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 8
Categories and Definitions 9
Portfolio of Investments 10
Notes to Portfolio of Investments 14
Statement of Assets and Liabilities 15
Statement of Operations 16
Statements of Changes in Net Assets 17
Notes to Financial Statements 18
IMPORTANT INFORMATION
Through our ongoing efforts to reduce expenses and respond to shareholder
requests, your annual and semiannual report mailings are streamlined. One copy
of each report is sent to each address, rather than to every registered owner.
For many shareholders and their families, this eliminates duplicate copies,
saving paper and postage costs to the Fund.
If you are the primary shareholder on at least one account, prefer not to
participate in streamlining, and would like to continue receiving one report per
registered account owner, you may request this in writing to:
USAA Investment Management Company
Attn: Report Mail
9800 Fredericksburg Road
San Antonio, TX 78284-8916
or phone a mutual fund representative at 1-800-531-8448 during business hours.
THIS REPORT IS FOR THE INFORMATION OF THE SHAREHOLDERS AND OTHERS WHO HAVE
RECEIVED A COPY OF THE CURRENTLY EFFECTIVE PROSPECTUS OF THE USAA SHORT-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.]
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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 SHORT-TERM BOND FUND
OBJECTIVE: High current income consistent with preservation of principal.
TYPES OF INVESTMENTS: Invests principally in a broad range of investment-grade
debt securities with a dollar-weighted average portfolio maturity of three years
or less.
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7/31/99 7/31/00
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Net Assets $241.2 Million $293.0 Million
Net Asset Value Per Share $9.75 $9.70
--------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS AS OF 7/31/00
--------------------------------------------------------------------------------
1 YEAR 5 YEARS SINCE INCEPTION ON 6/1/93
6.18% 6.07% 5.69%
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TOTAL RETURN EQUALS INCOME YIELD PLUS SHARE PRICE CHANGE AND ASSUMES
REINVESTMENT OF ALL DIVIDENDS AND CAPITAL GAIN DISTRIBUTIONS. NO ADJUSTMENT HAS
BEEN MADE FOR TAXES PAYABLE BY SHAREHOLDERS ON THEIR REINVESTED INCOME DIVIDENDS
AND CAPITAL GAIN DISTRIBUTIONS. THE PERFORMANCE DATA QUOTED REPRESENT PAST
PERFORMANCE AND ARE NOT AN INDICATION OF FUTURE RESULTS. INVESTMENT RETURN AND
PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE, AND AN INVESTOR'S SHARES, WHEN
REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST.
CUMULATIVE PERFORMANCE COMPARISON
A chart in the form of a line graph appears here, illustrating the comparison of
a $10,000 hypothetical investment in the USAA Short-Term Bond Fund, the Lehman
Brothers 1-3 Year Government/Corporate Index, and the Lipper Short Investment
Grade Debt Funds Average, for the period of 06/01/1993 through 07/31/2000. The
data points from the graph are as follows:
USAA SHORT- LEHMAN 1-3 YEAR LIPPER SHORT INV
TERM BOND FUND GOVT/CORP INDEX GRADE DEBT AVERAGE
-------------- --------------- ----------------------
06/01/93 $10,000 $10,000 $10,000
07/31/93 10,087 10,099 10,125
01/31/94 10,372 10,351 10,398
07/31/94 10,259 10,329 10,318
01/31/95 10,388 10,483 10,426
07/31/95 11,070 11,077 11,002
01/31/96 11,501 11,574 11,515
07/31/96 11,692 11,690 11,590
01/31/97 12,234 12,124 12,033
07/31/97 12,741 12,554 12,462
01/31/98 13,162 12,994 12,868
07/31/98 13,494 13,321 13,177
01/31/99 13,775 13,824 13,556
07/31/99 14,001 13,980 13,659
01/31/00 14,320 14,199 13,880
07/31/00 14,869 14,718 14,346
DATA SINCE INCEPTION ON 6/1/93 THROUGH 7/31/00
THE GRAPH ILLUSTRATES THE COMPARISON OF A $10,000 HYPOTHETICAL INVESTMENT IN THE
USAA SHORT-TERM BOND FUND TO THE BROAD-BASED LEHMAN BROTHERS 1-3 YEAR
GOVERNMENT/CORPORATE INDEX AND THE LIPPER SHORT INVESTMENT GRADE DEBT FUNDS
AVERAGE. THE LEHMAN INDEX IS AN UNMANAGED INDEX MADE UP OF GOVERNMENT, AGENCY,
AND CORPORATE BONDS LONGER THAN ONE YEAR AND LESS THAN THREE YEARS. THE LIPPER
AVERAGE IS THE AVERAGE PERFORMANCE LEVEL OF ALL SHORT 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.]
THE MARKET
Recent economic news indicates that economic growth 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 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.
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 over the past year. For the
12-month period ending July 31, 2000, the Fund's total return was 6.18% versus
the average of 4.94% by Lipper Analytical Services, Inc., in the short
investment-grade debt funds category. The 12-month dividend yield as of July 31,
2000, was 6.52% versus the average of 5.85% for other funds in the same Lipper
category.
The best-performing holdings over the past year were AT&T Capital Corporation,
Glenborough Properties, Osprey Trust, and Merrill Lynch. Holdings that
underperformed included Kmart, TriNet, Waste Management, and Nationwide Health
Properties. I continue to hold these bonds because they are turning around their
operations and have a potentially good outlook.
OUTLOOK
Looking to the future, I feel that the economy will continue to moderate, which
could result in an increase in the relative value of corporate bonds and
mortgage- and asset-backed securities. Our continued emphasis will be on finding
securities that represent good risk/reward characteristics. The Fund's long-term
returns versus its peers shows that for the three- and five-year periods ending
July 31, 2000, your Fund's annualized total return was 5.27% and 6.07%,
respectively, versus the Lipper average of 4.76% and 5.36%, respectively, in the
short investment grade debt funds category.
--------------------------------------------------------------------------------
* * * * *
Your Fund's performance received an Overall Star Rating of 5 stars
in the taxable bond fund category from Morningstar Rating(TradeMark)
for the period ending July 31, 2000.
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PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
MORNINGSTAR PROPRIETARY RATINGS ON U.S.-DOMICILED FUNDS REFLECT HISTORICAL
RISK-ADJUSTED PERFORMANCE AS OF JULY 31, 2000. THE RATINGS ARE SUBJECT TO CHANGE
EVERY MONTH. MORNINGSTAR RATINGS ON U.S.-DOMICILED FUNDS ARE CALCULATED FROM THE
FUND'S THREE- AND FIVE-YEAR AVERAGE ANNUAL RETURNS IN EXCESS OF 90-DAY U.S.
TREASURY BILL RETURNS WITH APPROPRIATE FEE ADJUSTMENTS, AND A RISK FACTOR THAT
REFLECTS FUND PERFORMANCE BELOW 90-DAY U.S. T-BILL RETURNS. THE USAA SHORT-TERM
BOND FUND RECEIVED 5 STARS FOR THE THREE- AND FIVE-YEAR PERIODS, RESPECTIVELY.
THE TOP 10% OF THE FUNDS IN A BROAD ASSET CLASS RECEIVE 5 STARS, THE NEXT 22.5%
RECEIVE 4 STARS, THE NEXT 35% RECEIVE 3 STARS, THE NEXT 22.5% RECEIVE 2 STARS,
AND THE BOTTOM 10% RECEIVE 1 STAR. THE FUND WAS RATED EXCLUSIVELY AGAINST
U.S.-DOMICILED FUNDS. THE FUND WAS RATED AMONG 1,717 AND 1,292 FUNDS IN THE
TAXABLE BOND FUND CATEGORY FOR THE THREE- AND FIVE-YEAR PERIODS, RESPECTIVELY.
YOU WILL FIND A LIST OF THE SECURITIES THAT THE FUND OWNS ON PAGES 10-13.
PORTFOLIO MIX
7/31/00
A pie chart is shown here depicting the Portfolio Mix as of July 31, 2000 of the
USAA Short-Term Bond Fund to be:
Corporate Bonds - 69.1%; Asset-Backed Securities - 17.8%; Collateralized
Mortgage Obligations - 9.8%; Variable-Rate Demand Notes - 2.2%; and Cash
Equivalents - 0.2%.
PERCENTAGES ARE OF THE NET ASSETS OF THE FUND AND MAY NOT EQUAL 100%.
INDEPENDENT AUDITORS' REPORT
KPMG
The Shareholders and Board of Directors
USAA SHORT-TERM BOND FUND:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of the USAA Short-Term Bond Fund, a series of the
USAA Mutual Fund, Inc., as of July 31, 2000, and the related statement of
operations for the year then ended, the statements of changes in net assets for
each of the years in the two-year period then ended, and the financial
highlights, presented in note 7 to the financial statements, for each of the
years in the five-year period then ended. These financial statements and
financial highlights are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned as of July 31, 2000, by correspondence with the custodian and
brokers. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
USAA Short-Term Bond Fund as of July 31, 2000, the results of its operations for
the year then ended, the changes in its net assets for each of the years in the
two-year period then ended, and the financial highlights for each of the years
in the five-year period then ended, in conformity with accounting principles
generally accepted in the United States of America.
KPMG LLP
San Antonio, Texas
September 1, 2000
USAA SHORT-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 which 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.
VARIABLE RATE DEMAND NOTES (VRDN) - provide the right, on any business day, to
sell the security at face value on either that day or within seven days. The
interest rate is adjusted at a stipulated daily, weekly, or monthly interval to
a rate that reflects current market conditions. The effective maturity is the
next put date.
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
RB Revenue Bond
CREDIT ENHANCEMENTS - add the financial strength of the provider of the
enhancement to support the issuer's ability to repay the principal when due. The
enhancement may be provided by either a high quality bank, insurance company, or
other corporation, or a collateral trust.
(LOC) Enhanced by a bank letter of credit.
(NBGA) Enhanced by a non-bank guarantee agreement.
USAA SHORT-TERM BOND FUND
PORTFOLIO OF INVESTMENTS
(IN THOUSANDS)
JULY 31, 2000
PRINCIPAL COUPON MARKET
AMOUNT SECURITY RATE MATURITY VALUE
--------------------------------------------------------------------------------
CORPORATE BONDS (69.1%)
BANKS - MAJOR REGIONAL (7.0%)
$4,000 Corporacion Andina De Fomento,
Global Bonds (Venezuela) 7.10% 2/01/2003 $ 3,912
6,000 First Union National Bank,
Subordinated Notes 6.18 2/15/2036 5,589
6,000 Popular North America, Inc., MTN 6.88 6/15/2001 5,962
5,000 Popular, Inc., Senior MTN 6.20 4/30/2001 4,950
--------------------------------------------------------------------------------
20,413
--------------------------------------------------------------------------------
BROADCASTING - RADIO & TV (2.4%)
7,000 Cox Communications, Inc., Notes 7.00 8/15/2001 6,973
--------------------------------------------------------------------------------
COMPUTER - HARDWARE (3.1%)
9,000 Sun Microsystems, Inc., Senior Notes 7.00 8/15/2002 8,968
--------------------------------------------------------------------------------
ELECTRIC UTILITIES (1.7%)
5,000 Dominion Resources, Inc., Senior Notes
Series C 7.60 7/15/2003 5,016
--------------------------------------------------------------------------------
FINANCE - CONSUMER (5.7%)
2,800 Capital One Bank, Bank Notes 6.57 1/27/2003 2,712
3,000 Capital One Bank, Bank Notes 6.15 6/01/2001 2,973
6,000 Capital One Bank, Bank Notes 5.95 2/15/2001 5,961
5,000 Ford Motor Credit Co., Global Notes 7.50 6/15/2003 5,010
--------------------------------------------------------------------------------
16,656
--------------------------------------------------------------------------------
FINANCE - DIVERSIFIED (4.6%)
15,000 Finova Capital Corp., MTN 7.25 11/08/2004 13,449
--------------------------------------------------------------------------------
INVESTMENT BANKS/BROKERAGE (1.6%)
5,000 Merrill Lynch & Co., Inc., Global
Notes 6.00 2/12/2003 4,856
--------------------------------------------------------------------------------
MANUFACTURING - DIVERSIFIED INDUSTRIES (3.2%)
10,000 EdperBrascan Corp., Notes 7.13 12/16/2003 9,502
--------------------------------------------------------------------------------
NATURAL GAS UTILITIES (6.9%)
8,000 Limestone Electron Trust, Senior
Secured Notes (a) 8.63 3/15/2003 8,086
11,900 Osprey Trust, Osprey I, Inc.,
Senior Notes (a) 8.31 1/15/2003 11,987
--------------------------------------------------------------------------------
20,073
--------------------------------------------------------------------------------
OIL - DOMESTIC INTEGRATED (2.1%)
6,000 Phillips Petroleum Co., Notes 8.50 5/25/2005 6,246
--------------------------------------------------------------------------------
REAL ESTATE INVESTMENT TRUSTS (15.3%)
7,000 Equity Operating L.P.,
Callable/Putable Notes 6.38 2/15/2002 6,873
11,410 Franchise Finance Corp. of America,
Senior Notes 7.00 11/30/2000 11,372
3,000 Nationwide Health Properties, Inc.,
MTN 8.61 3/01/2002 2,990
7,890 Nationwide Health Properties, Inc.,
MTN 6.59 7/07/2038 7,411
5,000 Oasis Residential, Inc., Senior Notes 6.75 11/15/2001 4,918
11,625 TriNet Corporate Realty Trust, Inc.,
Notes 7.30 5/15/2001 11,385
--------------------------------------------------------------------------------
44,949
--------------------------------------------------------------------------------
RETAIL - GENERAL MERCHANDISING (1.3%)
2,000 Kmart Corp., MTN 7.72 6/25/2002 1,912
2,000 Kmart Corp., MTN 7.76 7/01/2002 1,914
--------------------------------------------------------------------------------
3,826
--------------------------------------------------------------------------------
RETAIL - SPECIALTY (0.5%)
2,750 MacSaver Financial Services, Inc.,
Guaranteed Notes 7.40 2/15/2002 1,444
--------------------------------------------------------------------------------
SAVINGS & LOAN HOLDING CO. (3.8%)
6,000 Sovereign Bancorp, Inc., Senior Notes 6.63 3/15/2001 5,907
5,000 Sovereign Bank Lease, Pass-Through
Trust Certificates,
Series 2000-1(a) 10.20 6/30/2005 5,097
--------------------------------------------------------------------------------
11,004
--------------------------------------------------------------------------------
SERVICES - COMMERCIAL & CONSUMER (2.4%)
7,000 ServiceMaster Co., Notes 8.45 4/15/2005 7,014
--------------------------------------------------------------------------------
TELECOMMUNICATIONS - LONG DISTANCE (2.7%)
4,000 WorldCom, Inc., Senior Notes 6.13 8/15/2001 3,958
4,000 WorldCom, Inc., Senior Notes 7.55 4/01/2004 4,010
--------------------------------------------------------------------------------
7,968
--------------------------------------------------------------------------------
WASTE MANAGEMENT (4.8%)
5,985 Waste Management, Inc., Notes 6.13 7/15/2001 5,817
8,930 Waste Management, Inc., Notes 6.38 12/01/2003 8,319
--------------------------------------------------------------------------------
14,136
--------------------------------------------------------------------------------
Total corporate bonds (cost: $205,755) 202,493
--------------------------------------------------------------------------------
ASSET-BACKED SECURITIES (17.8%)
10,000 AESOP Funding II L.L.C.,
Series 1997-1, Rental Car Notes,
Class A-2 (LOC) (a) 6.40 10/20/2003 9,869
14,000 ARG Funding Corp., Series 1999-1,
Rental Car Notes, Class A-2
(LOC) (a) 5.88 5/20/2003 13,758
4,000 Firstplus Home Loan Owner Trust,
Series 1998-2, Class A-4 6.54 4/10/2015 3,974
4,765 Firstplus Home Loan Owner Trust,
Series 1998-4, Class A-3 6.24 5/11/2015 4,738
10,000 MBNA Master Credit Card Trust,
Series 2000 A, Class A 7.35 2/15/2005 10,101
5,000 Rental Car Finance Corp.,
Series 1999-1, Rental Car Notes,
Class A (a) 5.90 2/25/2007 4,789
5,000 Team Fleet Financing Corp.,
Series 1999-3, Rental Car Notes,
Class A (a) 6.70 6/25/2003 4,939
--------------------------------------------------------------------------------
Total asset-backed securities (cost: $52,632) 52,168
--------------------------------------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATIONS (9.8%)
2,906 Federal National Mortgage Assn.,
Series 1997-72 CA 9.50 9/18/2023 3,021
2,086 Federal National Mortgage Assn.,
Series 1997-79 U 9.00 11/18/2024 2,163
3,045 Federal National Mortgage Assn.,
Series 1997-89 N 9.50 12/20/2022 3,163
3,149 Federal National Mortgage Assn.,
Series 1998-1 H 9.00 8/18/2024 3,254
3,710 Federal National Mortgage Assn.,
Series 1998-11 M 9.00 2/18/2024 3,860
1,695 Federal National Mortgage Assn.,
Series 1998-2 GA 8.50 4/18/2025 1,732
4,622 Federal National Mortgage Assn.,
Series 1998-7 H 9.00 3/18/2025 4,814
6,770 Federal National Mortgage Assn.,
Series 2000-1 VA 7.00 8/18/2010 6,662
--------------------------------------------------------------------------------
Total collateralized mortgage obligations (cost: $29,529) 28,669
--------------------------------------------------------------------------------
VARIABLE-RATE DEMAND NOTES (2.2%)
MANUFACTURING - SPECIALIZED (1.8%)
3,125 Bay Corrugated Container Inc., Notes
(LOC) 6.76 9/01/2013 3,125
2,150 Florence, AL, IDB RB, Series 1999B
(LOC) 6.78 11/01/2008 2,150
--------------------------------------------------------------------------------
5,275
--------------------------------------------------------------------------------
MISCELLANEOUS (0.4%)
1,305 Ontario Redevelopment Agency, CA, RB,
Series B 1997 (NBGA) 6.79 9/01/2027 1,305
--------------------------------------------------------------------------------
Total variable-rate demand notes (cost: $6,580) 6,580
--------------------------------------------------------------------------------
CASH EQUIVALENTS (0.2%)
COMMERCIAL PAPER
582 MCN Energy Enterprises (a),(b)
(cost: $582) 6.92 8/01/2000 582
--------------------------------------------------------------------------------
Total investments (cost: $295,078) $290,492
================================================================================
USAA SHORT-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.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
USAA SHORT-TERM BOND FUND
STATEMENT OF ASSETS AND LIABILITIES
(IN THOUSANDS)
JULY 31, 2000
ASSETS
Investments in securities, at market value
(identified cost of $295,078) $ 290,492
Cash 505
Receivables:
Capital shares sold 73
Interest 4,191
Securities sold 109
----------
Total assets 295,370
----------
LIABILITIES
Capital shares redeemed 2,014
USAA Investment Management Company 60
USAA Transfer Agency Company 31
Accounts payable and accrued expenses 262
----------
Total liabilities 2,367
----------
Net assets applicable to capital shares outstanding $ 293,003
==========
REPRESENTED BY:
Paid-in capital $ 298,475
Accumulated net realized loss on investments (886)
Net unrealized depreciation of investments (4,586)
----------
Net assets applicable to capital shares outstanding $ 293,003
==========
Capital shares outstanding 30,208
==========
Authorized shares of $.01 par value 120,000
==========
Net asset value, redemption price, and offering
price per share $ 9.70
==========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
USAA SHORT-TERM BOND FUND
STATEMENT OF OPERATIONS
(IN THOUSANDS)
YEAR ENDED JULY 31, 2000
Net investment income:
Interest income $ 18,552
----------
Expenses:
Management fees 632
Transfer agent's fees 379
Custodian's fees 87
Postage 46
Shareholder reporting fees 20
Directors' fees 4
Registration fees 60
Professional fees 38
Other 7
----------
Total expenses 1,273
----------
Net investment income 17,279
----------
Net realized and unrealized loss on investments:
Net realized loss (842)
Change in net unrealized appreciation/depreciation (226)
----------
Net realized and unrealized loss (1,068)
----------
Increase in net assets resulting from operations $ 16,211
==========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
USAA SHORT-TERM BOND FUND
STATEMENTS OF CHANGES IN NET ASSETS
(IN THOUSANDS)
YEARS ENDED JULY 31,
2000 1999
------------------------------
From operations:
Net investment income $ 17,279 $ 12,587
Net realized loss on investments (842) (13)
Change in net unrealized
appreciation/depreciation of investments (226) (4,849)
------------------------------
Increase in net assets resulting
from operations 16,211 7,725
------------------------------
Distributions to shareholders from:
Net investment income (17,279) (12,587)
------------------------------
Net realized gains - (465)
------------------------------
From capital share transactions:
Proceeds from shares sold 179,445 159,576
Reinvested dividends 15,054 11,667
Cost of shares redeemed (141,675) (105,840)
------------------------------
Increase in net assets from
capital share transactions 52,824 65,403
------------------------------
Net increase in net assets 51,756 60,076
Net assets:
Beginning of period 241,247 181,171
------------------------------
End of period $ 293,003 $ 241,247
==============================
Change in shares outstanding:
Shares sold 18,538 16,163
Shares issued for dividends reinvested 1,555 1,182
Shares redeemed (14,635) (10,726)
------------------------------
Increase in shares outstanding 5,458 6,619
==============================
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
USAA SHORT-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
Short-Term Bond Fund (the Fund). The Fund's investment objective is high current
income consistent with preservation of 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 of three years or less.
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.
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 year
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
$898,000 which will expire in 2009. It is unlikely that the Company's Board of
Directors will authorize a distribution of capital gains realized in the future
until the capital loss carryover has been utilized or expires.
(4) INVESTMENT TRANSACTIONS
Cost of purchases and proceeds from sales/maturities of securities, excluding
short-term securities, for the year ended July 31, 2000, were $132,702,000 and
$69,472,000, respectively.
Gross unrealized appreciation and depreciation of investments as of July 31,
2000, were $936,000 and $5,523,000, respectively.
(5) TRANSACTIONS WITH MANAGER
A. MANAGEMENT FEES - USAA Investment Management Company carries out the Fund's
investment policies and manages the Fund's portfolio. The Fund's management fees
are computed at .24% of its annual average net assets.
The Manager has voluntarily agreed to limit the annual expenses of the Fund to
.50% of its annual average net assets through December 1, 2000.
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
2,717,000 shares (9.0%) 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 each period
is as follows:
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
----------------------------------------------------
2000 1999 1998 1997 1996
----------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value at
beginning of period $ 9.75 $ 9.99 $ 10.03 $ 9.79 $ 9.87
Net investment income .63 .58 .62 .61 .62
Net realized and
unrealized gain (loss) (.05) (.22) (.04) .25 (.08)
Distributions from net
investment income (.63) (.58) (.62) (.61) (.62)
Distributions of realized
capital gains - (.02) - (.01) -
----------------------------------------------------
Net asset value at
end of period $ 9.70 $ 9.75 $ 9.99 $ 10.03 $ 9.79
====================================================
Total return (%) * 6.18 3.76 5.91 8.97 5.62
Net assets at end
of period (000) $293,003 $241,247 $181,171 $133,746 $101,032
Ratio of expenses to
average net assets (%) .48 .50 .50 .50 .50
Ratio of expenses to
average net
assets excluding
reimbursement (%) n/a .52 .56 .61 .66
Ratio of net investment
income to average
net assets (%) 6.56 5.89 6.16 6.14 6.29
Portfolio turnover (%) 23.68 11.53 48.24 27.85 66.81
</TABLE>
* ASSUMES REINVESTMENT OF ALL DIVIDEND INCOME AND CAPITAL GAIN DISTRIBUTIONS
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
