TABLE OF CONTENTS
USAA FAMILY OF FUNDS 1
MESSAGE FROM THE PRESIDENT 2
INVESTMENT REVIEW 4
MESSAGE FROM THE MANAGER 5
FINANCIAL INFORMATION
Distributions to Shareholders 7
Independent Auditors' Report 8
Portfolio of Investments 9
Notes to Portfolio of Investments 13
Statement of Assets and Liabilities 14
Statement of Operations 15
Statements 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 INCOME STOCK
FUND, MANAGED BY USAA INVESTMENT MANAGEMENT COMPANY (IMCO). IT MAY BE USED AS
SALES LITERATURE ONLY WHEN PRECEDED OR ACCOMPANIED BY A CURRENT PROSPECTUS,
WHICH GIVES FURTHER DETAILS ABOUT THE FUND.
USAA WITH THE EAGLE IS REGISTERED IN THE U.S. PATENT & TRADEMARK
OFFICE.(COPYRIGHT)2000, USAA. ALL RIGHTS RESERVED.
USAA FAMILY OF FUNDS SUMMARY
FUND MINIMUM
TYPE/NAME VOLATILITY INVESTMENT
----------------------------------------------------------------
CAPITAL APPRECIATION
----------------------------------------------------------------
Aggressive Growth Very high $3,000
Emerging Markets Very high 3,000
First Start Growth
(Registered Trademark) Moderate to high 3,000
Gold Very high 3,000
Growth Moderate to high 3,000
Growth & Income Moderate 3,000
International Moderate to high 3,000
S&P 500(Registered
Trademark)Index Moderate 3,000
Science & Technology Very high 3,000
Small Cap Stock Very high 3,000
World Growth Moderate to high 3,000
----------------------------------------------------------------
ASSET ALLOCATION
----------------------------------------------------------------
Balanced Strategy Moderate $3,000
Cornerstone Strategy Moderate 3,000
Growth and Tax
Strategy Moderate 3,000
Growth Strategy Moderate to high 3,000
Income Strategy Low to moderate 3,000
----------------------------------------------------------------
INCOME - TAXABLE
----------------------------------------------------------------
GNMA(Registered Trademark) Low to moderate $3,000
High-Yield
Opportunities High 3,000
Income Moderate 3,000
Income Stock Moderate 3,000
Intermediate-Term
Bond Low to moderate 3,000
Short-Term Bond Low 3,000
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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
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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 PRESIDENT AND VICE CHAIRMAN OF THE BOARD, MICHAEL J.C. ROTH,
CFA, APPEARS HERE]
--------------------------------------------------------------------------------
SO FAR 2000 HAS BEEN AN UNINSPIRING INVESTMENT YEAR. LOOKING AT VARIOUS MARKET
AVERAGES, AN INVESTOR SEES MARKETS THAT ARE CLOSE TO ZERO RETURN, SLIGHTLY DOWN
OR SLIGHTLY UP.
--------------------------------------------------------------------------------
The biggest attention-grabber among indices is the Dow Jones Utilities. As
reported August 20 in THE NEW YORK TIMES, for the 2000 calendar year it is up
27.53%! If anyone predicted that, I missed it.
Years like this for the broad averages are, in a way, predictable. We know that
the S&P 500 Index, for instance, is not likely to take a sudden quantum leap and
begin to average 30% return per year. I believe it possibly will return
somewhere around 12%. (Please note I am surmising, not guaranteeing.) Another
interesting thing about the year 2000 is the number of actively managed funds
that are outperforming index funds.
Markets must take breathers like this. Such a pause allows the valuations of
securities to become more normal. That means that the relationship of, for
instance, a company's earnings per share to the price of a share becomes less
extreme. This, in turn, could ultimately allow the expected returns on stocks to
resume.
A family of mutual funds has the potential to make this kind of a period easier.
Ideally, you can build an asset allocation to express your risk tolerance. Many
fixed-income fund returns look very good in a year like this. And even if you
don't build such a portfolio, a fund family makes it easy to retreat to safety
because of the availability of bond and money market funds.
As you probably know, I am a strong proponent of asset allocation to build a
portfolio you can live with. That's because somewhere down the road this market
will ignite, and when it does you want to be sure you are there.
Sincerely,
Michael J.C. Roth, CFA
PRESIDENT AND
VICE CHAIRMAN OF THE BOARD
THE S&P 500 INDEX IS AN UNMANAGED INDEX REPRESENTING THE WEIGHTED AVERAGE
PERFORMANCE OF A GROUP OF 500 WIDELY HELD, PUBLICLY TRADED STOCKS. IT IS NOT
POSSIBLE TO INVEST IN THE S&P 500 INDEX.
AN INVESTMENT IN A MONEY MARKET FUND IS NOT INSURED OR GUARANTEED BY THE FDIC OR
ANY OTHER GOVERNMENT AGENCY. ALTHOUGH THE FUND SEEKS TO PRESERVE THE VALUE OF
YOUR INVESTMENT AT $1.00 PER SHARE, IT IS POSSIBLE TO LOSE MONEY BY INVESTING IN
THE FUND.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
FOR MORE COMPLETE INFORMATION ABOUT THE MUTUAL FUNDS MANAGED AND DISTRIBUTED BY
USAA INVESTMENT MANAGEMENT COMPANY, INCLUDING CHARGES AND OPERATING EXPENSES,
PLEASE CALL FOR A PROSPECTUS. READ IT CAREFULLY BEFORE INVESTING.
INVESTMENT REVIEW
USAA INCOME STOCK FUND
OBJECTIVE: Current income with the prospect of increasing dividend income and
the potential for capital appreciation.
TYPES OF INVESTMENTS: Invests principally in common stocks of well-established,
large companies with above-average dividend yields.
--------------------------------------------------------------------------------
7/31/99 7/31/00
--------------------------------------------------------------------------------
Net Assets $2,484.3 Million $1,882.7 Million
Net Asset Value Per Share $20.69 $17.63
--------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS AS OF 7/31/00
--------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS
-3.85% 12.88% 12.82%
--------------------------------------------------------------------------------
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 Income Stock Fund, the S&P 500
Index, and the Lipper Equity Income Funds Average, for the period of 07/31/1990
through 07/31/2000. The data points from the graph are as follows:
USAA INCOME LIPPER EQUITY INCOME
STOCK FUND S&P 500 INDEX FUNDS AVERAGE
----------- ------------- --------------------
07/31/90 $10,000 $10,000 $10,000
01/31/91 10,450 9,839 9,722
07/31/91 11,711 11,273 11,032
01/31/92 12,946 12,068 11,866
07/31/92 13,846 12,712 12,593
01/31/93 14,132 13,343 13,229
07/31/93 15,226 13,820 14,124
01/31/94 16,045 15,057 15,290
07/31/94 15,346 14,532 14,787
01/31/95 15,814 15,136 14,901
07/31/95 18,235 18,320 17,331
01/31/96 20,335 20,982 19,635
07/31/96 20,644 21,353 19,811
01/31/97 24,297 26,506 23,519
07/31/97 27,138 32,480 27,821
01/31/98 29,548 33,636 28,949
07/31/98 30,742 38,750 31,088
01/31/99 32,705 44,571 32,479
07/31/99 34,755 46,579 34,606
01/31/00 32,319 49,180 32,639
07/31/00 33,417 50,755 33,602
DATA FROM 7/31/90 THROUGH 7/31/00
THE GRAPH ILLUSTRATES THE COMPARISON OF A $10,000 HYPOTHETICAL INVESTMENT IN THE
USAA INCOME STOCK FUND TO THE S&P 500 INDEX AND THE LIPPER EQUITY INCOME FUNDS
AVERAGE, AN AVERAGE PERFORMANCE LEVEL OF ALL MIXED EQUITY AND INCOME FUNDS, AS
REPORTED BY LIPPER ANALYTICAL SERVICES, INC., AN INDEPENDENT ORGANIZATION THAT
MONITORS THE PERFORMANCE OF MUTUAL FUNDS. 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 DIRECTLY IN THE S&P
500 INDEX.
MESSAGE FROM THE MANAGER
[PHOTOGRAPH OF PORTFOLIO MANAGER: STEPHAN J. KLAFFKE, CFA, APPEARS HERE]
PERFORMANCE
During the past 12 months, the Federal Reserve (the Fed) initiated six separate
interest-rate increases. These increases generally had a negative impact on
interest-rate-sensitive investments. In particular, the USAA Income Stock Fund's
investments in OLD ECONOMY stocks performed poorly. During the fiscal year ended
July 31, 2000, the USAA Income Stock Fund's total return was -3.85%, while the
Lipper Equity Income category average total return was -2.57%.
For the 12 months ending July 31, 2000, the best-performing sectors of the Fund
were technology and capital goods. Our small technology investment made the
biggest positive contribution to the Fund's performance over the past 12 months.
The technology companies we invest in offer the Fund exposure to a growing
dividend stream and strong fundamentals, but have very minimal dividend yields.
Companies in the capital-goods sector offer above-average dividend yields with a
growing earnings stream.
The underperforming sectors of the Fund were health care and consumer cyclical
stocks. Bristol-Myers Squibb was the reason for the weak health-care
performance. Several events had a negative impact on the company: the delay of a
potential blockbuster drug Vanlev, concern regarding two profitable drugs that
are about to go off patent, and congressional hearings on drug pricing. We
believe that Bristol-Myers Squibb is an attractive investment at current prices.
The poor investment performance of consumer cyclical stocks can be directly tied
to the Fed's raising interest rates. We believe that the Fed is at the latter
stage of rate increases, which should provide a better economic backdrop for
these stocks.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
REFER TO THE BOTTOM OF PAGE 4 FOR THE LIPPER AVERAGE DEFINITION.
OUTLOOK AND PERSPECTIVE
The past several reports have detailed how a few stocks accounted for the bulk
of the stock market's overall return. During the past six months, the
performance of the stock market has begun to broaden. The improved performance
of a larger group of stocks has been given little notice, while the year-to-date
return of the market averages has remained negative. The USAA Income Stock
Fund's performance relative to its category and the market has improved over the
past six months. If the stock market's performance continues to come from a
larger number of stocks, we believe the modifications made over the past year
will provide the potential for better performance.
---------------------------------------------------
TOP 10 EQUITY HOLDINGS
(% OF NET ASSETS)
---------------------------------------------------
Verizon Communications 5.1
American Home Products Corp. 3.7
Bristol-Myers Squibb Co. 3.7
Texaco, Inc. 3.7
Nortel Networks Corp. 3.6
Ford Motor Co. 3.5
Qwest Communications
International, Inc. 3.5
National Fuel Gas Co. 3.4
Citigroup, Inc. 2.8
BP Amoco plc ADR 2.7
---------------------------------------------------
---------------------------------------------------
TOP 10 INDUSTRIES
(% OF NET ASSETS)
---------------------------------------------------
Oil - International Integrated 7.7
Health Care - Diversified 7.4
Natural Gas Utilities 6.7
Electric Utilities 5.7
Foods 5.3
Banks - Major Regional 5.2
Telephones 5.1
Banks - Money Center 4.7
Telecommunications - Long Distance 4.1
Communication Equipment 3.6
---------------------------------------------------
YOU WILL FIND A COMPLETE LISTING OF THE SECURITIES THAT THE FUND OWNS ON PAGES
9-12.
DISTRIBUTIONS TO SHAREHOLDERS
The following per share information describes the federal tax treatment of
distributions made during the fiscal year ended July 31, 2000. These figures are
provided for information purposes only and should not be used for reporting to
federal or state revenue agencies. Distributions for the calendar year will be
reported to you on Form 1099-DIV in January 2001.
Ordinary income $ .7016 *
Section 1250 gain .0016
Long-term capital gains 1.5404
-------
Total $2.2436
=======
84.21% of ordinary income distributions qualify for deduction by corporations.
* INCLUDES DISTRIBUTION OF SHORT-TERM CAPITAL GAINS, IF ANY, WHICH ARE TAXABLE
AS ORDINARY INCOME.
INDEPENDENT AUDITORS' REPORT
KPMG
The Shareholders and Board of Directors
USAA INCOME STOCK FUND:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of the USAA Income Stock 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 Income Stock 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 INCOME STOCK FUND
PORTFOLIO OF INVESTMENTS
JULY 31, 2000
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
--------------------------------------------------------------------------------
COMMON STOCKS (89.1%)
AEROSPACE/DEFENSE (2.2%)
600,000 B.F. Goodrich Co. $ 21,412
700,000 Lockheed Martin Corp. 19,688
--------------------------------------------------------------------------------
41,100
--------------------------------------------------------------------------------
ALUMINUM (1.1%)
700,000 Alcoa, Inc. 21,175
--------------------------------------------------------------------------------
AUTOMOBILES (3.5%)
1,400,000 Ford Motor Co. 65,188
--------------------------------------------------------------------------------
AUTO PARTS (0.6%)
400,000 Dana Corp. 9,175
183,306 Visteon Corp. 2,566
--------------------------------------------------------------------------------
11,741
--------------------------------------------------------------------------------
BANKS - MAJOR REGIONAL (5.2%)
1,000,000 Bank One Corp. 31,812
554,000 Fleet Boston Financial Corp. 19,840
890,000 PNC Financial Services Group 45,279
--------------------------------------------------------------------------------
96,931
--------------------------------------------------------------------------------
BANKS - MONEY CENTER (4.7%)
700,000 Bank of America Corp. 33,162
525,000 Chase Manhattan Corp. 26,086
1,100,000 First Union Corp. 28,394
--------------------------------------------------------------------------------
87,642
--------------------------------------------------------------------------------
BEVERAGES - NONALCOHOLIC (0.6%)
250,000 PepsiCo, Inc. 11,453
--------------------------------------------------------------------------------
CHEMICALS (1.3%)
102,127 Du Pont (E. I.) De Nemours & Co. 4,628
1,400,000 Lyondell Petrochemical Co. 19,600
--------------------------------------------------------------------------------
24,228
--------------------------------------------------------------------------------
CHEMICALS - SPECIALTY (0.6%)
450,000 International Flavors & Fragrances, Inc. 12,038
--------------------------------------------------------------------------------
COMMUNICATION EQUIPMENT (3.6%)
900,000 Nortel Networks Corp. 66,937
--------------------------------------------------------------------------------
COMPUTER - HARDWARE (1.7%)
300,000 Hewlett-Packard Co. 32,756
--------------------------------------------------------------------------------
ELECTRIC UTILITIES (5.7%)
900,000 Allegheny Energy, Inc. 28,237
805,000 Alliant Energy Corp. 21,182
700,000 New Century Energies, Inc. 23,931
1,100,000 TXU Corp. 34,375
--------------------------------------------------------------------------------
107,725
--------------------------------------------------------------------------------
ELECTRICAL EQUIPMENT (3.0%)
900,000 General Electric Co. 46,294
300,000 Honeywell International, Inc. 10,087
--------------------------------------------------------------------------------
56,381
--------------------------------------------------------------------------------
ELECTRONICS - INSTRUMENTATION (0.2%)
114,420 Agilent Technologies, Inc.* 4,663
--------------------------------------------------------------------------------
ELECTRONICS - SEMICONDUCTORS (1.4%)
400,000 Intel Corp. 26,700
--------------------------------------------------------------------------------
ENTERTAINMENT (0.4%)
200,000 Walt Disney Co. 7,738
--------------------------------------------------------------------------------
FINANCE - DIVERSIFIED (2.8%)
750,000 Citigroup, Inc. 52,922
--------------------------------------------------------------------------------
FOODS (4.2%)
1,500,000 ConAgra, Inc. 30,656
1,200,000 H.J. Heinz Co. 47,925
--------------------------------------------------------------------------------
78,581
--------------------------------------------------------------------------------
HEALTH CARE - DIVERSIFIED (7.4%)
1,300,000 American Home Products Corp. 68,981
1,400,000 Bristol-Myers Squibb Co. 69,475
--------------------------------------------------------------------------------
138,456
--------------------------------------------------------------------------------
HOUSEHOLD PRODUCTS (0.6%)
200,000 Procter & Gamble Co. 11,375
--------------------------------------------------------------------------------
INSURANCE - LIFE/HEALTH (0.6%)
250,000 Lincoln National Corp. 10,906
--------------------------------------------------------------------------------
INSURANCE - PROPERTY/CASUALTY (0.6%)
147,800 Chubb Corp. 10,937
--------------------------------------------------------------------------------
MANUFACTURING - DIVERSIFIED INDUSTRIES (2.2%)
113,500 Minnesota Mining & Manufacturing Co. 10,222
1,500,000 Tomkins plc ADR 19,688
200,000 United Technologies Corp. 11,675
--------------------------------------------------------------------------------
41,585
--------------------------------------------------------------------------------
NATURAL GAS UTILITIES (6.1%)
1,310,000 National Fuel Gas Co. 64,599
1,450,000 NICOR, Inc. 50,297
--------------------------------------------------------------------------------
114,896
--------------------------------------------------------------------------------
OIL - DOMESTIC INTEGRATED (2.0%)
315,000 Conoco, Inc. "B" 7,265
1,500,000 Occidental Petroleum Corp. 30,375
--------------------------------------------------------------------------------
37,640
--------------------------------------------------------------------------------
OIL - INTERNATIONAL INTEGRATED (7.7%)
984,000 BP Amoco plc ADR 51,476
300,000 Chevron Corp. 23,700
1,400,000 Texaco, Inc. 69,212
--------------------------------------------------------------------------------
144,388
--------------------------------------------------------------------------------
OIL & GAS - DRILLING/EQUIPMENT (0.7%)
400,000 Baker Hughes, Inc. 13,850
--------------------------------------------------------------------------------
PAPER & FOREST PRODUCTS (0.8%)
600,000 Mead Corp. 15,225
--------------------------------------------------------------------------------
PHOTOGRAPHY - IMAGING (0.5%)
600,000 Xerox Corp. 8,925
--------------------------------------------------------------------------------
PUBLISHING/NEWSPAPERS (0.8%)
920,000 Hollinger International, Inc. 14,950
--------------------------------------------------------------------------------
RAILROADS/SHIPPING (0.5%)
400,000 CSX Corp. 9,925
--------------------------------------------------------------------------------
REAL ESTATE INVESTMENT TRUSTS (3.3%)
625,000 Boston Properties, Inc. 25,937
400,000 Highwoods Properties, Inc. 10,800
330,000 Post Properties, Inc. 15,304
350,000 Simon Property Group, Inc. 9,144
--------------------------------------------------------------------------------
61,185
--------------------------------------------------------------------------------
RETAIL - DEPARTMENT STORES (0.4%)
500,000 J.C. Penney Co., Inc. 8,063
--------------------------------------------------------------------------------
SAVINGS & LOAN HOLDING CO. (2.0%)
1,200,000 Washington Mutual, Inc. 38,550
--------------------------------------------------------------------------------
TELECOMMUNICATIONS - CELLULAR/WIRELESS (0.9%)
400,000 Vodafone Group plc ADR 17,250
--------------------------------------------------------------------------------
TELECOMMUNICATIONS - LONG DISTANCE (4.1%)
1,383,456 Qwest Communications International, Inc. 64,936
350,000 Sprint Corp. 12,469
--------------------------------------------------------------------------------
77,405
--------------------------------------------------------------------------------
TELEPHONES (5.1%)
2,037,000 Verizon Communications 95,739
--------------------------------------------------------------------------------
Total common stocks (cost: $1,306,903) 1,677,149
--------------------------------------------------------------------------------
PREFERRED STOCKS (4.3%)
DRUGS (1.1%)
450,000 Monsanto Co., 6.50% cumulative convertible 21,600
--------------------------------------------------------------------------------
FOODS (1.1%)
640,000 Ralston Purina Co., 7.00% cumulative convertible 20,040
--------------------------------------------------------------------------------
MACHINERY - DIVERSIFIED (0.9%)
800,000 Ingersoll-Rand Co., 6.75% cumulative convertible 16,450
--------------------------------------------------------------------------------
NATURAL GAS UTILITIES (0.6%)
200,000 El Paso Energy Corp., 4.75% cumulative convertible 12,300
--------------------------------------------------------------------------------
OIL & GAS - EXPLORATION & PRODUCTION (0.6%)
250,000 Apache Corp., 6.50% cumulative convertible 11,062
--------------------------------------------------------------------------------
Total preferred stocks (cost: $86,903) 81,452
--------------------------------------------------------------------------------
PRINCIPAL
AMOUNT
(000)
--------------------------------------------------------------------------------
MONEY MARKET INSTRUMENTS (6.0%)
COMMERCIAL PAPER
$ 20,651 Associates Corp. of North America, 6.64%, 8/01/2000 20,651
51,653 Household Finance Corp., 6.45%, 8/01/2000 51,653
40,000 General Electric Capital Corp., 6.46%, 8/02/2000 39,993
--------------------------------------------------------------------------------
Total money market instruments (cost: $112,297) 112,297
--------------------------------------------------------------------------------
Total investments (cost: $1,506,103) $1,870,898
================================================================================
USAA INCOME STOCK FUND
NOTES TO PORTFOLIO OF INVESTMENTS
JULY 31, 2000
GENERAL NOTES
Market values of securities are determined by procedures and practices discussed
in note 1 to the financial statements.
The cost of securities for federal income tax purposes is approximately the same
as that reported in the financial statements.
The percentages shown represent the percentage of the investments to net assets.
Investments in foreign securities were 8.3% of net assets at July 31, 2000.
ADR - American Depositary Receipts are receipts issued by a U.S. bank evidencing
ownership of foreign shares. Dividends are paid in U.S. dollars.
SPECIFIC NOTES
* Non-income producing.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
<TABLE>
USAA INCOME STOCK FUND
STATEMENT OF ASSETS AND LIABILITIES
(IN THOUSANDS)
JULY 31, 2000
<S> <C>
ASSETS
Investments in securities, at market value (identified cost of $1,506,103) $1,870,898
Cash 179
Receivables:
Capital shares sold 67
Dividends 4,868
Securities sold 8,970
-----------
Total assets 1,884,982
-----------
LIABILITIES
Capital shares redeemed 1,195
USAA Investment Management Company 826
USAA Transfer Agency Company 199
Accounts payable and accrued expenses 97
-----------
Total liabilities 2,317
-----------
Net assets applicable to capital shares outstanding $1,882,665
===========
REPRESENTED BY:
Paid-in capital $1,459,567
Accumulated undistributed net investment income 5,421
Accumulated net realized gain on investments 52,882
Net unrealized appreciation of investments 364,795
----------
Net assets applicable to capital shares outstanding $1,882,665
==========
Capital shares outstanding 106,773
==========
Authorized shares of $.01 par value 250,000
==========
Net asset value, redemption price, and offering price per share $ 17.63
==========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
</TABLE>
USAA INCOME STOCK FUND
STATEMENT OF OPERATIONS
(IN THOUSANDS)
YEAR ENDED JULY 31, 2000
Net investment income:
Income:
Dividends (net of foreign taxes withheld of $274) $ 72,460
Interest 6,444
---------
Total income 78,904
---------
Expenses:
Management fees 10,830
Transfer agent's fees 2,826
Custodian's fees 253
Postage 394
Shareholder reporting fees 96
Directors' fees 4
Registration fees 44
Professional fees 80
Other 44
---------
Total expenses 14,571
---------
Net investment income 64,333
---------
Net realized and unrealized gain (loss) on investments:
Net realized gain 167,813
Change in net unrealized appreciation/depreciation (337,221)
---------
Net realized and unrealized loss (169,408)
---------
Decrease in net assets resulting from operations $(105,075)
==========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
USAA INCOME STOCK FUND
STATEMENTS OF CHANGES IN NET ASSETS
(IN THOUSANDS)
YEARS ENDED JULY 31,
2000 1999
------------------------
From operations:
Net investment income $ 64,333 $ 74,570
Net realized gain on investments 167,813 85,527
Change in net unrealized appreciation/depreciation
of investments (337,221) 137,017
------------------------
Increase (decrease) in net assets resulting
from operations (105,075) 297,114
------------------------
Distributions to shareholders from:
Net investment income (66,895) (72,510)
------------------------
Net realized gains (200,451) (91,729)
------------------------
From capital share transactions:
Proceeds from shares sold 139,044 217,500
Reinvested dividends 247,947 151,834
Cost of shares redeemed (616,201) (514,483)
------------------------
Decrease in net assets from capital
share transactions (229,210) (145,149)
------------------------
Net decrease in net assets (601,631) (12,274)
Net assets:
Beginning of period 2,484,296 2,496,570
------------------------
End of period $1,882,665 $2,484,296
========================
Accumulated undistributed net investment income:
End of period $ 5,421 $ 7,983
========================
Change in shares outstanding:
Shares sold 7,576 11,175
Shares issued for dividends reinvested 13,674 8,360
Shares redeemed (34,520) (26,520)
------------------------
Decrease in shares outstanding (13,270) (6,985)
========================
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
USAA INCOME STOCK FUND
NOTES TO FINANCIAL STATEMENTS
JULY 31, 2000
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USAA MUTUAL FUND, INC. (the Company), registered under the Investment Company
Act of 1940, as amended, is a diversified, open-end management investment
company incorporated under the laws of Maryland consisting of 13 separate funds.
The information presented in this annual report pertains only to the USAA Income
Stock Fund (the Fund). The Fund's investment objective is current income with
the prospect of increasing dividend income and the potential for capital
appreciation. USAA Investment Management Company (the Manager) attempts to
achieve this objective by investing the Fund's assets primarily in common stocks
of well-established, large companies with above-average dividend yields.
A. SECURITY VALUATION - The value of each security is determined (as of the
close of trading on the New York Stock Exchange on each business day the
Exchange is open) as set forth below:
1. Portfolio securities, except as otherwise noted, traded primarily on a
domestic securities exchange are valued at the last sales price on that
exchange.
2. Over-the-counter securities are priced at the last sales price or, if not
available, at the average of the bid and asked prices.
3. Securities purchased with maturities of 60 days or less are stated at
amortized cost, which approximates market value.
4. Securities that cannot be valued by the methods set forth above, and all
other assets, are valued in good faith at fair value, using methods determined
by the Manager under the general supervision of the Board of Directors.
B. FEDERAL TAXES - The Fund's policy is to comply with the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its income to its shareholders. Therefore, no
federal income or excise tax provision is required.
C. INVESTMENTS IN SECURITIES - Security transactions are accounted for on the
date the securities are purchased or sold (trade date). Gain or loss from sales
of investment securities is computed on the identified cost basis. Dividend
income, less foreign taxes, if any, is recorded on the ex-dividend date. If the
ex-dividend date has passed, certain dividends from foreign securities are
recorded upon notification. Interest income is recorded on the accrual basis.
Discounts and premiums on short-term securities are amortized over the life of
the respective securities.
D. USE OF ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that may affect the reported amounts in the financial
statements.
(2) LINES OF CREDIT
The Fund participates with other USAA funds in three joint short-term revolving
loan agreements totaling $850 million, two with USAA Capital Corporation
(CAPCO), an affiliate of the Manager ($250 million committed and $500 million
uncommitted), and one with Bank of America ($100 million committed). The purpose
of the agreements is to meet temporary or emergency cash needs, including
redemption requests that might otherwise require the untimely disposition of
securities.
Subject to availability under both agreements with CAPCO, the Fund may borrow
from CAPCO an amount up to 5% of the Fund's total assets at CAPCO's borrowing
rate with no markup. Subject to availability under its agreement with Bank of
America, the Fund may borrow from Bank of America, at Bank of America's
borrowing rate plus a markup, an amount which, when added to outstanding
borrowings under the CAPCO agreements, does not exceed 25% of the Fund's total
assets. The Fund had no borrowings under any of these agreements during the year
ended July 31, 2000.
(3) DISTRIBUTIONS
Distributions of net investment income are made quarterly. 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.
(4) INVESTMENT TRANSACTIONS
Cost of purchases and proceeds from sales of securities, excluding short-term
securities, for the year ended July 31, 2000, were $272,283,000 and
$768,082,000, respectively.
Gross unrealized appreciation and depreciation of investments as of July 31,
2000, were $523,133,000 and $158,338,000, 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 .50% of its annual average net assets.
During the year ended July 31, 2000, the Manager paid $6 million to the Fund in
connection with the Fund's uncollected share of a class action lawsuit
pertaining to a former portfolio holding. This amount has been included in net
realized gain on investments.
B. TRANSFER AGENT'S FEES - USAA Transfer Agency Company, d/b/a USAA Shareholder
Account Services, an affiliate of the Manager, provides transfer agent services
to the Fund based on an annual charge of $26 per shareholder account plus
out-of-pocket expenses.
C. UNDERWRITING SERVICES - The Manager provides exclusive underwriting and
distribution of the Fund's shares on a continuing best-efforts basis. The
Manager receives no commissions or fees for this service.
(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 any compensation from the Fund.
<TABLE>
(7) FINANCIAL HIGHLIGHTS
Per share operating performance for a share outstanding throughout each period
is as follows:
<CAPTION>
YEAR ENDED JULY 31,
----------------------------------------------------------------------
2000 1999 1998 1997 1996
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value at
beginning of period $ 20.69 $ 19.65 $ 19.01 $ 15.85 $ 14.96
Net investment income .56 .60 .75 .81 .77
Net realized and
unrealized gain (loss) (1.38) 1.75 1.66 3.88 1.16
Distributions from net
investment income (.58) (.58) (.75) (.79) (.77)
Distributions of realized
capital gains (1.66) (.73) (1.02) (.74) (.27)
----------------------------------------------------------------------
Net asset value at
end of period $ 17.63 $ 20.69 $ 19.65 $ 19.01 $ 15.85
======================================================================
Total return (%) * (3.85) 13.05 13.28 31.46 13.21
Net assets at
end of period (000) $1,882,665 $2,484,296 $2,496,570 $2,186,329 $1,710,769
Ratio of expenses to
average net assets (%) .67 .65 .65 .68 .72
Ratio of net investment
income to average
net assets (%) 2.97 3.06 3.85 4.73 4.84
Portfolio turnover (%) 13.34 34.20 22.34 34.95 32.38
* ASSUMES REINVESTMENT OF ALL DIVIDEND INCOME AND CAPITAL GAIN DISTRIBUTIONS DURING THE PERIOD.
</TABLE>
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
