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 16
Statement of Assets and Liabilities 17
Statement of Operations 18
Statement of Changes in Net Assets 19
Notes to Financial Statements 20
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 HIGH-YIELD
OPPORTUNITIES 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
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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
----------------------------------------------------------------
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
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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
----------------------------------------------------------------
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, 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 HIGH-YIELD OPPORTUNITIES FUND
OBJECTIVE: Provide an attractive total return primarily through high current
income and secondarily through capital appreciation.
TYPES OF INVESTMENTS: Normally at least 80% of the Fund's assets will be
invested in high-yield securities, including bonds often referred to as junk
bonds, convertible securities, or preferred stocks.
--------------------------------------------------------------------------------
7/31/00
--------------------------------------------------------------------------------
Net Assets $44.9 Million
Net Asset Value Per Share $9.78
--------------------------------------------------------------------------------
TOTAL RETURN AS OF 7/31/00
--------------------------------------------------------------------------------
SINCE INCEPTION ON 8/2/99 7.80%
--------------------------------------------------------------------------------
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 High-Yield Opportunities Fund, the
Credit Suisse First Boston (CSFB) Global High Yield Index, and the Lipper High
Current Yield Funds Average for the period of 08/02/1999 through 07/31/2000. The
data points from the graph are as follows:
USAA HIGH-YIELD CSFB GLOBAL LIPPER HIGH CURRENT
OPPORTUNITIES FUND HIGH YIELD INDEX YIELD FUNDS AVG.
------------------ ---------------- -------------------
08/02/99 $10,000 $10,000 $10,000
08/31/99 10,089 9,911 9,900
09/30/99 10,114 9,835 9,840
10/31/99 10,167 9,787 9,814
11/30/99 10,397 9,920 9,962
12/31/99 10,520 10,040 10,093
01/31/00 10,517 9,999 10,042
02/29/00 10,659 10,061 10,119
03/31/00 10,511 9,911 9,954
04/30/00 10,614 9,896 9,910
05/31/00 10,514 9,737 9,732
06/30/00 10,766 9,955 9,916
07/31/00 10,780 10,049 9,938
DATA SINCE INCEPTION ON 8/2/99 THROUGH 7/31/00
THE GRAPH ILLUSTRATES THE COMPARISON OF A $10,000 HYPOTHETICAL INVESTMENT IN THE
HIGH-YIELD OPPORTUNITIES FUND TO THE CSFB GLOBAL HIGH YIELD INDEX AND THE LIPPER
HIGH CURRENT YIELD FUNDS AVERAGE. THE CREDIT SUISSE FIRST BOSTON (CSFB) GLOBAL
HIGH YIELD INDEX IS AN UNMANAGED, TRADER-PRICED PORTFOLIO CONSTRUCTED TO MIRROR
THE HIGH-YIELD DEBT MARKET. THE LIPPER AVERAGE IS THE AVERAGE PERFORMANCE LEVEL
OF ALL HIGH CURRENT YIELD FUNDS, 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: MATTHEW FREUND, CFA, APPEARS HERE]
PERFORMANCE
From its inception date on August 2, 1999, to July 31, 2000, the total return of
your USAA High-Yield Opportunities Fund was 7.80%. Over the same period, your
Fund's total return was greater than 10-year U.S. Treasuries, which provided a
total return of 4.15%, and less than the S&P 500, which provided a total return
of 8.97%. For the 12-month period ending July 31, 2000, the Lipper High Current
Yield Fund Average return was -0.62%. Past performance is no guarantee of future
results.
The past 12 months have been marked by dramatic swings in investor sentiment.
Y2K concerns were exaggerated and presented no material impediments to future
economic growth. The high-yield market softened in March, almost a month before
the equity markets began their correction. Increases in short-term interest
rates and concerns over the future direction of default rates unsettled the
market. While significant, these concerns lessened in June and July as investors
began to take advantage of the values available in the market and bought
higher-yielding (lower-quality) securities.
The Fund benefited from its investments in the real estate investment trust
(REIT), cellular, energy, and gaming sectors. Nationwide Health Properties,
Crown Castle International, Chesapeake Energy, LifePoint Hospitals, and GT Group
Telecom were just a few of the names that provided attractive returns during the
period. Weakness in the retail and service sectors partially offset this strong
performance.
A WORD ON DEFAULTS
The following headlines all appeared recently in THE WALL STREET JOURNAL. They
highlight, perhaps unintentionally, the current risks and opportunities in the
high-yield market.
"Junk-Bond Defaults Are Up Sharply, Raising Concerns of a Credit Crunch"
(July 10, 2000)
"Corp. Bond Defaults Seen Hitting 8.4% By June '01: Moodys" (July 14, 2000)
"Moody's Report Fuels Debate Over Junk Bond Defaults" (July 18, 2000)
"Fund Managers, Analysts Predict Bullish Market in Junk Bonds" (July 26, 2000)
A default--simply defined--is the failure of the issuer or insurer of a
security to live up to its terms (typically the failure to pay interest or repay
principal when due). Since the dollar value of defaulting securities is
generally easy to determine (as shown on the previous page, a default gets
noticed by the press), most of the controversy is generated by disagreements
over the size of the high-yield market and the factors contributing to the
increase in defaults. Much of the blame is falling on increasingly cautious bank
lenders, who are thought to be tightening their credit standards, making it more
difficult for some companies to obtain loans and meet their obligations.
While academically intriguing, the debate is not worth inordinate attention
here. What is important is that risk is only half the story. As investors, we
must constantly compare an investment's potential return with the risk
associated with that investment. While the risk of default has been increasing,
this increase has not been a secret and has been largely priced into the market.
As shown in the following chart, the spread -- or the difference between the
yields on high-yield securities and underlying U.S. Treasury yields -- is near a
five-year high. Investors are receiving a higher yield today to compensate for a
possible increase in tomorrow's default rate.
CSFB GLOBAL HIGH YIELD INDEX
A chart in the form of a line graph appears here, illustrating the difference
between the yields on high-yield securities and underlying U.S. Treasury yields
for the period of 07/96 through 07/00. The data points from the graph are as
follows:
CSFB GLOBAL
HIGH YIELD INDEX
----------------
07/96 3.98%
10/96 4.04%
01/97 3.47%
04/97 3.52%
07/97 3.57%
10/97 3.81%
01/98 3.84%
04/98 3.77%
07/98 4.16%
10/98 7.43%
01/99 6.59%
04/99 5.59%
07/99 5.64%
10/99 6.28%
01/00 5.81%
04/00 6.71%
07/00 7.33%
SOURCE: CREDIT SUISSE FIRST BOSTON
Although past performance is no guarantee of future results, over the long run
investors generally have been well compensated for taking more risk. During
1991, for example, defaults peaked at more than 10%. Despite this increase, the
high-yield market provided a total return of more than 39% that year.
STRATEGY
We remain committed to providing an attractive total return primarily through
high current income (with capital appreciation a secondary objective). We invest
the majority of the Fund's assets in high-yield securities (including bonds,
convertible securities, and preferred stocks) with an emphasis on
noninvestment-grade debt. We continue to search for securities with the
potential for an attractive total return with acceptable risks.
OUTLOOK
The market is working to digest conflicting signals over the future direction of
economic growth. One day the economy is thought to be too strong, and inflation
fears resurface. The next day investors worry that the economy is cooling too
quickly and a sustained economic slowdown may be at hand. Add in the upcoming
elections and it's not surprising that the volatility of the high-yield and
equity markets has increased. Needless to say, the need for research,
diversified portfolios, and continuous surveillance remains crucial.
Nevertheless, the United States continues to have one of the strongest economies
in the world. Inflation fears continue, yet remain largely unsubstantiated. In
this environment, the high-yield market has the potential to continue to offer
long-term investors an attractive total-return opportunity -- greater than
high-quality bonds and with less sensitivity to interest rates, and lower than
the broad equity markets but with more predictability and higher current income.
REFER TO THE BOTTOM OF PAGE 4 FOR THE LIPPER AVERAGE DEFINITION.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
-----------------------------------------------------
TOP 10 INDUSTRIES
(% OF NET ASSETS)
-----------------------------------------------------
Telephones 11.5
Telecommunications - Cellular/Wireless 11.4
Real Estate Investment Trusts 9.9
Gaming Companies 6.1
Services - Commercial & Consumer 5.9
Finance - Consumer 4.2
Telecommunications - Long Distance 3.3
Broadcasting - Radio & TV 3.0
Textiles - Apparel 3.0
Chemicals 2.7
----------------------------------------------------
----------------------------------------------------
TOP 10 HOLDINGS
(% OF NET ASSETS)
----------------------------------------------------
GT Group Telecom, Inc. 3.2
Hartmarx Corp. 3.0
Hollywood Casino Corp. 2.8
Crown Castle International Corp. 2.3
LifePoint Hospitals Holdings, Inc. 2.3
Nextlink Communications, Inc. 2.2
Riverwood International Corp. 2.2
Station Casinos, Inc. 2.2
Nextel Communications, Inc. 2.1
Northwest Airlines, Inc. 2.1
----------------------------------------------------
YOU WILL FIND A COMPLETE LIST OF THE SECURITIES THAT THE FUND OWNS ON PAGES
11-15.
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 * $ .9730 *
=======
7.12% of ordinary income distributions qualify for deduction by corporations.
* 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 HIGH-YIELD OPPORTUNITIES FUND:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of the USAA High-Yield Opportunities Fund, a
series of the USAA Mutual Fund, Inc., as of July 31, 2000, and the related
statement of operations, statement of changes in net assets, and financial
highlights, presented in note 7 to the financial statements, for the period from
August 2, 1999, (commencement of operations) through July 31, 2000. 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 audit.
We conducted our audit 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 audit provides 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 High-Yield Opportunities Fund as of July 31, 2000, the results of its
operations, the changes in its net assets, and the financial highlights for the
period from August 2, 1999, (commencement of operations) through July 31, 2000,
in conformity with accounting principles generally accepted in the United States
of America.
KPMG LLP
San Antonio, Texas
September 1, 2000
<TABLE>
USAA HIGH-YIELD OPPORTUNIITES FUND
PORTFOLIO OF INVESTMENTS
JULY 31, 2000
<CAPTION>
PRINCIPAL MOODY'S MARKET
AMOUNT RATING VALUE
(000) SECURITY (UNAUDITED) MATURITY (000)
-----------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
CORPORATE BONDS (89.4%)
AIRLINES (2.1%)
$ 1,000 Northwest Airlines, Inc., Notes, 8.52% Ba2 4/07/2004 $ 959
-----------------------------------------------------------------------------------------------
AUTO PARTS (1.6%)
750 Collins and Aikman Products Co.,
Guaranteed Senior Subordinated Notes, 11.50% B2 4/15/2006 731
-----------------------------------------------------------------------------------------------
BEVERAGES - ALCOHOLIC (1.1%)
500 Canandaigua Brands, Inc.,
Senior Subordinated Notes, 8.50% B2 3/01/2009 476
------------------------------------------------------------------------------------------------
BROADCASTING - RADIO & TV (3.0%)
650 Charter Communications Holdings, LLC,
Senior Discount Notes, 0%/9.92%(a) B2 4/01/2011 374
1,000 RCN Corp., Senior Discount Notes,
Series B, 0%/11.13%(a) B3 10/15/2007 585
500 RCN Corp., Senior Notes, 10.00% B3 10/15/2007 407
-----------------------------------------------------------------------------------------------
1,366
-----------------------------------------------------------------------------------------------
CHEMICALS (2.7%)
750 Borden Chemical & Plastics, L.P. Notes, 9.50% B1 5/01/2005 693
500 Lyondell Chemical Co.,
Senior Subordinated Notes, 10.88% B2 5/01/2009 509
-----------------------------------------------------------------------------------------------
1,202
-----------------------------------------------------------------------------------------------
CONTAINERS - PAPER (2.2%)
1,000 Riverwood International Corp.,
Senior Notes, 10.63% B3 8/01/2007 1,000
-----------------------------------------------------------------------------------------------
DRUGS (1.7%)
750 Warner Chilcott, Inc., Senior Notes, 12.63%(b) B2 2/15/2008 776
-----------------------------------------------------------------------------------------------
ELECTRIC UTILITIES (0.6%)
250 AES Drax Energy Ltd,
US Senior Secured Notes, 11.50%(b),(c) Ba2 8/30/2010 258
-----------------------------------------------------------------------------------------------
ELECTRONICS - COMPUTER DISTRIBUTORS (1.2%)
500 Asat Finance LLC,
Guaranteed Senior Notes, 12.50%(b) B1 11/01/2006 541
-----------------------------------------------------------------------------------------------
ENGINEERING & CONSTRUCTION (1.1%)
500 Morrison Knudsen Corp.,
Senior Notes, 11.00%(b) Ba2 7/01/2010 503
-----------------------------------------------------------------------------------------------
FINANCE - CONSUMER (4.2%)
1,000 Advanta Corp., Notes, 7.00%(d) B1 5/01/2001 957
1,000 Metris Cos., Inc., Senior Notes, 10.00% Ba3 11/01/2004 945
-----------------------------------------------------------------------------------------------
1,902
-----------------------------------------------------------------------------------------------
FINANCE - DIVERSIFIED (1.0%)
500 Finova Capital Corp., Notes, 7.25% Baa2 11/08/2004 448
-----------------------------------------------------------------------------------------------
FOODS (1.3%)
794 Del Monte Foods Co.,
Senior Discount Notes, 0%/12.50%(a) Caa1 12/15/2007 601
-----------------------------------------------------------------------------------------------
GAMING COMPANIES (6.1%)
500 Aztar Corp., Senior Subordinated Notes, 8.88% B2 5/15/2007 477
1,210 Hollywood Casino Corp.,
Senior Secured Notes, 11.25% B3 5/01/2007 1,246
1,000 Station Casinos, Inc.,
Senior Subordinated Notes, 9.88%(b) B1 7/01/2010 1,009
-----------------------------------------------------------------------------------------------
2,732
-----------------------------------------------------------------------------------------------
HOSPITALS (2.3%)
1,000 LifePoint Hospitals Holdings, Inc.,
Senior Subordinated Notes, 10.75% B3 5/15/2009 1,045
-----------------------------------------------------------------------------------------------
HOUSEWARES (1.1%)
500 Windmere-Durable Holdings, Inc.,
Senior Subordinated Notes, 10.00% B3 7/31/2008 493
-----------------------------------------------------------------------------------------------
INTERNET SERVICES (1.8%)
1,000 PSINet, Inc., Senior Notes, 10.00% B3 2/15/2005 805
-----------------------------------------------------------------------------------------------
MANUFACTURING - DIVERSIFIED INDUSTRIES (1.1%)
500 Actuant Finance Corp.,
Senior Subordinated Notes, 13.00%(b),(c) B3 5/01/2009 503
-----------------------------------------------------------------------------------------------
MANUFACTURING - SPECIALIZED (1.1%)
500 Tekni-Plex, Inc.,
Senior Subordinated Notes, 12.75% B3 6/15/2010 513
-----------------------------------------------------------------------------------------------
NATURAL GAS UTILITIES (1.1%)
500 Transportadora De Gas Del Sur,
Euro Medium-Term Note, 10.38%(b) B1 4/15/2003 506
-----------------------------------------------------------------------------------------------
OIL & GAS - DRILLING/EQUIPMENT (1.2%)
500 RBF Finance Co., Senior Secured Notes, 11.38% Ba3 3/15/2009 544
-----------------------------------------------------------------------------------------------
OIL & GAS - EXPLORATION & PRODUCTION (1.1%)
500 Chesapeake Energy Corp., Senior Notes, 9.63% B2 5/01/2005 498
-----------------------------------------------------------------------------------------------
REAL ESTATE INVESTMENT TRUSTS (6.1%)
1,000 Healthcare Realty Trust, Inc.,
Subordinated Convertible Debentures, 6.55% Ba2 3/14/2002 891
500 TriNet Corporate Realty Trust, Inc.,
Notes, 7.30% Ba2 5/15/2001 490
1,000 TriNet Corporate Realty Trust, Inc.,
Notes, 7.95% Ba2 5/15/2006 843
580 TriNet Corporate Realty Trust, Inc.,
Dealer Remarketed Securities, 6.75% Ba2 3/01/2003 522
-----------------------------------------------------------------------------------------------
2,746
-----------------------------------------------------------------------------------------------
RETAIL - DISCOUNTERS (1.0%)
500 Mattress Discounters Corp.,
Senior Notes and Warrants, 12.63%(b) B2 7/15/2007 461
-----------------------------------------------------------------------------------------------
RETAIL - FOOD (2.0%)
1,000 Stater Brothers Holdings, Inc.,
Senior Notes, 10.75% B2 8/15/2006 895
-----------------------------------------------------------------------------------------------
RETAIL - SPECIALTY (1.5%)
250 MacSaver Financial Services, Inc.,
Guaranteed Notes, 7.40% Ba2 2/15/2002 131
575 Venator Group, Inc., Tranche Trust, 6.98% B1 10/15/2001 552
-----------------------------------------------------------------------------------------------
683
-----------------------------------------------------------------------------------------------
SAVINGS & LOAN HOLDING CO. (2.3%)
500 Sovereign Bancorp, Inc., Senior Notes, 10.25% Ba3 5/15/2004 508
500 Sovereign Bancorp, Inc., Senior Notes, 10.50% Ba3 11/15/2006 505
-----------------------------------------------------------------------------------------------
1,013
-----------------------------------------------------------------------------------------------
SERVICES - COMMERCIAL & CONSUMER (5.9%)
1,250 Budget Group, Inc., Senior Notes, 9.13% B2 4/01/2006 931
500 KinderCare Learning Centers, Inc.,
Senior Subordinated Notes, 9.50% B3 2/15/2009 463
1,000 Stewart Enterprises, Inc., Remarketable
or Redeemable Securities, 6.40% Ba2 5/01/2003 714
500 Weight Watchers International, Inc.,
Senior Subordinated Notes, 13.00% B2 10/01/2009 517
-----------------------------------------------------------------------------------------------
2,625
-----------------------------------------------------------------------------------------------
TELECOMMUNICATIONS - CELLULAR/WIRELESS (9.1%)
1,500 Airgate PCS, Inc., Senior Subordinated
Discount Notes, 0%/13.50%(a) Caa1 10/01/2009 874
1,000 Clearnet Communications, Inc.,
Senior Discount Notes, 0%/10.13%(a) B3 5/01/2009 600
1,000 Dolphin Telecom PLC,
Senior Discount Notes, Series B, 0%/14.00%(a) Caa2 5/15/2009 355
1,000 Nextel Communications, Inc.,
Senior Serial Notes, 9.38% B1 11/15/2009 960
1,000 SBA Communications Corp.,
Senior Discount Notes, 0%/12.00%(a) N/R 3/01/2008 732
1,000 US Unwired, Inc., Senior Subordinated
Discount Notes, Series B, 0%/13.38%(a) Caa1 11/01/2009 548
-----------------------------------------------------------------------------------------------
4,069
-----------------------------------------------------------------------------------------------
TELECOMMUNICATIONS - LONG DISTANCE (3.3%)
500 360networks, Inc., Senior Notes, 13.00%(b) B3 5/01/2008 492
500 Level 3 Communications, Inc.,
Senior Notes, 11.00% B3 3/15/2008 483
500 Williams Communications Group, Inc.,
Senior Notes, 10.70% B2 10/01/2007 485
-----------------------------------------------------------------------------------------------
1,460
-----------------------------------------------------------------------------------------------
TELEPHONES (11.5%)
2,750 GT Group Telecom, Inc., Senior Notes
and Warrants, 0%/13.25% (a),(b) Caa1 2/01/2010 1,443
1,000 Intermedia Communications, Inc.,
Senior Discount Notes, 0%/11.25%(a) B2 7/15/2007 675
500 Intermedia Communications, Inc.,
Senior Notes, 8.88% B2 11/01/2007 425
500 McLeod USA, Inc.,
Senior Discount Notes, 0%/10.50%(a) B1 3/01/2007 415
750 Metromedia Fiber Network, Inc.,
Senior Notes, 10.00% B2 12/15/2009 739
1,000 Nextlink Communications, Inc.,
Senior Notes, 10.75% B2 6/01/2009 970
500 Winstar Communications, Inc.,
Senior Notes, 12.50%(b) B3 4/15/2008 475
-----------------------------------------------------------------------------------------------
5,142
-----------------------------------------------------------------------------------------------
TEXTILES - APPAREL (3.0%)
1,362 Hartmarx Corp.,
Senior Subordinated Notes, 10.88% B3 1/15/2002 1,342
-----------------------------------------------------------------------------------------------
WASTE MANAGEMENT (2.5%)
500 Allied Waste North America, Inc.,
Senior Notes, 7.88% Ba3 1/01/2009 441
750 Allied Waste North America, Inc.,
Senior Subordinated Notes, 10.00% B2 8/01/2009 658
-----------------------------------------------------------------------------------------------
1,099
-----------------------------------------------------------------------------------------------
WATER UTILITIES (0.5%)
250 Azurix Corp., Senior Notes, 10.38%(b) Ba3 2/15/2007 231
-----------------------------------------------------------------------------------------------
Total corporate bonds (cost: $41,145) 40,168
-----------------------------------------------------------------------------------------------
NUMBER
OF SHARES
-----------
COMMON STOCKS (3.5%)
REAL ESTATE INVESTMENT TRUSTS (3.3%)
55,000 Entertainment Properties Trust 677
50,000 Nationwide Health Properties 788
-----------------------------------------------------------------------------------------------
1,465
-----------------------------------------------------------------------------------------------
ELECTRONICS - COMPUTER DISTRIBUTORS (0.2%)
500 Asat Finance LLC, Warrants 90
-----------------------------------------------------------------------------------------------
Total common stocks (cost: $1,313) 1,555
-----------------------------------------------------------------------------------------------
PREFERRED STOCKS (2.8%)
REAL ESTATE INVESTMENT TRUSTS (0.5%)
13,300 Prime Group Realty Trust, 9.00% cumulative redeemable 231
-----------------------------------------------------------------------------------------------
TELECOMMUNICATIONS - CELLULAR/WIRELESS (2.3%)
1,020 Crown Castle International Corp., PIK, 12.75% cumulative redeemable 1,046
-----------------------------------------------------------------------------------------------
Total preferred stocks (cost: $1,303) 1,277
-----------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT
(000)
----------
CASH EQUIVALENTS (3.9%)
COMMERCIAL PAPER
$ 1,752 General Electric Capital Corp., 6.64%, 8/01/2000 (cost: $1,752) 1,752
-----------------------------------------------------------------------------------------------
Total investments (cost: $45,513) $44,752
===============================================================================================
</TABLE>
USAA HIGH-YIELD OPPORTUNITIES 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 approximately the same
as that reported in the financial statements.
The percentages shown represent the percentage of the investments to net assets.
Pay-in-kind (PIK) - securities in which the issuer has the option to make
interest or dividend payment in cash or in additional securities. The securities
issued as interest or dividends usually have the same terms, including maturity
date, as the pay-in-kind securities.
SPECIFIC NOTES
(a) Stepped coupon note initially issued in zero coupon form which converts to
coupon form at the specified rate and date. As of the end of this reporting
period, the security is in zero coupon form.
(b) 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.
(c) At July 31, 2000, the cost of securities purchased on a delayed-delivery
basis was $743,000.
(d) At July 31, 2000, this security was segregated to cover delayed-delivery
purchases.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
<TABLE>
USAA HIGH YIELD OPPORTUNITIES FUND
STATEMENT OF ASSETS AND LIABILITIES
(IN THOUSANDS)
JULY 31, 2000
<S> <C>
ASSETS
Investments in securities, at market value (identified cost of $45,513) $ 44,752
Cash 21
Receivables:
Capital shares sold 71
Interest 881
Securities sold 109
USAA Transfer Agency Company 3
--------
Total assets 45,837
--------
LIABILITIES
Securities purchased 743
Capital shares redeemed 170
Accounts payable and accrued expenses 17
--------
Total liabilities 930
--------
Net assets applicable to capital shares outstanding $ 44,907
========
REPRESENTED BY:
Paid-in capital $ 45,978
Accumulated undistributed net investment income 124
Accumulated net realized loss on investments (434)
Net unrealized depreciation of investments (761)
--------
Net assets applicable to capital shares outstanding $ 44,907
========
Capital shares outstanding 4,593
========
Authorized shares of $.01 par value 100,000
========
Net asset value, redemption price, and offering price per share $ 9.78
========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
</TABLE>
USAA HIGH-YIELD OPPORTUNITIES FUND
STATEMENT OF OPERATOINS
(IN THOUSANDS)
PERIOD ENDED JULY 31, 2000*
Net investment income:
Income:
Dividends $ 262
Interest 3,596
--------
Total income 3,858
--------
Expenses:
Management fees 174
Transfer agent's fees 33
Custodian's fees 44
Postage 6
Shareholder reporting fees 17
Directors' fees 4
Registration fees 86
Professional fees 49
Other 3
--------
Total expenses before reimbursement 416
Expenses reimbursed (155)
--------
Total expenses after reimbursement 261
--------
Net investment income 3,597
--------
Net realized and unrealized loss on investments:
Net realized loss (434)
Change in net unrealized appreciation/depreciation (761)
--------
Net realized and unrealized loss (1,195)
--------
Increase in net assets resulting from operations $ 2,402
========
* FUND COMMENCED OPERATIONS ON AUGUST 2, 1999.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
USAA HIGH-YIELD OPPORTUNITIES FUND
STATEMENT OF CHANGES IN NET ASSETS
(IN THOUSANDS)
PERIOD ENDED JULY 31, 2000*
From operations:
Net investment income $ 3,597
Net realized loss on investments (434)
Change in net unrealized appreciation/depreciation
of investments (761)
--------
Increase in net assets resulting
from operations 2,402
--------
Distributions to shareholders from:
Net investment income (3,541)
--------
From capital share transactions:
Proceeds from shares sold 55,017
Reinvested dividends 1,070
Cost of shares redeemed (10,041)
--------
Increase in net assets from
capital share transactions 46,046
--------
Net increase in net assets 44,907
Net assets:
Beginning of period -
--------
End of period $ 44,907
========
Accumulated undistributed net investment income:
End of period $ 124
========
Change in shares outstanding:
Shares sold 5,488
Shares issued for dividends reinvested 108
Shares redeemed (1,003)
--------
Increase in shares outstanding 4,593
========
* FUND COMMENCED OPERATIONS ON AUGUST 2, 1999.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
USAA HIGH-YIELD OPPORTUNITIES 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
High-Yield Opportunities Fund (the Fund), which commenced operations on August
2, 1999. The Fund's investment objective is to provide an attractive total
return primarily through high current income and secondarily through capital
appreciation. USAA Investment Management Company (the Manager) attempts to
achieve this objective by normally investing at least 80% of the Fund's assets
in high-yield securities, including bonds (often referred to as "junk" bonds),
convertible securities, or preferred stocks.
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. 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. 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 paid-in
capital by $68,000 and increase accumulated undistributed net investment income
by $68,000.
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 securities are amortized over the life of the
respective securities.
D. USE OF ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that may affect the reported amounts in the financial
statements.
(2) LINES OF CREDIT
The Fund participates with other USAA funds in three joint short-term revolving
loan agreements totaling $850 million, two with USAA Capital Corporation
(CAPCO), an affiliate of the Manager ($250 million committed and $500 million
uncommitted), and one with Bank of America ($100 million committed). The purpose
of the agreements is to meet temporary or emergency cash needs, including
redemption requests that might otherwise require the untimely disposition of
securities.
Subject to availability under both agreements with CAPCO, the Fund may borrow
from CAPCO an amount up to 5% of the Fund's total assets at CAPCO's borrowing
rate with no markup. Subject to availability under its agreement with Bank of
America, the Fund may borrow from Bank of America, at Bank of America's
borrowing rate plus a markup, an amount which, when added to outstanding
borrowings under the CAPCO agreements, does not exceed 25% of the Fund's total
assets. The Fund had no borrowings under any of these agreements during the
period 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 $364,000 which will expire in 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 period ended July 31, 2000, were $59,438,000 and
$16,104,000, respectively.
Gross unrealized appreciation and depreciation of investments as of July 31,
2000, were $742,000 and $1,504,000, 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 .50% of its annual average net assets.
The Manager has voluntarily agreed to limit the annual expenses of the Fund to
.75% of its annual average net assets through December 1, 2000, and accordingly
has waived $155,000 of its management fee for the period ended July 31, 2000. In
subsequent years, the Manager may recover all or a portion of this waived amount
from the Fund, provided that such recovery is made not later than three years
from the Fund's inception date of August 2, 1999, and provided that the
additional amount paid by the Fund, together with all other expenses of the
Fund, in the aggregate, would not cause the Fund's expense ratio in any of the
three years to exceed .75% of the Fund's 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
USAA Investment Management Company is indirectly wholly owned by United Services
Automobile Association (the Association), a large, diversified financial
services institution. At July 31, 2000, the Association and its affiliates owned
1,898,000 shares (41.3%) 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 compensation from the Fund.
(7) FINANCIAL HIGHLIGHTS
Per share operating performance for a share outstanding throughout the period is
as follows:
PERIOD ENDED
JULY 31,
2000*
-----------
Net asset value at
beginning of period $ 10.00
Net investment income 1.08(a)
Net realized and unrealized loss (.33)
Distributions from net investment income (.97)
--------
Net asset value at end of period $ 9.78
========
Total return (%)** 7.80
Net assets at end of period (000) $ 44,907
Ratio of expenses to average net assets (%) .75
Ratio of expenses to average net assets,
excluding reimbursements (%) 1.19
Ratio of net investment income
to average net assets (%) 10.30
Portfolio turnover (%) 51.88
* FUND COMMENCED OPERATIONS ON AUGUST 2, 1999.
** ASSUMES REINVESTMENT OF ALL DIVIDEND INCOME DISTRIBUTIONS DURING THE PERIOD.
(a) CALCULATED USING WEIGHTED AVERAGE SHARES.
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
