) 456-7211
For account servicing, exchanges, or redemptions
1-800-531-8448, (in San Antonio) 456-7202
Recorded Mutual Fund Price Quotes
24-hour service (from any phone)
1-800-531-8066, (in San Antonio) 498-8066
Mutual Fund USAA TouchLine(Registered Trademark)
(from touch-tone phones only)
For account balance, last transaction, fund prices,
or to exchange or redeem fund shares
1-800-531-8777, (in San Antonio) 498-8777
