TABLE OF CONTENTS
USAA FAMILY OF FUNDS 1
MESSAGE FROM THE PRESIDENT 2
INVESTMENT REVIEW 4
MESSAGE FROM THE MANAGER 5
FINANCIAL INFORMATION
Distributions to Shareholders 9
Independent Auditors' Report 10
Portfolio of Investments 11
Notes to Portfolio of Investments 14
Statement of Assets and Liabilities 15
Statement of Operations 16
Statements of Changes in Net Assets 17
Notes to Financial Statements 18
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 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
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CAPITAL APPRECIATION
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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
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ASSET ALLOCATION
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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
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INCOME - TAXABLE
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GNMA(Registered Trademark) 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
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INCOME - TAX EXEMPT
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Long-Term Moderate $3,000
Intermediate-Term Low to moderate 3,000
Short-Term Low 3,000
State Bond Income Moderate 3,000
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MONEY MARKET
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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
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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, 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 PRESIDENT AND VICE CHAIRMAN OF THE BOARD, MICHAEL J.C. ROTH, CFA,
APPEARS HERE]
--------------------------------------------------------------------------------
SO FAR 2000 HAS BEEN AN UNINSPIRING INVESTMENT YEAR. LOOKING AT VARIOUS MARKET
AVERAGES, AN INVESTOR SEES MARKETS THAT ARE CLOSE TO ZERO RETURN, SLIGHTLY DOWN
OR SLIGHTLY UP.
--------------------------------------------------------------------------------
The biggest attention-grabber among indices is the Dow Jones Utilities. As
reported August 20 in THE NEW YORK TIMES, for the 2000 calendar year it is up
27.53%! If anyone predicted that, I missed it.
Years like this for the broad averages are, in a way, predictable. We know that
the S&P 500 Index, for instance, is not likely to take a sudden quantum leap and
begin to average 30% return per year. I believe it possibly will return
somewhere around 12%. (Please note I am surmising, not guaranteeing.) Another
interesting thing about the year 2000 is the number of actively managed funds
that are outperforming index funds.
Markets must take breathers like this. Such a pause allows the valuations of
securities to become more normal. That means that the relationship of, for
instance, a company's earnings per share to the price of a share becomes less
extreme. This, in turn, could ultimately allow the expected returns on stocks to
resume.
A family of mutual funds has the potential to make this kind of a period easier.
Ideally, you can build an asset allocation to express your risk tolerance. Many
fixed-income fund returns look very good in a year like this. And even if you
don't build such a portfolio, a fund family makes it easy to retreat to safety
because of the availability of bond and money market funds.
As you probably know, I am a strong proponent of asset allocation to build a
portfolio you can live with. That's because somewhere down the road this market
will ignite, and when it does you want to be sure you are there.
Sincerely,
Michael J.C. Roth, CFA
PRESIDENT AND
VICE CHAIRMAN OF THE BOARD
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.
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 $1.00 PER SHARE, IT IS POSSIBLE TO LOSE MONEY BY INVESTING IN
THE FUND.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
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 INCOME FUND
OBJECTIVE: Maximum current income without undue risk to principal.
TYPES OF INVESTMENTS: Invests principally in income-producing securities.
----------------------------------------------------------------------------
7/31/99 7/31/00
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Net Assets $1,415.4 Million $1,273.3 Million
Net Asset Value Per Share $11.70 $11.60
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AVERAGE ANNUAL TOTAL RETURNS AS OF 7/31/00
----------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS
6.11% 6.76% 8.19%
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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 Income Fund, the Lehman Brothers
Aggregate Bond Index, and the Lipper Corporate Debt A-Rated Average for the
period of 07/31/1990 through 07/31/2000. The data points from the graph are as
follows:
USAA INCOME LEHMAN BROTHERS LIPPER CORP. DEBT
FUND AGGREGATE BOND INDEX A-RATED AVERAGE
------------- -------------------- -----------------
07/31/90 $10,000 $10,000 $10,000
01/31/91 10,509 10,581 10,456
07/31/91 11,230 11,070 10,977
01/31/92 12,189 11,959 11,945
07/31/92 13,119 12,706 12,774
01/31/93 13,777 13,271 13,337
07/31/93 14,693 13,998 14,217
01/31/94 14,956 14,484 14,766
07/31/94 14,196 14,011 14,075
01/31/95 14,518 14,149 14,149
07/31/95 15,849 15,428 15,481
01/31/96 17,602 16,547 16,690
07/31/96 16,765 16,282 16,278
01/31/97 17,798 17,086 17,111
07/31/97 18,802 18,035 18,116
01/31/98 19,963 18,919 18,946
07/31/98 20,628 19,454 19,449
01/31/99 21,561 20,446 20,260
07/31/99 20,712 19,938 19,602
01/31/00 20,623 20,069 19,622
07/31/00 21,977 21,127 20,444
DATA FROM 7/31/90 THROUGH 7/31/00
THE GRAPH ILLUSTRATES THE COMPARISON OF A $10,000 HYPOTHETICAL INVESTMENT IN THE
USAA INCOME FUND TO THE BROAD-BASED LEHMAN BROTHERS AGGREGATE BOND INDEX AND THE
LIPPER CORPORATE DEBT A-RATED AVERAGE. THE LEHMAN BROTHERS AGGREGATE BOND INDEX
IS AN UNMANAGED INDEX MADE UP OF THE GOVERNMENT/CORPORATE INDEX, THE
MORTGAGE-BACKED SECURITIES INDEX, AND THE ASSET-BACKED SECURITIES INDEX. THE
LIPPER CORPORATE DEBT A-RATED AVERAGE IS THE AVERAGE PERFORMANCE LEVEL OF ALL
CORPORATE DEBT FUNDS A-RATED, AS REPORTED BY LIPPER ANALYTICAL SERVICES, INC.,
AN INDEPENDENT ORGANIZATION THAT MONITORS THE PERFORMANCE OF MUTUAL FUNDS.
MESSAGE FROM THE MANAGER
[PHOTOGRAPH OF PORTFOLIO MANAGER: MARGARET "DIDI" WEINBLATT, CFA, APPEARS HERE]
MARKET CONDITIONS
The Federal Reserve Board (the Fed) is now a year into the tightening cycle that
began in June 1999; it has raised interest rates six times for a total of 1.75%.
Yields on Treasury bonds started the fiscal year slightly above 6% and rose
steadily through mid-January to 6.75%. Faced with a large budget surplus, in
mid-January the U.S. government announced a buyback of Treasury bonds. This
created strong demand for long-term Treasury bonds, and as a result their yields
fell and prices rose.
10- & 30-YEAR U.S. TREASURY BOND YIELDS
A chart in the form of a line graph appears here, illustrating the performance
of a 10- and 30-year U.S. Treasury Bond Yields for the period 07/30/1999 through
07/31/2000. The data points from the graph are as follows:
10-Year 30-Year
------- -------
07/30/99 5.90% 6.10%
08/16/99 5.96% 6.09%
08/31/99 5.97% 6.06%
09/15/99 5.92% 6.10%
09/30/99 5.88% 6.05%
10/15/99 6.07% 6.26%
10/29/99 6.02% 6.16%
11/15/99 5.92% 6.02%
11/30/99 6.19% 6.29%
12/15/99 6.24% 6.33%
12/31/99 6.44% 6.48%
01/14/00 6.68% 6.70%
01/31/00 6.67% 6.49%
02/15/00 6.55% 6.25%
02/29/00 6.41% 6.14%
03/15/00 6.29% 6.08%
03/31/00 6.00% 5.83%
04/14/00 5.85% 5.78%
04/28/00 6.21% 5.96%
05/15/00 6.45% 6.15%
05/31/00 6.27% 6.01%
06/15/00 6.05% 5.92%
06/30/00 6.03% 5.90%
07/14/00 6.10% 5.88%
07/31/00 6.03% 5.78%
But the Fed's tightening caused yields on short-term bonds to rise. The result
was an INVERTED Treasury yield curve -- a condition where yields of long-term
bonds are lower than those of short-term bonds. The chart below shows the yield
curve for the beginning and end of the fiscal year. At the beginning of the
fiscal year, yields on long-term bonds were higher than those of short-term
bonds. This is a NORMAL yield curve, where buyers demand an extra yield premium
for the risk of lending money for a longer period of time. But since January,
short-term rates have been higher than long-term.
HISTORICAL YIELD CURVE
A chart in the form of a line graph appears here, illustrating the yield curve
for the beginning and end of the fiscal year for the period 07/30/1999 through
07/31/2000. The data points from the graph are as follows:
07/30/1999 07/31/2000 CHANGE
---------- ---------- ------
3 month 4.74% 6.18% 1.44%
6 month 4.84% 6.35% 1.52%
1 year 5.10% 6.05% .95%
2 year 5.62% 6.28% .67%
5 year 5.79% 6.14% .35%
10 year 5.90% 6.04% .13%
30 year 6.10% 5.79% - .32%
PERFORMANCE
For the 12-month period ending July 31, 2000, the USAA Income Fund had a total
return of 6.11%, ahead of the 4.10% average return for the A-rated bond fund
category of Lipper Analytical Services, Inc. and the 5.97% return for the Lehman
Brothers Aggregate Bond Index. Lipper ranked the Fund 5 out of 175, 4 out of
115, and 7 out of 42 funds for the one-, five-, and 10-year periods,
respectively, in the A-rated bond fund category for the period ended July 31,
2000. Lipper rankings are based on total returns.
The Fund benefited from its overweight position in U.S. government and agency
mortgage-backed securities (56.8% of the Fund). In the last six months, the 9.9%
position in preferred stock of real estate investment trusts (REITs) posted
stellar returns after dragging down performance for much of last year. Long-term
Treasuries posted their best six-month return in five years.
The Fund also benefited from its slightly longer average duration during most of
the period. (Duration is a measure of a fund's sensitivity to changes in
interest rates.) As of July 31, 2000, the Fund's duration has been shortened to
5.8 years.
As Treasury bond yields fell, corporate yields held steady or rose slightly.
Thus the spread (or difference in yield) between corporate and Treasury bonds
has increased, making corporate bonds more attractive relative to other
fixed-income securities. This created a buying opportunity that we used to
increase the Fund's allocation in corporate bonds to 22.5% from 16% at the
beginning of the fiscal year. The table below shows yields and yield spreads
between Ford Motor Company Global Landmark Security (GlobLS) 7.45% coupon
maturing on July 16, 2031, and the Treasury 5 1/4 coupon maturing on November
15, 2028. The Ford securities, issued in July 1999 at a yield spread of 1.40%
over the Treasury bond, today yields 2% more than the same Treasury. While the
yield on the Treasury has gone down during this period, the yield on the Ford
security has increased.
HISTORICAL YIELDS AND YIELD SPREADS
A chart in the form of a line graph appears here, illustrating the historical
yield and yield spreads between Ford Motor Company Global Landmark Security
(GlobLS) 7.45% coupon maturing on July 16, 2031, and the Treasury 5 1/4 coupon
maturing on November 15, 2028 for the period 07/30/1999 through 07/31/2000. The
data points from the graph are as follows:
TREASURY FORD SPREAD
-------- ---- ------
07/30/99 6.19% 7.61% 1.42%
08/31/99 6.24% 7.59% 1.35%
09/30/99 6.24% 7.58% 1.34%
10/29/99 6.32% 7.55% 1.23%
11/30/99 6.45% 7.60% 1.15%
12/31/99 6.62% 7.74% 1.12%
01/31/00 6.55% 7.88% 1.33%
02/29/00 6.29% 7.90% 1.61%
03/31/00 6.01% 7.69% 1.68%
04/28/00 6.17% 7.87% 1.70%
05/31/00 6.22% 8.16% 1.94%
06/30/00 6.11% 7.97% 1.86%
07/31/00 5.96% 7.92% 1.96%
DIVIDENDS
As of June 28, 2000, the Fund's dividend was increased from 6.25 cents to 6.4
cents. The current portfolio of investments supports this new monthly dividend.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
YOU WILL FIND A COMPLETE LIST OF THE SECURITIES THAT THE FUND OWNS ON PAGES
11-13.
OUTLOOK
Our outlook for the bond market hinges on Fed policy. After a year of Fed
tightening, the economy is beginning to show signs of slowing -- good news for
the bond market. A slowing economy would signal that the tightening cycle might
be nearing its end. For this reason, we are cautiously optimistic about the
outlook for the bond market.
Going forward, we plan to keep our basic strategy intact: investing in
mortgage-backed pass-through securities, Treasury bonds, intermediate-term
corporate bonds, and REITs. We continue to use the spread widening in corporate
bonds to add to this sector and to increase the income component of the Fund.
We appreciate your confidence in us, and look forward to serving you in the
future.
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TOP 10 SECURITIES
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COUPON RATE % % OF NET ASSETS
------------- ---------------
FNMA 7.50 14.9
GNMA 7.50 12.9
GNMA 6.00 9.6
GNMA 7.00 8.9
GNMA 6.50 6.2
U.S. Treasury Bond 5.25 5.0
FNMA 7.00 3.2
Phillips Petroleum Co., Notes 8.75 1.7
Ford Motor Credit Co.,
Global Notes 7.50 1.6
Household Finance Corp., Notes 7.25 1.5
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YOU WILL FIND A COMPLETE LIST OF THE SECURITIES THAT THE FUND OWNS ON PAGES
11-13.
DISTRIBUTIONS TO SHAREHOLDERS
The following per share information describes the federal tax treatment of
distributions made during the fiscal year ended July 31, 2000. These figures are
provided for information purposes only and should not be used for reporting to
federal or state revenue agencies. Distributions for the calendar year will be
reported to you on Form 1099-DIV in January 2001.
Ordinary income $.7531 *
Long-term capital gains .0276
------
Total $.7807
======
* INCLUDES DISTRIBUTION OF SHORT-TERM CAPITAL GAINS, IF ANY, WHICH ARE TAXABLE
AS ORDINARY INCOME.
INDEPENDENT AUDITORS' REPORT
KPMG
The Shareholders and Board of Directors
USAA INCOME FUND:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of the USAA Income Fund, a series of the USAA
Mutual Fund, Inc., as of July 31, 2000, 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 the financial highlights, presented
in note 7 to the financial statements, for each of the years in the five-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 auditing standards generally accepted
in the United States of America. 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, 2000, 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 Income Fund as of July 31, 2000, 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 in the
five-year period then ended, in conformity with accounting principles generally
accepted in the United States of America.
KPMG LLP
San Antonio, Texas
September 1, 2000
<TABLE>
USAA INCOME FUND
PORTFOLIO OF INVESTMENTS
JULY 31, 2000
<CAPTION>
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
-----------------------------------------------------------------------------------------
<C> <S> <C>
STOCKS (10.2%)
COMMON (0.3%)
230,000 Nationwide Health Properties, Inc. (cost: $2,359) $ 3,622
----------
PREFERRED (9.9%)
57,846 Archstone Communities Trust depositary shares "B",
9.00% cumulative redeemable 1,359
483,800 Avalon Bay Communities, Inc., "C", 8.50% cumulative redeemable 11,157
421,240 Avalon Bay Communities, Inc., "D", 8.00% cumulative redeemable 9,030
103,107 Avalon Bay Communities, Inc., "F", 9.00% cumulative redeemable 2,391
444,526 Avalon Bay Communities, Inc., "G", 8.96% cumulative redeemable 10,280
211,268 Duke-Weeks Realty Corp., Inc. depositary shares "A",
9.10% cumulative redeemable 5,084
332,655 Equity Office Properties Trust depositary shares "A",
8.98% cumulative redeemable 7,942
40,000 Equity Residential Properties Trust depositary shares "B",
9.125% cumulative redeemable 980
575,000 Equity Residential Properties Trust depositary shares "C",
9.125% cumulative redeemable 14,088
115,300 Equity Residential Properties Trust depositary shares "F",
9.65% cumulative redeemable 2,796
142,500 Equity Residential Properties Trust depositary shares "K",
8.29% cumulative redeemable 6,782
452,600 First Industrial Realty Trust, Inc. depositary shares "B",
8.75% cumulative redeemable 10,070
412,000 Gables Residential Trust "A", 8.30% cumulative redeemable 8,575
250,000 Post Properties, Inc. "A", 8.50% cumulative redeemable 11,438
194,660 Prologis Trust, Inc. "A", 9.40% cumulative redeemable 4,611
338,500 Prologis Trust, Inc. "C", 8.54% cumulative redeemable 14,682
200,000 Shurgard Storage Centers, Inc. "B", 8.80% cumulative redeemable 4,538
----------
Total preferred (cost: $139,196) 125,803
----------
Total stocks (cost: $141,555) 129,425
----------
PRINCIPAL
AMOUNT COUPON
(000) SECURITY RATE MATURITY
-----------------------------------------------------------------------------------------
CORPORATE OBLIGATIONS (22.5%)
$ 8,000 Associates Corp. of North America,
Senior Notes 6.25% 11/01/2008 7,211
13,000 AT&T Capital Corp., MTN 7.50 11/15/2000 13,023
10,000 Bank One Corp. (b) 7.88 8/01/2010 9,962
20,000 BankBoston N.A., MTN 6.38 4/15/2008 18,482
5,000 Caliber Systems, Inc., Notes 7.80 8/01/2006 4,903
4,900 Consolidated Rail Corp., Debentures 9.75 6/15/2020 5,575
20,000 Cummins Engine Co., Inc., MTN, Series A 6.45 3/01/2005 18,595
15,000 DaimlerChrysler NA Holding, Global Debentures 8.00 6/15/2010 15,273
9,000 Finova Capital Corp., MTN 7.25 11/08/2004 8,070
10,000 Finova Capital Corp., MTN 6.00 1/07/2004 8,246
15,000 First Union Corp., Subordinated Notes 7.50 7/15/2006 14,771
20,000 Ford Motor Credit Co., Global Notes 7.50 3/15/2005 19,920
20,000 Household Finance Corp., Notes 7.25 5/15/2006 19,474
10,000 MBNA Corp. 6.75 3/15/2008 9,192
20,000 Merrill Lynch & Co., MTN, Series B (c) 6.00 10/11/2005 18,683
20,000 Phillips Petroleum Co., Notes 8.75 5/25/2010 21,319
15,000 ServiceMaster Co., Notes 8.45 4/15/2005 15,030
5,000 TriNet Corporate Realty Trust, Inc., Notes 7.95 5/15/2006 4,217
15,000 Washington Mutual, Inc., Subordinated Notes 8.25 4/01/2010 15,093
15,000 Waste Management Technologies, Inc., Notes 7.00 10/15/2006 13,771
9,000 Wells Fargo & Co., Subordinated Notes 6.88 4/01/2006 8,746
16,750 Yosemite Security Trust I, Bonds (a) 8.25 11/15/2004 16,835
----------
Total corporate obligations (cost: $292,842) 286,391
----------
EURODOLLAR AND YANKEE OBLIGATIONS (1.9%)
10,000 Province of Quebec, Debentures 6.50 1/17/2006 9,623
15,000 Province of Quebec, Global Debentures 7.00 1/30/2007 14,723
----------
Total eurodollar and yankee obligations (cost: $23,812) 24,346
----------
U.S. GOVERNMENT & AGENCY ISSUES (62.6%)
FEDERAL NATIONAL MORTGAGE ASSN. (18.0%)
41,372 7.00%, 9/01/2022 - 9/01/2023 40,270
191,453 7.50%, 2/01/2022 - 7/01/2030 189,413
----------
229,683
----------
GOVERNMENT NATIONAL MORTGAGE ASSN. (38.8%)
132,193 6.00%, 8/15/2028 - 10/15/2028 122,003
83,439 6.50%, 6/15/2023 - 5/15/2028 79,478
116,151 7.00%, 5/15/2023 - 7/15/2029 113,077
165,109 7.50%, 7/15/2023 - 8/15/2029 164,049
14,961 8.00%, 4/15/2030 15,092
----------
493,699
----------
U.S. TREASURY BONDS (5.0%)
70,571 5.25%, 11/15/2028 63,624
----------
OTHER U.S. GOVERNMENT AGENCIES (0.8%)
10,000 Tennessee Valley Auth., Global Note,
Power Bond Series G 7.13% 5/01/2030 10,132
----------
Total U.S. government & agency issues (cost: $821,748) 797,138
----------
MONEY MARKET INSTRUMENT (3.1%)
39,736 General Electric Capital Corp., CP
(cost: $39,736) 6.64 8/01/2000 39,736
----------
Total investments (cost: $1,319,693) $1,277,036
==========
</TABLE>
PORTFOLIO SUMMARY BY CONCENTRATION
----------------------------------
U.S. Government 62.6%
Real Estate Investment Trusts 10.5
Finance - Diversified 5.4
Finance - Consumer 3.7
Banks - Major Regional 3.6
Foreign Government 1.9
Oil - Domestic Integrated 1.7
Investment Banks/Brokerage 1.5
Heavy Duty Trucks & Parts 1.4
Natural Gas Utilities 1.3
Automobiles 1.2
Banks - Money Center 1.2
Savings & Loan Holding Co. 1.2
Services - Commercial & Consumer 1.2
Waste Management 1.1
Other 0.8
-----
Total 100.3%
=====
USAA INCOME FUND
NOTES TO PORTFOLIO OF INVESTMENTS
JULY 31, 2000
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 $1,320,735,000.
The percentages shown represent the percentage of the investments to net assets.
SPECIFIC NOTES
(a) Security is not registered under the Securities Act of 1933. A resale of
this security in the United States may occur in an exempt transaction to a
qualified institutional buyer as defined by the Rule 144A, and as such is
generally deemed by the Manager to be liquid under guidelines established by the
Board of Directors.
(b) At July 31, 2000, the cost of securities purchased on a delayed-delivery
basis was $9,944,000.
(c) At July 31, 2000, a portion of this security was segregated to cover
delayed-delivery purchases.
PORTFOLIO DESCRIPTION ABBREVIATIONS
CP Commercial Paper
MTN Medium-Term Note
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
<TABLE>
USAA INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES
(IN THOUSANDS)
JULY 31, 2000
<S>
ASSETS <C>
Investments in securities, at market value (identified cost of $1,319,693) $1,277,036
Cash 192
Receivables:
Capital shares sold 827
Dividends and interest 11,167
----------
Total assets 1,289,222
----------
LIABILITIES
Securities purchased 14,276
Capital shares redeemed 1,203
USAA Investment Management Company 259
USAA Transfer Agency Company 118
Accounts payable and accrued expenses 85
----------
Total liabilities 15,941
----------
Net assets applicable to capital shares outstanding $1,273,281
==========
REPRESENTED BY:
Paid-in capital $1,345,500
Accumulated undistributed net investment income 3,472
Accumulated net realized loss on investments (33,034)
Net unrealized depreciation of investments (42,657)
----------
Net assets applicable to capital shares outstanding $1,273,281
==========
Capital shares outstanding 109,802
==========
Authorized shares of $.01 par value 270,000
==========
Net asset value, redemption price, and offering price per share $ 11.60
==========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
</TABLE>
USAA INCOME FUND
STATEMENT OF OPERATIONS
(IN THOUSANDS)
YEAR ENDED JULY 31, 2000
Net investment income:
Income:
Dividends $10,880
Interest 84,033
-------
Total income 94,913
-------
Expenses:
Management fees 3,165
Transfer agent's fees 1,740
Custodian's fees 196
Postage 215
Shareholder reporting fees 49
Directors' fees 3
Registration fees 37
Professional fees 54
Other 29
-------
Total expenses 5,488
-------
Net investment income 89,425
-------
Net realized and unrealized gain (loss) on investments:
Net realized loss (32,061)
Change in net unrealized appreciation/depreciation 16,788
-------
Net realized and unrealized loss (15,273)
-------
Increase in net assets resulting from operations $74,152
=======
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
<TABLE>
USAA INCOME FUND
STATEMENTS OF CHANGES IN NET ASSETS
(IN THOUSANDS)
YEARS ENDED JULY 31,
<CAPTION>
2000 1999
-------------------------
<S> <C> <C>
From operations:
Net investment income $ 89,425 $ 105,582
Net realized gain (loss) on investments (32,061) 45,287
Change in net unrealized appreciation/depreciation of
investments 16,788 (133,924)
-------------------------
Increase in net assets resulting from operations 74,152 16,945
-------------------------
Distributions to shareholders from:
Net investment income (85,949) (106,248)
-------------------------
Net realized gains (3,306) (63,044)
-------------------------
From capital share transactions:
Proceeds from shares sold 142,642 283,608
Reinvested dividends 70,219 141,194
Cost of shares redeemed (339,874) (608,632)
-------------------------
Decrease in net assets from
capital share transactions (127,013) (183,830)
-------------------------
Net decrease in net assets (142,116) (336,177)
Net assets:
Beginning of period 1,415,397 1,751,574
-------------------------
End of period $1,273,281 $1,415,397
=========================
Accumulated undistributed (overdistributed)
net investment income:
End of period $ 3,472 $ (4)
=========================
Change in shares outstanding:
Shares sold 12,364 22,816
Shares issued for dividends reinvested 6,124 11,266
Shares redeemed (29,634) (49,127)
-------------------------
Decrease in shares outstanding (11,146) (15,045)
=========================
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
</TABLE>
USAA INCOME FUND
NOTES TO FINANCIAL STATEMENTS
JULY 31, 2000
(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 annual report pertains only to the USAA Income
Fund (the Fund). The Fund's investment objective is maximum current income
without undue risk to principal. USAA Investment Management Company (the
Manager) attempts to achieve this objective by investing the Fund's assets
primarily in income-producing securities.
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. Debt and government securities are valued each business day by a pricing
service (the Service) approved by the Fund's Board of Directors. The Service
uses the mean between quoted bid and asked prices or the last sale price to
price securities when, in the Service's judgment, these prices are readily
available and are representative of the securities' market values. For many
securities, such prices are not readily available. The Service generally prices
these securities based on methods that include consideration of yields or prices
of securities of comparable quality, coupon, maturity and type, indications as
to values from dealers in securities, and general market conditions.
2. Portfolio securities, except as otherwise noted, traded primarily on a
domestic securities exchange are valued at the last sales price on that
exchange.
3. Over-the-counter securities are priced at the last sales price or, if not
available, at the average of the bid and asked prices.
4. Securities purchased with maturities of 60 days or less are stated at
amortized cost, which approximates market value.
5. 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. The Fund had no borrowings under any of these agreements during the year
ended July 31, 2000.
(3) DISTRIBUTIONS
Distributions of net investment income are made monthly. Distributions of
realized gains from security transactions not offset by capital losses are made
annually in the succeeding fiscal year or as otherwise required to avoid the
payment of federal taxes. At July 31, 2000, the fund had a capital loss
carryover for federal income tax purposes of $31,993,000, which will expire in
2008-2009. It is unlikely that the Company's Board of Directors will authorize a
distribution of capital gains realized in the future until the capital loss
carryover has been utilized or expires.
(4) INVESTMENT TRANSACTIONS
Cost of purchases and proceeds from sales/maturities of securities, excluding
short-term securities, for the year ended July 31, 2000, were $321,729,000 and
$472,926,000, respectively.
Gross unrealized appreciation and depreciation of investments as of July 31,
2000, were $6,607,000 and $49,264,000, respectively, and for tax purposes,
$6,607,000 and $50,306,000, 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 .24% 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 $28.50 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.
(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 compensation from the Fund.
(7) FINANCIAL HIGHLIGHTS
Per share operating performance for a share outstanding throughout each period
is as follows:
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
-----------------------------------------------------------------------
2000 1999 1998 1997 1996
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value at
beginning of period $ 11.70 $ 12.88 $ 12.54 $ 11.97 $ 12.11
Net investment income .78 .80 .85 .83 .83
Net realized and
unrealized gain (loss) (.10) (.72) .33 .57 (.13)
Distributions from net
investment income (.75) (.80) (.84) (.83) (.84)
Distributions of realized
capital gains (.03) (.46) - - -
-----------------------------------------------------------------------
Net asset value at
end of period $ 11.60 $ 11.70 $ 12.88 $ 12.54 $ 11.97
=======================================================================
Total return (%)* 6.11 .40 9.72 12.15 5.78
Net assets at
end of period (000) $1,273,281 $1,415,397 $1,751,574 $1,662,981 $1,737,306
Ratio of expenses to
average net assets (%) .42 .38 .38 .39 .40
Ratio of net investment
income to average
net assets (%) 6.78 6.31 6.62 6.76 6.64
Portfolio turnover (%) 24.68 54.02 47.35 57.50 81.26
* ASSUMES REINVESTMENT OF ALL DIVIDEND INCOME AND CAPITAL GAIN DISTRIBUTIONS DURING THE PERIOD.
</TABLE>
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
Laura T. Starks
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 6:00 a.m. to 10:00 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) 456-7200
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
