Table of Contents
USAA Family of Funds 1
Message from the President 2
Investment Review 4
Message from the Manager 5
Shareholder Voting Results 7
Financial Information
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) Trust Low to moderate $3,000
High-Yield
Opportunities High 3,000
Income Moderate 3,000
Income Stock Moderate 3,000
Intermediate-Term
Bond Low to moderate 3,000
Short-Term Bond Low 3,000
INCOME - TAX EXEMPT
================================================================================
Long-Term Moderate $3,000
Intermediate-Term Low to moderate 3,000
Short-Term Low 3,000
State Bond Income Moderate 3,000
MONEY MARKET
================================================================================
Money Market Very low $3,000
Tax Exempt
Money Market Very low 3,000
Treasury Money Market Trust
(Registered Trademark) Very low 3,000
State Money Market Very low 3,000
Foreign investing is subject to additional risks, which are discussed in the
funds' prospectuses.
S&P 500(Registered Trademark)is a trademark of The McGraw-Hill Companies, Inc.
and has been licensed for use. The product is not sponsored, sold, or promoted
by Standard & Poor's, and Standard & Poor's makes no representation regarding
the advisability of investing in the product.
Some income may be subject to state or local taxes or the federal alternative
minimum tax.
An investment in a money market fund is not insured or guaranteed by the FDIC or
any other government agency. Although the fund seeks to preserve the value of
your investment at $1 per share, it is possible to lose money by investing in
the fund.
The Science & Technology Fund may be more volatile than a fund that diversifies
across many industries.
The InveStart(Registered Trademark) program is available for investors without
the $3,000 initial investment required to open an IMCO mutual fund account. A
mutual fund account can be opened with no initial investment if you elect to
have monthly automatic investments of at least $50 from a bank account.
InveStart is not available on tax-exempt funds or the S&P 500 Index Fund. The
minimum initial investment for IRAs is $250, except for the $2,000 minimum
required for the S&P 500 Index Fund. IRAs are not available for tax-exempt
funds. The Growth and Tax Strategy Fund is not available as an investment for
your IRA because the majority of its income is tax exempt.
California, Florida, New York, Texas, and Virginia funds available to residents
only.
Nondeposit investment products are not insured by the FDIC, are not deposits or
other obligations of, or guaranteed by, USAA Federal Savings Bank, are subject
to investment risks, and may lose value.
For more complete information about the mutual funds managed and distributed by
USAA Investment Management Company, including charges and operating expenses,
please call 1-800-531-8181 for a prospectus. Read it carefully before you
invest.
Message from the President
[PHOTOGRAPH OF THE PRESIDENT AND VICE CHAIRMAN OF THE BOARD, MICHAEL J.C. ROTH,
CFA, APPEARS HERE]
What an exciting time this is!
The way we do business, the way we communicate with each other, the way we live
our lives is all changing with breathtaking speed. It is fascinating and
sometimes scary. And it creates new investment ideas every day.
As we begin 2000, a challenging investment picture is out there. In the last
half of 1999, especially, investors in growth or technology stocks had wonderful
returns. These came on the heels of four previous years of returns that were
well above average. Those returns in 1999 were the product of the actions of
investors who think on the leading edge: technology, Internet, electronics. For
investors who included bonds or value-based stocks in their portfolios, 1999 was
disappointing. The returns there were largely driven by the Federal Reserve,
which is much more concerned with inflation than with leading-edge thinking. I
do not mean that as a put-down; that's just how it is.
And one last piece of the puzzle: the returns for growth and technology stocks
are coupled with price/earnings ratios that are so far above any common standard
that people are only guessing at what they mean.
So, in a nutshell, 1999 was huge returns on growth and tech stocks coupled with
valuations that were stratospheric and paltry returns on everything else. And,
oh yes, the economy continues to grow in a way that has some economists talking
about eliminating the national debt in just over a decade.
Great opportunities coupled with very interesting risks is a picture that for
many of you will continue to argue for the approach we have counseled. Create a
portfolio that pursues your goals within a level of risk which you can tolerate.
That portfolio can be much more exciting than it was a few years ago. We'd love
to help you create it.
Sincerely,
Michael J.C. Roth, CFA
President and
Vice Chairman of the Board
Past performance is no guarantee of future results.
Investment Review
USAA 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.
- --------------------------------------------------------------------------------
1/31/00
- --------------------------------------------------------------------------------
Net Assets $44.7 Million
Net Asset Value Per Share $9.80
- --------------------------------------------------------------------------------
Total Return as of 1/31/00
- --------------------------------------------------------------------------------
Since Inception on 8/2/99 1.47%
- --------------------------------------------------------------------------------
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 08/02/99 through 01/31/2000. 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
08/99 10,010 9,995 9,985
09/99 10,139 10,111 10,085
10/99 10,174 10,148 10,099
11/99 10,218 10,148 10,107
12/99 10,177 10,099 10,064
01/00 10,147 10,066 10,026
Data since inception on 8/2/99 through 1/31/00
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 THE PORTFOLIO MANAGER, PAUL LUNDMARK, CFA, APPEARS HERE]
Since this is the first manager report for the Fund, it gives me great pleasure
to say "Welcome aboard." I am very excited about managing this Fund and am
looking forward to a profitable partnership with you.
THE MARKET
Interest rates have risen dramatically since the inception of the Fund.
Investors fear that the economy is growing too fast to contain inflation. In an
effort to slow the economy, the Federal Reserve (the Fed) has raised the fed
funds rate by 1% since May of 1999. However, investors feel that more increases
may be necessary.
MANAGEMENT PHILOSOPHY
My philosophy in managing the 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 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 compare these securities by performing a total return analysis
over a one-year time horizon. This horizon analysis tries to quantify the unique
characteristics of different securities (put/call features, duration, maturity).
This research process provides a rational rather than an emotional process to
investing.
PERFORMANCE
Because of my risk/reward orientation, I have favored investments in
higher-yielding instruments, such as corporate bonds and mortgage- and
asset-backed securities, rather than Treasuries.
OUTLOOK
Looking to the future, I feel that the economy will continue to be strong. This
should result in corporate bonds and mortgage- and asset-backed securities
increasing in relative value. Our continued emphasis will be on finding
securities that represent good risk/reward characteristics.
Respectfully submitted on February 4, 2000.
PORTFOLIO MIX
JANUARY 31, 2000
A pie chart is shown here depicting the Portfolio Mix as of January 31, 2000 of
the USAA Intermediate-Term Bond Fund to be:
Corporate Bonds - 83.6%; Collateralized Mortgage Obligations - 8.1%;
Asset-Backed Securities - 4.2%; and Cash Equivalents - 2.2%.
Percentages are of the net assets in the portfolio and may or may not equal
100%.
Shareholder Voting Results
On October 15, 1999, a special meeting of shareholders was held to vote on the
following proposals. All proposals were approved by the shareholders. All
shareholders of record on August 19, 1999, were entitled to vote on each
proposal. The number of votes shown below are for the entire series of the USAA
Mutual Fund, Inc. (the Company) for proposals 1 and 2.
1 Proposal to elect Directors as follows:
DIRECTORS VOTES FOR VOTES WITHHELD
Robert G. Davis 1,769,441,834 27,742,867
Michael J.C. Roth 1,769,442,078 27,742,623
Barbara B. Dreeben 1,769,442,172 27,742,529
Robert L. Mason 1,769,442,172 27,742,529
David G. Peebles 1,769,442,078 27,742,623
Michael F. Reimherr 1,769,441,328 27,743,373
Richard A. Zucker 1,769,444,074 27,740,627
John W. Saunders, Jr. and Howard L. Freeman, Jr. did not stand for re-election
to the Board. Their term of office terminated on December 31, 1999.
2 Proposal to ratify the selection by the Board of Directors of KPMG LLP as
auditors for the Company.
NUMBER OF SHARES VOTING
- --------------------------------------------------------------------------------
FOR AGAINST ABSTAIN
1,664,427,712 19,027,937 27,873,822
USAA INTERMEDIATE-TERM BOND FUND
CATEGORIES AND DEFINITIONS
PORTFOLIO OF INVESTMENTS
January 31, 2000
(Unaudited)
Corporate bonds - debt securities issued by corporations as a method of raising
capital. Interest rates are constant to maturity. Prior to maturity, the market
price of a corporate bond generally varies inversely to the movement of interest
rates.
Collateralized mortage obligations and asset-backed securities - these
securities represent ownership in a pool of mortgage 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 an asset-backed security
generally will decline, however, when interest rates are declining, 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)
January 31, 2000
(Unaudited)
<TABLE>
<CAPTION>
Principal Coupon Market
Amount Security Rate Maturity Value
- ----------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
CORPORATE BONDS (83.6%)
Aerospace/Defense
$1,000 Coltec Industries, Inc., Senior Notes 7.50% 4/15/2008 $ 952
- ----------------------------------------------------------------------------------------------
Auto Parts
2,000 Meritor Automotive, Inc., Notes 6.80 2/15/2009 1,805
- ----------------------------------------------------------------------------------------------
Banks - Major Regional
1,000 Compass Bank, MTN 8.10 8/15/2009 1,000
1,000 Corporacion Andina de Fomento,
Global Bonds (Venezuela) 6.75 3/15/2005 942
1,000 First Union Corp., Subordinated Debentures 6.18 2/15/2036 923
2,000 Imperial Bank, Subordinated Capital Notes 8.50 4/01/2009 1,826
1,000 Popular North America, Inc., MTN 7.38 9/15/2001 996
1,000 Southtrust Bank, N.A., Subordinated Notes 6.57 12/15/2027 935
950 Union Planters Bank, National Assn.,
Putable/Callable Subordinated Notes 6.50 3/15/2018 843
- ----------------------------------------------------------------------------------------------
7,465
- ----------------------------------------------------------------------------------------------
Broadcasting - Radio & TV
1,000 Comcast Cable Communications, Inc.,
Senior Notes 6.20 11/15/2008 896
1,000 Cox Communications, Inc., Senior Notes 7.88 8/15/2009 1,000
- ----------------------------------------------------------------------------------------------
1,896
- ----------------------------------------------------------------------------------------------
Distributions - Food/Health
1,000 Supervalu, Inc., Notes 7.63 9/15/2004 978
- ----------------------------------------------------------------------------------------------
Electric Utilities
1,000 Empire District Electric Co., Senior Notes 7.70 11/15/2004 984
- ----------------------------------------------------------------------------------------------
Electronics - Defense
1,000 Litton Industries, Inc., Notes (a) 8.00 10/15/2009 980
- ----------------------------------------------------------------------------------------------
Electronics - Instrumentation
1,000 EG & G, Inc., Notes 6.80 10/15/2005 935
- ----------------------------------------------------------------------------------------------
Entertainment
1,000 Viacom, Inc., Senior Notes 7.75 6/01/2005 999
- ----------------------------------------------------------------------------------------------
Finance - Consumer
1,000 Capital One Financial Corp., Senior Notes 7.25 5/01/2006 940
1,000 Household Finance Corp., Senior Notes 6.50 11/15/2008 911
- ----------------------------------------------------------------------------------------------
1,851
- ----------------------------------------------------------------------------------------------
Finance - Diversified
1,000 Heller Financial, Inc., Notes (a) 7.38 11/01/2009 957
1,000 Newcourt Credit Group, Inc., Notes, Series B 6.88 2/16/2005 964
- ----------------------------------------------------------------------------------------------
1,921
- ----------------------------------------------------------------------------------------------
Homebuilding
1,000 Pulte Corp., Senior Notes 7.00 12/15/2003 939
- ----------------------------------------------------------------------------------------------
Investment Banks/Brokerage
1,000 Merrill Lynch & Co., Inc., Redeemable Notes 6.88 11/15/2018 898
- ----------------------------------------------------------------------------------------------
Manufacturing - Diversified Industries
1,000 EdperBrascan Corp., Notes 7.13 12/16/2003 959
- ----------------------------------------------------------------------------------------------
Natural Gas Utilities
1,000 Osprey Trust, Osprey I, Inc., Senior Notes (a) 8.31 1/15/2003 994
- ----------------------------------------------------------------------------------------------
Oil & Gas - Exploration & Production
1,000 Woodside Petroleum, Notes (a) 6.60 4/15/2008 900
- ----------------------------------------------------------------------------------------------
Real Estate Investment Trusts
1,000 EOP Operating, L.P., Notes 6.80 1/15/2009 900
1,000 Health Care Property Investors, Inc.,
Senior Notes 6.50 2/15/2006 836
1,000 Nationwide Health Properties, Inc., MTN,
Series B 7.60 5/10/2007 883
1,000 Reckson Operating Partnership, L.P., Notes 7.75 3/15/2009 914
2,000 TriNet Corporate Realty Trust, Inc., Notes 7.95 5/15/2006 1,703
- ----------------------------------------------------------------------------------------------
5,236
- ----------------------------------------------------------------------------------------------
Retail - Food
1,000 Safeway, Inc., Notes 7.25 9/15/2004 982
- ----------------------------------------------------------------------------------------------
Savings & Loan Holding Co.
2,000 Sovereign Bancorp, Inc., Senior Notes 10.25 5/15/2004 1,990
- ----------------------------------------------------------------------------------------------
Services - Commercial & Consumer
$1,000 Service Master Co., Notes 7.88 8/15/2009 950
- ----------------------------------------------------------------------------------------------
Truckers
1,000 Cummins Engine Co., Inc., MTN, Series A 6.45 3/01/2005 925
- ----------------------------------------------------------------------------------------------
Waste Management
1,000 Waste Management, Inc., Notes 6.13 7/15/2001 958
1,000 Waste Management, Inc., Notes 6.38 12/01/2003 908
- ----------------------------------------------------------------------------------------------
1,866
- ----------------------------------------------------------------------------------------------
Total corporate bonds (cost: $38,173) 37,405
- ----------------------------------------------------------------------------------------------
ASSET-BACKED SECURITIES (4.2%)
1,000 ARG Funding Corp., Rental Car Asset Backed
Notes, Series 1999-1, Class A-2 6.02 5/20/2005 945
1,000 LB Commercial Mortgage Trust, Commercial
Mortgage Pass Through Certificates,
Series 1998 C-1, Class A-2 6.40 8/18/2007 939
- ----------------------------------------------------------------------------------------------
Total asset-backed securities (cost: $1,899) 1,884
- ----------------------------------------------------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATIONS (8.1%)
1,000 Federal Home Loan Mortgage Corp.,
REMIC Trust, Series 2160 VC 6.00 8/15/2013 884
1,000 Federal National Mortgage Assn., REMIC Trust,
Series 1999-25 VB 6.00 4/25/2016 875
1,000 Federal National Mortgage Assn., REMIC Trust,
Series 1999-56 D 7.00 12/18/2014 948
1,000 Government National Mortgage Assn.,
Series 1999-14 VD 6.00 3/20/2014 889
- ----------------------------------------------------------------------------------------------
Total collateralized mortgage obligations (cost: $3,678) 3,596
- ----------------------------------------------------------------------------------------------
CASH EQUIVALENTS (2.2%)
Commercial Paper
981 Raytheon Co. (b) (cost: $981) 6.10 2/01/2000 981
- ----------------------------------------------------------------------------------------------
Total investments (cost: $44,731) $43,866
==============================================================================================
</TABLE>
PORTFOLIO SUMMARY BY INDUSTRY
-----------------------------
Banks - Major Regional 16.7%
Real Estate Investment Trusts 11.7
Collateralized Mortgage Obligations 8.0
Savings & Loan Holding Co. 4.5
Electronics - Defense 4.4
Finance - Diversified 4.3
Broadcasting - Radio & TV 4.3
Asset-Backed Securities 4.2
Waste Management 4.2
Finance - Consumer 4.1
Auto Parts 4.0
Entertainment 2.2
Natural Gas Utilities 2.2
Electric Utilities 2.2
Retail - Food 2.2
Distributions - Food/Health 2.2
Manufacturing - Diversified Industries 2.2
Aerospace/Defense 2.1
Services - Commercial & Consumer 2.1
Homebuilding 2.1
Electronics - Instrumentation 2.1
Truckers 2.1
Oil & Gas - Exploration & Production 2.0
Investment Banks/Brokerage 2.0
----
Total 98.1%
====
USAA INTERMEDIATE-TERM BOND FUND
NOTES TO PORTFOLIO OF INVESTMENTS
January 31, 2000
(Unaudited)
GENERAL NOTES
Market values of securities are determined by procedures and practices discussed
in note 1 to the financial statements.
The cost of securities for federal income tax purposes is approximately the same
as that reported in the financial statements.
The percentages shown represent the percentage of the investments to net assets.
SPECIFIC NOTES
(a) Security is exempt from registration under the Securities Act of 1933 and
has been determined to be liquid by the Fund's investment manager. Any 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.
(b) Security is restricted as to disposition under Section 4(2) of the
Securities Act of 1933 (the Act). Any resale of Section 4(2) commercial paper
must be effected in a transaction exempt from registration under the Act.
See accompanying notes to financial statements.
USAA INTERMEDIATE-TERM BOND FUND
STATEMENT OF ASSETS AND LIABILITIES
(IN THOUSANDS)
January 31, 2000
(Unaudited)
ASSETS
Investments in securities, at market value (identified
cost of $44,731) $ 43,866
Cash 195
Receivables:
Capital shares sold 64
Interest 877
--------
Total assets 45,002
--------
LIABILITIES
Capital shares redeemed 51
USAA Investment Management Company 43
USAA Transfer Agency Company 2
Accounts payable and accrued expenses 22
Dividends on capital shares 165
--------
Total liabilities 283
--------
Net assets applicable to capital shares outstanding $ 44,719
========
REPRESENTED BY:
Paid-in capital $ 45,584
Net unrealized depreciation of investments (865)
--------
Net assets applicable to capital shares outstanding $ 44,719
========
Capital shares outstanding 4,565
========
Authorized shares of $.01 par value 100,000
========
Net asset value, redemption price, and offering price per share $ 9.80
========
See accompanying notes to financial statements.
USAA INTERMEDIATE-TERM BOND FUND
STATEMENT OF OPERATIONS
(IN THOUSANDS)
Six-month period ended January 31, 2000*
(Unaudited)
Net investment income:
Interest income $1,260
------
Expenses:
Management fees 81
Transfer agent's fees 8
Custodian's fees 18
Postage 3
Shareholder reporting fees 3
Directors' fees 2
Registration fees 71
Professional fees 14
Other 1
------
Total expenses before reimbursement 201
Expenses reimbursed (95)
------
Total expenses after reimbursement 106
------
Net investment income 1,154
------
Net unrealized loss on investments:
Change in net unrealized appreciation/depreciation (865)
------
Net unrealized loss (865)
------
Increase in net assets resulting from operations $ 289
======
* 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)
Six-month period ended January 31, 2000*
(Unaudited)
From operations:
Net investment income $ 1,154
Change in net unrealized appreciation/depreciation of
investments (865)
-------
Increase in net assets resulting from operations 289
-------
Distributions to shareholders from:
Net investment income (1,154)
-------
From capital share transactions:
Proceeds from shares sold 47,611
Shares issued for dividends reinvested 328
Cost of shares redeemed (2,355)
-------
Increase in net assets from capital share transactions 45,584
-------
Net increase in net assets 44,719
Net assets:
Beginning of period -
-------
End of period $44,719
=======
Change in shares outstanding:
Shares sold 4,770
Shares issued for dividends reinvested 33
Shares redeemed (238)
-------
Increase in shares outstanding 4,565
=======
* Fund commenced operations on August 2, 1999.
See accompanying notes to financial statements.
USAA INTERMEDIATE-TERM BOND FUND
NOTES TO FINANCIAL STATEMENTS
January 31, 2000
(Unaudited)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USAA MUTUAL FUND, INC. (the Company), registered under the Investment Company
Act of 1940, as amended, is a diversified, open-end management investment
company incorporated under the laws of Maryland consisting of 13 separate funds.
The information presented in this semiannual report pertains only to the USAA
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) seeks to achieve
this objective by investing the Fund's assets principally in a broad range of
investment-grade debt securities with a dollar-weighted average portfolio
maturity between three to 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 judgement, 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 which 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.
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. Each committed line of credit is also subject to a facility fee. CAPCO
charges an annual facility fee of up to .08% of the committed facility, and Bank
of America charges an annual facility fee of .09% of the committed facility. The
Fund had no borrowings under any of these agreements during the six-month period
ended January 31, 2000.
(3) DISTRIBUTIONS
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 in the succeeding fiscal year or as
otherwise required to avoid the payment of federal taxes.
(4) INVESTMENT TRANSACTIONS
Cost of purchases and proceeds from sales of securities, excluding short-term
securities, for the period ending January 31, 2000, were $45.6 million and $2.0
million, respectively.
Gross unrealized appreciation and depreciation of investments as of January 31,
2000, were $14,495 and $879,101, 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 is on an
annual basis equal to .50% of the first $50 million, .40% of that portion over
$50 million but not over $100 million, and .30% of the 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. Because the Fund's estimated expenses for
the six-month period ending January 31, 2000, exceeded .65%, the Manager has
absorbed a portion of the Fund's expenses to reduce the Fund's expense ratio to
.65%.
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 January 31, 2000, the Association and its affiliates
owned 2.1 million shares (46.0%) 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:
Six-month
Period Ended
January 31,
2000*
-------------
Net asset value at beginning of period $ 10.00
Net investment income .35
Net unrealized loss (.20)
Distributions from net investment income (.35)
-------------
Net asset value at end of period $ 9.80
=============
Total return (%) ** 1.47
Net assets at end of period (000) $44,719
Ratio of expenses to average net assets (%) .65%
Ratio of expenses to average net assets
excluding reimbursement (%) 1.22(a)
Ratio of net investment income to
average net assets (%) 7.05(a)
Portfolio turnover (%) 6.99
*Fund commenced operations on August 2, 1999.
**Assumes reinvestment of all dividend income and capital gains distributions
during the period.
(a)Annualized. The ratio is not necessarily indicative of 12 months of
operations.
Directors
Robert G. Davis, Chairman of the Board
Michael J.C. Roth, Vice Chairman of the Board
Barbara B. Dreeben
Robert L. Mason
David G. Peebles
Michael F. Reimherr
Richard A. Zucker
Investment Adviser, Underwriter, and Distributor
USAA Investment Management Company
9800 Fredericksburg Road
San Antonio, Texas 78288
Transfer Agent Legal Counsel
USAA Shareholder Account Services Goodwin, Procter & Hoar LLP
9800 Fredericksburg Road Exchange Place
San Antonio, Texas 78288 Boston, Massachusetts 02109
Custodian Independent Auditors
State Street Bank and Trust Company KPMG LLP
P.O. Box 1713 112 East Pecan, Suite 2400
Boston, Massachusetts 02105 San Antonio, Texas 78205
Telephone Assistance Hours Internet Access
Call toll free - Central Time usaa.com(Service Mark)
Monday - Friday 7:00 a.m. to 9:00 p.m.
Saturdays 8:30 a.m. to 5:00 p.m.
Sundays 11:30 a.m. to 8:00 p.m.
For Additional Information on Mutual Funds
1-800-531-8181, (in San Antonio) 456-7211
For account servicing, exchanges, or redemptions
1-800-531-8448, (in San Antonio) 456-7202
Recorded Mutual Fund Price Quotes
24-hour service (from any phone)
1-800-531-8066, (in San Antonio) 498-8066
Mutual Fund USAA TouchLine(Registered Trademark)
(from touch-tone phones only)
For account balance, last transaction, fund prices,
or to exchange or redeem fund shares
1-800-531-8777, (in San Antonio) 498-8777
