TABLE OF CONTENTS
USAA FAMILY OF FUNDS 1
MESSAGE FROM THE PRESIDENT 2
INVESTMENT REVIEW 4
MESSAGE FROM THE MANAGER 5
FINANCIAL INFORMATION
Independent Auditors' Report 7
Categories and Definitions 8
Portfolio of Investments 9
Notes to Portfolio of Investments 13
Statement of Assets and Liabilities 14
Statement of Operations 15
Statement 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
INTERMEDIATE-TERM BOND 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) 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, 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.]
--------------------------------------------------------------------------------
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 INTERMEDIATE-TERM BOND FUND
OBJECTIVE: High current income without undue risk to principal.
TYPES OF INVESTMENTS: Invests principally in a broad range of investment-grade
debt securities with a dollar-weighted average portfolio maturity between three
to 10 years.
--------------------------------------------------------------------------------
7/31/00
--------------------------------------------------------------------------------
Net Assets $63.9 Million
Net Asset Value Per Share $9.82
--------------------------------------------------------------------------------
TOTAL RETURN AS OF 7/31/00
--------------------------------------------------------------------------------
SINCE INCEPTION ON 8/2/99 5.56%
--------------------------------------------------------------------------------
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 Intermediate-Term Bond Fund, the
Lehman Aggregate Bond Index, and the Lipper Intermediate Investment Grade Debt
Funds Average for the period of 08/02/1999 through 07/31/2000. The data points
from the graph are as follows:
USAA INTERMEDIATE- LEHMAN AGGREGATE LIPPER INTER INV
TERM BOND FUND BOND INDEX GRADE DEBT FUNDS AVG.
------------------ ---------------- ---------------------
08/02/99 $10,000 $10,000 $10,000
08/31/99 10,010 9,995 9,986
09/30/99 10,139 10,111 10,086
10/31/99 10,174 10,148 10,100
11/30/99 10,218 10,148 10,110
12/31/99 10,177 10,099 10,069
01/31/00 10,147 10,066 10,033
02/29/00 10,262 10,187 10,132
03/31/00 10,388 10,321 10,249
04/30/00 10,311 10,292 10,193
05/31/00 10,222 10,287 10,173
06/30/00 10,458 10,501 10,378
07/31/00 10,556 10,597 10,459
DATA SINCE INCEPTION ON 8/2/99 THROUGH 7/31/00
THE GRAPH ILLUSTRATES THE COMPARISON OF A $10,000 HYPOTHETICAL INVESTMENT IN THE
USAA INTERMEDIATE-TERM BOND FUND TO THE LEHMAN AGGREGATE BOND INDEX AND THE
LIPPER INTERMEDIATE INVESTMENT GRADE DEBT FUNDS AVERAGE. THE LEHMAN 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 AVERAGE IS
THE AVERAGE PERFORMANCE LEVEL OF ALL INTERMEDIATE INVESTMENT-GRADE DEBT 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: PAUL LUNDMARK, CFA, APPEARS HERE.]
THE MARKET
Recent economic news indicates that the economy has begun to moderate. This
suggests that the 1.75% increase in the federal funds rate since June 1999 is
beginning to take effect. Investors feel that the Federal Reserve (the Fed) will
not have to continue to raise rates aggressively, a move that investors feared
would lead to a recession. This "soft landing" scenario could potentially result
in non-Treasury securities' performing very well.
MANAGEMENT PHILOSOPHY
My philosophy in managing the USAA Intermediate-Term Bond Fund is as follows: No
one can consistently predict the course of interest rates over time. However,
interest-rate forecasts can be used to determine how an investment may perform,
especially under extreme scenarios. As a result, you will see no dramatic change
in the maturity and duration of the portfolio in an effort to time the market.
Instead, the emphasis is on looking for bonds that represent value in terms of
risk and total return. This search for value starts in-house. The fixed-income
research analysts and I sort through myriad sources of information to come up
with potential security purchases. I then perform a total-return analysis over a
one-year time horizon to compare these securities. This horizon analysis tries
to quantify the unique characteristics of different securities (put/call
features, duration, maturity). It is a rational rather than an emotional
approach to investing.
PERFORMANCE
Because of my risk/reward orientation, I continue to favor investments in
higher-yielding instruments -- such as corporate bonds and mortgage- and
asset-backed securities rather than Treasuries. This investment style resulted
in the Fund's outperforming most of its peers since August 31, 1999. Since the
Fund's inception on August 2, 1999, its total return for the period ending July
31, 2000, is 5.56%.
The best-performing holdings were Waste Management, Corporacion Andina de
Fomento, Viacom, and a collateralized mortgage obligation (CMO), Federal Home
Loan Mortgage 2160 VC. Underperformers included TriNet, EdperBrascan, and
Imperial Bancorp. I continue to hold these bonds because of their positive
outlook and sound financial condition.
OUTLOOK
Looking to the future, I feel that the economy will continue to moderate, which
could result in non-Treasury securities' increasing in relative value. Our
continued emphasis will be on finding securities that represent good risk/reward
characteristics.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
PORTFOLIO MIX
7/31/00
A pie chart is shown here depicting the Portfolio Mix as of July 31, 2000 of the
USAA Intermediate-Term Bond Fund to be:
Corporate Bonds - 87.7%; Collateralized Mortgage Obligations - 5.7%;
Cash Equivalents - 3.6%; and Asset-Backed Securities - 3.0%.
PERCENTAGES ARE OF THE NET ASSETS OF THE FUND AND MAY NOT EQUAL 100%.
YOU WILL FIND A LIST OF THE SECURITIES THAT THE FUND OWNS ON PAGES 9-12.
INDEPENDENT AUDITORS' REPORT
KPMG
The Shareholders and Board of Directors
USAA INTERMEDIATE-TERM BOND FUND:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of the USAA Intermediate-Term Bond 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 Intermediate-Term Bond 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
USAA INTERMEDIATE-TERM BOND FUND
CATEGORIES AND DEFINITIONS
PORTFOLIO OF INVESTMENTS
JULY 31, 2000
CORPORATE BONDS - debt securities issued by corporations as a method of raising
capital. Interest rates are constant to maturity. Prior to maturity, the market
value of a corporate bond generally varies inversely to the movement of interest
rates.
COLLATERALIZED MORTGAGE OBLIGATIONS AND ASSET-BACKED SECURITIES - debt
securities that represent ownership in a pool of mortgage or other loans. They
differ from conventional bonds in that principal is paid back to the investor or
payments are made on the underlying mortgages in the pool. Like other
fixed-income securities, when interest rates rise, the value of asset-backed
securities generally will decline. However, when interest rates decline, the
value of asset-backed securities with prepayment features may not increase as
much as other fixed-income securities.
CASH EQUIVALENTS - consist of short-term obligations issued by banks,
corporations, and U.S. government agencies. The interest rate is constant to
maturity.
PORTFOLIO DESCRIPTION ABBREVIATIONS
MTN Medium-Term Note
USAA INTERMEDIATE-TERM BOND FUND
PORTFOLIO OF INVESTMENTS
(IN THOUSANDS)
JULY 31, 2000
PRINCIPAL COUPON MARKET
AMOUNT SECURITY RATE MATURITY VALUE
--------------------------------------------------------------------------------
CORPORATE BONDS (87.7%)
AEROSPACE/DEFENSE (1.5%)
$1,000 Coltec Industries, Inc., Senior Notes 7.50% 4/15/2008 $ 942
--------------------------------------------------------------------------------
BANKS - MAJOR REGIONAL (10.2%)
1,000 Compass Bank, MTN 8.10 8/15/2009 995
1,000 Corporacion Andina de Fomento,
Global Bonds (Venezuela) 6.75 3/15/2005 950
2,000 Imperial Bancorp, Subordinated
Capital Notes 8.50 4/01/2009 1,786
1,000 Popular North America, Inc., MTN 7.38 9/15/2001 996
1,000 Southtrust Bank, N.A., Callable/Putable
Subordinated Notes 6.57 12/15/2027 929
950 Union Planters Bank, N.A.,
Callable/Putable Subordinated Notes 6.50 3/15/2018 836
--------------------------------------------------------------------------------
6,492
--------------------------------------------------------------------------------
BANKS - MONEY CENTER (2.9%)
2,000 First Union Corp., Callable/Putable
Subordinated Debentures 6.18 2/15/2036 1,863
--------------------------------------------------------------------------------
BROADCASTING - RADIO & TV (3.0%)
1,000 Comcast Cable Communications, Inc.,
Senior Notes 6.20 11/15/2008 909
1,000 Cox Communications, Inc., Senior Notes 7.88 8/15/2009 1,013
--------------------------------------------------------------------------------
1,922
--------------------------------------------------------------------------------
DISTRIBUTIONS - FOOD/HEALTH (1.6%)
1,000 Supervalu, Inc., Notes 7.63 9/15/2004 997
--------------------------------------------------------------------------------
ELECTRIC UTILITIES (4.8%)
2,000 Dominion Resources, Inc., VA, Bonds 8.13 6/15/2010 2,032
1,000 Empire District Electric Co., Senior
Notes 7.70 11/15/2004 1,005
--------------------------------------------------------------------------------
3,037
--------------------------------------------------------------------------------
ELECTRONICS - DEFENSE (3.1%)
2,000 Litton Industries, Inc., Senior Notes 8.00 10/15/2009 2,006
--------------------------------------------------------------------------------
ELECTRONICS - INSTRUMENTATION (1.5%)
1,000 EG&G, Inc., Notes 6.80 10/15/2005 962
--------------------------------------------------------------------------------
ENTERTAINMENT (3.1%)
1,000 Viacom, Inc., Senior Notes (d) 7.75 6/01/2005 1,009
1,000 Viacom, Inc., Senior Notes (c) 7.70 7/30/2010 997
--------------------------------------------------------------------------------
2,006
--------------------------------------------------------------------------------
FINANCE - CONSUMER (6.0%)
1,000 Capital One Financial Corp., Senior Notes 7.25 5/01/2006 926
1,000 Ford Motor Credit Co., Notes 7.38 10/28/2009 976
1,000 Household Finance Corp., Global Notes 8.00 5/09/2005 1,011
1,000 Household Finance Corp., Senior Notes 6.50 11/15/2008 908
--------------------------------------------------------------------------------
3,821
--------------------------------------------------------------------------------
FINANCE - DIVERSIFIED (10.2%)
3,000 Finova Capital Corp., MTN 7.25 11/08/2004 2,690
2,000 Heller Financial Inc., Notes 7.38 11/01/2009 1,899
2,000 Newcourt Credit Group, Inc., Notes,
Series B 6.88 2/16/2005 1,928
--------------------------------------------------------------------------------
6,517
--------------------------------------------------------------------------------
HEAVY DUTY TRUCKS & PARTS (1.5%)
1,000 Cummins Engine Co., Inc., MTN, Series A 6.45 3/01/2005 930
--------------------------------------------------------------------------------
HOMEBUILDING (1.5%)
1,000 Pulte Corp., Senior Notes 7.00 12/15/2003 937
--------------------------------------------------------------------------------
INVESTMENT BANKS/BROKERAGE (1.4%)
1,000 Merrill Lynch & Co., Inc., Redeemable
Notes 6.88 11/15/2018 907
--------------------------------------------------------------------------------
MANUFACTURING - DIVERSIFIED INDUSTRIES (1.5%)
1,000 EdperBrascan Corp., Notes 7.13 12/16/2003 950
--------------------------------------------------------------------------------
NATURAL GAS UTILITIES (6.3%)
2,000 Limestone Electron Trust,
Senior Secured Note (a) 8.63 3/15/2003 2,021
2,000 Osprey Trust, Osprey I, Inc.,
Senior Notes (a) 8.31 1/15/2003 2,015
--------------------------------------------------------------------------------
4,036
--------------------------------------------------------------------------------
OIL - DOMESTIC INTEGRATED (3.3%)
2,000 Phillips Petroleum Co., Notes 8.50 5/25/2005 2,082
--------------------------------------------------------------------------------
OIL & GAS - EXPLORATION & PRODUCTION (1.4%)
1,000 Woodside Petroleum, Notes (a) 6.60 4/15/2008 924
--------------------------------------------------------------------------------
REAL ESTATE INVESTMENT TRUSTS (11.7%)
1,105 American Health Properties, Inc., Notes 7.50 1/15/2007 989
1,000 EOP Operating L.P., Notes 6.80 1/15/2009 916
1,000 Health Care Properties Investors, Inc.,
Senior Notes 6.50 2/15/2006 875
1,000 Nationwide Health Properties, Inc., MTN,
Series B 7.60 5/10/2007 890
1,000 Reckson Operating Partnership, L.P.,
Notes 7.75 3/15/2009 938
3,400 TriNet Corporate Realty Trust, Inc.,
Notes 7.95 5/15/2006 2,868
--------------------------------------------------------------------------------
7,476
--------------------------------------------------------------------------------
RETAIL - FOOD (1.5%)
1,000 Safeway, Inc., Notes 7.25 9/15/2004 989
--------------------------------------------------------------------------------
SAVINGS & LOAN HOLDING CO. (3.2%)
2,000 Sovereign Bancorp, Inc., Senior Notes 10.25 5/15/2004 2,030
--------------------------------------------------------------------------------
SERVICES - COMMERCIAL & CONSUMER (2.9%)
2,000 Service Master Co., Notes 7.88 8/15/2009 1,876
--------------------------------------------------------------------------------
WASTE MANAGEMENT (3.6%)
1,450 Waste Management, Inc., Notes 6.13 7/15/2001 1,409
1,000 Waste Management, Inc., Notes 6.38 12/01/2003 932
--------------------------------------------------------------------------------
2,341
--------------------------------------------------------------------------------
Total corporate bonds (cost: $56,677) 56,043
--------------------------------------------------------------------------------
ASSET-BACKED SECURITIES (3.0%)
1,000 ARG Funding Corp., Series 1999-1A,
Class A-3 6.02 5/20/2005 970
1,000 LB Commercial Mortgage Trust,
Commercial Mortgage Pass Through
Certificates, Series 1998 C-1, Class A-2 6.40 8/18/2007 954
--------------------------------------------------------------------------------
Total asset-backed securities (cost: $1,906) 1,924
--------------------------------------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATIONS (5.7%)
1,000 Federal Home Loan Mortgage Corp.,
REMIC Trust, Series 2160 VC 6.00 8/15/2013 908
1,000 Federal National Mortgage Assn.,
REMIC Trust, Series 1999-25 VB 6.00 4/25/2016 884
1,000 Federal National Mortgage Assn.,
REMIC Trust, Series 1999-56 D 7.00 12/18/2014 942
1,000 Government National Mortgage Assn.,
Series 1999-14 VD 6.00 3/20/2014 906
--------------------------------------------------------------------------------
Total collateralized mortgage obligations (cost: $3,688) 3,640
--------------------------------------------------------------------------------
CASH EQUIVALENTS (3.6%)
COMMERCIAL PAPER
2,296 MCN Energy Enterprises (a),(b)
(cost: $2,296) 6.92 8/01/2000 2,296
--------------------------------------------------------------------------------
Total investments (cost: $64,567) $63,903
================================================================================
USAA INTERMEDIATE-TERM BOND 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.
Callable/Putable Security - Provides the option for the underwriter to call the
bonds at face value from the investor on a specified date prior to the bond's
maturity. If the underwriter does not exercise the call option, the investor is
obligated under the put feature to sell the bond back to the issuer at face
value on that specified date. This mandatory put feature shortens the effective
maturity of the security.
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) Commercial paper issued in reliance on the "private placement" exemption
from registration afforded by Section 4(2) of the Securities Act of 1933. Unless
this commercial paper is subsequently registered, a resale of this commercial
paper in the United States must be effected in a transaction exempt from
registration under the Securities Act of 1933. Section 4(2) commercial paper is
normally resold to other investors through or with the assistance of the issuer
or an investment dealer who makes a market in this security, 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 $999,000.
(d) At July 31, 2000, this security was segregated to cover delayed-delivery
purchases.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
USAA INTERMEDIATE-TERM BOND FUND
STATEMENT OF ASSETS AND LIABILITIES
(IN THOUSANDS)
JULY 31, 2000
ASSETS
Investments in securities, at market value (identified cost
of $64,567) $ 63,903
Cash 48
Receivables:
Capital shares sold 27
Interest 1,178
--------
Total assets 65,156
--------
LIABILITIES
Securities purchased 999
Capital shares redeemed 87
USAA Transfer Agency Company 4
Accounts payable and accrued expenses 194
--------
Total liabilities 1,284
--------
Net assets applicable to capital shares outstanding $ 63,872
========
REPRESENTED BY:
Paid-in capital $ 64,542
Accumulated undistributed net investment income 62
Accumulated net realized loss on investments (68)
Net unrealized depreciation of investments (664)
--------
Net assets applicable to capital shares outstanding $ 63,872
========
Capital shares outstanding 6,505
========
Authorized shares of $.01 par value 100,000
========
Net asset value, redemption price, and offering price per share $ 9.82
========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
USAA INTERMEDIATE-TERM BOND FUND
STATEMENT OF OPERATIONS
(IN THOUSANDS)
PERIOD ENDED JULY 31, 2000*
Net investment income:
Interest $3,517
------
Expenses:
Management fees 219
Transfer agent's fees 28
Custodian's fees 46
Postage 5
Shareholder reporting fees 14
Directors' fees 4
Registration fees 98
Professional fees 34
Other 3
------
Total expenses before reimbursement 451
Expenses reimbursed (167)
------
Total expenses after reimbursement 284
------
Net investment income 3,233
------
Net realized and unrealized loss on investments:
Net realized loss on investments (68)
Change in net unrealized appreciation/depreciation (664)
------
Net realized and unrealized loss (732)
------
Increase in net assets resulting from operations $2,501
======
* FUND COMMENCED OPERATIONS ON AUGUST 2, 1999.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
USAA INTERMEDIATE-TERM BOND FUND
STATEMENT OF CHANGES IN NET ASSETS
(IN THOUSANDS)
PERIOD ENDED JULY 31, 2000*
From operations:
Net investment income $ 3,233
Net realized loss on investments (68)
Change in net unrealized appreciation/depreciation
of investments (664)
-------
Increase in net assets resulting
from operations 2,501
-------
Distributions to shareholders from:
Net investment income (3,233)
-------
From capital share transactions:
Proceeds from shares sold 76,936
Reinvested dividends 1,369
Cost of shares redeemed (13,701)
-------
Increase in net assets from
capital share transactions 64,604
-------
Net increase in net assets 63,872
Net assets:
Beginning of period -
-------
End of period $63,872
=======
Accumulated undistributed net investment income:
End of period $ 62
=======
Change in shares outstanding:
Shares sold 7,760
Shares issued for dividends reinvested 139
Shares redeemed (1,394)
-------
Increase in shares outstanding 6,505
=======
* FUND COMMENCED OPERATIONS ON AUGUST 2, 1999.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
USAA INTERMEDIATE-TERM BOND 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
Intermediate-Term Bond Fund (the Fund), which commenced operations on August 2,
1999. The Fund's investment objective is high 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 a broad range
of investment-grade debt securities with a dollar-weighted average portfolio
maturity between three years and 10 years.
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 $62,000 and increase accumulated undistributed net investment income
by $62,000.
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. 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
Net investment income is accrued daily as dividends and distributed to
shareholders 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 $68,000
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 period ended July 31, 2000, were $65,870,000 and
$3,760,000, respectively.
Gross unrealized appreciation and depreciation of investments as of July 31,
2000, were $270,000 and $934,000, 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 as a percentage of its annual average net assets, which on an
annual basis is equal to .50% of the first $50 million, .40% of that portion
over $50 million but not over $100 million, and .30% of that portion over $100
million.
The Manager has voluntarily agreed to limit the annual expenses of the Fund to
.65% of its annual average net assets through December 1, 2000, and accordingly
has waived $167,000 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 .65% 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
1,488,000 shares (22.9%) 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 .72
Net realized and unrealized loss (.18)
Distributions from net investment income (.72)
--------
Net asset value at end of period $ 9.82
========
Total return (%)** 5.56
Net assets at end of period (000) $ 63,872
Ratio of expenses to average net assets (%) .65
Ratio of expenses to average net assets, excluding
reimbursement (%) 1.03
Ratio of net investment income to average
net assets (%) 7.37
Portfolio turnover (%) 8.60
* FUND COMMENCED OPERATIONS ON AUGUST 2, 1999.
** ASSUMES REINVESTMENT OF ALL DIVIDEND INCOME DURING THE PERIOD.
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
