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 10
Statement of Assets and Liabilities 11
Statement of Operations 12
Statements of Changes in Net Assets 13
Notes to Financial Statements 14
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 GNMA Trust,
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 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 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 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]
As I write this message, I am also in the process of preparing to lead a panel
on personal finance at the Greater San Antonio Chamber of Commerce's annual
conference on economic development. As we enter 2000, I have asked my fellow
panelists to look back to what they consider to be the key lessons they have
learned in careers that all span at least 25 years in investments.
The incident and the person I have chosen is the visit of a well-known equity
strategist from one of the major investment bankers to San Antonio in the spring
of 1982. I should remind you what the spring of 1982 was like. The market had
not yet shaken off the effects of repeated, arbitrary increases in the price of
oil; the roaring inflation which followed; and the highest U.S. interest rates
since the Civil War. Stocks and bonds had not yet come off their worst
performance since World War II. Against this backdrop, that well-known equity
strategist delivered a magnificent after-dinner presentation. He plucked facts
and figures from a wide variety of sources and wove them into a compelling
argument. His conclusion was clear: "Stay out of this market!" He was brilliant.
He was dead wrong. That summer saw the beginning of the greatest bull market for
both stocks and bonds in U.S. history.
This incident has greatly influenced my thinking and my career. It taught me
these things:
- It is best to base investment strategy on something other than a
forecast of the market.
- If you insist on forecasting the market, it doesn't help to make
the little calls. You absolutely must be right at times like
spring of 1982.
- If you use an asset allocation approach to investing, your chances
of being in at a major turning point are 100%.
That is why I believe in the asset allocation approach of our strategy funds.
Sincerely,
Michael J.C. Roth, CFA
President and
Vice Chairman of the Board
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 GNMA TRUST
OBJECTIVE: High level of current income consistent with preservation of
principal.
TYPES OF INVESTMENTS: Invests principally in securities backed by the full faith
and credit of the U.S. government; mostly GNMA pass-through certificates, which
represent ownership in a pool of mortgage loans or a single mortgage loan.
- --------------------------------------------------------------------------------
11/30/99 5/31/99
================================================================================
Net Assets $463.8 Million $500.5 Million
Net Asset Value Per Share $9.51 $10.00
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Average Annual Total Returns and 30-Day SEC Yield(*) as of 11/30/99
================================================================================
5/31/99 Since Inception 30-Day
to 11/30/99(+) 1 Year 5 Years on 2/1/91 SEC Yield
-1.68% -2.71% 6.86% 6.75% 6.72%
- --------------------------------------------------------------------------------
(*) Calculated as prescribed by the Securities and Exchange Commission.
(+) 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 GNMA Trust, the Lehman Brothers
Inc. GNMA 30-Year Index, and the Lipper GNMA Funds Average for the period of
2/01/91 through 11/30/99. The data points from the graph are as follows:
USAA GNMA Lehman Lipper
Trust Index Average
------------- ------- -------
02/01/91 $10,000 $10,000 $10,000
05/31/91 10,207 10,335 10,279
11/30/91 10,932 11,173 11,016
05/31/92 11,382 11,651 11,469
11/30/92 11,838 12,128 11,911
05/31/93 12,594 12,765 12,531
11/30/93 12,731 12,969 12,772
05/31/94 12,677 12,721 12,464
11/30/94 12,778 12,750 12,419
05/31/95 14,013 14,193 13,756
11/30/95 14,818 14,898 14,421
05/31/96 14,524 14,953 14,351
11/30/96 15,575 16,007 15,318
05/31/97 15,865 16,375 15,558
11/30/97 16,759 17,292 16,422
05/31/98 17,554 17,958 17,052
11/30/98 18,296 18,584 17,606
05/31/99 18,105 18,837 17,710
11/30/99 17,801 19,052 17,853
Data since inception on 2/01/91 through 11/30/99
The graph illustrates the comparison of a $10,000 hypothetical investment in the
USAA GNMA Trust to the broad-based unmanaged index of the Lehman Brothers, Inc.
GNMA 30-Year Index and an unmanaged index of funds similar to the Trust as
represented by the Lipper GNMA Funds Average. Lipper Analytical Services, Inc.
is an independent organization that monitors the performance of mutual funds.
Message from the Manager
[PHOTOGRAPH OF PORTFOLIO MANAGER: DONNA J. BAGGERLY, CFA, APPEARS HERE]
INTEREST RATE MARKET
Interest rates on November 30, 1999, were higher than at the beginning of this
reporting period, May 31, 1999.
GNMA PASS-THROUGH AND U.S. TREASURY NOTE YIELDS
A graph is shown comparing the GNMA 6.5% 30-Year Pass-through Certificate to the
10-Year U.S. Treasury Note for the period 05/31/99 to 11/30/99. The vertical
axis shows the yield and the horizontal axis shows the time period. The data
points from the graph are as follows:
GNMA 6.5% 30-Year 10-Year
Pass-through Certificate U.S. Treasury Note
------------------------ ------------------
05/31/99 6.93% 5.62%
06/30/99 7.06% 5.78%
07/30/99 7.34% 5.90%
08/31/99 7.46% 5.97%
09/30/99 7.22% 5.88%
10/29/99 7.25% 6.02%
11/30/99 7.35% 6.19%
Please note that the top line is the yield of the 6.5% 30-year GNMA pass-through
certificate. The bottom line in the graph represents the yield of the 10-year
U.S. Treasury note, which is the industry standard against which most mortgage
securities are measured.
Following the highly volatile period from August to November 1998, the bond
market stabilized through January 1999. Since then interest rates have moved
upward, depressing bond prices again.
Economic strength continued through November 1999, renewing inflation fears and
the specter of higher interest rates. This fear continues even though the
Federal Reserve (the Fed) raised interest rates 0.25% three times in the
six-month period: in June, August, and November. The yield on the 10-year
Treasury note has moved from 5.62% on May 28, 1999, to 6.19% for November 30,
1999, the end of this reporting period. With the yield on the Treasury note over
6%, this rise in interest rates may be about over.
USAA GNMA TRUST PERFORMANCE
While past performance is no guarantee of future results, from May 31, 1999, to
November 30, 1999, your Fund paid an annualized dividend distribution yield of
6.25% versus an average annualized dividend distribution yield of 5.70% for the
Lipper GNMA Funds Average. During the six-month period, the Trust's share price
fell $0.49 to $9.51. Over this period, your Fund had a total return of -1.79%,
below the Lipper GNMA Funds Average total return of 0.60% for the same time
period.
THE USAA GNMA TRUST PORTFOLIO
With the 10-year Treasury note rate up over 0.40% since May 31, 1999, and over
1.50% since the beginning of the year, investing for low prepayment risk has had
the side effect of increasing the volatility of mortgage securities and funds
that invest in them. As expected in a period of rising interest rates, the USAA
GNMA Trust experienced negative performance for the year due to a significant
price decline. With the Fed raising rates three times in 1999 and its concern
with inflation and the current tight labor market, there is a possibility that
the Fed may raise rates again in 2000. A number of steps have been taken to
decrease the volatility of the Fund if interest rates continue to rise. The
portfolio's holdings in 6% and 6.5% fixed-rate single-family mortgages were sold
and the proceeds were reinvested in 7% and 7.5% fixed-rate single-family
mortgages. Virtually all of the project loans were sold, and proceeds were
invested in 7.5% and 8% fixed-rate single-family mortgages. We still continue to
hold the construction loan investments.
The following graph shows the fixed-rate single-family mortgage composition by
coupon.
FIXED-RATE SINGLE-FAMILY MORTGAGE POOL COMPOSITION BY COUPON RATE
A bar graph is shown here illustrating the Fixed-Rate Single-Family Mortgage
Pool Composition by Coupon Rate as of 11/30/99. The vertical axis shows the
coupon rate, and the horizontal axis shows the category percentage.
The values are:
Coupon Rate 5.5 6.75 7.0 7.5 8.0 8.5 9.0
Category % 6.2 1.3 12.9 10.6 16.6 1.0 0.5
The graph also shows the average coupon rate to be 6.5%.
Twelve-month dividend yield is computed by dividing income dividends paid during
the 12 months by the latest month-end net asset value adjusted for capital gains
distributions.
Refer to the bottom of page 4 for the Lipper Average definition.
The economy is still growing with no sign of rising inflation. Many - including
the Fed - are wondering how long low inflation can continue with such a tight
labor market. Therefore, as we enter the year 2000 and more economic information
becomes available, your Fund may continue to be repositioned for rising rates if
it appears warranted. However, as in the past, the USAA GNMA Trust will continue
to be managed with the objective of returning a high level of current income
consistent with preservation of principal.
- --------------------------------------------------------------------------------
NEW PORTFOLIO MANAGER
On November 1, 1999, Donna Baggerly assumed management of the USAA GNMA Trust.
Donna was a senior analyst at USAA Investment Management Company for four years
and has a total of 12 years of investment management experience. Her predecessor
in managing your Fund, Ken Willmann, moved into senior management of USAA
Investment Management Company.
- --------------------------------------------------------------------------------
TYPES OF MORTGAGES
11/30/99
A pie chart is shown here depicting the Types of Mortgages as of November 30,
1999 of the USAA GNMA Trust to be:
Fixed-Rate Single-Family - 48.6%; and Construction Loans - 48.9%.
Percentages are of the net assets in the portfolio and may or may not equal
100%.
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
Investment Trust (the Trust) for proposals 1 and 2.
1 Proposal to elect Trustees as follows:
TRUSTEES VOTES FOR VOTES WITHHELD
Robert G. Davis 181,888,787 2,690,901
Michael J.C. Roth 181,881,641 2,698,047
David G. Peebles 181,888,787 2,690,901
Robert L. Mason 181,888,787 2,690,901
Michael F. Reimherr 181,883,427 2,696,261
Richard A. Zucker 181,875,813 2,696,966
Barbara B. Dreeben 181,883,427 2,696,261
John W. Saunders, Jr. and Howard L. Freeman, Jr. did not stand for re-election
to the Board. Their term of office will terminate on December 31, 1999.
2 Proposal to ratify the selection by the Board of Trustees of KPMG LLP as
auditors for the Trust for the fiscal year ending May 31, 2000.
NUMBER OF SHARES VOTING
- --------------------------------------------------------------------------------
FOR AGAINST ABSTAIN
179,181,697 2,930,888 2,467,103
USAA GNMA TRUST
PORTFOLIO OF INVESTMENTS
(IN THOUSANDS)
November 30, 1999
(Unaudited)
Principal Market
Amount Security Value
- --------------------------------------------------------------------------------
U.S. GOVERNMENT & AGENCY ISSUES (101.8%)
Government National Mortgage Assn. I, Single Family (42.0%)
$ 6,427 6.75%, 5/15/2028 $ 6,187
61,115 7.00%, 4/15/2027 - 6/15/2029 (b) 59,704
49,283 7.50%, 2/15/2028 - 10/15/2029 (b) 49,188
73,698 8.00%, 1/15/2022 - 12/15/2029 (a),(b) 74,946
2,350 8.50%, 6/15/2021 - 7/15/2022 2,442
2,086 9.00%, 7/15/2021 2,200
- --------------------------------------------------------------------------------
194,667
- --------------------------------------------------------------------------------
Government National Mortgage Assn. II, Single Family (6.6%)
31,984 5.50%, 12/20/2028 - 2/20/2029 (b) 28,580
1,920 8.00%, 12/20/2022 1,954
- --------------------------------------------------------------------------------
30,534
- --------------------------------------------------------------------------------
Government National Mortgage Assn. I, Construction Loan (48.9%)
22,396 6.25%, 10/15/2001 (a) 19,817
5,880 6.35%, 3/15/2001 (a) 5,195
9,231 6.38%, 7/15/2001 (a) 8,142
7,598 6.40%, 6/15/2000 - 10/15/2000 (a) 6,842
30,422 6.50%, 3/15/2001 - 5/15/2001 (a) 27,110
49,300 6.63%, 4/15/2002 (a) 44,462
9,513 6.70%, 9/15/2000 (a) 8,806
8,502 6.80%, 5/15/2000 (a) 7,934
3,575 6.85%, 4/15/2000 (a) 3,335
11,838 6.88%, 7/15/2000 (a) 11,096
16,635 7.00%, 8/15/2000 (a) 15,722
7,028 7.05%, 4/15/2000 (a) 6,615
64,088 7.50%, 7/15/2002 (a) 61,825
- --------------------------------------------------------------------------------
226,901
- --------------------------------------------------------------------------------
U.S. Treasury Note (4.3%)
20,000 6.38%, 1/15/2000 20,019
- --------------------------------------------------------------------------------
Total U.S. government & agency issues (cost: $493,650) 472,121
- --------------------------------------------------------------------------------
REPURCHASE AGREEMENTS (16.7%)
77,475 Deutsche Bank Securities Corp., 5.58%, acquired on
11/30/99 and due 12/01/99 at $77,487 (collateralized
by a $74,050 U.S. Treasury Note, 7.25%, due 5/15/16;
market value of $79,063) (cost: $77,475) (b) 77,475
- --------------------------------------------------------------------------------
Total investments (cost: $571,125) $549,596
================================================================================
USAA GNMA TRUST
NOTES TO PORTFOLIO OF INVESTMENTS
November 30, 1999
(Unaudited)
GENERAL NOTES
Market values of securities are determined by procedures and practices discussed
in note 1 to the financial statements.
The cost of securities for federal income tax purposes is approximately the same
as that reported in the financial statements.
The percentages shown represent the percentage of the investments to net assets.
SPECIFIC NOTES
(a) At November 30, 1999, the cost of securities purchased on a delayed-delivery
basis was $169.5 million. The majority of these are GNMA construction loans,
which are drawn against monthly during the construction period. Once the
construction is completed, the security converts to a project loan.
(b) At November 30, 1999, portions of these securities were segregated to cover
delayed-delivery purchases.
See accompanying notes to financial statements.
<TABLE>
USAA GNMA TRUST
STATEMENT OF ASSETS AND LIABILITIES
(IN THOUSANDS)
November 30, 1999
(Unaudited)
<S> <C>
ASSETS
Investments in securities, at market value (identified cost of $493,650) $472,121
Repurchase agreements 77,475
Cash 55
Receivables:
Capital shares sold 49
Interest 3,586
Securities sold 81,228
--------
Total assets 634,514
--------
LIABILITIES
Securities purchased 169,523
Capital shares redeemed 366
USAA Investment Management Company 48
USAA Transfer Agency Company 50
Accounts payable and accrued expenses 23
Dividends on capital shares 698
--------
Total liabilities 170,708
--------
Net assets applicable to capital shares outstanding $463,806
========
REPRESENTED BY:
Paid-in capital $503,027
Accumulated net realized loss on investments (17,692)
Net unrealized depreciation of investments (21,529)
--------
Net assets applicable to capital shares outstanding $463,806
========
Capital shares outstanding, unlimited number of shares authorized,
no par value 48,818
========
Net asset value, redemption price, and offering price per share $ 9.51
========
See accompanying notes to financial statements.
</TABLE>
USAA GNMA TRUST
STATEMENT OF OPERATIONS
(IN THOUSANDS)
Six-month period ended November 30, 1999
(Unaudited)
Net investment income:
Interest income $ 16,616
--------
Expenses:
Management fees 298
Transfer agent's fees 298
Custodian's fees 53
Postage 28
Shareholder reporting fees 15
Trustees' fees 2
Registration fees 13
Professional fees 13
Other 8
--------
Total expenses 728
--------
Net investment income 15,888
--------
Net realized and unrealized loss on investments:
Net realized loss (8,415)
Change in net unrealized appreciation/depreciation (16,576)
--------
Net realized and unrealized loss (24,991)
--------
Decrease in net assets resulting from operations $ (9,103)
========
See accompanying notes to financial statements.
<TABLE>
USAA GNMA TRUST
STATEMENTS OF CHANGES IN NET ASSETS
(IN THOUSANDS)
Six-month period ended November 30, 1999,
and year ended May 31, 1999
(Unaudited)
<CAPTION>
11/30/99 5/31/99
---------------------------
<S> <C> <C>
From operations:
Net investment income $ 15,888 $ 27,716
Net realized gain (loss) on investments (8,415) 2,274
Change in net unrealized depreciation
of investments (16,576) (18,135)
--------------------------
Increase (decrease) in net assets
resulting from operations (9,103) 11,855
--------------------------
Distributions to shareholders from:
Net investment income (15,888) (27,716)
--------------------------
From capital share transactions:
Proceeds from shares sold 48,493 212,281
Shares issued for dividends reinvested 11,747 20,534
Cost of shares redeemed (71,907) (94,018)
--------------------------
Increase (decrease) in net assets from capital
share transactions (11,667) 138,797
--------------------------
Net increase (decrease) in net assets (36,658) 122,936
Net assets:
Beginning of period 500,464 377,528
--------------------------
End of period $463,806 $500,464
==========================
Change in shares outstanding:
Shares sold 5,020 20,571
Shares issued for dividends reinvested 1,223 1,992
Shares redeemed (7,453) (9,126)
--------------------------
Increase (decrease) in shares outstanding (1,210) 13,437
==========================
See accompanying notes to financial statements.
</TABLE>
USAA GNMA TRUST
NOTES TO FINANCIAL STATEMENTS
November 30, 1999
(Unaudited)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USAA INVESTMENT TRUST (the Trust), registered under the Investment Company Act
of 1940, as amended, is a diversified, open-end management investment company
organized as a Massachusetts business trust consisting of eleven separate funds.
The information presented in this semiannual report pertains only to the USAA
GNMA Trust (the Fund). The Fund's investment objective is to provide a high
level of current income consistent with preservation of principal. USAA
Investment Management Company (the Manager) seeks to achieve this objective by
investing the Fund's assets in securities backed by the full faith and credit of
the U.S. government.
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. Government securities are valued each business day by a pricing service
(the Service) approved by the Trust's Board of Trustees. 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. Securities purchased with maturities of 60 days or less are stated at
amortized cost, which approximates market value. Repurchase agreements are
valued at cost.
3. 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 Trustees.
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 either of these agreements during the
six-month period ended November 30, 1999.
(3) DISTRIBUTIONS
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. Net investment income is accrued daily as
dividends and distributed to shareholders monthly. At November 30, 1999, the
Fund had capital loss carryovers for federal income tax purposes of
approximately $17.7 million which, if not offset by subsequent capital gains,
will expire between 2003 - 2008. It is unlikely that the Trust's Board of
Trustees will authorize a distribution of capital gains realized in the future
until the capital loss carryovers have been utilized or expire.
(4) INVESTMENT TRANSACTIONS
Cost of purchases and proceeds from sales/maturities of securities, excluding
short-term securities, for the six-month period ended November 30, 1999, were
$300.1 million and $301.1 million, respectively.
Gross unrealized appreciation and depreciation of investments at November 30,
1999, were $.1 million and $21.6 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 .125% 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.
(6) TRANSACTIONS WITH AFFILIATES
Certain trustees and officers of the Fund are also directors, officers, and/or
employees of the Manager. None of the affiliated trustees or Fund officers
received any compensation from the Fund.
(7) REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with commercial banks or
recognized security dealers. These agreements are secured exclusively by
obligations backed by the full faith and credit of the U.S. government.
Obligations pledged as collateral are required to maintain a value equal to or
in excess of the resale price of the repurchase agreement and are held by the
Fund's custodian until maturity of the repurchase agreement. The Fund's Manager
monitors the creditworthiness of sellers with which the Fund may enter into
repurchase agreements.
(8) YEAR 2000 (UNAUDITED)
Like other mutual funds, the Fund could be adversely affected if the computer
systems used by the Manager and the Fund's other service providers are not able
to perform their intended functions effectively after 1999 because of the
inability of computer software to distinguish the year 2000 from the year 1900.
The Manager has taken steps to address this potential year 2000 problem with
respect to the computer systems that they use and to obtain satisfactory
assurances that the comparable steps are being taken by the Fund's other major
service providers. At this time, however, there can be no assurance that these
steps will be sufficient to avoid any adverse impact to the Fund from this
problem.
(9) FINANCIAL HIGHLIGHTS
Per share operating performance for a share outstanding throughout each period
is as follows:
<TABLE>
<CAPTION>
Six-month
Period Ended
November 30, Year Ended May 31,
--------------------------------------------------------------------------
1999 1999 1998 1997 1996 1995
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value at
beginning of period $ 10.00 $ 10.32 $ 9.95 $ 9.76 $ 10.09 $ 9.82
Net investment income .32 .65 .66 .69 .70 .72
Net realized and
unrealized gain (loss) (.49) (.32) .37 .19 (.33) .27
Distributions from net
investment income (.32) (.65) (.66) (.69) (.70) (.72)
--------------------------------------------------------------------------
Net asset value at
end of period $ 9.51 $ 10.00 $ 10.32 $ 9.95 $ 9.76 $ 10.09
==========================================================================
Total return (%) * (1.68) 3.13 10.65 9.23 3.65 10.54
Net assets at end
of period (000) $463,806 $500,464 $377,528 $308,798 $301,589 $265,571
Ratio of expenses to
average net
assets (%) .31(a) .31 .30 .30 .32 .32
Ratio of net investment
income to average net
assets (%) 6.66(a) 6.24 6.48 6.93 6.90 7.34
Portfolio turnover (%) 56.36 64.93 60.85 77.82 127.77 93.78
</TABLE>
* Assumes reinvestment of all dividend income distributions during the period.
(a) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
TRUSTEES
Robert G. Davis, Chairman of the Board
Michael J.C. Roth, President and Vice Chairman of the Board
John W. Saunders, Jr., Vice President
Barbara B. Dreeben
Howard L. Freeman, Jr.
Robert L. Mason
Richard A. Zucker
INVESTMENT ADVISER, UNDERWRITER, AND DISTRIBUTOR
USAA Investment Management Company
9800 Fredericksburg Road
San Antonio, Texas 78288
TRANSFER AGENT
USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, Texas 78288
CUSTODIAN
State Street Bank and Trust Company
P.O. Box 1713
Boston, Massachusetts 02105
LEGAL COUNSEL
Goodwin, Procter & Hoar LLP
Exchange Place
Boston, Massachusetts 02109
INDEPENDENT AUDITORS
KPMG LLP
112 East Pecan, Suite 2400
San Antonio, Texas 78205
Telephone Assistance Hours
Call toll free - Central Time
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.
Internet Access
usaa.com(Service Mark)
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
