Table of Contents
USAA Family of Funds 1
Message from the President 2
Investment Review 4
Message from the Manager 5
Shareholder Voting Results 8
Financial Information
Portfolio of Investments 9
Notes to Portfolio of Investments 12
Statement of Assets and Liabilities 13
Statement of Operations 14
Statements of Changes in Net Assets 15
Notes to Financial Statements 16
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 Income 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 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 INCOME FUND
OBJECTIVE: Maximum current income without undue risk to principal.
TYPES OF INVESTMENTS: Invests principally in income-producing securities.
- --------------------------------------------------------------------------------
7/31/99 1/31/00
================================================================================
Net Assets $1,415.4 Million $1,275.8 Million
Net Asset Value Per Share $11.70 $11.25
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Average Annual Total Returns as of 1/31/00
================================================================================
7/31/99 to 1/31/00 1 Year 5 Years 10 Years
-0.43%(+) -4.35% 7.27% 8.01%
- --------------------------------------------------------------------------------
(+) Total returns for periods of less than one year are not annualized. This
six-month return is cumulative.
Total return equals income yield plus share price change and assumes
reinvestment of all dividends and capital gains distributions. No adjustment has
been made for taxes payable by shareholders on their reinvested income dividends
and capital gains 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 Income Fund, the Lehman Brothers
Aggregate Bond Index, and the Lipper Corporate Debt A Rated Average for the
period of 01/31/90 through 01/31/2000. The data points from the graph are as
follows:
USAA Income Lehman Brothers Lipper Corp. Debt
Fund Aggregate Bond Index A Rated Average
------------- -------------------- -----------------
01/31/90 $10,000 $10,000 $10,000
07/31/90 10,472 10,551 10,479
01/31/91 11,005 11,163 10,947
07/31/91 11,760 11,680 11,495
01/31/92 12,764 12,618 12,500
07/31/92 13,739 13,406 13,367
01/31/93 14,428 14,002 13,955
07/31/93 15,386 14,769 14,881
01/31/94 15,662 15,282 15,455
07/31/94 14,866 14,783 14,725
01/31/95 15,203 14,928 14,796
07/31/95 16,597 16,277 16,168
01/31/96 18,432 17,458 17,417
07/31/96 17,556 17,179 16,939
01/31/97 18,638 18,027 17,785
07/31/97 19,689 19,028 18,827
01/31/98 20,905 19,960 19,682
07/31/98 21,602 20,525 20,185
01/31/99 22,579 21,572 21,041
07/31/99 21,689 21,036 20,271
01/31/00 21,596 21,174 20,257
Data from 1/31/90 through 1/31/00
The graph illustrates the comparison of a $10,000 hypothetical investment in the
USAA Income Fund to the broad-based Lehman Brothers Aggregate Bond Index and the
Lipper Corporate Debt A Rated Average. The Lehman Brothers Aggregate Bond 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 Corporate Debt A Rated Average is the average performance level of all
corporate debt funds A rated, as reported by Lipper Analytical Services, Inc.,
an independent organization that monitors the performance of mutual funds.
Message from the Manager
[PHOTOGRAPH OF PORTFOLIO MANAGER: JOHN W. SAUNDERS, JR., CFA, APPEARS HERE.]
For most of 1999, interest rates moved up, causing bond prices, which move
inversely with interest rates, to fall. The year began with the world's
financial systems recovering from the Russian debt crisis during the fall of
1998. In reaction to this crisis, the Federal Reserve (the Fed) had acted to
restore liquidity into the financial system by easing interest rates. As 1999
began, this action had restored confidence to the financial markets and paved
the way for strong economic growth. However, strong growth throughout 1999
renewed inflation fears, and the Fed was forced to take back its 1998 easings.
It increased interest rates by 0.75% in three one-quarter point moves in the
second half of 1999, and by another 0.25% in early February 2000. Although
inflation for the year, as measured by the Consumer Price Index, was only 1.9%
- -- the slowest in 34 years -- sharply higher energy prices and a tight labor
market served to heighten inflation fears. During the last six-month period, the
yield on the 30-year Treasury bond has moved from 6.11% on July 30, 1999, to
6.49% on January 31, 2000, while the yield on the 10-year Treasury has moved
from 5.90% to 6.67% in the same period.
30-YEAR U.S. TREASURY BOND YIELD
A chart in the form of a line graph appears here, illustrating the performance
of a 30-year U.S. Treasury Bond Yield for the period 07/31/99 through
01/31/2000. The data points from the graph are as follows:
07/31/99 6.11%
08/16/99 6.09%
08/31/99 6.07%
09/15/99 6.11%
09/30/99 6.06%
10/15/99 6.27%
10/29/99 6.15%
11/15/99 6.04%
11/30/99 6.29%
12/15/99 6.34%
12/31/99 6.48%
01/17/00 6.69%
01/31/00 6.49%
In this rising interest rate environment, the USAA Income Fund underperformed in
its peer group because of the portfolio's longer average maturity. The Fund's
high income orientation tends to keep average maturity longer. The Fund's
average annual total return for the past six months was -0.43% versus an average
of -0.07% for all funds in the Lipper Corporate Debt Fund A Rated Category. The
distribution yield was very attractive at 6.71% versus an average of 6.03% for
its Lipper category.
PORTFOLIO
As of January 31, 2000, the Fund's portfolio mix as percentages of net assets
was 10.8% U.S. Treasury bonds, 62.1% agency mortgage pass-through securities,
16.9% corporate bonds, and 9.5% preferred stocks.
OUTLOOK
The bond market continues to be unsettled. Most market observers expect the Fed
to continue raising interest rates until the pace of economic growth slows. A
slowing economy tends to set the stage for rising bond prices. In addition, the
federal budget surplus and the Department of the Treasury's announcement of
plans to reduce the federal debt by buying back Treasury securities create a
demand for the remaining Treasury securities. This gives us reason to be
cautiously optimistic about the course of long-term interest rates over the next
six months.
Respectfully submitted on February 4, 2000.
- --------------------------------------------------------------------------------
On January 31, 2000, John W. (Jack) Saunders, Jr., portfolio manager of the USAA
Income Fund since 1985, retired from USAA. Jack, a 34-year veteran of USAA
Investment Management Company, was a significant force behind the development of
the Company. He will be sorely missed by all!
With 20 years industry experience, Didi Weinblatt has been hand-picked to take
over as the portfolio manager of your Fund. Didi has an impressive background as
both an analyst and portfolio manager. We are confident in Didi's abilities and
know that she will strive to deliver the same commitment you expect from USAA.
Top 10 Securities
(% of Net Assets)
-----------------------------------------------------------------
Coupon Rate % % Of Net Assets
------------- ---------------
GNMA 7.50 23.5
GNMA 6.00 13.1
U.S. Treasury Bond 5.25 10.8
GNMA 7.00 9.2
FNMA 7.50 6.6
GNMA 6.50 6.4
FNMA 7.00 3.3
AT&T Capital Corp., MTN 7.50 1.6
Household Finance Corp., Notes 7.25 1.5
Merrill Lynch & Co.,
MTN, Series B 6.00 1.5
-----------------------------------------------------------------
See page 9 for a complete listing of the portfolio of investments.
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
<TABLE>
USAA INCOME FUND
PORTFOLIO OF INVESTMENTS
January 31, 2000
(Unaudited)
<CAPTION>
Market
Number Value
of Shares Security (000)
- ------------------------------------------------------------------------------------------
<C> <S> <C>
PREFERRED STOCKS (9.5%)
57,846 Archstone Communities Trust depositary shares "B",
9.00% cumulative redeemable $ 1,287
483,800 Avalon Bay Communities, Inc., "C", 8.50% cumulative redeemable 10,341
421,240 Avalon Bay Communities, Inc., "D", 8.00% cumulative redeemable 8,293
103,107 Avalon Bay Communities, Inc., "F", 9.00% cumulative redeemable 2,211
444,526 Avalon Bay Communities, Inc., "G", 8.96% cumulative redeemable 9,502
211,268 Duke Realty Investments, Inc. depositary shares "A",
9.10% cumulative redeemable 4,806
332,655 Equity Office Properties Trust depositary shares "A",
8.98% cumulative redeemable 7,651
40,000 Equity Residential Properties Trust depositary shares "B",
9.125% cumulative redeemable 900
575,000 Equity Residential Properties Trust depositary shares "C",
9.125% cumulative redeemable 12,974
142,500 Equity Residential Properties Trust depositary shares "F",
8.29% cumulative redeemable 6,368
115,300 Equity Residential Properties Trust depositary shares "F",
9.65% cumulative redeemable 2,666
452,600 First Industrial Realty Trust, Inc. depositary shares "B",
8.75% cumulative redeemable 9,335
412,000 Gables Residential Trust "A", 8.30% cumulative redeemable 7,674
250,000 Post Properties, Inc. "A", 8.50% cumulative redeemable 10,125
46,060 Prologis Trust, Inc. "A", 9.40% cumulative redeemable 1,039
338,500 Prologis Trust, Inc. "C", 8.54% cumulative redeemable 14,323
200,000 Shurgard Storage Centers, Inc. "B", 8.80% cumulative redeemable 3,950
46,075 United Dominion Realty Trust, Inc. depositary shares "A",
9.25% cumulative redeemable 947
400,000 United Dominion Realty Trust, Inc. depositary shares "B",
8.60% cumulative redeemable 7,600
- ------------------------------------------------------------------------------------------
Total preferred stocks (cost: $146,902) 121,992
- ------------------------------------------------------------------------------------------
Principal
Amount Coupon
(000) Security Rate Maturity
- ------------------------------------------------------------------------------------------
CORPORATE OBLIGATIONS (16.9%)
$ 8,000 Associates Corp. of North America, Senior Notes 6.25% 11/01/2008 7,194
20,000 AT&T Capital Corp., MTN 7.50 11/15/2000 20,081
20,000 BankBoston N.A., MTN 6.38 4/15/2008 18,312
5,000 Caliber Systems, Inc., Notes 7.80 8/01/2006 4,834
10,000 Chase Manhattan Corp., Subordinated Notes 6.13 10/15/2008 8,919
15,000 Chase Manhattan Corp., Subordinated Notes 7.13 2/01/2007 14,414
4,900 Consolidated Rail Corp., Debentures 9.75 6/15/2020 5,647
20,000 Cummins Engine Co., Inc., MTN, Series A 6.45 3/01/2005 18,508
10,000 Finova Capital Corp., MTN 6.00 1/07/2004 9,457
15,000 First Union Corp., Subordinated Notes 7.50 7/15/2006 14,700
20,000 Household Finance Corp., Notes 7.25 5/15/2006 19,423
10,000 MBNA Corp., Subordinated Notes 6.75 3/15/2008 9,237
20,000 Merrill Lynch & Co., MTN, Series B 6.00 10/11/2005 18,553
10,000 Province of Quebec, Debentures 6.50 1/17/2006 9,464
15,000 Province of Quebec, Global Debentures 7.00 1/30/2007 14,493
15,000 Waste Management, Inc., Notes 7.00 10/15/2006 13,372
9,000 Wells Fargo & Co., Subordinated Notes 6.88 4/01/2006 8,595
- ------------------------------------------------------------------------------------------
Total corporate obligations (cost: $223,973) 215,203
- ------------------------------------------------------------------------------------------
U.S. GOVERNMENT & AGENCY ISSUES (72.9%)
Federal National Mortgage Assn. (9.9%)
43,460 7.00%, 9/01/2022 - 9/01/2023 41,736
86,120 7.50%, 2/01/2022 - 2/01/2023 84,307
- ------------------------------------------------------------------------------------------
126,043
- ------------------------------------------------------------------------------------------
Government National Mortgage Assn. (52.2%)
186,913 6.00%, 7/15/2028 - 10/15/2028 167,665
88,153 6.50%, 6/15/2023 - 5/15/2028 82,062
122,321 7.00%, 5/15/2023 - 7/15/2029 116,976
305,508 7.50%, 9/15/2022 - 8/15/2029 299,278
- ------------------------------------------------------------------------------------------
665,981
- ------------------------------------------------------------------------------------------
U.S. Treasury Bonds (10.8%)
165,281 5.25%, 11/15/2028 137,596
- ------------------------------------------------------------------------------------------
Total U.S. government & agency issues (cost: $996,712) 929,620
- ------------------------------------------------------------------------------------------
SHORT-TERM (.01%)
Commercial Paper
100 General Electric Capital Corp., 5.81%, 2/01/2000
(cost: $100) 100
- ------------------------------------------------------------------------------------------
Total investments (cost: $1,367,687) $1,266,915
==========================================================================================
</TABLE>
PORTFOLIO SUMMARY BY INDUSTRY
-----------------------------
U.S. Government 72.9%
Real Estate Investment Trusts 9.6
Banks - Money Center 3.0
Banks - Major Regional 2.8
Finance - Diversified 2.3
Finance - Consumer 2.1
Foreign Government 1.9
Investment Banks/Brokerage 1.5
Heavy Duty Trucks & Parts 1.4
Waste Management 1.0
Railroads/Shipping .4
Truckers .4
----
Total 99.3%
====
USAA INCOME 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.
PORTFOLIO DESCRIPTION ABBREVIATION
MTN Medium-Term Note
See accompanying notes to financial statements.
<TABLE>
USAA INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES
(IN THOUSANDS)
January 31, 2000
(Unaudited)
<S> <C>
ASSETS
Investments in securities, at market value (identified cost of $1,367,687) $1,266,915
Cash 234
Receivables:
Capital shares sold 107
Dividends and interest 10,953
----------
Total assets 1,278,209
----------
LIABILITIES
Capital shares redeemed 1,931
USAA Investment Management Company 264
USAA Transfer Agency Company 138
Accounts payable and accrued expenses 43
----------
Total liabilities 2,376
----------
Net assets applicable to capital shares outstanding $1,275,833
==========
REPRESENTED BY:
Paid-in capital $1,386,490
Accumulated undistributed net investment income 2,387
Accumulated net realized loss on investments (12,272)
Net unrealized depreciation of investments (100,772)
----------
Net assets applicable to capital shares outstanding $1,275,833
==========
Capital shares outstanding 113,391
==========
Authorized shares of $.01 par value 270,000
==========
Net asset value, redemption price, and offering price per share $ 11.25
==========
See accompanying notes to financial statements.
</TABLE>
USAA INCOME FUND
STATEMENT OF OPERATIONS
(IN THOUSANDS)
Six-month period ended January 31, 2000
(Unaudited)
Net investment income:
Income:
Dividends $ 6,298
Interest 43,265
--------
Total income 49,563
--------
Expenses:
Management fees 1,659
Transfer agent's fees 931
Custodian's fees 100
Postage 64
Shareholder reporting fees 13
Directors' fees 1
Registration fees 37
Professional fees 17
Other 8
--------
Total expenses 2,830
--------
Net investment income 46,733
--------
Net realized and unrealized loss on investments:
Net realized loss (11,299)
Change in net unrealized appreciation/depreciation (41,327)
--------
Net realized and unrealized loss (52,626)
--------
Decrease in net assets resulting from operations $ (5,893)
========
See accompanying notes to financial statements.
USAA INCOME FUND
STATEMENTS OF CHANGES IN NET ASSETS
(IN THOUSANDS)
Six-month period ended January 31, 2000,
and year ended July 31, 1999
(Unaudited)
1/31/00 7/31/99
-------------------------
From operations:
Net investment income $ 46,733 $ 105,582
Net realized gain (loss) on investments (11,299) 45,287
Change in net unrealized appreciation/depreciation
of investments (41,327) (133,924)
------------------------
Increase (decrease) in net assets
resulting from operations (5,893) 16,945
------------------------
Distributions to shareholders from:
Net investment income (44,341) (106,248)
------------------------
Net realized gains (3,306) (63,044)
------------------------
From capital share transactions:
Proceeds from shares sold 90,579 283,608
Shares issued for dividends reinvested 37,783 141,194
Cost of shares redeemed (214,386) (608,632)
------------------------
Decrease in net assets from
capital share transactions (86,024) (183,830)
------------------------
Net decrease in net assets (139,564) (336,177)
Net assets:
Beginning of period 1,415,397 1,751,574
------------------------
End of period $1,275,833 $1,415,397
========================
Undistributed (overdistributed) net investment
income included in net assets:
End of period $ 2,387 $ (4)
========================
Change in shares outstanding:
Shares sold 7,817 22,816
Shares issued for dividends reinvested 3,286 11,266
Shares redeemed (18,660) (49,127)
------------------------
Decrease in shares outstanding (7,557) (15,045)
========================
See accompanying notes to financial statements.
USAA INCOME 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
Income Fund (the Fund). The Fund's investment objective is maximum 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 income-producing securities.
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. Portfolio securities, except as otherwise noted, traded primarily on a
domestic securities exchange are valued at the last sales price on that
exchange.
3. Over-the-counter securities are priced at the last sales price or, if not
available, at the average of the bid and asked prices.
4. Securities purchased with maturities of 60 days or less are stated at
amortized cost, which approximates market value.
5. 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. Dividend
income is recorded on the ex-dividend date; interest income is recorded on the
accrual basis. Discounts and premiums on short-term securities are amortized
over the life of the respective securities. Amortization of market discounts on
long-term securities is recognized as interest income upon disposition of the
security to the extent there is a gain on disposition.
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
Distributions of net investment income are made 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 six months ending January 31, 2000, were $20.1 million and
$105.9 million, respectively.
Gross unrealized appreciation and depreciation of investments as of January 31,
2000, were $1.4 million and $102.2 million, 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.
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.
D. Brokerage services - USAA Brokerage Services, a discount brokerage service
of the Manager, may execute portfolio transactions for the Fund. The Fund did
not utilize these services during the six-month period ended January 31, 2000.
(6) TRANSACTIONS WITH AFFILIATES
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.
<TABLE>
(7) FINANCIAL HIGHLIGHTS
Per share operating performance for a share outstanding throughout each period
is as follows:
<CAPTION>
Six-month
Period Ended
January 31, Year Ended July 31,
---------------------------------------------------------------------------------
2000 1999 1998 1997 1996 1995
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value at
beginning of period $ 11.70 $ 12.88 $ 12.54 $ 11.97 $ 12.11 $ 11.67
Net investment income .40 .80 .85 .83 .83 .84
Net realized and
unrealized gain (loss) (.45) (.72) .33 .57 (.13) .45
Distributions from net
investment income (.38) (.80) (.84) (.83) (.84) (.85)
Distributions of realized
capital gains (.03) (.46) - - - -
--------------------------------------------------------------------------------
Net asset value at
end of period $ 11.25 $ 11.70 $ 12.88 $ 12.54 $ 11.97 $ 12.11
================================================================================
Total return (%) * -0.43 .40 9.72 12.15 5.78 11.64
Net assets at
end of
period (000) $1,275,833 $1,415,397 $1,751,574 $1,662,981 $1,737,306 $1,755,171
Ratio of expenses to
average net assets (%) .41(a) .38 .38 .39 .40 .41
Ratio of net investment
income to average net
assets (%) 6.78(a) 6.31 6.62 6.76 6.64 7.27
Portfolio turnover (%) 1.49 54.02 47.35(b) 57.50(b) 81.26(b) 30.86(b)
(a) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
* Assumes reinvestment of all dividend income and capital gains distributions
during the period.
</TABLE>
(b) Prior to July 31, 1998, the Fund, at times, simultaneously purchased and
sold the same securities. These transactions sometimes were high in volume
and were dissimilar to other trade activity within the Fund. If these
transactions were excluded from the calculation, the portfolio turnover rate
would have been as follows:
Six-month
Period Ended
January 31, Year Ended July 31,
----------------------------------------------------
2000 1999 1998 1997 1996 1995
----------------------------------------------------
Portfolio turnover (%) N/A N/A 42.11 22.07 44.69 9.09
Purchases and sales of
this type are as follows:
Purchases (000) N/A N/A $88,811 $593,587 $648,396 $360,943
Sales (000) N/A N/A $88,915 $594,283 $649,193 $361,366
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
