TABLE OF CONTENTS
USAA FAMILY OF FUNDS 1
MESSAGE FROM THE PRESIDENT 2
INVESTMENT REVIEW 4
MESSAGE FROM THE MANAGERS 5
FINANCIAL INFORMATION
Independent Auditors' Report 9
Portfolio of Investments 10
Notes to Portfolio of Investments 20
Statement of Assets and Liabilities 21
Statement of Operations 22
Statement of Changes in Net Assets 23
Notes to Financial Statements 24
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 SMALL CAP
STOCK FUND, MANAGED BY USAA INVESTMENT MANAGEMENT COMPANY (IMCO). IT MAY BE USED
AS SALES LITERATURE ONLY WHEN PRECEDED OR ACCOMPANIED BY A CURRENT PROSPECTUS,
WHICH GIVES FURTHER DETAILS ABOUT THE FUND.
USAA WITH THE EAGLE IS REGISTERED IN THE U.S. PATENT & TRADEMARK
OFFICE.(COPYRIGHT)2000, USAA. ALL RIGHTS RESERVED.
USAA FAMILY OF FUNDS SUMMARY
FUND MINIMUM
TYPE/NAME VOLATILITY INVESTMENT
-------------------------------------------------------------
CAPITAL APPRECIATION
-------------------------------------------------------------
Aggressive Growth Very high $3,000
Emerging Markets Very high 3,000
First Start Growth
(Registered Trademark) Moderate to high 3,000
Gold Very high 3,000
Growth Moderate to high 3,000
Growth & Income Moderate 3,000
International Moderate to high 3,000
S&P 500(Registered
Trademark)Index Moderate 3,000
Science & Technology Very high 3,000
Small Cap Stock Very high 3,000
World Growth Moderate to high 3,000
-------------------------------------------------------------
ASSET ALLOCATION
-------------------------------------------------------------
Balanced Strategy Moderate $3,000
Cornerstone Strategy Moderate 3,000
Growth and Tax
Strategy Moderate 3,000
Growth Strategy Moderate to high 3,000
Income Strategy Low to moderate 3,000
-------------------------------------------------------------
INCOME - TAXABLE
-------------------------------------------------------------
GNMA(Registered
Trademark) 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 SMALL CAP STOCK FUND
OBJECTIVE: Long-term growth of capital.
TYPES OF INVESTMENTS: Invests principally in equity securities of companies with
small market capitalizations.
--------------------------------------------------------------------------------
7/31/00
--------------------------------------------------------------------------------
Net Assets $101.0 Million
Net Asset Value Per Share $13.17
--------------------------------------------------------------------------------
TOTAL RETURN AS OF 7/31/00
--------------------------------------------------------------------------------
SINCE INCEPTION ON 8/2/99 31.70%
--------------------------------------------------------------------------------
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 Small Cap Stock Fund, the S&P
SmallCap 600 Index, and the Lipper Small Cap General Funds Average for the
period of 08/02/1999 through 07/31/2000. The data points from the graph are as
follows:
USAA SMALL CAP S&P SMALLCAP LIPPER SMALL CAP
STOCK FUND 600 INDEX GENERAL FUNDS AVG.
--------------- ------- ------------------
08/02/99 $10,000 $10,000 $10,000
08/31/99 9,900 9,560 9,732
09/30/99 9,890 9,601 9,780
10/31/99 10,080 9,577 10,013
11/30/99 11,560 9,980 10,857
12/31/99 13,220 10,797 12,297
01/31/00 13,460 10,462 12,036
02/29/00 16,650 11,863 14,151
03/31/00 14,010 11,425 13,690
04/30/00 12,430 11,229 12,648
05/31/00 11,870 10,896 11,926
06/30/00 13,760 11,540 13,205
07/31/00 13,170 11,257 12,697
DATA SINCE INCEPTION ON 8/2/99 THROUGH 7/31/00
THE GRAPH ILLUSTRATES THE COMPARISON OF A $10,000 HYPOTHETICAL INVESTMENT IN THE
SMALL CAP STOCK FUND TO THE S&P SMALLCAP 600 INDEX AND THE LIPPER SMALL CAP
GENERAL FUNDS AVERAGE. THE S&P SMALLCAP 600 INDEX IS AN UNMANAGED
MARKET-VALUE-WEIGHTED INDEX CONSISTING OF 600 DOMESTIC STOCKS CHOSEN FOR MARKET
SIZE, LIQUIDITY, AND INDUSTRY GROUP REPRESENTATION. THE LIPPER AVERAGE IS THE
AVERAGE PERFORMANCE LEVEL OF ALL SMALL-CAP GENERAL FUNDS, AS REPORTED BY LIPPER
ANALYTICAL SERVICES, INC., AN INDEPENDENT ORGANIZATION THAT MONITORS THE
PERFORMANCE OF MUTUAL FUNDS.
MESSAGE FROM THE MANAGERS
[PHOTOGRAPH OF THE PORTFOLIO MANAGERS, ERIC M. EFRON, CFA, AND JOHN K. CABELL,
JR., CFA, APPEARS HERE.]
MARKET CONDITIONS
During the year that ended on July 31, 2000, U.S. equity markets in general
encountered high levels of volatility. The year started off on an encouraging
note. Buoyed by strong earnings reports, encouraged by a heady market for
initial public offerings (IPOs), and infatuated with the NEW ECONOMY, growth
stock prices moved up sharply between August 1, 1999, and early March 2000,
while value stocks lagged. A series of interest-rate hikes by the Federal
Reserve (the Fed) seemed not to matter. Technology stocks, particularly
Internet-related ones, led the charge upward, joined by biotech and
communications equities. As a result, valuations reached unsustainable levels.
In this highly charged environment, long-discredited small-market-capitalization
equities were particularly strong.
In early March 2000, however, there was a sea change in investor psychology.
Internet stocks, particularly the dot-coms in the business-to-consumer space,
started to show evidence that their business models might not work. Prices of
IPOs and secondary offerings began to soften. Questions arose regarding the
ownership of intellectual property in the genome and biotech areas. Rising
prices at the gas pump fueled fears of inflation. The Fed continued to boost
interest rates to slow the economy, and this time people took notice. The
confluence of these factors prompted investors to sell stocks aggressively,
which led to a dramatic drop in equity valuations and prices that lasted well
into April. Between March 3, when it peaked at 223.58 on an intraday basis, and
April 14, when bearish sentiment dragged it down to its calendar 2000
year-to-date low (185.32, intraday), the S&P SmallCap 600 Index dropped 17.0%.
The peak-to-trough decline for the NASDAQ Composite was even more extreme,
40.7%. The movement was especially violent in the technology, biotech, and
communications areas that had been so strong earlier in the year.
Between late April and early July, fears over the issues listed earlier
subsided, and U.S. equity markets staged a recovery, but it was not strong
enough to offset the damage of the preceding months. In July, stock prices in
general retreated once again, although not as much as they had in March and
April.
Even after all of this volatility, all of the major stock market indices that we
follow generated positive returns for the year, although they closed
considerably below their annual highs. Between August 2, 1999, the inception
date for the USAA Small Cap Stock Fund, and July 31, 2000, the
large-cap-oriented Dow Jones 30 Industrials and the S&P 500 Index were up 0.35%
and 9.03%, respectively. The technology-rich NASDAQ Composite led the pack, up
43.86%. The small-cap-intensive S&P SmallCap 600 and Russell 2000 indices filled
the middle ground, returning 12.99% and 14.55%, respectively.
PERFORMANCE
The USAA Small Cap Stock Fund participated fully in the volatility discussed
above. Between its inception on August 2, 1999, and July 31, 2000, it generated
a total return of 31.70%, outperforming all of the major stock market indicators
that we follow, with the exception of the NASDAQ Composite. As of July 31, 2000,
24% of the Fund's total return came from our participation in IPOs.
PORTFOLIO STRATEGY
The USAA Small Cap Stock Fund's strategy remains unchanged. We thought it would
be useful to review how this Fund compares and contrasts with the USAA
Aggressive Growth Fund, which we also manage.
The USAA Small Cap Stock Fund diversifies according to investment style but not
according to market-capitalization range. It places all of its new investments
in small-capitalization stocks, but incorporates a blended style by investing in
both growth and value equities. By our definition, any stock with a market
capitalization equal to or less than the largest market-capitalization stock
(currently about $3.2 billion) in the S&P SmallCap 600 Index is a small-cap
stock. In effect, the Fund lets the stock market define the size of a
small-capitalization stock. Our target is dynamic and fluid rather than static.
We have a flexible definition of "value." Value stocks can include stocks
selling at low multiples of earnings, revenues, assets, or book value relative
to:
- equities in general - future growth prospects
- similar equities - perceived economic value
- past valuations
Stocks may be deemed to be values for other reasons as well. The companies
underlying value stocks tend to be more mature and growing at slower rates than
their growth counterparts. By most conventional measures, value stocks tend to
be more moderately priced and less volatile than growth stocks, although there
may be exceptions. Small-cap stocks still remain high on the relative risk
spectrum. We believe that our selection of value stocks has good appreciation
potential, but in growth-dominated stock markets such as the one we are
experiencing now, it may take more time for this potential to be realized than
might be the case for growth stocks.
In contrast to the USAA Small Cap Stock Fund, the USAA Aggressive Growth Fund
diversifies according to market capitalization but not according to investment
style. It has the flexibility to invest in tiny companies and giant ones, but at
the same time, it invests only in companies with rapidly growing earnings or the
prospects thereof.
Where the two funds overlap is in the area of small-cap growth stocks. Within
this sphere, the USAA Small Cap Stock Fund follows the USAA Aggressive Growth
Fund's example of investing in rapidly growing companies that are in a good
position to take advantage of changing social and economic trends, but each Fund
diversifies away from this common core in a different manner. As described
above, the USAA Small Cap Stock Fund branches out into value stocks, and the
USAA Aggressive Growth Fund extends into the mid- and large-cap realms. The
intended design of each Fund is to provide investors at all times with exposure
to parts of the stock market that are in relative favor.
OUTLOOK
The performance of the USAA Small Cap Stock Fund during the stock market
correction earlier this year serves as a stark reminder that funds of its type
are very volatile. This is a risk that investors should be aware of at all
times. The long-term growth prospects for the growth stocks in the Fund look
good, and the other holdings sell at very attractive valuations in our analysis.
The growth stocks that we have invested in usually carry a high valuation. But
this should not be a problem so long as the underlying companies realize their
perceived growth potential, interest rates behave, and other disruptive events
remain at a manageable level. Because this is not a perfect world, however, we
think that equity markets will continue to encounter air pockets. Although we
are optimistic about the long-term outcome of our investment journey, we urge
our investors to keep their seat belts fastened.
REFER TO PAGE 4 FOR THE S&P SMALLCAP 600 INDEX DEFINITION.
NASDAQ COMPOSITE INDEX IS A MARKET-VALUE-WEIGHTED INDEX THAT MEASURES ALL
DOMESTIC AND NON-U.S.-BASED SECURITIES.
DOW JONES INDUSTRIAL AVERAGE IS A PRICE-WEIGHTED AVERAGE OF 30 ACTIVELY TRADED
BLUE CHIP STOCKS, PRIMARILY INDUSTRIALS.
THE RUSSELL 2000 IS A WIDELY RECOGNIZED UNMANAGED SMALL-CAP INDEX CONSISTING OF
THE 2,000 SMALLEST COMPANIES WITHIN THE RUSSELL 3000(REGISTERED TRADEMARK)
INDEX.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
THE PERFORMANCE OF THE USAA SMALL CAP STOCK FUND AND THE USAA AGGRESSIVE GROWTH
FUND WILL REFLECT THE VOLATILITY OF INVESTMENTS IN SMALL-CAP STOCKS AND IPOS.
-------------------------------------- -------------------------------------
TOP 10 EQUITY HOLDINGS TOP 10 INDUSTRIES
(% OF NET ASSETS) (% OF NET ASSETS)
-------------------------------------- -------------------------------------
Sepracor, Inc. 4.2 Biotechnology 11.9
Biovail Corp. 2.3 Drugs 9.2
Forward Air Corp. 2.2 Communication Equipment 6.3
QIAGEN N.V. 2.0 Oil & Gas - Drilling/Equipment 4.6
IDEC Pharmaceuticals Corp. 1.9 Computer Software & Service 4.4
Quanta Services, Inc. 1.4 Internet Services 4.0
Techne Corp. 1.2 Medical Products & Supplies 3.9
Caliper Technologies Corp. 1.1 Services - Commercial & Consumer 3.8
Four Seasons Hotels, Inc. 1.1 Retail - Specialty 3.2
99 Cents Only Stores 1.1 Electronics - Semiconductors 2.6
-------------------------------------- -------------------------------------
YOU WILL FIND A COMPLETE LIST OF THE SECURITIES THAT THE FUND OWNS ON PAGES
10-19.
INDEPENDENT AUDITORS' REPORT
KPMG
The Shareholders and Board of Directors
USAA SMALL CAP STOCK FUND:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of the USAA Small Cap Stock 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 Small Cap Stock 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 SMALL CAP STOCK FUND
PORTFOLIO OF INVESTMENTS
JULY 31, 2000
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
--------------------------------------------------------------------------------
COMMON STOCKS (92.4%)
AEROSPACE/DEFENSE (0.1%)
12,000 AAR Corp. $ 144
--------------------------------------------------------------------------------
AIR FREIGHT (2.5%)
10,000 EGL, Inc.* 287
50,000 Forward Air Corp.* 2,256
--------------------------------------------------------------------------------
2,543
--------------------------------------------------------------------------------
AIRLINES (0.4%)
11,200 Atlantic Coast Airlines Holdings, Inc.* 413
--------------------------------------------------------------------------------
AUTO PARTS (1.5%)
30,000 Copart, Inc.* 398
18,700 Lear Corp.* 436
9,200 Littelfuse, Inc.* 324
29,700 Tower Automotive, Inc.* 362
--------------------------------------------------------------------------------
1,520
--------------------------------------------------------------------------------
BANKS - MAJOR REGIONAL (0.3%)
9,000 Bank of the Ozarks, Inc. 135
10,000 Hamilton Bancorp, Inc.* 180
--------------------------------------------------------------------------------
315
--------------------------------------------------------------------------------
BEVERAGES - ALCOHOLIC (0.3%)
9,000 Beringer Wine Estates Holdings, Inc. "B"* 331
--------------------------------------------------------------------------------
BIOTECHNOLOGY (11.9%)
16,000 Abgenix, Inc.* 802
1,300 Aclara Biosciences, Inc.* 55
25,000 Applied Molecular Evolution, Inc.* 659
2,500 Argonaut Technologies, Inc.* 49
19,000 Biomatrix, Inc.* 395
15,000 Celgene Corp.* 779
900 Discovery Partners International, Inc.* 16
5,000 Diversa Corp.* 180
10,000 Gemini Genomics plc* 174
16,000 IDEC Pharmaceuticals Corp.* 1,965
900 Illumina, Inc.* 32
6,900 Inhale Therapeutic Systems, Inc.* 560
8,000 Invitrogen Corp.* 502
2,000 Luminex Corp.* 73
11,000 Maxygen, Inc.* 682
10,000 Medarex, Inc.* 729
6,000 Millennium Pharmaceuticals, Inc.* 577
40,000 QIAGEN N.V.* 1,990
12,000 Sequenom, Inc.* 340
12,000 Techne Corp.* 1,198
2,500 Variagenics, Inc.* 51
15,000 Vical, Inc.* 244
--------------------------------------------------------------------------------
12,052
--------------------------------------------------------------------------------
BROADCASTING - RADIO & TV (0.5%)
14,300 Sinclair Broadcast Group, Inc. "A"* 156
5,900 Spanish Broadcasting Systems, Inc. "A"* 66
13,600 Wink Communications, Inc.* 333
--------------------------------------------------------------------------------
555
--------------------------------------------------------------------------------
BUILDING MATERIAL GROUP (1.2%)
8,000 Simpson Manufacturing, Inc.* 392
15,000 Trex Company, Inc.* 804
--------------------------------------------------------------------------------
1,196
--------------------------------------------------------------------------------
CHEMICALS (0.6%)
13,700 Symyx Technologies* 580
--------------------------------------------------------------------------------
CHEMICALS - DIVERSIFIED (0.4%)
8,700 Cabot Microelectronics Corp.* 409
--------------------------------------------------------------------------------
CHEMICALS - SPECIALTY (0.1%)
11,800 Polymer Group, Inc. 91
--------------------------------------------------------------------------------
COMMUNICATION EQUIPMENT (6.3%)
400 Accelerated Networks, Inc.* 10
8,200 Advanced Fibre Communications, Inc.* 352
12,500 Airnet Communications Corp.* 347
1,700 Airspan Networks, Inc.* 38
200 Avici Systems, Inc.* 20
8,000 Breezecom Ltd.* 282
8,500 Clarent Corp.* 364
13,000 Digital Microwave Corp.* 353
9,200 Harmonic, Inc.* 217
7,600 interWAVE Communications International, Ltd.* 118
20,100 MCK Communications, Inc.* 364
8,100 Metawave Communications Corp.* 219
700 Netro Corp.* 38
300 New Focus, Inc.* 30
1,300 Next Level Communications, Inc.* 117
600 ONI Systems Corp.* 53
11,100 Paradyne Networks, Inc.* 316
8,800 PCTEL, Inc.* 269
8,700 Sierra Wireless, Inc.* 505
1,000 Sonus Networks, Inc.* 186
900 Sunrise Telecom, Inc.* 42
900 Sycamore Networks, Inc.* 111
14,100 Tekelec, Inc.* 553
8,300 Telaxis Communications Corp.* 158
10,200 Terayon Communication Systems, Inc.* 520
500 Triton Network Systems, Inc.* 14
13,800 UTStarcom, Inc.* 351
14,500 Vyyo, Inc.* 392
--------------------------------------------------------------------------------
6,339
--------------------------------------------------------------------------------
COMPUTER - HARDWARE (0.4%)
1,700 Network Engines, Inc.* 47
6,200 Sandisk Corp.* 395
--------------------------------------------------------------------------------
442
--------------------------------------------------------------------------------
COMPUTER - NETWORKING (0.6%)
13,500 Finisar Corp.* 359
6,400 JNI Corp.* 273
500 Stratos Lightwave, Inc.* 19
--------------------------------------------------------------------------------
651
--------------------------------------------------------------------------------
COMPUTER SOFTWARE & SERVICE (4.4%)
7,100 Active Software, Inc.* 405
31,400 Avant! Corp.* 491
45,500 Bindview Development Corp.* 402
5,000 Bluestone Software, Inc.* 111
9,700 ClickSoftware Technologies Ltd.* 47
2,900 Corio, Inc.* 49
28,200 Crossworlds Software, Inc.* 472
26,200 Legato Systems, Inc.* 255
10,900 Network Associates, Inc.* 209
1,200 Nuance Communications, Inc.* 168
1,100 Numerical Technologies, Inc.* 51
3,200 OpenTV Corp. "A"* 158
11,500 OTG Software, Inc.* 384
11,700 Perot Systems Corp. "A"* 105
16,200 Scientific Learning Corp.* 103
4,300 Sequoia Software Corp.* 50
2,500 Talarian Corp.* 32
10,100 Transaction Systems Architects, Inc.* 179
9,100 Ulticom, Inc.* 305
7,600 ValiCert, Inc.* 84
2,100 Virage, Inc.* 34
11,300 Wind River Systems, Inc.* 331
--------------------------------------------------------------------------------
4,425
--------------------------------------------------------------------------------
CONSTRUCTION - CEMENT & AGGREGATES (0.2%)
4,500 Vulcan Materials Co.* 193
--------------------------------------------------------------------------------
DRUGS (9.2%)
15,000 Alpharma, Inc. "A" 983
40,000 Biovail Corp.* 2,320
21,000 Jones Pharma, Inc. 686
34,500 King Pharmaceuticals, Inc.* 1,039
40,000 Sepracor, Inc.* 4,230
--------------------------------------------------------------------------------
9,258
--------------------------------------------------------------------------------
ELECTRICAL EQUIPMENT (1.0%)
600 Capstone Turbine Corp.* 33
12,600 DDI Corp.* 277
5,300 Manufacturers Services Ltd.* 123
27,000 SLI, Inc. 292
2,700 SMTC Corp.* 49
15,200 Viasystems Group, Inc.* 250
--------------------------------------------------------------------------------
1,024
--------------------------------------------------------------------------------
ELECTRONICS - COMPUTER DISTRIBUTORS (0.4%)
12,000 Kent Electronics Corp.* 373
--------------------------------------------------------------------------------
ELECTRONICS - INSTRUMENTATION (0.6%)
12,600 Methode Electronics, Inc. "A" 572
--------------------------------------------------------------------------------
ELECTRONICS - SEMICONDUCTORS (2.6%)
2,000 Centillium Communications, Inc.* 162
3,300 Exar Corp.* 306
5,900 Hi/fn, Inc.* 286
16,300 Insilicon, Inc.* 276
1,900 Intersil Holding Corp.* 109
900 Marvell Technology Group Ltd.* 41
5,600 Metalink Ltd.* 127
5,300 MIPS Technologies, Inc.* 247
7,700 MMC Networks, Inc.* 381
9,100 Parthus Technologies plc ADR* 274
600 Quantum Effect Devices, Inc.* 45
300 Silicon Image, Inc.* 16
300 Silicon Laboratories, Inc.* 17
2,300 Stanford Microdevices, Inc.* 97
3,600 Virata Corp.* 230
--------------------------------------------------------------------------------
2,614
--------------------------------------------------------------------------------
ENGINEERING & CONSTRUCTION (1.4%)
1,700 Lexent, Inc.* 45
30,000 Quanta Services, Inc.* 1,373
--------------------------------------------------------------------------------
1,418
--------------------------------------------------------------------------------
ENTERTAINMENT (0.2%)
10,000 Crown Media Holdings, Inc. "A"* 161
--------------------------------------------------------------------------------
EQUIPMENT - SEMICONDUCTORS (1.1%)
7,400 Brooks Automation, Inc.* 367
5,500 Cymer, Inc.* 250
9,500 Electroglas, Inc.* 190
5,900 PRI Automation, Inc.* 269
--------------------------------------------------------------------------------
1,076
--------------------------------------------------------------------------------
FINANCE - CONSUMER (1.2%)
24,750 Metris Companies, Inc. 725
20,000 NCO Group, Inc.* 495
--------------------------------------------------------------------------------
1,220
--------------------------------------------------------------------------------
FINANCE - DIVERSIFIED (0.5%)
8,700 Heller Financial, Inc. "A"* 209
5,200 SEI Investments Co. 284
--------------------------------------------------------------------------------
493
--------------------------------------------------------------------------------
FOODS (0.6%)
7,000 American Italian Pasta Co. "A"* 138
10,000 Suiza Foods Corp.* 464
--------------------------------------------------------------------------------
602
--------------------------------------------------------------------------------
GAMING COMPANIES (0.7%)
21,000 Isle of Capri Casinos, Inc.* 260
11,600 Mandalay Resort Group* 283
12,000 Station Casinos, Inc.* 155
--------------------------------------------------------------------------------
698
--------------------------------------------------------------------------------
HEALTH CARE - DIVERSIFIED (1.2%)
30,000 Accredo Health, Inc.* 990
5,200 Professional Detailing, Inc.* 192
--------------------------------------------------------------------------------
1,182
--------------------------------------------------------------------------------
HEALTH CARE - HMOS (0.8%)
12,000 Express Scripts, Inc. "A"* 771
--------------------------------------------------------------------------------
HEALTH CARE - SPECIALIZED SERVICES (2.4%)
7,200 Advance Paradigm, Inc.* 178
8,000 eBenX, Inc.* 177
10,000 Omnicare, Inc. 97
12,500 Orthodontic Centers of America, Inc.* 323
17,000 Priority Healthcare Corp. "B"* 912
20,000 RehabCare Group, Inc.* 711
--------------------------------------------------------------------------------
2,398
--------------------------------------------------------------------------------
HOMEBUILDING (0.2%)
14,000 Crossmann Communities, Inc.* 210
--------------------------------------------------------------------------------
HOSPITALS (0.3%)
6,500 Province Healthcare Co.* 279
--------------------------------------------------------------------------------
HOUSEWARES (0.5%)
10,600 Salton, Inc.* 334
10,000 Yankee Candle Co., Inc.* 209
--------------------------------------------------------------------------------
543
--------------------------------------------------------------------------------
INTERNET SERVICES (4.0%)
4,100 724 Solutions, Inc.* 137
8,400 Be Free, Inc.* 43
500 Blue Martini Software, Inc.* 30
2,200 Click Commerce, Inc.* 69
12,700 Cysive, Inc.* 305
7,500 Digital Island, Inc.* 215
17,400 divine interVentures, Inc.* 152
7,900 Entrust Technologies, Inc.* 226
10,700 Evoke Communications, Inc.* 86
5,400 Freemarkets, Inc.* 260
34,000 HeadHunter.NET, Inc.* 272
4,300 homestore.com, Inc.* 151
14,600 i3 Mobile, Inc.* 193
7,600 Ibeam Broadcasting Corp.* 94
1,000 InterNAP Network Services Corp.* 34
27,374 Internet Pictures Corp.* 303
11,000 Loudeye Technologies, Inc.* 157
23,200 Promotions.com, Inc.* 120
750 PurchasePro.com, Inc.* 29
1,600 Register.com, Inc.* 43
3,900 Retek, Inc.* 120
4,200 Selectica, Inc.* 217
12,300 Sportsline USA, Inc.* 194
500 StorageNetworks, Inc.* 55
3,700 Tumbleweed Communications Corp.* 166
1,000 Versata, Inc.* 34
12,300 Viador, Inc.* 131
40,000 XCare.net, Inc.* 197
--------------------------------------------------------------------------------
4,033
--------------------------------------------------------------------------------
INVESTMENT MANAGEMENT (0.7%)
20,000 Blackrock, Inc."A"* 675
--------------------------------------------------------------------------------
LEISURE TIME (0.3%)
14,000 Steiner Leisure Ltd.* 271
--------------------------------------------------------------------------------
LODGING/HOTEL (2.1%)
16,000 Four Seasons Hotels, Inc. 1,122
30,000 Hotel Reservations Network, Inc.* 1,033
--------------------------------------------------------------------------------
2,155
--------------------------------------------------------------------------------
MANUFACTURING - DIVERSIFIED INDUSTRIES (0.1%)
13,000 AMCOL International Corp. 48
--------------------------------------------------------------------------------
MANUFACTURING - SPECIALIZED (0.5%)
13,000 Astec Industries, Inc.* 253
18,200 Maxwell Technologies, Inc.* 266
--------------------------------------------------------------------------------
519
--------------------------------------------------------------------------------
MEDICAL PRODUCTS & SUPPLIES (3.9%)
10,000 ABIOMED, Inc.* 397
20,600 ArthroCare Corp.* 748
20,300 Caliper Technologies Corp.* 1,116
10,000 Charles River Laboratories International* 302
6,500 CONMED Corp.* 87
16,000 SciQuest.com, Inc.* 157
16,100 Varian Medical Systems, Inc.* 692
35,000 Vascular Solutions, Inc.* 486
--------------------------------------------------------------------------------
3,985
--------------------------------------------------------------------------------
OIL & GAS - DRILLING/EQUIPMENT (4.6%)
15,000 Cooper Cameron Corp.* 969
20,000 Dril-Quip, Inc.* 799
6,500 Ensco International, Inc. 219
25,000 Grant Prideco, Inc.* 503
7,700 Precision Drilling Corp.* 263
11,100 R&B Falcon Corp.* 221
13,600 Smith International, Inc.* 971
10,500 Veritas DGC, Inc.* 226
13,000 Weatherford International, Inc.* 521
--------------------------------------------------------------------------------
4,692
--------------------------------------------------------------------------------
OIL & GAS - EXPLORATION & PRODUCTION (1.5%)
11,600 Cabot Oil & Gas Corp. 215
15,100 EOG Resources, Inc. 446
16,100 Louis Dreyfus Natural Gas Corp.* 418
18,000 Spinnaker Exploration Co.* 449
--------------------------------------------------------------------------------
1,528
--------------------------------------------------------------------------------
RESTAURANTS (1.4%)
20,000 Creative Host Services, Inc.* 100
500 Creative Host Services, Inc. Warrants* -
6,000 Krispy Kreme Doughnuts, Inc.* 408
20,000 P. F. Chang's China Bistro, Inc.* 589
15,000 Papa John's International, Inc.* 357
--------------------------------------------------------------------------------
1,454
--------------------------------------------------------------------------------
RETAIL - BUILDING SUPPLIES (0.8%)
12,300 Fastenal Co. 759
--------------------------------------------------------------------------------
RETAIL - DEPARTMENT STORES (0.2%)
10,000 Nordstrom, Inc. 175
--------------------------------------------------------------------------------
RETAIL - DISCOUNTERS (0.4%)
8,850 Dollar Tree Stores, Inc.* 377
--------------------------------------------------------------------------------
RETAIL - FOOD (0.2%)
22,500 Wild Oats Markets, Inc.* 228
--------------------------------------------------------------------------------
RETAIL - SPECIALTY (3.2%)
25,000 99 Cents Only Stores* 1,077
25,000 Cost Plus, Inc.* 833
18,000 Linens 'n Things, Inc.* 539
17,000 Tuesday Morning Corp.* 165
15,000 Williams-Sonoma, Inc.* 581
--------------------------------------------------------------------------------
3,195
--------------------------------------------------------------------------------
RETAIL - SPECIALTY APPAREL (2.0%)
13,000 Abercrombie & Fitch Co. "A"* 209
13,000 American Eagle Outfitters, Inc.* 193
20,000 Charlotte Russe Holding, Inc.* 241
34,000 Chico's FAS, Inc.* 1,003
15,000 Too, Inc.* 337
--------------------------------------------------------------------------------
1,983
--------------------------------------------------------------------------------
SERVICES - COMMERCIAL & CONSUMER (3.8%)
56,200 Armor Holdings, Inc.* 826
4,500 Corporate Executive Board Co.* 288
11,200 Heidrick & Struggles International, Inc.* 750
24,600 Innotrac Corp.* 126
37,200 Kforce.com, Inc.* 167
47,100 Labor Ready, Inc.* 236
18,200 Merix Corp.* 910
20,000 Profit Recovery Group International, Inc.* 185
13,300 The Titan Corp.* 395
--------------------------------------------------------------------------------
3,883
--------------------------------------------------------------------------------
SERVICES - COMPUTER SYSTEMS (1.7%)
16,200 Complete Business Solutions, Inc.* 207
10,100 iGATE Capital Corp.* 95
41,700 IMRglobal Corp.* 547
5,500 MarchFirst, Inc.* 114
41,600 Pomeroy Computer Resources, Inc.* 707
--------------------------------------------------------------------------------
1,670
--------------------------------------------------------------------------------
SERVICES - DATA PROCESSING (1.0%)
12,000 Affiliated Computer Services, Inc.* 541
15,000 Computer Horizons Corp.* 196
3,526 MedQuist, Inc.* 76
27,000 Syntel, Inc.* 253
--------------------------------------------------------------------------------
1,066
--------------------------------------------------------------------------------
SPECIALTY PRINTING (0.2%)
23,700 Consolidated Graphics, Inc.* 253
--------------------------------------------------------------------------------
TELECOMMUNICATIONS - CELLULAR/WIRELESS (1.6%)
600 Aether Systems, Inc.* 100
11,600 Alamosa PCS Holdings, Inc.* 232
19,900 Dobson Communications Corp. "A"* 435
3,600 Leap Wireless International, Inc.* 228
1,600 Nextel Partners, Inc. "A"* 51
4,000 Tritel, Inc.* 124
4,800 Triton PCS Holdings, Inc. "A"* 241
8,500 UbiquiTel, Inc.* 86
8,700 US Unwired, Inc. "A"* 124
--------------------------------------------------------------------------------
1,621
--------------------------------------------------------------------------------
TELECOMMUNICATIONS - LONG DISTANCE (0.8%)
100,000 American TeleSource International, Inc.* 450
12,200 Universal Access, Inc.* 337
--------------------------------------------------------------------------------
787
--------------------------------------------------------------------------------
TELEPHONES (0.4%)
15,000 GT Group Telecom, Inc. "B"* 245
6,750 Winstar Communications, Inc.* 204
--------------------------------------------------------------------------------
449
--------------------------------------------------------------------------------
WASTE MANAGEMENT (0.4%)
20,000 Waste Connections, Inc.* 405
--------------------------------------------------------------------------------
Total common stocks (cost: $82,500) 93,302
--------------------------------------------------------------------------------
PRINCIPAL
AMOUNT
(000)
------------
MONEY MARKET INSTRUMENT (6.8%)
$ 6,871 Federal Home Loan Mortgage, Discount Note,
6.48%, 8/01/2000 (cost: $6,871) 6,871
--------------------------------------------------------------------------------
Total investments (cost: $89,371) $100,173
================================================================================
USAA SMALL CAP STOCK 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.
Investments in foreign securities were 7.7% of net assets at July 31, 2000.
ADR - American Depositary Receipts are foreign shares held by a U.S. bank which
issues a receipt evidencing ownership. Dividends are paid in U.S. dollars.
SPECIFIC NOTES
* Non-income producing.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
USAA SMALL CAP STOCK FUND
STATEMENT OF ASSETS AND LIABILITIES
(IN THOUSANDS)
JULY 31, 2000
ASSETS
Investments in securities, at market value
(identified cost of $89,371) $ 100,173
Cash 173
Receivables:
Capital shares sold 111
Dividends 2
Securities sold 1,652
----------
Total assets 102,111
----------
LIABILITIES
Securities purchased 916
Capital shares redeemed 70
USAA Investment Management Company 66
USAA Transfer Agency Company 16
Accounts payable and accrued expenses 63
----------
Total liabilities 1,131
----------
Net assets applicable to capital shares outstanding $ 100,980
==========
REPRESENTED BY:
Paid-in capital $ 93,976
Accumulated net realized loss on investments (3,798)
Net unrealized appreciation of investments 10,802
----------
Net assets applicable to capital shares outstanding $ 100,980
==========
Capital shares outstanding 7,667
==========
Authorized shares of $.01 par value 100,000
==========
Net asset value, redemption price, and offering price per share $ 13.17
==========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
USAA SMALL CAP STOCK FUND
STATEMENT OF OPERATIONS
(IN THOUSANDS)
PERIOD ENDED JULY 31, 2000*
Net investment loss:
Income:
Dividends $ 31
Interest 432
---------
Total income 463
---------
Expenses:
Management fees 524
Transfer agent's fees 193
Custodian's fees 82
Postage 30
Shareholder reporting fees 15
Directors' fees 4
Registration fees 114
Professional fees 35
Other 3
---------
Total expenses 1,000
---------
Net investment loss (537)
---------
Net realized and unrealized gain (loss) on investments:
Net realized loss on investments (3,798)
Change in net unrealized appreciation/depreciation 10,802
---------
Net realized and unrealized gain 7,004
---------
Increase in net assets resulting from operations $ 6,467
=========
* FUND COMMENCED OPERATIONS ON AUGUST 2, 1999.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
USAA SMALL CAP STOCK FUND
STATEMENT OF CHANGES IN NET ASSETS
(IN THOUSANDS)
PERIOD ENDED JULY 31, 2000*
From operations:
Net investment loss $ (537)
Net realized loss on investments (3,798)
Change in net unrealized appreciation/depreciation
of investments 10,802
---------
Increase in net assets resulting
from operations 6,467
---------
From capital share transactions:
Proceeds from shares sold 140,189
Cost of shares redeemed (45,676)
---------
Increase in net assets from capital
share transactions 94,513
---------
Net increase in net assets 100,980
Net assets:
Beginning of period -
---------
End of period $ 100,980
=========
Change in shares outstanding:
Shares sold 11,159
Shares redeemed (3,492)
---------
Increase in shares outstanding 7,667
=========
* FUND COMMENCED OPERATIONS ON AUGUST 2, 1999.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
USAA SMALL CAP STOCK 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 Small
Cap Stock Fund (the Fund), which commenced operations on August 2, 1999. The
Fund's investment objective is long-term growth of capital. USAA Investment
Management Company (the Manager) attempts to achieve this objective by investing
the Fund's assets primarily in equity securities of companies with small market
capitalizations.
A. SECURITY VALUATION - The value of each security is determined (as of the
close of trading on the New York Stock Exchange on each business day the
Exchange is open) as set forth below:
1. Portfolio securities, except as otherwise noted, traded primarily on a
domestic securities exchange are valued at the last sales price on that
exchange.
2. Over-the-counter securities are priced at the last sales price or, if not
available, at the average of the bid and asked prices.
3. Securities purchased with maturities of 60 days or less are stated at
amortized cost, which approximates market value.
4. Securities that cannot be valued by the methods set forth above, and all
other assets, are valued in good faith at fair value, using methods determined
by the Manager under the general supervision of the Board of Directors.
B. FEDERAL TAXES - The Fund's policy is to comply with the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its income to its shareholders. Therefore, no
federal income or excise tax provision is required. As a result of certain
permanent differences between book and tax basis accounting, reclassifications
have been made on the statement of assets and liabilities to decrease
accumulated undistributed net investment loss by $537,000, and decrease paid in
capital by $537,000.
C. INVESTMENTS IN SECURITIES - Security transactions are accounted for on the
date the securities are purchased or sold (trade date). Gain or loss from sales
of investment securities is computed on the identified cost basis. Dividend
income, less foreign taxes, if any, is recorded on the ex-dividend date. If the
ex-dividend date has passed, certain dividends from foreign securities are
recorded upon notification. Interest income is recorded on the accrual basis.
Discounts and premiums on short-term securities are amortized over the life of
the respective securities.
D. USE OF ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that may affect the reported amounts in the
financial statements.
(2) LINES OF CREDIT
The Fund participates with other USAA funds in three joint short-term revolving
loan agreements totaling $850 million, two with USAA Capital Corporation
(CAPCO), an affiliate of the Manager ($250 million committed and $500 million
uncommitted), and one with Bank of America ($100 million committed). The purpose
of the agreements is to meet temporary or emergency cash needs, including
redemption requests that might otherwise require the untimely disposition of
securities.
Subject to availability under 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 and 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 $3,798,000 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 of securities, excluding short-term
securities, for the period ended July 31, 2000, were $108,837,000 and
$22,357,000, respectively.
Gross unrealized appreciation and depreciation of investments as of July 31,
2000, were $25,103,000 and $14,301,000, 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 .75% of its annual average net assets.
B. TRANSFER AGENT'S FEES - USAA Transfer Agency Company, d/b/a USAA Shareholder
Account Services, an affiliate of the Manager, provides transfer agent services
to the Fund based on an annual charge of $26 per shareholder account plus
out-of-pocket expenses.
C. UNDERWRITING SERVICES - The Manager provides exclusive underwriting and
distribution of the Fund's shares on a continuing best-efforts basis. The
Manager receives no commissions or fees for this service.
D. BROKERAGE SERVICES - USAA Brokerage Services, a discount brokerage service
of the Manager, may execute portfolio transactions for the Fund. The amount of
brokerage commissions paid to USAA Brokerage Services during the period ended
July 31, 2000, was $2,000.
(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
832,000 shares (10.9%) 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 loss (.10)(a)
Net realized and unrealized gain 3.27
--------------
Net asset value at end of period $ 13.17
==============
Total return (%) 31.70
Net assets at end of period (000) $100,980
Ratio of expenses to average net assets (%) 1.43
Ratio of net investment loss to average net assets (%) (.77)
Portfolio turnover (%) 36.73
* FUND COMMENCED OPERATIONS ON AUGUST 2, 1999.
(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
