USAA AGGRESSIVE GROWTH FUND
December 1, 1995 PROSPECTUS
USAA Aggressive Growth Fund (the Fund) is one of seven
no-load mutual funds offered by USAA Mutual Fund, Inc.
(the Company). The Fund is managed by USAA Investment
Management Company (the Manager).
WHAT ARE THE INVESTMENT
OBJECTIVE AND POLICIES?
The Fund's investment objective is appreciation of capital.
Investments are primarily in common stocks of companies that
have the prospect of rapidly growing earnings. Page 9.
HOW DO YOU BUY?
Fund shares are sold on a continuous basis at the net
asset value per share without a sales charge. Make your
initial investment directly with the Manager by mail, in
person, or in certain instances, by telephone. Page 12.
HOW DO YOU SELL?
You may redeem Fund shares by mail, telephone, fax, or
telegraph on any day that the net asset value is calculated. Page 14.
This Prospectus, which should be read and retained for
future reference, provides information regarding the
Company and the Fund that you should know before investing.
SHARES OF THE USAA AGGRESSIVE GROWTH FUND ARE NOT
DEPOSITS OR OTHER OBLIGATIONS OF, OR GUARANTEED BY THE
USAA FEDERAL SAVINGS BANK, ARE NOT INSURED BY THE FDIC OR
ANY OTHER GOVERNMENT AGENCY, AND ARE SUBJECT TO MARKET RISKS.
If you would like more information, a STATEMENT OF
ADDITIONAL INFORMATION (SAI) of the Company, dated
December 1, 1995, is available upon request and without
charge by writing to USAA MUTUAL FUND, INC., 9800
Fredericksburg Rd., San Antonio, TX 78288, or by calling
1-800-531-8181. The SAI has been filed with the
Securities and Exchange Commission and is incorporated by
reference into this Prospectus.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
TABLE OF CONTENTS
Page
SUMMARY DATA
Fees and Expenses 3
Financial Highlights 4
Performance Information 6
USING MUTUAL FUNDS
USAA Family of No-Load Mutual Funds 7
Using Mutual Funds in an Investment Program 8
INVESTMENT PORTFOLIO INFORMATION
Investment Objective and Policies 9
SHAREHOLDER INFORMATION
Purchase of Shares 12
Redemption of Shares 14
Conditions of Purchase and Redemption 15
Exchanges 16
Other Services 17
Share Price Calculation 18
Dividends, Distributions and Taxes 19
Management of the Company 20
Description of Shares 21
Service Providers 22
Telephone Assistance Numbers 22
FEES AND EXPENSES
The following summary is provided to assist you in
understanding the expenses you will bear directly or indirectly.
Shareholder Transaction Expenses
- ----------------------------------------------------------------------
Sales Load Imposed on Purchases None
Sales Load Imposed on Reinvested Dividends None
Deferred Sales Load None
Redemption Fee* None
Exchange Fee None
Annual Fund Operating Expenses (as a percentage of average net assets)
- ----------------------------------------------------------------------
Management Fees .47%
12b-1 Fees None
Other Expenses
Transfer Agent Fees** .26%
Custodian Fees .04%
All Other Expenses .09%
---
Total Other Expenses .39%
---
Total Fund Operating Expenses .86%
===
- ----------------------------------------------------------------------
* A shareholder who requests delivery of redemption
proceeds by wire transfer will be subject to a $10
fee. See Redemption of Shares - Bank Wire.
** The Fund pays USAA Shareholder Account Services an
annual fixed fee per account for its services.
See Transfer Agent in the SAI, page 18.
Example of Effect of Fund Expenses
- ---------------------------------------------------------------------
An investor would pay the following expenses on a $1,000 investment,
assuming (1) 5% annual return and (2) redemption at the end of the
periods shown.
1 year - $ 9
3 years - $ 27
5 years - $ 48
10 years - $106
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST
OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR LESS THAN
THOSE ABOVE.
FINANCIAL HIGHLIGHTS
The following per share operating performance for a share
outstanding throughout each of the periods in the ten-
year period ended July 31, 1995, has been audited by KPMG
Peat Marwick LLP. This table should be read in conjunction
with the Fund's financial statements for the year ended
July 31, 1995, and the auditors' report thereon, that appear
in the Fund's Annual Report. Further performance information
is contained in the Annual Report and is available upon
request without charge.
TEN-MONTH
YEAR ENDED PERIOD ENDED
JULY 31, JULY 31, YEAR ENDED SEPTEMBER 30,
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
Net asset value at
beginning of period $ 17.74 $ 20.40 $ 18.85 $ 20.60 $ 12.34
Net investment income (loss) (.05)(b) (.02)(b) .02 (.01)(b) .03
Net realized and
unrealized gain (loss) 8.35 (1.37) 3.67 (1.73) 8.33
Distributions from net
investment income - (.02) - (.01) (.10)
Distributions of realized
capital gains (1.55) (1.25) (2.14) - -
------ ------ ------ ------ ------
Net asset value at
end of period $ 24.49 $ 17.74 $ 20.40 $ 18.85 $ 20.60
====== ====== ====== ====== ======
Total return (%)* 49.98 (7.31) 21.32 (8.45) 68.22
Net assets at end of
period (000) $363,390 $248,953 $277,198 $234,967 $208,084
Ratio of expenses to
average net assets (%) .86 .83(a) .86 .82 .87
Ratio of net investment
income (loss) to average
net assets (%) (.28) (.10)(a) .10 (.05) .17
Portfolio turnover (%) 138.32 98.99 113.01 74.08 50.12
YEAR ENDED SEPTEMBER 30,
1990 1989 1988 1987 1986
---- ---- ---- ---- ----
Net asset value at
beginning of period $ 19.78 $ 17.23 $ 21.79 $ 17.29 $ 14.78
Net investment income (loss) .11 .14 .13 .11 .07
Net realized and
unrealized gain (loss) (4.74) 3.02 (2.71) 4.81 2.55
Distributions from net
investment income (.19) (.14) (.12) (.07) (.11)
Distributions of realized
capital gains (2.62) (.47) (1.86) (.35) -
------ ------ ------ ------ ------
Net asset value at
end of period $ 12.34 $ 19.78 $ 17.23 $ 21.79 $ 17.29
====== ====== ====== ====== ======
Total return (%)* (27.00) 19.20 (9.73) 28.92 17.78
Net assets at end of
period (000) $114,674 $157,467 $139,260 $149,826 $119,003
Ratio of expenses to
average net assets (%) .94 .91 1.00 .97 1.05
Ratio of net investment
income (loss) to average
net assets (%) .68 .78 .82 .54 .37
Portfolio turnover (%) 77.60 98.15 67.56 35.34 57.30
- --------------
* Assumes reinvestment of all dividend income and capital gain
distributions during the period.
(a) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
(b) Calculated using weighted average shares.
PERFORMANCE INFORMATION
Performance information should be considered in light of
the Fund's investment objective and policies and market
conditions during the time periods for which it is
reported. Historical performance should not be
considered as representative of the future performance of
the Fund.
The Company may quote the Fund's total return in
advertisements and reports to shareholders or prospective
investors. The Fund's performance may also be compared
to that of other mutual funds with a similar investment
objective and to stock or relevant indexes that are
referenced in Appendix B to the SAI. Standard total
return results reported by the Fund do not take into
account recurring and nonrecurring charges for optional
services which only certain shareholders elect and which
involve nominal fees, such as the $10 fee for a delivery
of redemption proceeds by wire transfer.
The Fund's average annual total return is computed by
determining the average annual compounded rate of return
for a specific period which, when applied to a
hypothetical $1,000 investment in the Fund at the
beginning of the period, would produce the redeemable
value of that investment at the end of the period,
assuming reinvestment of all dividends and distributions
during the period.
Further information concerning the Fund's total return
is included in the SAI.
USAA FAMILY OF NO-LOAD MUTUAL FUNDS
The USAA Family of No-Load Mutual Funds includes a
variety of Funds, each with different objectives and
policies. In combination, these Funds are designed to
provide investors with the opportunity to formulate their
own investment program. You may exchange any shares you
hold in any one USAA Fund for shares in any other USAA
Fund. For more complete information about the Funds in
the USAA Family of Funds, including charges and expenses,
call the Manager for a Prospectus. Be sure to read it
carefully before you invest or send money.
USAA MUTUAL FUND, INC.
Aggressive Growth Fund
Growth Fund
Growth & Income Fund
Income Stock Fund
Income Fund
Short-Term Bond Fund
Money Market Fund
USAA INVESTMENT TRUST
Income Strategy Fund
Growth and Tax Strategy Fund
Balanced Strategy Fund
Cornerstone Strategy Fund
Growth Strategy Fund
Emerging Markets Fund
Gold Fund
International Fund
World Growth Fund
GNMA Trust
Treasury Money Market Trust
USAA TAX EXEMPT FUND, INC.
Long-Term Fund
Intermediate-Term Fund
Short-Term Fund
Tax Exempt Money Market Fund
California Bond Fund*
California Money Market Fund*
New York Bond Fund*
New York Money Market Fund*
Virginia Bond Fund*
Virginia Money Market Fund*
USAA STATE TAX-FREE TRUST
Florida Tax-Free Income Fund*
Florida Tax-Free Money Market Fund*
Texas Tax-Free Income Fund*
Texas Tax-Free Money Market Fund*
* Available for sale only to residents of these specific states.
USING MUTUAL FUNDS IN AN INVESTMENT PROGRAM
I. THE IDEA BEHIND MUTUAL FUNDS
Mutual funds were conceived as a vehicle that could give
small investors some of the advantages enjoyed by wealthy
investors. A relatively small investment buys part of a
widely diversified portfolio. That portfolio is managed
by investment professionals, relieving the shareholder of
the need to make individual stock or bond selections.
The investor also enjoys conveniences, such as daily
pricing, liquidity, and in the case of the USAA Family of
Funds, no sales charge. The portfolio, because of its
size, has lower transaction costs on its trades than most
individuals would have. As a result each shareholder
owns an investment that in earlier times would have been
available only to very wealthy people.
II. USING FUNDS IN AN INVESTMENT PROGRAM
In choosing a mutual fund as an investment vehicle, the
shareholder is foregoing some investment decisions, but
must still make others. The decisions foregone are those
involved with choosing individual securities. The Fund
Manager will perform that function. In addition, the
Manager will arrange for the safekeeping of securities,
auditing the annual financial statements, and daily
valuation of the Fund, as well as other functions.
The shareholder, however, retains at least part of the
responsibility for an equally important decision. This
decision includes determining a portfolio of mutual funds
that balances the investor's investment goals with his or
her tolerance for risk. It is likely that this decision
may involve the use of more than one fund of the USAA
Family of Funds.
For example, assume a shareholder wished to invest in a
widely diversified common stock portfolio. The
shareholder could include the Aggressive Growth Fund,
Growth Fund, Growth & Income Fund, and Income Stock Fund
in such a portfolio. This portfolio would include stocks
of large and small companies, high-dividend stocks and
growth stocks. This is just one example of how an
individual could combine funds to create a portfolio
tailored to his or her own risk and reward goals.
III. USAA'S FAMILY OF FUNDS
The Manager offers investors another alternative in its
asset strategy funds, the Income Strategy, Growth and Tax
Strategy, Balanced Strategy, Cornerstone Strategy, and
Growth Strategy Funds. These unique mutual funds provide
a professionally managed diversified investment portfolio
within a mutual fund. These Funds are designed for the
shareholder who prefers to delegate the asset allocation
process to an investment manager. The Funds are
structured to achieve diversification across a number of
investment categories.
Whether you prefer to create your own mix of mutual
funds or use an asset strategy fund, the USAA Family of
Funds provides a broad range of choices covering just
about any investor's investment objectives. Our sales
representatives stand ready to inform you of your choices
and to help you craft a portfolio which meets your needs.
INVESTMENT OBJECTIVE AND POLICIES
INVESTMENT OBJECTIVE
The Fund's investment objective is appreciation of capital.
The investment objective of the Fund cannot be changed
without shareholder approval. In view of the risks
inherent in all investments in securities, there is no
assurance that this objective will be achieved.
The investment policies and techniques used to pursue
the Fund's objective may be changed without shareholder
approval, except as otherwise noted. Further information
regarding the Fund's investment policies and restrictions
is provided in the SAI.
INVESTMENT POLICIES,
TECHNIQUES AND RISK FACTORS
The Manager will pursue this objective by investing the
Fund's assets primarily in common stocks, preferred
stocks and other securities convertible into common
stocks or securities which carry the right to buy common
stocks. The Fund will invest in companies that have the
prospect of rapidly growing earnings. These investments
may tend to be made in smaller, less recognized
companies, but may also include large, widely recognized
companies. Investments may also include foreign
securities. Up to 10% of the Fund's assets may be
invested in shares of U.S. Real Estate Investment Trusts
(REITs). The Fund's investments in REITs may subject the
Fund to many of the same risks associated with the direct
ownership of real estate. In addition, REITs are
dependent upon the capabilities of the REIT manager(s)
and have limited diversification.
While the portfolio will be broadly diversified, the
Fund is expected to be significantly more volatile than
the average equity mutual fund. Investing in smaller
less well-known companies, especially those that have a
narrow product line or are thinly traded, often involves
greater risk than investing in established companies with
proven track records.
Convertible securities are bonds, preferred stocks, and
other securities that pay interest or dividends and offer
the buyer the option of converting the security into
common stock. The value of convertible securities
depends partially on interest rate changes and the credit
quality of the issuer. Because a convertible security
affords an investor the opportunity, through its
conversion feature, to participate in the capital
appreciation of the underlying common stock, the value of
convertible securities may also change based on the price
of the common stock.
Up to 30% of the Fund's total assets may be invested in
foreign securities, including American Depositary
Receipts (ADRs), Global Depositary Receipts (GDRs), or
similar forms of ownership interest in securities of
foreign issuers deposited with a depositary. Foreign
holdings may include securities issued in emerging as
well as established markets. Foreign securities may
present greater risks than domestic securities. For a
discussion of risks associated with investments in
foreign issuers, see Special Risk Considerations.
As a temporary defensive measure, the Manager may
invest up to 100% of the Fund's assets in high quality,
short-term debt instruments.
The Fund's portfolio turnover rate will vary from year
to year depending on market conditions. It may exceed
100%. Because a high turnover rate increases transaction
costs and may increase taxable capital gains, the Manager
carefully weighs the anticipated benefits of trading.
Forward Currency Contracts - The Fund values its
securities and other assets in U.S. dollars. The Fund
may, however, hold securities denominated in foreign
currencies. As a result, the value of the securities will
be directly affected by changes in the exchange rate
between the dollar and foreign currencies. In managing
currency exposure, the Fund may enter into forward
currency contracts. A forward currency contract involves
an agreement to purchase or sell a specified currency at
a specified future date or over a specified time period
at a price set at the time of the contract.
The Fund may enter into forward currency contracts
under two circumstances. First, when the Fund enters
into a contract for the purchase or sale of a security
denominated in a foreign currency, it may desire to "lock
in" the U.S. dollar price of the security. Second, when
management of the Fund believes that the currency of a
specific country may deteriorate relative to the U.S.
dollar, it may enter into a forward contract to sell that
currency. The Fund may not hedge with respect to a
particular currency for an amount greater than the
aggregate market value (determined at the time of making
any sale of forward currency) of the securities held in
its portfolio denominated or quoted in, or bearing a
substantial correlation to, such currency.
The use of forward currency contracts to protect the
value of the Fund's assets against a decline in the value
of a currency does not eliminate fluctuations in the
value of the Fund's underlying security holdings. In
addition, although the use of forward currency contracts
can minimize the risk of loss due to a decline in value
of the foreign currency, the use of such contracts will
tend to limit any potential gain resulting from an
increase in the relative value of the foreign currency to
the U.S. dollar. Under such circumstances, a fund that
has entered into forward currency contracts to hedge its
currency risks may be in a less favorable position than a
fund that had not entered into such contracts. The
projection of short-term currency market movements is
extremely difficult and successful execution of a short-
term hedging strategy is uncertain.
Repurchase Agreements - The Fund may invest in repurchase
agreements which are collateralized by obligations issued
or guaranteed by the U.S. Government, its agencies and
instrumentalities. A repurchase agreement is a
transaction in which a security is purchased with a
simultaneous commitment to sell the security back to the
seller (a commercial bank or recognized securities
dealer) at an agreed upon price on an agreed upon date,
usually not more than seven days from the date of
purchase. The resale price reflects the purchase price
plus an agreed upon market rate of interest which is
unrelated to the coupon rate or maturity of the purchased
security. The obligation of the seller to pay the agreed
upon price is in effect secured by the value of the
underlying security. In these transactions, the
securities purchased by the Fund will have a total value
equal to or in excess of the amount of the repurchase
obligation and will be held by the Fund's custodian until
repurchased. If the seller defaults and the value of the
underlying security declines, the Fund may incur a loss
and may incur expenses in selling the collateral. If the
seller seeks relief under the bankruptcy laws, the
disposition of the collateral may be delayed or limited.
Liquidity - The Fund may not invest more than 15% of the
value of its net assets in illiquid securities, including
repurchase agreements maturing in more than seven days.
Commercial paper that is subject to restrictions on
transfer, and other securities that may be resold
pursuant to Rule 144A under the Securities Act of 1933,
may be determined to be liquid in accordance with
guidelines established by the Board of Directors.
INVESTMENT RESTRICTIONS
The following restrictions may not be changed without
shareholder approval:
a. The Fund may not borrow money, except for
temporary or emergency purposes in an amount not
exceeding 33 1/3% of its total assets (including
the amount borrowed) less liabilities (other than
borrowings).
b. The Fund may not, with respect to 75% of its total
assets, purchase the securities of any issuer
(except Government Securities, as such term is
defined in the 1940 Act) if, as a result, the Fund
would own more than 10% of the outstanding voting
securities of such issuer or the Fund would have
more than 5% of the value of its total assets
invested in the securities of such issuer.
c. The Fund may not invest more than 25% of the value
of its total assets in any one industry. This
limitation does not apply to securities issued or
guaranteed by the U.S. Government or its corporate
instrumentalities.
SPECIAL RISK CONSIDERATIONS
Investment in Foreign Securities - Investing in foreign
securities presents certain risks not present in domestic
investments. Such risks may include currency exchange
rate fluctuations, foreign market illiquidity, increased
price volatility, exchange control regulations, different
accounting, reporting and disclosure requirements,
political or social instability, and difficulties in
obtaining judgments or effecting collections thereon.
Brokerage commissions and custodial services may be more
costly, and stock trade settlements may be more lengthy,
more costly and more difficult than in domestic markets.
These investments may be subject to foreign withholding
taxes which may reduce the effective rates of return.
Information which may impact the market value of
securities of a foreign issuer may not be available to
the Manager on a timely basis. The Manager will endeavor
to ascertain such information on as timely a basis as is
practicable, however, any impact on the net asset value
will be deemed to have occurred upon authentication by
the Manager.
A developing country can be considered to be a country
which is in the initial stages of its industrialization
cycle. Investments in developing countries involve
exposure to economic structures that are generally less
diverse and mature than in the United States, and to
political systems which may be less stable. Due to
illiquidity and lack of hedging instruments, it is
presently difficult or in some cases impossible to hedge
the currency risk in these markets. In the past, markets
of developing countries have been more volatile than the
markets of developed countries.
Political risk includes a greater potential for coup
d'etats, insurrections and expropriation by governmental
organizations. For example, the Fund may invest in
Eastern Europe and former states of the Soviet Union
(also known as the CIS or the Commonwealth of Independent
States). These countries were under communist systems
which had nationalized private industry. There is no
guarantee that nationalization may not occur again in
this region or others in which the Fund invests, in which
case the Fund may lose all or part of its investment in
that country's issuers.
PURCHASE OF SHARES
OPENING AN ACCOUNT
You may open an account and make an investment by any of
the following methods. A complete, signed application is
required together with a check for each new account.
TAX ID NUMBER
We require that each shareholder named on the account
provide the Company with a social security number or tax
identification number to avoid possible tax withholding requirements.
EFFECTIVE DATE
When you make a purchase, your purchase price will be the net
asset value (NAV) per share next determined after the Fund
receives your request in proper form. If the Fund receives your
request prior to the close of the New York Stock Exchange on a day
on which the Exchange is open, your purchase price will be the NAV
per share determined for that day. If the Fund receives your
request after the time at which the NAV per share is calculated,
the purchase will be effective on the next business day. Because of
the more lengthy clearing process and the need to convert foreign
currency, a check drawn on a foreign bank will not be deemed received
for the purchase of shares until such time as the check has cleared
and the Manager has received good funds, which may take up to
4 to 6 weeks. Furthermore, a bank charge may be assessed
in the clearing process, which will be deducted from the
amount of the purchase. To avoid a delay in the
effectiveness of your purchase, the Manager suggests that
you convert your foreign check to U.S. dollars prior to
investment in the Fund.
Purchase of Shares
Minimum Investments
Initial Purchase (non-IRA): $1,000
After January 31, 1996 $3,000 or minimum $100 with a minimum $50
monthly electronic investment
Additional Purchases: $50
Initial Purchase - IRA: $1,000
$250 for spousal account
After January 31, 1996 $250 or minimum $100 with a minimum $50 monthly
electronic investment
Additional Purchases: $50
How to Purchase:
Mail * To open an account, send your application and check to:
USAA Investment Management Company
9800 Fredericksburg Rd., San Antonio, TX 78288
* To add to your account, send your check and the "Invest by
Mail" stub that accompanies your fund's transaction
confirmation to the Transfer Agent:
USAA Shareholder Account Services
9800 Fredericksburg Rd., San Antonio, TX 78288
* To exchange by mail, call 1-800-531-8448 for instructions.
In Person * To open an account, bring your application and check to:
USAA Investment Management Company
USAA Federal Savings Bank
10750 Robert F. McDermott Freeway, San Antonio
Automatically * Additional purchases on a regular basis can be deducted
via from a bank account, paycheck, income-producing investment
Electronic or from a USAA money market account. Sign up for these
Funds services when opening an account or call 1-800-531-8448 to
Transfer add these services.
(EFT) * Purchases through payroll deduction ($25 minimum each pay
period with no initial investment) can be made by any
employee of USAA, its subsidiaries or affiliated companies.
Bank Wire * To add to an account, instruct your bank (which may charge
a fee for the service) to wire the specified amount to the
Fund as follows:
State Street Bank and Trust Company, Boston, MA 02101
ABA#011000028
Attn: USAA Aggressive Growth Fund
USAA AC-69384998
Shareholder(s) Name(s)_________________
Shareholder(s) Account Number___________________
Phone * If you have an existing USAA account and would like to open a
1-800-531-8448 new account or if you would like to exchange to another USAA
fund, call for instructions. The new account must have the
same registration as your existing account.
* To add to an account, intermittent (as-needed) purchases can
be deducted from your bank account through our Buy/Sell
Service. Call for instructions.
Through a * To open a new account through your USAA Asset Management
USAA AMA Account, call USAA Brokerage Services at 1-800-531-8343.
REDEMPTION OF SHARES
You may redeem shares of the Fund by any of the following
methods on any day the NAV per share is calculated.
Redemptions will be effective on the day on which
instructions are received in accordance with the
requirements set forth below. However, if instructions
are received after the NAV per share calculation,
redemption will be effective on the next business day.
REDEMPTION PROCEEDS
Redemption proceeds are distributed within seven days
after the effective date of redemption. Payment for
redemption of shares purchased by check or electronic
funds transfer will not be disbursed until
the purchase check or electronic funds transfer has
cleared, which could take up to 15 days from the purchase
date. If you are considering redeeming shares soon after
purchase, you should purchase by bank wire or certified
check to avoid delay.
In addition, the Company may elect to suspend the
redemption of shares or postpone the date of payment
during any period that the New York Stock Exchange is
closed, or trading in the markets the Company normally
utilizes is restricted, or during any period that
redemption is otherwise permitted to be suspended by the
Securities and Exchange Commission.
How to Redeem:
Written, * Send your written instructions to:
Fax, or USAA Shareholder Account Services
Telegraph 9800 Fredericksburg Rd., San Antonio, TX 78288
* Send a signed fax to 210-498-2889, or send a telegraph to
USAA Shareholder Account Services.
Written redemption requests must include the following:
(1) a letter of instruction or stock assignment, and
stock certificate (if issued), specifying the Fund and
the number of shares or dollar amount to be redeemed;
(2) signatures of all owners of the shares exactly as
their names appear on the account; (3) other supporting
legal documents, if required, as in the case of estates,
trusts, guardianships, custodianships, partnerships,
corporations, and pension and profit-sharing plans; and
(4) method of payment.
Phone * Call toll free 1-800-531-8448, in San Antonio, 210-456-7202.
The Fund will employ reasonable procedures to confirm
that instructions communicated by telephone are genuine,
and if it does not, it may be liable for any losses due
to unauthorized or fraudulent instructions. Information
is obtained prior to any discussion regarding an account
including: (1) USAA number or account number, (2) the
name(s) on the account registration, and (3) social
security number or tax identification number for the
account registration. In addition, all telephone
communications with a shareholder are recorded and
confirmations of all account transactions are sent to the
address of record.
Redemption by telephone, fax, or telegraph is not
available for shares represented by stock certificates.
Through a * Call USAA Brokerage Services at 1-800-531-8343 for more
USAA AMA information.
Methods of Payment:
Bank Wire * Allows redemptions to be sent directly to your bank account.
Establish this service when you apply for your account,
or later upon request. If your account is at a savings
bank, savings and loan association, or credit union,
please obtain precise wiring instructions from your
institution. Specifically, include the name of the
correspondent bank and your institution's account number
at that bank. The Transfer Agent deducts a wire fee from
the account for the redemption by wire. The fee as of
the date of this Prospectus is $10 ($25 for wires to a
foreign bank) and is subject to change at any time. The
fee is paid to State Street Bank and Trust Company and
the Transfer Agent for their services in connection with
the wire redemption. Your bank may also charge a fee for
receiving funds by wire.
Automatically * Systematic (regular) or intermittent (as-needed) redemptions
via EFT can be credited to your bank account.
Establish any of our electronic investing services when you apply for your
account, or later upon request.
Check * A check payable to the registered shareholder(s) will be
Redemption mailed to the address of record.
This check redemption privilege is automatically
established when your application is completed and
accepted. There is a 15-day waiting period before a
check redemption can be processed following a telephone
address change. Should you wish to redeem shares within
the 15 days following a telephone address change, you
may do so by providing written instructions by mail or
facsimile.
CONDITIONS OF PURCHASE AND REDEMPTION
NONPAYMENT
If any order to purchase shares is cancelled due to
nonpayment or if the Company does not receive good funds
either by check or electronic funds transfer, the
cancellation will be treated as a redemption of shares
purchased and you will be responsible for any resulting
loss incurred by the Fund or the Manager. If you are a
shareholder, shares can be redeemed from any of your
account(s) as reimbursement for all losses. In addition,
you may be prohibited or restricted from making future
purchases in any of the USAA Family of Funds. A $15 fee
is charged for all returned items, including checks and
electronic funds transfers.
TRANSFER OF SHARES
Fund shares may be transferred to another person by
sending written instructions to the Transfer Agent. The
account must be clearly identified and the shareholder
must include the number of shares to be transferred, the
signatures of all registered owners, and all stock
certificates, if any, which are the subject of transfer.
You also need to send written instructions signed by all
registered owners and supporting documents to change an
account registration due to events such as divorce,
marriage, or death. If a new account needs to be
established, an application must be completed and
returned to the Transfer Agent.
ACCOUNT BALANCE
The Board of Directors may cause the redemption of an
account with a balance of less than 10 shares of the
Fund, subject to certain limitations described in
Additional Information Regarding Redemption of Shares in
the SAI.
COMPANY RIGHTS
The Company reserves the right to:
(1) reject purchase or exchange orders when in the best interest
of the Company;
(2) limit or discontinue the offering of shares of any
portfolio of the Company without notice to the shareholders;
(3) impose a redemption charge of up to 1%of the net asset value
of shares redeemed if circumstances indicate a
charge is necessary for the protection of remaining
investors (for example, if excessive market-timing
share activity unfairly burdens long-term investors);
provided, however, this 1% charge will not be imposed
upon shareholders unless authorized by the Board of
Directors and adequate notice has been given to shareholders;
(4) require a signature guarantee for purchases, redemptions, or
changes in account information in those instances where the
appropriateness of a signature authorization is in question.
The section Additional Information Regarding Redemption of
Shares in the SAI contains information on acceptable guarantors.
EXCHANGES
EXCHANGE PRIVILEGE
The Exchange Privilege is automatically established when
you complete your application. You may exchange shares
among Funds in the USAA Family of Funds, provided you do
not hold these shares in stock certificate form and that
the shares to be acquired are offered in your state of
residence. Exchange redemptions and purchases will be
processed simultaneously at the share prices next
determined after the exchange order is received. For
federal income tax purposes, an exchange between Funds is
a taxable event. Accordingly, a capital gain or loss may be realized.
The Fund has undertaken certain procedures regarding
telephone transactions. See Redemption of Shares - Phone.
EXCHANGE LIMITATIONS,
EXCESSIVE TRADING
To minimize Fund costs and to protect the Funds and their
shareholders from unfair expense burdens, the Funds
restrict excessive exchanges. Exchanges out of any Fund
in the USAA Family of Funds are limited for each account
to six per calendar year except that there is no
limitation on exchanges out of the Short-Term Bond Fund,
Tax Exempt Short-Term Fund, or any of the money market
funds in the USAA Family of Funds.
OTHER SERVICES
INVESTMENT PLANS
InveStart(registered trademark) - an investment program
for beginning or first-time investors. Like more
experienced investors, InveStart(registered trademark)
customers may choose to establish a systematic investment
plan for their portfolio.
Systematic Investment Plans - you may establish a
systematic investment plan by completing the appropriate
forms. At the time you sign up for any of the following
investment plans that utilize the electronic funds
transfer service, you will choose the day of the month
(the effective date) on which you would like to regularly
purchase shares. When this day falls on a weekend or
holiday, the electronic transfer will take place on the
last business day before the effective date. Call the
Manager to obtain instructions. More information about
these preauthorized plans is contained in the SAI.
* InvesTronic(registered trademark) - an automatic
investment program for the purchase of additional shares
through electronic funds transfer. The investor selects
the day(s) each month that money is transferred from a
checking or savings account. Effective January 31, 1996,
with this program you can make initial investments as low
as $100 and automatic monthly additions of $50 to the account.
* Direct Purchase Service - the periodic purchase of
shares through electronic funds transfer from a non-
governmental employer, an income-producing investment, or
an account with a participating financial institution.
* Automatic Purchase Plan - the periodic transfer of
funds from a USAA money market fund to purchase shares in
another non-money market USAA mutual fund.
* Buy/Sell Service - the intermittent purchase or
redemption of shares through electronic funds transfer to
or from a checking or savings account.
* Systematic Withdrawal Plan - the periodic redemption of
shares from one of your accounts permitting you to receive a
fixed amount of money monthly or quarterly.
* Retirement Plans - plans are available for IRA
(including SEP/IRA) and 403(b)(7) accounts. Federal
taxes on current income may be deferred if an investor qualifies.
* Directed Dividends - If you own shares in more than one
of the Funds in the USAA Family of Funds, you may direct
that dividends and/or capital gain distributions earned
in one fund be used to automatically purchase shares in
another fund.
SHAREHOLDER STATEMENTS
AND REPORTS
You will receive a confirmation after each transaction in
your account except:
i) a payment you make after January 31, 1996 under
the InvesTronic(registered trademark), Automatic
Purchase Plan, or Direct Purchase Service
investment plans, or
ii) a redemption you make after January 31, 1996 under
the Systematic Withdrawal Plan.
At the end of each quarter you will receive a
consolidated statement for all of your mutual fund
accounts, regardless of account activity. The fourth
quarter consolidated statement will reflect all account
activity for the prior tax year. There will be a $10 fee
charged for copies of historical statements for other
than the prior tax year for any one account. You will
receive the Fund's financial statements with a summary of
its investments and performance at least semiannually.
In an effort to reduce expenses and respond to
shareholders' requests to reduce mail, the Company
intends to consolidate mailings of Annual and Semiannual
Reports to households having multiple accounts with the
same address of record. One copy of each report will be
furnished to that address. You may request additional
reports by notifying the Company.
TELEPHONE ASSISTANCE
Call our telephone assistance numbers for specific forms, a copy of
the SAI, the most recent Annual Report and/or Semiannual Report, or
if you have any questions concerning any of the services offered.
SHARE PRICE CALCULATION
The price at which shares of the Fund are purchased and
redeemed by shareholders is equal to the NAV per share
determined on the effective date of the
purchase or redemption.
WHEN
The NAV per share for the Fund is calculated at the close
of the regular trading session of the New York Stock
Exchange, which is usually 4:00 p.m. Eastern time. You
may buy and sell Fund shares at the NAV per share without
a sales charge.
HOW
The NAV per share is calculated by adding the value of
all securities and other assets in the Fund, deducting
liabilities, and dividing by the number of shares
outstanding. Portfolio securities, except as otherwise
noted, traded primarily on a domestic securities exchange
are valued at the last sales price on that exchange.
Portfolio securities traded primarily on foreign
securities exchanges are generally valued at the closing
values of such securities on the exchange where primarily
traded. If no sale is reported, the latest bid price is
generally used.
Over-the-counter securities are generally priced at the
last sales price or, if not available, at the average of
the bid and asked prices.
Debt securities purchased with maturities of 60 days or
less are stated at amortized cost which approximates
market value. Other debt securities are valued each
business day at their current market value as determined
by a pricing service approved by the Board of Directors.
Securities which 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.
For additional information, see Valuation of Securities
in the SAI.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
Net investment income will be distributed to shareholders
annually. Any net capital gain generally will be
distributed at least annually. The Fund intends to make
such additional distributions as may be necessary to
avoid the imposition of any federal income or excise tax.
All income dividends and capital gain distributions are
automatically reinvested, unless the shareholder specifies
otherwise. The share price will be the net asset value of
the Fund shares computed on the ex-dividend date. Any
income dividend or capital gain distributions paid by the
Fund will reduce the NAV per share by the amount of the
dividend or distribution. An investor should consider
carefully the effects of purchasing shares of the Fund
shortly before any dividend or distribution. Although in
effect a return of capital, these distributions are
subject to taxes.
It is anticipated that the Fund will not pay any
significant dividends from net in-vestment income.
Potential investors should be in a financial position to
forego current income from investment in this Fund.
Any dividend or distribution payment returned to the
Manager as not deliverable will be invested in the
shareholder's Fund account at the then-current NAV per
share. If any check for the payment of dividends or
distributions is not cashed within six months from the
date on the check, it becomes void. The amount of the
check will then be invested in the shareholder's account
at the then-current NAV per share.
FEDERAL TAXES
The following discussion relates only to generally
applicable federal income tax provisions in effect as of
the date of this Prospectus. Therefore, shareholders are
urged to consult their own tax advisers about the status
of distributions from the Fund in their own states and localities.
Fund - The Fund intends to qualify as a regulated
investment company under Subchapter M of the Internal
Revenue Code of 1986, as amended (the Code). By
complying with the applicable provisions of the Code, the
Fund will not be subject to federal income tax on its net
investment income and net capital gains (capital gains in
excess of capital losses) distributed to shareholders.
Shareholder - Dividends from taxable net investment
income and distributions of net short-term capital gains
are taxable to shareholders as ordinary income, whether
received in cash or reinvested in additional shares. A
portion of these dividends may qualify for the 70%
dividends received deduction available to corporations.
Distributions of net long-term capital gains are
taxable as long-term capital gains whether received in
cash or reinvested in additional shares, and regardless
of the length of time the investor has held the shares of
the Fund.
Withholding - The Fund is required by federal law to
withhold and remit to the U.S. Treasury a portion of the
income dividends and capital gain distributions and
proceeds of redemptions paid to any non-corporate
shareholder who fails to furnish the Fund with a correct
tax identification number, who underreports dividend or
interest income, or who fails to certify that he is not
subject to withholding. To avoid this withholding
requirement, you must certify on your application, or on
a separate Form W-9 supplied by the Transfer Agent, that
your tax identification number is correct and that you
are not currently subject to backup withholding.
Reporting - Information concerning the status of
dividends and distributions for federal income tax
purposes will be mailed to shareholders annually.
MANAGEMENT OF THE COMPANY
The business affairs of the Company are subject to the
supervision of the Board of Directors.
The Manager, USAA Investment Management Company (IMCO),
was organized in May 1970 and is an affiliate of United
Services Automobile Association (USAA), a large
diversified financial services institution. As of the
date of this Prospectus, the Manager had approximately $29
billion in total assets under management. The Manager's mailing
address is 9800 Fredericksburg Rd., San Antonio, TX 78288.
Officers and employees of the Manager are permitted to
engage in personal securities transactions subject to
restrictions and procedures set forth in the Joint Code
of Ethics adopted by the Company and the Manager. Such
restrictions and procedures include substantially all of
the recommendations of the Advisory Group of the
Investment Company Institute and comply with Securities
and Exchange Commission rules and regulations.
ADVISORY AGREEMENT
The Manager serves as the manager and investment adviser
of the Company, providing services under an Advisory
Agreement. Under the Advisory Agreement, the Manager is
responsible for the management of the Funds, business
affairs, and placement of brokerage orders, subject to
the authority of and supervision by the Board of Directors.
For its services under the Advisory Agreement, the Fund
pays the Manager an annual fee which is computed as a
percentage of the Fund's average net assets (ANA),
accrued daily and paid monthly. The Fund's management
fees are computed at one-half of one percent (.50%) of
the first $200,000,000 of ANA, with the fee reduced to
two-fifths of one percent (.40%) for that portion of ANA
in excess of $200,000,000 and not over $300,000,000, and
further reduced to one-third of one percent (.33%) for
that portion of ANA in excess of $300,000,000. The fees
paid to the Manager for the fiscal year ended July 31,
1995 were equal to .47% of ANA.
OPERATING EXPENSES
For the fiscal year ended July 31, 1995, the total
operating expenses for the Fund as a percentage of the
Fund's ANA equaled .86%.
PORTFOLIO TRANSACTIONS
Purchases and sales of equity securities for the Fund's
portfolio may be accomplished through USAA Brokerage
Services, a discount brokerage service of the Manager.
The Board of Directors has adopted procedures to ensure
that any commissions paid to USAA Brokerage Services are
reasonable and fair.
PORTFOLIO MANAGERS
The following individuals are primarily responsible for
managing the Fund.
John K. Cabell, Jr. and Eric M. Efron, Executive Directors
of Equity Investments since October of 1995, have managed
the Fund since March 1995. Mr. Cabell has 17 years
investment management experience and has worked six years
as a Senior Securities Analyst in Equity Investments for
IMCO. His business experience during the past five years
also included the following positions: Chief Economist for
Retirement Systems of Alabama from March 1991 to March 1994
and Senior Investment Analyst for Seidler Amdec from October
1990 to February 1991. Mr. Cabell earned the Chartered
Financial Analyst (CFA) designation in 1982 and is a member
of the Association for Investment Management and Research
(AIMR) and the San Antonio Financial Analysts Society, Inc.
(SAFAS). He holds an MA and BS from the University of Alabama.
Mr. Efron has 20 years investment management experience and
has worked four years as a Senior Securities Analyst in Equity
Investments for IMCO. Prior to joining IMCO, he held various
investment positions with C&S/Sovran Bank of Atlanta, Georgia
from September 1984 to December 1991. Mr. Efron earned the CFA
designation in 1983 and is also a member of the AIMR and SAFAS.
He holds an MBA from New York University, an MA from the
University of Michigan, and a BA from Oberlin College, Ohio.
DESCRIPTION OF SHARES
The Company is an open-end management investment company
incorporated under the laws of the State of Maryland on
October 14, 1980. The Company is authorized to issue
shares in separate classes, or Funds. The Fund described
in this Prospectus is being offered to the public. The
Fund is classified as a diversified investment company.
Under the Company's charter, the Board of Directors is
authorized to create new Funds in addition to those already
existing without approval of the shareholders of the Company.
Under provisions of the Bylaws of the Company, no
annual meeting of shareholders is required. Ordinarily,
no shareholder meeting will be held unless required by
the Investment Company Act of 1940. The Directors may
fill vacancies on the Board or appoint new Directors provided
that immediately after such action at least two-thirds of the
Directors have been elected by shareholders.
Shareholders are entitled to one vote per share (with
proportionate voting for fractional shares) irrespective
of the relative net asset value of the shares. For
matters affecting an individual fund, a separate vote of
the shareholders of that fund is required.
SERVICE PROVIDERS
UNDERWRITER/ USAA Investment Management Company
DISTRIBUTOR 9800 Fredericksburg Rd., San Antonio, Texas 78288.
TRANSFER USAA Shareholder Account Services
AGENT 9800 Fredericksburg Rd., San Antonio, Texas 78288.
CUSTODIAN State Street Bank and Trust Company
P.O. Box 1713, Boston, Massachusetts 02105.
LEGAL Goodwin, Procter & Hoar
COUNSEL Exchange Place, Boston, Massachusetts 02109.
INDEPENDENT KPMG Peat Marwick LLP
AUDITORS 112 East Pecan, Suite 2400, San Antonio, Texas 78205.
TELEPHONE ASSISTANCE
(Call toll free - Central Time)
Monday-Friday 8:00 a.m. to 8:00 p.m.
Saturday: 8:30 a.m. to 5:00 p.m.
For further information on mutual funds:
1-800-531-8181
In San Antonio 210-456-7211
For account servicing, exchanges or redemptions:
1-800-531-8448
In San Antonio 210-456-7202
RECORDED 24 HOUR SERVICE
MUTUAL FUND PRICE QUOTES
(From any phone)
1-800-531-8066
In San Antonio 210-498-8066
MUTUAL FUND TOUCHLINE(registered trademark)
(From Touchtone phones only)
For account balance, last transaction or fund prices:
1-800-531-8777
In San Antonio 210-498-8777
[THIS PAGE LEFT BLANK INTENTIONALLY]
[THIS PAGE LEFT BLANK INTENTIONALLY]
USAA GROWTH FUND
December 1, 1995 PROSPECTUS
USAA Growth Fund (the Fund) is one of seven no-load
mutual funds offered by USAA Mutual Fund, Inc. (the
Company). The Fund is managed by USAA Investment
Management Company (the Manager).
WHAT ARE THE INVESTMENT
OBJECTIVE AND POLICIES?
The Fund's primary investment objective is long-term growth of capital
with secondary objectives of regular income and conservation of principal.
Investments are primarily in common stocks. Page 9.
HOW DO YOU BUY?
Fund shares are sold on a continuous basis at the net
asset value per share without a sales charge. Make your
initial investment directly with the Manager by mail, in
person, or in certain instances, by telephone. Page 11.
HOW DO YOU SELL?
You may redeem Fund shares by mail, telephone, fax, or
telegraph on any day that the net asset value is calculated. Page 13.
This Prospectus, which should be read and retained for
future reference, provides information regarding the
Company and the Fund that you should know before investing.
SHARES OF THE USAA GROWTH FUND ARE NOT DEPOSITS OR
OTHER OBLIGATIONS OF, OR GUARANTEED BY THE USAA FEDERAL
SAVINGS BANK, ARE NOT INSURED BY THE FDIC OR ANY OTHER
GOVERNMENT AGENCY, AND ARE SUBJECT TO MARKET RISKS.
If you would like more information, a STATEMENT OF
ADDITIONAL INFORMATION (SAI) of the Company, dated
December 1, 1995, is available upon request and without
charge by writing to USAA MUTUAL FUND, INC., 9800
Fredericksburg Rd., San Antonio, TX 78288, or by calling
1-800-531-8181. The SAI has been filed with the
Securities and Exchange Commission and is incorporated by
reference into this Prospectus.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
TABLE OF CONTENTS
Page
SUMMARY DATA
Fees and Expenses 3
Financial Highlights 4
Performance Information 6
USING MUTUAL FUNDS
USAA Family of No-Load Mutual Funds 7
Using Mutual Funds in an Investment Program 8
INVESTMENT PORTFOLIO INFORMATION
Investment Objective and Policies 9
SHAREHOLDER INFORMATION
Purchase of Shares 11
Redemption of Shares 13
Conditions of Purchase and Redemption 14
Exchanges 15
Other Services 16
Share Price Calculation 17
Dividends, Distributions and Taxes 18
Management of the Company 19
Service Providers 20
Description of Shares 20
Telephone Assistance Numbers 20
FEES AND EXPENSES
The following summary is provided to assist you in
understanding the expenses you will bear directly or indirectly.
Shareholder Transaction Expenses
- ----------------------------------------------------------------------
Sales Load Imposed on Purchases None
Sales Load Imposed on Reinvested Dividends None
Deferred Sales Load None
Redemption Fee* None
Exchange Fee None
Annual Fund Operating Expenses (as a percentage of average net assets)
- ----------------------------------------------------------------------
Management Fees .75%
12b-1 Fees None
Other Expenses
Transfer Agent Fees** .21%
Custodian Fees .02%
All Other Expenses .06%
----
Total Other Expenses .29%
----
Total Fund Operating Expenses 1.04%
====
- --------------------------------------------------------------------
* A shareholder who requests delivery of redemption
proceeds by wire transfer will be subject to a $10
fee. See Redemption of Shares - Bank Wire.
** The Fund pays USAA Shareholder Account Services an
annual fixed fee per account for its services.
See Transfer Agent in the SAI, page 18.
Example of Effect of Fund Expenses
- ---------------------------------------------------------------------
An investor would pay the following expenses on a $1,000
investment, assuming (1) 5% annual return and (2)
redemption at the end of the periods shown.
1 year - $ 11
3 years - $ 33
5 years - $ 57
10 years - $ 127
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION
OF PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE
GREATER OR LESS THAN THOSE SHOWN.
FINANCIAL HIGHLIGHTS
The following per share operating performance for a share
outstanding throughout each of the periods in the ten-
year period ended July 31, 1995, has been audited by KPMG
Peat Marwick LLP. This table should be read in conjunction
with the Fund's financial statements for the year ended
July 31, 1995, and the auditors' report thereon, that appear
in the Fund's Annual Report. Further performance information
is contained in the Annual Report and is available upon
request without charge.
TEN-MONTH
YEAR ENDED PERIOD ENDED
JULY 31, JULY 31, YEAR ENDED SEPTEMBER 30,
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
Net asset value at
beginning of period $ 17.63 $ 19.76 $ 17.49 $ 16.28 $ 13.25
Net investment income .26 .19 .19 .36 .46
Net realized and
unrealized gain (loss) 3.95 (.17) 2.67 1.26 3.03
Distributions from net
investment income (.27) (.16) (.32) (.41) (.46)
Distributions of realized
capital gains (2.51) (1.99) (.27) - -
------ ------ ------ ------ ------
Net asset value at
end of period $ 19.06 $ 17.63 $ 19.76 $ 17.49 $ 16.28
====== ====== ====== ====== ======
Total return (%)* 26.46 .31 16.77 10.17 27.12
Net assets at end of
period (000) $922,821 $618,685 $605,457 $432,125 $318,846
Ratio of expenses to
average net assets (%) 1.04 1.04(a) 1.07 1.07 1.11
Ratio of net investment
income to average net
assets (%) 1.63 1.33(a) 1.07 2.27 3.18
Portfolio turnover (%) 69.64 117.80 96.19 39.39 36.99
YEAR ENDED SEPTEMBER 30,
1990 1989 1988 1987 1986
---- ---- ---- ---- ----
Net asset value at
beginning of period $ 14.68 $ 11.68 $ 19.63 $ 15.94 $ 13.76
Net investment income .41 .41 .29 .38 .22
Net realized and
unrealized gain (loss) (1.38) 2.93 (3.99) 5.09 2.54
Distributions from net
investment income (.46) (.34) (.37) (.19) (.28)
Distributions of realized
capital gains - - (3.88) (1.59) (.30)
------ ------ ------ ------ ------
Net asset value at
end of period $ 13.25 $ 14.68 $ 11.68 $ 19.63 $ 15.94
====== ====== ====== ====== ======
Total return (%)* (6.78) 29.37 (18.28) 37.93 20.66
Net assets at end of
period (000) $223,051 $229,547 $208,129 $272,257 $173,775
Ratio of expenses to
average net assets (%) 1.18 1.19 1.22 1.09 1.09
Ratio of net investment
income to average net
assets (%) 2.95 3.02 2.40 2.14 1.37
Portfolio turnover (%) 55.77 95.28 109.22 124.26 109.65
- --------------
* Assumes reinvestment of all dividend income and
capital gain distributions during the period.
(a) Annualized. The ratio is not necessarily
indicative of 12 months of operations.
PERFORMANCE INFORMATION
Performance information should be considered in light of
the Fund's investment objective and policies and market
conditions during the time periods for which it is
reported. Historical performance should not be
considered as representative of the future performance of
the Fund.
The Company may quote the Fund's total return in
advertisements and reports to shareholders or prospective
investors. The Fund's performance may also be compared
to that of other mutual funds with a similar investment
objective and to stock or relevant indexes that are
referenced in Appendix B to the SAI. Standard total
return results reported by the Fund do not take into
account recurring and nonrecurring charges for optional
services which only certain shareholders elect and which
involve nominal fees, such as the $10 fee for a delivery
of redemption proceeds by wire transfer.
The Fund's average annual total return is computed by
determining the average annual compounded rate of return
for a specific period which, when applied to a
hypothetical $1,000 investment in the Fund at the
beginning of the period, would produce the redeemable
value of that investment at the end of the period,
assuming reinvestment of all dividends and distributions
during the period.
Further information concerning the Fund's total return
is included in the SAI.
USAA FAMILY OF NO-LOAD MUTUAL FUNDS
The USAA Family of No-Load Mutual Funds includes a
variety of Funds, each with different objectives and
policies. In combination, these Funds are designed to
provide investors with the opportunity to formulate their
own investment program. You may exchange any shares you
hold in any one USAA Fund for shares in any other USAA
Fund. For more complete information about the Funds in
the USAA Family of Funds, including charges and expenses,
call the Manager for a Prospectus. Be sure to read it
carefully before you invest or send money.
USAA MUTUAL FUND, INC.
Aggressive Growth Fund
Growth Fund
Growth & Income Fund
Income Stock Fund
Income Fund
Short-Term Bond Fund
Money Market Fund
USAA INVESTMENT TRUST
Income Strategy Fund
Growth and Tax Strategy Fund
Balanced Strategy Fund
Cornerstone Strategy Fund
Growth Strategy Fund
Emerging Markets Fund
Gold Fund
International Fund
World Growth Fund
GNMA Trust
Treasury Money Market Trust
USAA TAX EXEMPT FUND, INC.
Long-Term Fund
Intermediate-Term Fund
Short-Term Fund
Tax Exempt Money Market Fund
California Bond Fund*
California Money Market Fund*
New York Bond Fund*
New York Money Market Fund*
Virginia Bond Fund*
Virginia Money Market Fund*
USAA STATE TAX-FREE TRUST
Florida Tax-Free Income Fund*
Florida Tax-Free Money Market Fund*
Texas Tax-Free Income Fund*
Texas Tax-Free Money Market Fund*
* Available for sale only to residents of these specific states.
USING MUTUAL FUNDS IN AN INVESTMENT PROGRAM
I. THE IDEA BEHIND MUTUAL FUNDS
Mutual funds were conceived as a vehicle that could give
small investors some of the advantages enjoyed by wealthy
investors. A relatively small investment buys part of a
widely diversified portfolio. That portfolio is managed
by investment professionals, relieving the shareholder of
the need to make individual stock or bond selections.
The investor also enjoys conveniences, such as daily
pricing, liquidity, and in the case of the USAA Family of
Funds, no sales charge. The portfolio, because of its
size, has lower transaction costs on its trades than most
individuals would have. As a result each shareholder
owns an investment that in earlier times would have been
available only to very wealthy people.
II. USING FUNDS IN AN INVESTMENT PROGRAM
In choosing a mutual fund as an investment vehicle, the
shareholder is foregoing some investment decisions, but
must still make others. The decisions foregone are those
involved with choosing individual securities. The Fund
Manager will perform that function. In addition, the
Manager will arrange for the safekeeping of securities,
auditing the annual financial statements, and daily
valuation of the Fund, as well as other functions.
The shareholder, however, retains at least part of the
responsibility for an equally important decision. This
decision includes determining a portfolio of mutual funds
that balances the investor's investment goals with his or
her tolerance for risk. It is likely that this decision
may involve the use of more than one fund of the USAA
Family of Funds.
For example, assume a shareholder wished to invest in a
widely diversified common stock portfolio. The
shareholder could include the Aggressive Growth Fund,
Growth Fund, Growth & Income Fund, and Income Stock Fund
in such a portfolio. This portfolio would include stocks
of large and small companies, high-dividend stocks and
growth stocks. This is just one example of how an
individual could combine funds to create a portfolio
tailored to his or her own risk and reward goals.
III. USAA'S FAMILY OF FUNDS
The Manager offers investors another alternative in its
asset strategy funds, the Income Strategy, Growth and Tax
Strategy, Balanced Strategy, Cornerstone Strategy, and
Growth Strategy Funds. These unique mutual funds provide
a professionally managed diversified investment portfolio
within a mutual fund. These Funds are designed for the
shareholder who prefers to delegate the asset allocation
process to an investment manager. The Funds are
structured to achieve diversification across a number of
investment categories.
Whether you prefer to create your own mix of mutual
funds or use an asset strategy fund, the USAA Family of
Funds provides a broad range of choices covering just
about any investor's investment objectives. Our sales
representatives stand ready to inform you of your choices
and to help you craft a portfolio which meets your needs.
INVESTMENT OBJECTIVE AND POLICIES
INVESTMENT OBJECTIVE
The Fund's primary investment objective is long-term
growth of capital with secondary objectives of regular
income and conservation of principal.
The investment objective of the Fund cannot be changed
without shareholder approval. In view of the risks
inherent in all investments in securities, there is no
assurance that this objective will be achieved.
The investment policies and techniques used to pursue
the Fund's objective may be changed without shareholder
approval, except as otherwise noted. Further information
regarding the Fund's investment policies and restrictions
is provided in the SAI.
INVESTMENT POLICIES AND
TECHNIQUES
The Manager will pursue this objective by investing the
Fund's assets primarily in common stocks, preferred
stocks or in securities convertible into common stocks or
securities which carry the right to buy common stocks and
U.S. Real Estate Investment Trusts (REITs). The Fund
will limit its investments in convertible securities, at
the time of acquisition, to 5% of the value of its net
assets. The Fund's investments in REITs may subject the
Fund to many of the same risks associated with the direct
ownership of real estate. In addition, REITs are
dependent upon the capabilities of the REIT manager(s)
and have limited diversification.
A carefully selected portfolio of securities broadly
diversified among industries and companies will be
maintained. Generally, investments will be in
established companies with substantial capitalization.
The Manager may also invest in nonconvertible debt
securities and nonconvertible preferred stock when these
securities seem to offer a good prospect for appreciation.
The Manager will not seek to realize profits for the
Fund by anticipating short-term market movements and
intends to purchase securities for long-term capital appreciation.
Up to 30% of the Fund's total assets may be invested in
American Depositary Receipts (ADRs) or similar forms of
ownership interest in securities of foreign issuers
deposited with a depositary, and securities of foreign
issuers which are traded on U.S. securities exchanges or
in U.S. over-the-counter markets. Securities of foreign
issuers may present greater risks than securities of
domestic issuers. Such risks include currency exchange
rate fluctuations, increased price volatility, different
accounting, reporting and disclosure requirements, and
political or social instability. These investments may
be subject to foreign withholding taxes which may reduce
the effective rates of return.
As a temporary defensive measure, the Manager may
invest up to 100% of the Fund's assets in high quality,
short-term debt instruments.
Repurchase Agreements - The Fund may invest in repurchase
agreements which are collateralized by obligations issued
or guaranteed by the U.S. Government, its agencies and
instrumentalities. A repurchase agreement is a
transaction in which a security is purchased with a
simultaneous commitment to sell the security back to the
seller (a commercial bank or recognized securities
dealer) at an agreed upon price on an agreed upon date,
usually not more than seven days from the date of
purchase. The resale price reflects the purchase price
plus an agreed upon market rate of interest which is
unrelated to the coupon rate or maturity of the purchased
security. The obligation of the seller to pay the agreed
upon price is in effect secured by the value of the
underlying security. In these transactions, the
securities purchased by the Fund will have a total value
equal to or in excess of the amount of the repurchase
obligation and will be held by the Fund's custodian until
repurchased. If the seller defaults and the value of the
underlying security declines, the Fund may incur a loss
and may incur expenses in selling the collateral. If the
seller seeks relief under the bankruptcy laws, the
disposition of the collateral may be delayed or limited.
Liquidity - The Fund may not invest more than 15% of the
value of its net assets in illiquid securities, including
repurchase agreements maturing in more than seven days.
Commercial paper that is subject to restrictions on
transfer, and other securities that may be resold
pursuant to Rule 144A under the Securities Act of 1933,
may be determined to be liquid in accordance with
guidelines established by the Board of Directors.
INVESTMENT RESTRICTIONS
The following restrictions may not be changed without
shareholder approval:
a. The Fund may not borrow money, except for
temporary or emergency purposes in an amount not
exceeding 33 1/3% of its total assets (including
the amount borrowed) less liabilities (other than
borrowings).
b. The Fund may not, with respect to 75% of its total
assets, purchase the securities of any issuer
(except Government Securities, as such term is
defined in the 1940 Act) if, as a result, the Fund
would own more than 10% of the outstanding voting
securities of such issuer or the Fund would have
more than 5% of the value of its total assets
invested in the securities of such issuer.
c. The Fund may not invest more than 25% of the value
of its total assets in any one industry. This
limitation does not apply to securities issued or
guaranteed by the U.S. Government or its corporate
instrumentalities.
PURCHASE OF SHARES
OPENING AN ACCOUNT
You may open an account and make an investment by any of
the following methods. A complete, signed application is
required together with a check for each new account.
TAX ID NUMBER
We require that each shareholder named on the account
provide the Company with a social security number or tax
identification number to avoid possible tax withholding requirements.
EFFECTIVE DATE
When you make a purchase, your purchase price will be the
net asset value (NAV) per share next determined after the Fund
receives your request in proper form. If the Fund receives your
request prior to the close of the New York Stock Exchange on a
day on which the Exchange is open, your purchase price will be
the NAV per share determined for that day. If the Fund receives
your request after the time at which the NAV per share is calculated,
the purchase will be effective on the next business day. Because of
the more lengthy clearing process and the need to convert foreign
currency, a check drawn on a foreign bank will not be deemed received
for the purchase of shares until such time as the check has cleared
and the Manager has received good funds, which may take up to
4 to 6 weeks. Furthermore, a bank charge may be assessed
in the clearing process, which will be deducted from the
amount of the purchase. To avoid a delay in the
effectiveness of your purchase, the Manager suggests that
you convert your foreign check to U.S. dollars prior to
investment in the Fund.
Purchase of Shares
Minimum Investments
Initial Purchase (non-IRA): $1,000
After January 31, 1996 $3,000 or minimum $100 with a minimum $50
monthly electronic investment
Additional Purchases: $50
Initial Purchase - IRA: $1,000
$250 for spousal account
After January 31, 1996 $250 or minimum $100 with a minimum $50 monthly
electronic investment
Additional Purchases: $50
How to Purchase:
Mail * To open an account, send your application and check to:
USAA Investment Management Company
9800 Fredericksburg Rd., San Antonio, TX 78288
* To add to your account, send your check and the "Invest by
Mail" stub that accompanies your fund's transaction
confirmation to the Transfer Agent:
USAA Shareholder Account Services
9800 Fredericksburg Rd., San Antonio, TX 78288
* To exchange by mail, call 1-800-531-8448 for instructions.
In Person * To open an account, bring your application and check to:
USAA Investment Management Company
USAA Federal Savings Bank
10750 Robert F. McDermott Freeway, San Antonio
Automatically * Additional purchases on a regular basis can be deducted from
via a bank account, paycheck, income-producing investment or from
Electronic a USAA money market account. Sign up for these services when
Funds opening an account or call 1-800-531-8448 to add these
Transfer services.
(EFT) * Purchases through payroll deduction ($25 minimum each pay
period with no initial investment) can be made by any
employee of USAA, its subsidiaries or affiliated companies.
Bank Wire * To add to an account, instruct your bank (which may charge
a fee for the service) to wire the specified amount to the
Fund as follows:
State Street Bank and Trust Company, Boston, MA 02101
ABA#011000028
Attn: USAA Growth Fund
USAA AC-69384998
Shareholder(s) Name(s)_________________
Shareholder(s) Account Number___________________
Phone * If you have an existing USAA account and would like to open a
1-800-531-8448 new account or if you would like to exchange to another USAA
fund, call for instructions. The new account must have the
same registration as your existing account.
* To add to an account, intermittent (as-needed) purchases can
be deducted from your bank account through our Buy/Sell
Service. Call for instructions.
Through a * To open a new account through your USAA Asset Management
USAA AMA Account, call USAA Brokerage Services at 1-800-531-8343.
REDEMPTION OF SHARES
You may redeem shares of the Fund by any of the following
methods on any day the NAV per share is calculated.
Redemptions will be effective on the day on which
instructions are received in accordance with the
requirements set forth below. However, if instructions
are received after the NAV per share calculation,
redemption will be effective on the next business day.
REDEMPTION PROCEEDS
Redemption proceeds are distributed within seven days
after the effective date of redemption. Payment for
redemption of shares purchased by check or electronic
funds transfer will not be disbursed until the
purchase check or electronic funds transfer has
cleared, which could take up to 15 days from the purchase
date. If you are considering redeeming shares soon after
purchase, you should purchase by bank wire or certified
check to avoid delay.
In addition, the Company may elect to suspend the
redemption of shares or postpone the date of payment
during any period that the New York Stock Exchange is
closed, or trading in the markets the Company normally
utilizes is restricted, or during any period that
redemption is otherwise permitted to be suspended by the
Securities and Exchange Commission.
How to Redeem:
Written, * Send your written instructions to:
Fax, or USAA Shareholder Account Services
Telegraph 9800 Fredericksburg Rd., San Antonio, TX 78288
* Send a signed fax to 210-498-2889, or send a telegraph to
USAA Shareholder Account Services.
Written redemption requests must include the following:
(1) a letter of instruction or stock assignment, and
stock certificate (if issued), specifying the Fund and
the number of shares or dollar amount to be redeemed;
(2) signatures of all owners of the shares exactly as
their names appear on the account; (3) other supporting
legal documents, if required, as in the case of estates,
trusts, guardianships, custodianships, partnerships,
corporations, and pension and profit-sharing plans; and
(4) method of payment.
Phone * Call toll free 1-800-531-8448, in San Antonio, 210-456-7202.
The Fund will employ reasonable procedures to confirm
that instructions communicated by telephone are genuine,
and if it does not, it may be liable for any losses due
to unauthorized or fraudulent instructions. Information
is obtained prior to any discussion regarding an account
including: (1) USAA number or account number, (2) the
name(s) on the account registration, and (3) social
security number or tax identification number for the
account registration. In addition, all telephone
communications with a shareholder are recorded and
confirmations of all account transactions are sent to the
address of record.
Redemption by telephone, fax, or telegraph is not
available for shares represented by stock certificates.
Through a * Call USAA Brokerage Services at 1-800-531-8343 for more
USAA AMA information.
Methods of Payment:
Bank Wire * Allows redemptions to be sent directly to your bank account.
Establish this service when you apply for your account,
or later upon request. If your account is at a savings
bank, savings and loan association, or credit union,
please obtain precise wiring instructions from your
institution. Specifically, include the name of the
correspondent bank and your institution's account number
at that bank. The Transfer Agent deducts a wire fee from
the account for the redemption by wire. The fee as of
the date of this Prospectus is $10 ($25 for wires to a
foreign bank) and is subject to change at any time. The
fee is paid to State Street Bank and Trust Company and
the Transfer Agent for their services in connection with
the wire redemption. Your bank may also charge a fee for
receiving funds by wire.
Automatically * Systematic (regular) or intermittent (as-needed) redemptions
via EFT can be credited to your bank account.
Establish any of our electronic investing services when
you apply for your account, or later upon request.
Check * A check payable to the registered shareholder(s) will be
Redemption mailed to the address of record.
This check redemption privilege is automatically
established when your application is completed and
accepted. There is a 15-day waiting period before a
check redemption can be processed following a telephone
address change. Should you wish to redeem shares within
the 15 days following a telephone address change, you may
do so by providing written instructions by mail or facsimile.
CONDITIONS OF PURCHASE AND REDEMPTION
NONPAYMENT
If any order to purchase shares is cancelled due to
nonpayment or if the Company does not receive good funds
either by check or electronic funds transfer, the
cancellation will be treated as a redemption of shares
purchased and you will be responsible for any resulting
loss incurred by the Fund or the Manager. If you are a
shareholder, shares can be redeemed from any of your
account(s) as reimbursement for all losses. In addition,
you may be prohibited or restricted from making future
purchases in any of the USAA Family of Funds. A $15 fee
is charged for all returned items, including checks and
electronic funds transfers.
TRANSFER OF SHARES
Fund shares may be transferred to another person by
sending written instructions to the Transfer Agent. The
account must be clearly identified and the shareholder
must include the number of shares to be transferred, the
signatures of all registered owners, and all stock
certificates, if any, which are the subject of transfer.
You also need to send written instructions signed by all
registered owners and supporting documents to change an
account registration due to events such as divorce,
marriage, or death. If a new account needs to be
established, an application must be completed and
returned to the Transfer Agent.
ACCOUNT BALANCE
The Board of Directors may cause the redemption of an
account with a balance of less than 10 shares of the
Fund, subject to certain limitations described in
Additional Information Regarding Redemption of Shares in
the SAI.
COMPANY RIGHTS
The Company reserves the right to:
(1) reject purchase or exchange orders when in the
best interest of the Company;
(2) limit or discontinue the offering of shares of any
portfolio of the Company without notice to the shareholders;
(3) impose a redemption charge of up to 1% of the net
asset value of shares redeemed if circumstances
indicate a charge is necessary for the protection of
remaining investors (for example, if excessive market-timing
share activity unfairly burdens long-term investors);
provided, however, this 1% charge will not be imposed
upon shareholders unless authorized by the Board of
Directors and adequate notice has been given to shareholders;
(4) require a signature guarantee for purchases, redemptions, or
changes in account information in those instances where the
appropriateness of a signature authorization is in question.
The section Additional Information Regarding Redemption of Shares
in the SAI contains information on acceptable guarantors.
EXCHANGES
EXCHANGE PRIVILEGE
The Exchange Privilege is automatically established when
you complete your application. You may exchange shares
among Funds in the USAA Family of Funds, provided you do
not hold these shares in stock certificate form and that
the shares to be acquired are offered in your state of
residence. Exchange redemptions and purchases will be
processed simultaneously at the share prices next
determined after the exchange order is received. For
federal income tax purposes, an exchange between Funds is
a taxable event. Accordingly, a capital gain or loss may
be realized.
The Fund has undertaken certain procedures regarding
telephone transactions. See Redemption of Shares - Phone.
EXCHANGE LIMITATIONS,
EXCESSIVE TRADING
To minimize Fund costs and to protect the Funds and their
shareholders from unfair expense burdens, the Funds
restrict excessive exchanges. Exchanges out of any Fund
in the USAA Family of Funds are limited for each account
to six per calendar year except that there is no
limitation on exchanges out of the Short-Term Bond Fund,
Tax Exempt Short-Term Fund, or any of the money market
funds in the USAA Family of Funds.
OTHER SERVICES
INVESTMENT PLANS
InveStart(registered trademark) - an investment program
for beginning or first-time investors. Like more
experienced investors, InveStart(registered trademark)
customers may choose to establish a systematic investment
plan for their portfolio.
Systematic Investment Plans - you may establish a
systematic investment plan by completing the appropriate
forms. At the time you sign up for any of the following
investment plans that utilize the electronic funds
transfer service, you will choose the day of the month
(the effective date) on which you would like to regularly
purchase shares. When this day falls on a weekend or
holiday, the electronic transfer will take place on the
last business day before the effective date. Call the
Manager to obtain instructions. More information about
these preauthorized plans is contained in the SAI.
* InvesTronic(registered trademark) - an automatic
investment program for the purchase of additional shares
through electronic funds transfer. The investor selects
the day(s) each month that money is transferred from a
checking or savings account. Effective January 31, 1996,
with this program you can make initial investments as low
as $100 and automatic monthly additions of $50 to the account.
* Direct Purchase Service - the periodic purchase of
shares through electronic funds transfer from a non-
governmental employer, an income-producing investment, or
an account with a participating financial institution.
* Automatic Purchase Plan - the periodic transfer of
funds from a USAA money market fund to purchase shares in
another non-money market USAA mutual fund.
* Buy/Sell Service - the intermittent purchase or
redemption of shares through electronic funds transfer to
or from a checking or savings account.
* Systematic Withdrawal Plan - the periodic redemption of
shares from one of your accounts permitting you to receive a
fixed amount of money monthly or quarterly.
* Retirement Plans - plans are available for IRA
(including SEP/IRA) and 403(b)(7) accounts. Federal
taxes on current income may be deferred if an investor qualifies.
* Directed Dividends - If you own shares in more than one
of the Funds in the USAA Family of Funds, you may direct
that dividends and/or capital gain distributions earned
in one fund be used to automatically purchase shares in
another fund.
SHAREHOLDER STATEMENTS
AND REPORTS
You will receive a confirmation after each transaction in
your account except:
i) a payment you make after January 31, 1996 under
the InvesTronic(registered trademark), Automatic
Purchase Plan, or Direct Purchase Service
investment plans, or
ii) a redemption you make after January 31, 1996 under
the Systematic Withdrawal Plan.
At the end of each quarter you will receive a
consolidated statement for all of your mutual fund
accounts, regardless of account activity. The fourth
quarter consolidated statement will reflect all account
activity for the prior tax year. There will be a $10 fee
charged for copies of historical statements for other
than the prior tax year for any one account. You will
receive the Fund's financial statements with a summary of
its investments and performance at least semiannually.
In an effort to reduce expenses and respond to
shareholders' requests to reduce mail, the Company
intends to consolidate mailings of Annual and Semiannual
Reports to households having multiple accounts with the
same address of record. One copy of each report will be
furnished to that address. You may request additional
reports by notifying the Company.
TELEPHONE ASSISTANCE
Call our telephone assistance numbers for specific forms,
a copy of the SAI, the most recent Annual Report and/or
Semiannual Report, or if you have any questions concerning
any of the services offered.
SHARE PRICE CALCULATION
The price at which shares of the Fund are purchased and
redeemed by shareholders is equal to the NAV per share
determined on the effective date of the purchase or redemption.
WHEN
The NAV per share for the Fund is calculated at the close
of the regular trading session of the New York Stock
Exchange, which is usually 4:00 p.m. Eastern time. You
may buy and sell Fund shares at the NAV per share without
a sales charge.
HOW
The NAV per share is calculated by adding the value of
all securities and other assets in the Fund, deducting
liabilities, and dividing by the number of shares
outstanding. Portfolio securities, except as otherwise
noted, traded primarily on a securities exchange are
valued at the last sales price on that exchange. If no
sale is reported, the latest bid price is generally used.
Over-the-counter securities are generally priced at the
last sales price or, if not available, at the average of
the bid and asked prices.
Debt securities purchased with maturities of 60 days or
less are stated at amortized cost which approximates
market value. Other debt securities are valued each
business day at their current market value as determined
by a pricing service approved by the Board of Directors.
Securities which 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.
For additional information, see Valuation of Securities
in the SAI.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
Net investment income will be distributed to shareholders
annually. Any net capital gain generally will be
distributed at least annually. The Fund intends to make
such additional distributions as may be necessary to
avoid the imposition of any federal income or excise tax.
All income dividends and capital gain distributions are
automatically reinvested, unless the shareholder specifies
otherwise. The share price will be the net asset value of
the Fund shares computed on the ex-dividend date. Any
income dividend or capital gain distributions paid by the
Fund will reduce the NAV per share by the amount of the
dividend or distribution. An investor should consider
carefully the effects of purchasing shares of the Fund
shortly before any dividend or distribution. Although
in effect a return of capital, these distributions are
subject to taxes.
Any dividend or distribution payment returned to the
Manager as not deliverable will be invested in the
shareholder's Fund account at the then-current NAV per share.
If any check for the payment of dividends or distributions
is not cashed within six months from the date on the check,
it becomes void. The amount of the check will then be
invested in the shareholder's account at the then-current
NAV per share.
FEDERAL TAXES
The following discussion relates only to generally
applicable federal income tax provisions in effect as of
the date of this Prospectus. Therefore, shareholders are
urged to consult their own tax advisers about the status
of distributions from the Fund in their own states and localities.
Fund - The Fund intends to qualify as a regulated
investment company under Subchapter M of the Internal
Revenue Code of 1986, as amended (the Code). By
complying with the applicable provisions of the Code, the
Fund will not be subject to federal income tax on its net
investment income and net capital gains (capital gains in
excess of capital losses) distributed to shareholders.
Shareholder - Dividends from taxable net investment
income and distributions of net short-term capital gains
are taxable to shareholders as ordinary income, whether
received in cash or reinvested in additional shares. A
portion of these dividends may qualify for the 70%
dividends received deduction available to corporations.
Distributions of net long-term capital gains are
taxable as long-term capital gains whether received in
cash or reinvested in additional shares, and regardless
of the length of time the investor has held the shares of
the Fund.
Withholding - The Fund is required by federal law to
withhold and remit to the U.S. Treasury a portion of the
income dividends and capital gain distributions and
proceeds of redemptions paid to any non-corporate
shareholder who fails to furnish the Fund with a correct
tax identification number, who underreports dividend or
interest income, or who fails to certify that he is not
subject to withholding. To avoid this withholding
requirement, you must certify on your application, or on
a separate Form W-9 supplied by the Transfer Agent, that
your tax identification number is correct and that you
are not currently subject to backup withholding.
Reporting - Information concerning the status of
dividends and distributions for federal income tax
purposes will be mailed to shareholders annually.
MANAGEMENT OF THE COMPANY
The business affairs of the Company are subject to the
supervision of the Board of Directors.
The Manager, USAA Investment Management Company (IMCO),
was organized in May 1970 and is an affiliate of United
Services Automobile Association (USAA), a large
diversified financial services institution. As of the
date of this Prospectus, the Manager had approximately $29
billion in total assets under management. The Manager's mailing
address is 9800 Fredericksburg Rd., San Antonio, TX 78288.
Officers and employees of the Manager are permitted to
engage in personal securities transactions subject to
restrictions and procedures set forth in the Joint Code
of Ethics adopted by the Company and the Manager. Such
restrictions and procedures include substantially all of
the recommendations of the Advisory Group of the
Investment Company Institute and comply with Securities
and Exchange Commission rules and regulations.
ADVISORY AGREEMENT
The Manager serves as the manager and investment adviser
of the Company, providing services under an Advisory
Agreement. Under the Advisory Agreement, the Manager is
responsible for the management of the Funds, business
affairs, and placement of brokerage orders, subject to
the authority of and supervision by the Board of Directors.
For its services under the Advisory Agreement, the Fund
pays the Manager an annual fee which is computed as a
percentage of the Fund's average net assets (ANA),
accrued daily and paid monthly. The Fund's management
fees were computed and paid at three-fourths of one
percent (.75%) of ANA for the fiscal year ended July 31,
1995. This fee is higher than that charged to most other
mutual funds, but is comparable to fees charged to other
mutual funds with similar investment objectives and policies.
OPERATING EXPENSES
For the fiscal year ended July 31, 1995, the total
operating expenses for the Fund as a percentage of the
Fund's ANA equaled 1.04%.
PORTFOLIO TRANSACTIONS
Purchases and sales of equity securities for the Fund's
portfolio may be accomplished through USAA Brokerage
Services, a discount brokerage service of the Manager.
The Board of Directors has adopted procedures to ensure
that any commissions paid to USAA Brokerage Services are
reasonable and fair.
PORTFOLIO MANAGER
The following individual is primarily responsible for
managing the Fund.
David G. Parsons, Assistant Vice President of Equity
Investments since March of 1995, has managed the Fund
since January 1994. Mr. Parsons has 12 years investment
management experience working for IMCO where he has held
various positions in Equity Investments. Mr. Parsons
earned the Chartered Financial Analyst designation in
1986 and is a member of the Association for Investment
Management and Research and the San Antonio Financial
Analysts Society, Inc. He holds an MBA from the
University of Texas, an MA from Southern Illinois
University and a BA from Austin College, Texas.
SERVICE PROVIDERS
UNDERWRITER/ USAA Investment Management Company
DISTRIBUTOR 9800 Fredericksburg Rd., San Antonio, Texas 78288.
TRANSFER USAA Shareholder Account Services
AGENT 9800 Fredericksburg Rd., San Antonio, Texas 78288.
CUSTODIAN State Street Bank and Trust Company
P.O. Box 1713, Boston, Massachusetts 02105.
LEGAL Goodwin, Procter & Hoar
COUNSEL Exchange Place, Boston, Massachusetts 02109.
INDEPENDENT KPMG Peat Marwick LLP
AUDITORS 112 East Pecan, Suite 2400, San Antonio, Texas 78205.
DESCRIPTION OF SHARES
The Company is an open-end management investment company
incorporated under the laws of the State of Maryland on
October 14, 1980. The Company is authorized to issue
shares in separate classes, or Funds. The Fund described
in this Prospectus is being offered to the public. The
Fund is classified as a diversified investment company.
Under the Company's charter, the Board of Directors is
authorized to create new Funds in addition to those
already existing without approval of the shareholders of
the Company.
Under provisions of the Bylaws of the Company, no annual
meeting of shareholders is required. Ordinarily, no shareholder
meeting will be held unless required by the Investment
Company Act of 1940. The Directors may fill vacancies on
the Board or appoint new Directors provided that
immediately after such action at least two-thirds of the
Directors have been elected by shareholders.
Shareholders are entitled to one vote per share (with
proportionate voting for fractional shares) irrespective
of the relative net asset value of the shares. For
matters affecting an individual fund, a separate vote of
the shareholders of that fund is required.
TELEPHONE ASSISTANCE
(Call toll free - Central Time)
Monday-Friday 8:00 a.m. to 8:00 p.m.
Saturday: 8:30 a.m. to 5:00 p.m.
For further information on mutual funds:
1-800-531-8181
In San Antonio 210-456-7211
For account servicing, exchanges or redemptions:
1-800-531-8448
In San Antonio 210-456-7202
RECORDED 24 HOUR SERVICE
MUTUAL FUND PRICE QUOTES
(From any phone)
1-800-531-8066
In San Antonio 210-498-8066
MUTUAL FUND TOUCHLINE(registered trademark)
(From Touchtone phones only)
For account balance, last transaction or fund prices:
1-800-531-8777
In San Antonio 210-498-8777
USAA GROWTH & INCOME FUND
December 1, 1995 PROSPECTUS
USAA Growth & Income Fund (the Fund) is one of seven no-
load mutual funds offered by USAA Mutual Fund, Inc. (the
Company). The Fund is managed by USAA Investment
Management Company (the Manager).
WHAT ARE THE INVESTMENT
OBJECTIVE AND POLICIES?
The Fund's investment objective is capital growth and current income.
Investments are primarily in dividend paying
common stocks. Page 8.
HOW DO YOU BUY?
Fund shares are sold on a continuous basis at the net
asset value per share without a sales charge. Make your
initial investment directly with the Manager by mail, in
person, or in certain instances, by telephone. Page 10.
HOW DO YOU SELL?
You may redeem Fund shares by mail, telephone, fax,
or telegraph on any day that the net asset value is
calculated. Page 12.
This Prospectus, which should be read and retained for
future reference, provides information regarding the
Company and the Fund that you should know before investing.
SHARES OF THE USAA GROWTH & INCOME FUND ARE NOT
DEPOSITS OR OTHER OBLIGATIONS OF, OR GUARANTEED BY THE
USAA FEDERAL SAVINGS BANK, ARE NOT INSURED BY THE FDIC OR
ANY OTHER GOVERNMENT AGENCY, AND ARE SUBJECT TO MARKET RISKS.
If you would like more information, a STATEMENT OF
ADDITIONAL INFORMATION (SAI) of the Company, dated
December 1, 1995, is available upon request and without
charge by writing to USAA MUTUAL FUND, INC., 9800
Fredericksburg Rd., San Antonio, TX 78288, or by calling
1-800-531-8181. The SAI has been filed with the
Securities and Exchange Commission and is incorporated by
reference into this Prospectus.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
TABLE OF CONTENTS
Page
SUMMARY DATA
Fees and Expenses 3
Financial Highlights 4
Performance Information 5
USING MUTUAL FUNDS
USAA Family of No-Load Mutual Funds 6
Using Mutual Funds in an Investment Program 7
INVESTMENT PORTFOLIO INFORMATION
Investment Objective and Policies 8
SHAREHOLDER INFORMATION
Purchase of Shares 10
Redemption of Shares 12
Conditions of Purchase and Redemption 13
Exchanges 14
Other Services 15
Share Price Calculation 16
Dividends, Distributions and Taxes 17
Management of the Company 18
Service Providers 19
Description of Shares 19
Telephone Assistance Numbers 19
FEES AND EXPENSES
The following summary is provided to assist you in
understanding the expenses you will bear directly or indirectly.
Shareholder Transaction Expenses
- ---------------------------------------------------------------------
Sales Load Imposed on Purchases None
Sales Load Imposed on Reinvested Dividends None
Deferred Sales Load None
Redemption Fee* None
Exchange Fee None
Annual Fund Operating Expenses (as a percentage of average net assets)
- ----------------------------------------------------------------------
Management Fees .60%
12b-1 Fees None
Other Expenses
Transfer Agent Fees** .25%
Custodian Fees .05%
All Other Expenses .11%
----
Total Other Expenses .41%
----
Total Fund Operating Expenses 1.01%
====
- ----------------------------------------------------------------------
* A shareholder who requests delivery of redemption
proceeds by wire transfer will be subject to a $10
fee. See Redemption of Shares - Bank Wire.
** The Fund pays USAA Shareholder Account Services an
annual fixed fee per account for its services.
See Transfer Agent in the SAI, page 18.
Example of Effect of Fund Expenses
- ---------------------------------------------------------------------
An investor would pay the following expenses on a $1,000
investment, assuming (1) 5% annual return and (2)
redemption at the end of the periods shown.
1 year - $ 10
3 years - $ 32
5 years - $ 56
10 years - $ 124
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION
OF PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE
GREATER OR LESS THAN THOSE SHOWN.
FINANCIAL HIGHLIGHTS
The following per share operating performance for a share
outstanding throughout each of the periods in the three-
year period ended July 31, 1995, has been audited by KPMG
Peat Marwick LLP. This table should be read in conjunction
with the Fund's financial statements for the year ended
July 31, 1995, and the auditors' report thereon, that appear
in the Fund's Annual Report. Further performance information
is contained in the Annual Report and is available upon
request without charge.
TEN-MONTH FOUR-MONTH
YEAR ENDED PERIOD ENDED PERIOD ENDED
JULY 31, JULY 31, SEPTEMBER 30,
1995 1994 1993*
---- ---- ----
Net asset value at
beginning of period $ 10.36 $ 10.23 $ 10.00
Net investment income .24(b) .17(b) .03
Net realized and
unrealized gain 1.81 .16 .20
Distributions from net
investment income (.23) (.18) -
Distributions of realized
capital gains (.11) (.02) -
------- ------- -------
Net asset value at
end of period $ 12.07 $ 10.36 $ 10.23
======= ======= =======
Total return (%)** 20.30 3.28 2.30
Net assets at end of
period (000) $208,490 $134,622 $ 69,606
Ratio of expenses to
average net assets (%) 1.01 1.12(a) 1.63(a)
Ratio of net investment
income to average net
assets (%) 2.21 1.95(a) 1.87(a)
Portfolio turnover (%) 19.45 13.90 10.68
- --------------
* Fund commenced operations June 1, 1993.
** Assumes reinvestment of all dividend income and capital gain
distributions during the period.
(a) Annualized. The ratio is not necessarily indicative of 12 months
of operations.
(b) Calculated using weighted average shares.
PERFORMANCE INFORMATION
Performance information should be considered in light of
the Fund's investment objective and policies and market
conditions during the time periods for which it is
reported. Historical performance should not be
considered as representative of the future performance of
the Fund.
The Company may quote the Fund's total return in
advertisements and reports to shareholders or prospective
investors. The Fund's performance may also be compared
to that of other mutual funds with a similar investment
objective and to stock or relevant indexes that are
referenced in Appendix B to the SAI. Standard total
return results reported by the Fund do not take into
account recurring and nonrecurring charges for optional
services which only certain shareholders elect and which
involve nominal fees, such as the $10 fee for a delivery
of redemption proceeds by wire transfer.
The Fund's average annual total return is computed by
determining the average annual compounded rate of return
for a specific period which, when applied to a
hypothetical $1,000 investment in the Fund at the
beginning of the period, would produce the redeemable
value of that investment at the end of the period,
assuming reinvestment of all dividends and distributions
during the period.
Further information concerning the Fund's total return
is included in the SAI.
USAA FAMILY OF NO-LOAD MUTUAL FUNDS
The USAA Family of No-Load Mutual Funds includes a
variety of Funds, each with different objectives and
policies. In combination, these Funds are designed to
provide investors with the opportunity to formulate their
own investment program. You may exchange any shares you
hold in any one USAA Fund for shares in any other USAA
Fund. For more complete information about the Funds in
the USAA Family of Funds, including charges and expenses,
call the Manager for a Prospectus. Be sure to read it
carefully before you invest or send money.
USAA MUTUAL FUND, INC.
Aggressive Growth Fund
Growth Fund
Growth & Income Fund
Income Stock Fund
Income Fund
Short-Term Bond Fund
Money Market Fund
USAA INVESTMENT TRUST
Income Strategy Fund
Growth and Tax Strategy Fund
Balanced Strategy Fund
Cornerstone Strategy Fund
Growth Strategy Fund
Emerging Markets Fund
Gold Fund
International Fund
World Growth Fund
GNMA Trust
Treasury Money Market Trust
USAA TAX EXEMPT FUND, INC.
Long-Term Fund
Intermediate-Term Fund
Short-Term Fund
Tax Exempt Money Market Fund
California Bond Fund*
California Money Market Fund*
New York Bond Fund*
New York Money Market Fund*
Virginia Bond Fund*
Virginia Money Market Fund*
USAA STATE TAX-FREE TRUST
Florida Tax-Free Income Fund*
Florida Tax-Free Money Market Fund*
Texas Tax-Free Income Fund*
Texas Tax-Free Money Market Fund*
* Available for sale only to residents of these specific states.
USING MUTUAL FUNDS IN AN INVESTMENT PROGRAM
I. THE IDEA BEHIND MUTUAL FUNDS
Mutual funds were conceived as a vehicle that could give
small investors some of the advantages enjoyed by wealthy
investors. A relatively small investment buys part of a
widely diversified portfolio. That portfolio is managed
by investment professionals, relieving the shareholder of
the need to make individual stock or bond selections.
The investor also enjoys conveniences, such as daily
pricing, liquidity, and in the case of the USAA Family of
Funds, no sales charge. The portfolio, because of its
size, has lower transaction costs on its trades than most
individuals would have. As a result each shareholder
owns an investment that in earlier times would have been
available only to very wealthy people.
II. USING FUNDS IN AN INVESTMENT PROGRAM
In choosing a mutual fund as an investment vehicle, the
shareholder is foregoing some investment decisions, but
must still make others. The decisions foregone are those
involved with choosing individual securities. The Fund
Manager will perform that function. In addition, the
Manager will arrange for the safekeeping of securities,
auditing the annual financial statements, and daily
valuation of the Fund, as well as other functions.
The shareholder, however, retains at least part of the
responsibility for an equally important decision. This
decision includes determining a portfolio of mutual funds
that balances the investor's investment goals with his or
her tolerance for risk. It is likely that this decision
may involve the use of more than one fund of the USAA
Family of Funds.
For example, assume a shareholder wished to invest in a
widely diversified common stock portfolio. The
shareholder could include the Aggressive Growth Fund,
Growth Fund, Growth & Income Fund, and Income Stock Fund
in such a portfolio. This portfolio would include stocks
of large and small companies, high-dividend stocks and
growth stocks. This is just one example of how an
individual could combine funds to create a portfolio
tailored to his or her own risk and reward goals.
III. USAA'S FAMILY OF FUNDS
The Manager offers investors another alternative in its
asset strategy funds, the Income Strategy, Growth and Tax
Strategy, Balanced Strategy, Cornerstone Strategy, and
Growth Strategy Funds. These unique mutual funds provide
a professionally managed diversified investment portfolio
within a mutual fund. These Funds are designed for the
shareholder who prefers to delegate the asset allocation
process to an investment manager. The Funds are
structured to achieve diversification across a number of
investment categories.
Whether you prefer to create your own mix of mutual
funds or use an asset strategy fund, the USAA Family of
Funds provides a broad range of choices covering just
about any investor's investment objectives. Our sales
representatives stand ready to inform you of your choices
and to help you craft a portfolio which meets your needs.
INVESTMENT OBJECTIVE AND POLICIES
INVESTMENT OBJECTIVE
The Fund's investment objective is capital growth and
current income.
The investment objective of the Fund cannot be changed
without shareholder approval. In view of the risks
inherent in all investments in securities, there is no
assurance that this objective will be achieved.
The investment policies and techniques used to pursue
the Fund's objective may be changed without shareholder
approval, except as otherwise noted. Further information
regarding the Fund's investment policies and restrictions
is provided in the SAI.
INVESTMENT POLICIES AND
TECHNIQUES
The Manager will pursue this objective by investing at
least 65% of the Fund's assets in dividend paying common
stocks or in securities convertible into common stocks or
securities which carry the right to buy common stocks and
U.S. Real Estate Investment Trusts (REITs). The Fund
will limit its investments in convertible securities, at
the time of acquisition, to 5% of the value of its net
assets. The Manager may also invest in nonconvertible
debt securities and nonconvertible preferred stock. The
Fund's investments in REITs may subject the Fund to many
of the same risks associated with the direct ownership of
real estate. In addition, REITs are dependent upon the
capabilities of the REIT manager(s) and have limited diversification.
Up to 30% of the Fund's total assets may be invested in
American Depositary Receipts (ADRs) or similar forms of
ownership interest in securities of foreign
issuers deposited with a depositary, and securities of
foreign issuers which are traded on U.S. securities
exchanges or in U.S. over-the-counter markets.
Securities of foreign issuers may present greater risks
than securities of domestic issuers. Such risks include
currency exchange rate fluctuations, increased price
volatility, different accounting, reporting and
disclosure requirements, and political or social instability.
These investments may be subject to foreign withholding taxes
which may reduce the effective rates of return.
As a temporary defensive measure, the Manager may
invest up to 100% of the Fund's assets in high quality,
short-term debt instruments.
The nonconvertible debt securities and the
nonconvertible preferred stock must be investment grade
at the time of purchase. Investment grade securities are
those issued or guaranteed by the U.S. Government, its
agencies and instrumentalities, those rated at least Baa
by Moody's Investors Service (Moody's), BBB by Standard &
Poor's Ratings Group (S&P), BBB by Fitch Investors
Service (Fitch), or BBB by Duff and Phelps (D&P), or
those judged to be of equivalent quality by the Manager
if not rated. Securities rated in the lowest level of
investment grade have some speculative characteristics
since adverse economic conditions and changing
circumstances are more likely to have an adverse impact
on such securities. If the rating of a security is
downgraded below investment grade, the Manager will
determine whether it is in the best interest of the
Fund's shareholders to continue to hold such security in
the Fund's portfolio. Unless otherwise directed by the
Board of Directors, if downgrades result in more than 5%
of the Fund's net assets being invested in securities that
are less than investment grade quality, the Manager will take
immediate action to reduce the Fund's holdings in such
securities to 5% or less of the Fund's net assets. For a
more complete description of debt ratings, see Appendix A
to the SAI.
Repurchase Agreements - The Fund may invest in repurchase
agreements which are collateralized by obligations issued
or guaranteed by the U.S. Government, its agencies and
instrumentalities. A repurchase agreement is a
transaction in which a security is purchased with a
simultaneous commitment to sell the security back to the
seller (a commercial bank or recognized securities
dealer) at an agreed upon price on an agreed upon date,
usually not more than seven days from the date of
purchase. The resale price reflects the purchase price
plus an agreed upon market rate of interest which is
unrelated to the coupon rate or maturity of the purchased
security. The obligation of the seller to pay the agreed
upon price is in effect secured by the value of the
underlying security. In these transactions, the
securities purchased by the Fund will have a total value
equal to or in excess of the amount of the repurchase
obligation and will be held by the Fund's custodian until
repurchased. If the seller defaults and the value of the
underlying security declines, the Fund may incur a loss
and may incur expenses in selling the collateral. If the
seller seeks relief under the bankruptcy laws, the
disposition of the collateral may be delayed or limited.
Liquidity - The Fund may not invest more than 15% of the
value of its net assets in illiquid securities, including
repurchase agreements maturing in more than seven days.
Commercial paper that is subject to restrictions on
transfer, and other securities that may be resold
pursuant to Rule 144A under the Securities Act of 1933,
may be determined to be liquid in accordance with
guidelines established by the Board of Directors.
INVESTMENT RESTRICTIONS
The following restrictions may not be changed without
shareholder approval:
a. The Fund may not borrow money, except for
temporary or emergency purposes in an amount not
exceeding 33 1/3% of its total assets (including
the amount borrowed) less liabilities (other than
borrowings).
b. The Fund may not, with respect to 75% of its total
assets, purchase the securities of any issuer
(except Government Securities, as such term is
defined in the 1940 Act) if, as a result, the Fund
would own more than 10% of the outstanding voting
securities of such issuer or the Fund would have
more than 5% of the value of its total assets
invested in the securities of such issuer.
c. The Fund may not invest more than 25% of the value
of its total assets in any one industry. This
limitation does not apply to securities issued or
guaranteed by the U.S. Government or its corporate
instrumentalities.
PURCHASE OF SHARES
OPENING AN ACCOUNT
You may open an account and make an investment by any of
the following methods. A complete, signed application is
required together with a check for each new account.
TAX ID NUMBER
We require that each shareholder named on the account
provide the Company with a social security number or tax
identification number to avoid possible tax withholding
requirements.
EFFECTIVE DATE
When you make a purchase, your purchase price will be
the net asset value (NAV) per share next determined after
the Fund receives your request in proper form. If the
Fund receives your request prior to the close of the
New York Stock Exchange on a day on which the Exchange
is open, your purchase price will be the NAV per share
determined for that day. If the Fund receives your request
after the time at which the NAV per share is calculated,
the purchase will be effective on the next business day.
Because of the more lengthy clearing process and the need to
convert foreign currency, a check drawn on a foreign bank
will not be deemed received for the purchase of shares until
such time as the check has cleared and the Manager has received
good funds, which may take up to 4 to 6 weeks. Furthermore, a
bank charge may be assessed in the clearing process, which
will be deducted from the amount of the purchase. To avoid a
delay in the effectiveness of your purchase, the Manager suggests
that you convert your foreign check to U.S. dollars prior to
investment in the Fund.
Purchase of Shares
Minimum Investments
Initial Purchase (non-IRA): $1,000
After January 31, 1996 $3,000 or minimum $100 with a minimum $50
monthly electronic investment
Additional Purchases: $50
Initial Purchase - IRA: $1,000
$250 for spousal account
After January 31, 1996 $250 or minimum $100 with a minimum $50
monthly electronic investment
Additional Purchases: $50
How to Purchase:
Mail * To open an account, send your application and check to:
USAA Investment Management Company
9800 Fredericksburg Rd., San Antonio, TX 78288
* To add to your account, send your check and
the "Invest by Mail" stub that accompanies
your fund's transaction confirmation to the Transfer Agent:
USAA Shareholder Account Services
9800 Fredericksburg Rd., San Antonio, TX 78288
* To exchange by mail, call 1-800-531-8448 for instructions.
In Person * To open an account, bring your application and check to:
USAA Investment Management Company
USAA Federal Savings Bank
10750 Robert F. McDermott Freeway, San Antonio
Automatically * Additional purchases on a regular basis can be deducted
via from a bank account, paycheck, income-producing investment
Electronic or from a USAA money market account. Sign up for these
Funds services when opening an account or call 1-800-531-8448 to
Transfer add these services.
(EFT) * Purchases through payroll deduction ($25 minimum each pay
period with no initial investment) can be made by any
employee of USAA, its subsidiaries or affiliated companies.
Bank Wire * To add to an account, instruct your bank (which may charge
a fee for the service) to wire the specified amount to the
Fund as follows:
State Street Bank and Trust Company, Boston, MA 02101
ABA#011000028
Attn: USAA Growth & Income Fund
USAA AC-69384998
Shareholder(s) Name(s)_________________
Shareholder(s) Account Number___________________
Phone * If you have an existing USAA account and would like to open a
1-800-531-8448 new account or if you would like to exchange to another USAA
fund, call for instructions. The new account must have the
same registration as your existing account.
* To add to an account, intermittent (as-needed) purchases can
be deducted from your bank account through our Buy/Sell
Service. Call for instructions.
Through a * To open a new account through your USAA Asset Management
USAA AMA Account, call USAA Brokerage Services at 1-800-531-8343.
REDEMPTION OF SHARES
You may redeem shares of the Fund by any of the following
methods on any day the NAV per share is calculated.
Redemptions will be effective on the day on which
instructions are received in accordance with the
requirements set forth below. However, if instructions
are received after the NAV per share calculation,
redemption will be effective on the next business day.
REDEMPTION PROCEEDS
Redemption proceeds are distributed within seven days
after the effective date of redemption. Payment for
redemption of shares purchased by check or electronic
funds transfer will not be disbursed until
the purchase check or electronic funds transfer has
cleared, which could take up to 15 days from the purchase
date. If you are considering redeeming shares soon after
purchase, you should purchase by bank wire or certified
check to avoid delay.
In addition, the Company may elect to suspend the
redemption of shares or postpone the date of payment
during any period that the New York Stock Exchange is
closed, or trading in the markets the Company normally
utilizes is restricted, or during any period that
redemption is otherwise permitted to be suspended by the
Securities and Exchange Commission.
How to Redeem:
Written, * Send your written instructions to:
Fax, or USAA Shareholder Account Services
Telegraph 9800 Fredericksburg Rd., San Antonio, TX 78288
* Send a signed fax to 210-498-2889, or send a telegraph to
USAA Shareholder Account Services.
Written redemption requests must include the following:
(1) a letter of instruction or stock assignment, and
stock certificate (if issued), specifying the Fund and
the number of shares or dollar amount to be redeemed;
(2) signatures of all owners of the shares exactly as
their names appear on the account; (3) other supporting
legal documents, if required, as in the case of estates,
trusts, guardianships, custodianships, partnerships,
corporations, and pension and profit-sharing plans; and
(4) method of payment.
Phone * Call toll free 1-800-531-8448, in San Antonio, 210-456-7202.
The Fund will employ reasonable procedures to confirm
that instructions communicated by telephone are genuine,
and if it does not, it may be liable for any losses due
to unauthorized or fraudulent instructions. Information
is obtained prior to any discussion regarding an account
including: (1) USAA number or account number, (2) the
name(s) on the account registration, and (3) social
security number or tax identification number for the
account registration. In addition, all telephone
communications with a shareholder are recorded and
confirmations of all account transactions are sent to the
address of record.
Redemption by telephone, fax, or telegraph is not
available for shares represented by stock certificates.
Through a * Call USAA Brokerage Services at 1-800-531-8343 for more
USAA AMA information.
Methods of Payment:
Bank Wire * Allows redemptions to be sent directly to your bank account.
Establish this service when you apply for your account,
or later upon request. If your account is at a savings
bank, savings and loan association, or credit union,
please obtain precise wiring instructions from your
institution. Specifically, include the name of the
correspondent bank and your institution's account number
at that bank. The Transfer Agent deducts a wire fee from
the account for the redemption by wire. The fee as of
the date of this Prospectus is $10 ($25 for wires to a
foreign bank) and is subject to change at any time. The
fee is paid to State Street Bank and Trust Company and
the Transfer Agent for their services in connection with
the wire redemption. Your bank may also charge a fee for
receiving funds by wire.
Automatically * Systematic (regular) or intermittent (as-needed) redemptions
via EFT can be credited to your bank account.
Establish any of our electronic investing services when
you apply for your account, or later upon request.
Check * A check payable to the registered shareholder(s) will be
Redemption mailed to the address of record.
This check redemption privilege is automatically
established when your application is completed and
accepted. There is a 15-day waiting period before a
check redemption can be processed following a telephone
address change. Should you wish to redeem shares within
the 15 days following a telephone address change, you may
do so by providing written instructions by mail or facsimile.
CONDITIONS OF PURCHASE AND REDEMPTION
NONPAYMENT
If any order to purchase shares is cancelled due to
nonpayment or if the Company does not receive good funds
either by check or electronic funds transfer, the
cancellation will be treated as a redemption of shares
purchased and you will be responsible for any resulting
loss incurred by the Fund or the Manager. If you are a
shareholder, shares can be redeemed from any of your
account(s) as reimbursement for all losses. In addition,
you may be prohibited or restricted from making future
purchases in any of the USAA Family of Funds. A $15 fee
is charged for all returned items, including checks and
electronic funds transfers.
TRANSFER OF SHARES
Fund shares may be transferred to another person by
sending written instructions to the Transfer Agent. The
account must be clearly identified and the shareholder
must include the number of shares to be transferred, the
signatures of all registered owners, and all stock
certificates, if any, which are the subject of transfer.
You also need to send written instructions signed by all
registered owners and supporting documents to change an
account registration due to events such as divorce,
marriage, or death. If a new account needs to be
established, an application must be completed and
returned to the Transfer Agent.
ACCOUNT BALANCE
The Board of Directors may cause the redemption of an
account with a balance of less than 10 shares of the
Fund, subject to certain limitations described in
Additional Information Regarding Redemption of Shares in
the SAI.
COMPANY RIGHTS
The Company reserves the right to:
(1) reject purchase or exchange orders when in the
best interest of the Company;
(2) limit or discontinue the offering of shares of any
portfolio of the Company without notice to the
shareholders;
(3) impose a redemption charge of up to 1% of the net
asset value of shares redeemed if circumstances
indicate a charge is necessary for the protection of
remaining investors (for example, if excessive market-timing
share activity unfairly burdens long-term investors);
provided, however, this 1% charge will not be imposed
upon shareholders unless authorized by the Board of
Directors and adequate notice has been given to shareholders;
(4) require a signature guarantee for purchases, redemptions, or
changes in account information in those instances where the
appropriateness of a signature authorization is in question.
The section Additional Information Regarding Redemption of
Shares in the SAI contains information on acceptable guarantors.
EXCHANGES
EXCHANGE PRIVILEGE
The Exchange Privilege is automatically established when
you complete your application. You may exchange shares
among Funds in the USAA Family of Funds, provided you do
not hold these shares in stock certificate form and that
the shares to be acquired are offered in your state of
residence. Exchange redemptions and purchases will be
processed simultaneously at the share prices next
determined after the exchange order is received. For
federal income tax purposes, an exchange between Funds is
a taxable event. Accordingly, a capital gain or loss may
be realized.
The Fund has undertaken certain procedures regarding
telephone transactions. See Redemption of Shares - Phone.
EXCHANGE LIMITATIONS,
EXCESSIVE TRADING
To minimize Fund costs and to protect the Funds and their
shareholders from unfair expense burdens, the Funds
restrict excessive exchanges. Exchanges out of any Fund
in the USAA Family of Funds are limited for each account
to six per calendar year except that there is no
limitation on exchanges out of the Short-Term Bond Fund,
Tax Exempt Short-Term Fund, or any of the money market
funds in the USAA Family of Funds.
OTHER SERVICES
INVESTMENT PLANS
InveStart(registered trademark) - an investment program
for beginning or first-time investors. Like more
experienced investors, InveStart(registered trademark)
customers may choose to establish a systematic investment
plan for their portfolio.
Systematic Investment Plans - you may establish a
systematic investment plan by completing the appropriate
forms. At the time you sign up for any of the following
investment plans that utilize the electronic funds
transfer service, you will choose the day of the month
(the effective date) on which you would like to regularly
purchase shares. When this day falls on a weekend or
holiday, the electronic transfer will take place on the
last business day before the effective date. Call the
Manager to obtain instructions. More information about
these preauthorized plans is contained in the SAI.
* InvesTronic(registered trademark) - an automatic
investment program for the purchase of additional shares
through electronic funds transfer. The investor selects
the day(s) each month that money is transferred from a
checking or savings account. Effective January 31, 1996,
with this program you can make initial investments as low
as $100 and automatic monthly additions of $50 to the account.
* Direct Purchase Service - the periodic purchase of
shares through electronic funds transfer from a non-
governmental employer, an income-producing investment, or
an account with a participating financial institution.
* Automatic Purchase Plan - the periodic transfer of
funds from a USAA money market fund to purchase shares in
another non-money market USAA mutual fund.
* Buy/Sell Service - the intermittent purchase or
redemption of shares through electronic funds transfer to
or from a checking or savings account.
* Systematic Withdrawal Plan - the periodic redemption of
shares from one of your accounts permitting you to
receive a fixed amount of money monthly or quarterly.
* Retirement Plans - plans are available for IRA
(including SEP/IRA) and 403(b)(7) accounts. Federal
taxes on current income may be deferred if an investor qualifies.
* Directed Dividends - If you own shares in more than one
of the Funds in the USAA Family of Funds, you may direct
that dividends and/or capital gain distributions earned
in one fund be used to automatically purchase shares in
another fund.
SHAREHOLDER STATEMENTS
AND REPORTS
You will receive a confirmation after each transaction in
your account except:
i) a reinvested dividend, or
ii) a payment you make after January 31, 1996 under
the InvesTronic(registered trademark), Direct
Purchase Service, Automatic Purchase Plan, or
Directed Dividends investment plans, or
iii) a redemption you make after January 31, 1996 under
the Systematic Withdrawal Plan.
At the end of each quarter you will receive a
consolidated statement for all of your mutual fund
accounts, regardless of account activity. The fourth
quarter consolidated statement will reflect all account
activity for the prior tax year. There will be a $10 fee
charged for copies of historical statements for other
than the prior tax year for any one account. You will
receive the Fund's financial statements with a summary of
its investments and performance at least semiannually.
In an effort to reduce expenses and respond to
shareholders' requests to reduce mail, the Company
intends to consolidate mailings of Annual and Semiannual
Reports to households having multiple accounts with the same
address of record. One copy of each report will be
furnished to that address. You may request additional
reports by notifying the Company.
TELEPHONE ASSISTANCE
Call our telephone assistance numbers for specific forms,
a copy of the SAI, the most recent Annual Report and/or
Semiannual Report, or if you have any questions
concerning any of the services offered.
SHARE PRICE CALCULATION
The price at which shares of the Fund are purchased and
redeemed by shareholders is equal to the NAV per share
determined on the effective date of the purchase or redemption.
WHEN
The NAV per share for the Fund is calculated at the close
of the regular trading session of the New York Stock
Exchange, which is usually 4:00 p.m. Eastern time. You
may buy and sell Fund shares at the NAV per share without
a sales charge.
HOW
The NAV per share is calculated by adding the value of
all securities and other assets in the Fund, deducting
liabilities, and dividing by the number of shares
outstanding. Portfolio securities, except as otherwise
noted, traded primarily on a securities exchange are
valued at the last sales price on that exchange. If no
sale is reported, the latest bid price is generally used.
Over-the-counter securities are generally priced at the
last sales price or, if not available, at the average of
the bid and asked prices.
Debt securities purchased with maturities of 60 days
or less are stated at amortized cost which approximates
market value. Other debt securities are valued each
business day at their current market value as determined
by a pricing service approved by the Board of Directors.
Securities which 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.
For additional information, see Valuation of
Securities in the SAI.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
Net investment income will be distributed to shareholders
quarterly. Any net capital gain generally will be
distributed at least annually. The Fund intends to make
such additional distributions as may be necessary to
avoid the imposition of any federal income or excise tax.
All income dividends and capital gain distributions
are automatically reinvested, unless the shareholder
specifies otherwise. The share price will be the net
asset value of the Fund shares computed on the ex-dividend
date. Any income dividend or capital gain distributions paid
by the Fund will reduce the NAV per share by the amount of
the dividend or distribution. An investor should consider
carefully the effects of purchasing shares of the Fund
shortly before any dividend or distribution. Although
in effect a return of capital, these distributions are
subject to taxes.
Any dividend or distribution payment returned to the
Manager as not deliverable will be invested in the
shareholder's Fund account at the then-current NAV per share.
If any check for the payment of dividends or distributions
is not cashed within six months from the date on the check,
it becomes void. The amount of the check will then be
invested in the shareholder's account at the then-current
NAV per share.
FEDERAL TAXES
The following discussion relates only to generally
applicable federal income tax provisions in effect as of
the date of this Prospectus. Therefore, shareholders are
urged to consult their own tax advisers about the status
of distributions from the Fund in their own states and
localities.
Fund - The Fund intends to qualify as a regulated
investment company under Subchapter M of the Internal
Revenue Code of 1986, as amended (the Code). By
complying with the applicable provisions of the Code, the
Fund will not be subject to federal income tax on its net
investment income and net capital gains (capital gains in
excess of capital losses) distributed to shareholders.
Shareholder - Dividends from taxable net investment
income and distributions of net short-term capital gains
are taxable to shareholders as ordinary income, whether
received in cash or reinvested in additional shares. A
portion of these dividends may qualify for the 70%
dividends received deduction available to corporations.
Distributions of net long-term capital gains are
taxable as long-term capital gains whether received in
cash or reinvested in additional shares, and regardless
of the length of time the investor has held the shares of
the Fund.
Withholding - The Fund is required by federal law to
withhold and remit to the U.S. Treasury a portion of the
income dividends and capital gain distributions and
proceeds of redemptions paid to any non-corporate
shareholder who fails to furnish the Fund with a correct
tax identification number, who underreports dividend or
interest income, or who fails to certify that he is not
subject to withholding. To avoid this withholding
requirement, you must certify on your application, or on
a separate Form W-9 supplied by the Transfer Agent, that
your tax identification number is correct and that you
are not currently subject to backup withholding.
Reporting - Information concerning the status of
dividends and distributions for federal income tax
purposes will be mailed to shareholders annually.
MANAGEMENT OF THE COMPANY
The business affairs of the Company are subject to the
supervision of the Board of Directors.
The Manager, USAA Investment Management Company (IMCO),
was organized in May 1970 and is an affiliate of United
Services Automobile Association (USAA), a large
diversified financial services institution. As of the
date of this Prospectus, the Manager had approximately $29
billion in total assets under management. The
Manager's mailing address is 9800 Fredericksburg Rd., San
Antonio, TX 78288.
Officers and employees of the Manager are permitted to
engage in personal securities transactions subject to
restrictions and procedures set forth in the Joint Code
of Ethics adopted by the Company and the Manager. Such
restrictions and procedures include substantially all of
the recommendations of the Advisory Group of the
Investment Company Institute and comply with Securities
and Exchange Commission rules and regulations.
ADVISORY AGREEMENT
The Manager serves as the manager and investment adviser
of the Company, providing services under an Advisory
Agreement. Under the Advisory Agreement, the Manager is
responsible for the management of the Funds, business
affairs, and placement of brokerage orders, subject to
the authority of and supervision by the Board of Directors.
For its services under the Advisory Agreement, the Fund
pays the Manager an annual fee which is computed as a
percentage of the Fund's average net assets (ANA),
accrued daily and paid monthly. The Fund's management
fees were computed and paid at three-fifths of one
percent (.60%) of ANA for the fiscal year ended July 31, 1995.
OPERATING EXPENSES
For the fiscal year ended July 31, 1995, the total
operating expenses for the Fund as a percentage of the
Fund's ANA equaled 1.01%.
PORTFOLIO TRANSACTIONS
Purchases and sales of equity securities for the Fund's
portfolio may be accomplished through USAA Brokerage
Services, a discount brokerage service of the Manager.
The Board of Directors has adopted procedures to ensure
that any commissions paid to USAA Brokerage Services are
reasonable and fair.
PORTFOLIO MANAGER
The following individual is primarily responsible for
managing the Fund.
R. David Ullom, Assistant Vice President of Equity
Investments since September of 1994, has managed the Fund
since its inception in June 1993. Mr. Ullom has 21 years
investment management experience and has worked for IMCO
ten years where he has held various positions in Equity
Investments. Mr. Ullom earned the Chartered Financial
Analyst designation in 1980 and is a member of the
Association for Investment Management and Research and
the San Antonio Financial Analysts Society, Inc. He
holds an MBA from Washington University, Missouri and a
BS from Oklahoma State University.
SERVICE PROVIDERS
UNDERWRITER/ USAA Investment Management Company
DISTRIBUTOR 9800 Fredericksburg Rd., San Antonio, Texas 78288.
TRANSFER USAA Shareholder Account Services
AGENT 9800 Fredericksburg Rd., San Antonio, Texas 78288.
CUSTODIAN State Street Bank and Trust Company
P.O. Box 1713, Boston, Massachusetts 02105.
LEGAL Goodwin, Procter & Hoar
COUNSEL Exchange Place, Boston, Massachusetts 02109.
INDEPENDENT KPMG Peat Marwick LLP
AUDITORS 112 East Pecan, Suite 2400, San Antonio, Texas 78205.
DESCRIPTION OF SHARES
The Company is an open-end management investment company
incorporated under the laws of the State of Maryland on
October 14, 1980. The Company is authorized to issue
shares in separate classes, or Funds. The Fund described
in this Prospectus is being offered to the public. The
Fund is classified as a diversified investment company.
Under the Company's charter, the Board of Directors is
authorized to create new Funds in addition to those already
existing without approval of the shareholders of the Company.
Under provisions of the Bylaws of the Company, no
annual meeting of shareholders is required. Ordinarily, no
shareholder meeting will be held unless required by the Investment
Company Act of 1940. The Directors may fill vacancies on
the Board or appoint new Directors provided that
immediately after such action at least two-thirds of the
Directors have been elected by shareholders.
Shareholders are entitled to one vote per share
(with proportionate voting for fractional shares)
irrespective of the relative net asset value of the
shares. For matters affecting an individual fund, a
separate vote of the shareholders of that fund is required.
TELEPHONE ASSISTANCE
(Call toll free - Central Time)
Monday-Friday 8:00 a.m. to 8:00 p.m.
Saturday: 8:30 a.m. to 5:00 p.m.
For further information on mutual funds:
1-800-531-8181
In San Antonio 210-456-7211
For account servicing, exchanges or redemptions:
1-800-531-8448
In San Antonio 210-456-7202
RECORDED 24 HOUR SERVICE
MUTUAL FUND PRICE QUOTES
(From any phone)
1-800-531-8066
In San Antonio 210-498-8066
MUTUAL FUND TOUCHLINE(registered trademark)
(From Touchtone phones only)
For account balance, last transaction or fund prices:
1-800-531-8777
In San Antonio 210-498-8777
[THIS PAGE LEFT BLANK INTENTIONALLY]
USAA INCOME STOCK FUND
December 1, 1995 PROSPECTUS
USAA Income Stock Fund (the Fund) is one of seven no-load
mutual funds offered by USAA Mutual Fund, Inc. (the
Company). The Fund is managed by USAA Investment
Management Company (the Manager).
WHAT ARE THE INVESTMENT
OBJECTIVE AND POLICIES?
The Fund's investment objective is current income with the prospect of
increasing dividend income and the potential for capital appreciation.
Investments are primarily in common stocks of well-established,
large companies with above-average dividend yields. Page 9.
HOW DO YOU BUY?
Fund shares are sold on a continuous basis at the net
asset value per share without a sales charge. Make your
initial investment directly with the Manager by mail, in
person, or in certain instances, by telephone. Page 11.
HOW DO YOU SELL?
You may redeem Fund shares by mail, telephone, fax, or
telegraph on any day that the net asset value is
calculated. Page 13.
This Prospectus, which should be read and retained for
future reference, provides information regarding the
Company and the Fund that you should know before
investing.
SHARES OF THE USAA INCOME STOCK FUND ARE NOT DEPOSITS
OR OTHER OBLIGATIONS OF, OR GUARANTEED BY THE USAA
FEDERAL SAVINGS BANK, ARE NOT INSURED BY THE FDIC OR ANY
OTHER GOVERNMENT AGENCY, AND ARE SUBJECT TO MARKET RISKS.
If you would like more information, a STATEMENT OF
ADDITIONAL INFORMATION (SAI) of the Company, dated
December 1, 1995, is available upon request and without
charge by writing to USAA MUTUAL FUND, INC., 9800
Fredericksburg Rd., San Antonio, TX 78288, or by calling
1-800-531-8181. The SAI has been filed with the
Securities and Exchange Commission and is incorporated by
reference into this Prospectus.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A
CRIMINAL OFFENSE.
TABLE OF CONTENTS
Page
SUMMARY DATA
Fees and Expenses 3
Financial Highlights 4
Performance Information 6
USING MUTUAL FUNDS
USAA Family of No-Load Mutual Funds 7
Using Mutual Funds in an Investment Program 8
INVESTMENT PORTFOLIO INFORMATION
Investment Objective and Policies 9
SHAREHOLDER INFORMATION
Purchase of Shares 11
Redemption of Shares 13
Conditions of Purchase and Redemption 14
Exchanges 15
Other Services 16
Share Price Calculation 17
Dividends, Distributions and Taxes 18
Management of the Company 19
Service Providers 20
Description of Shares 20
Telephone Assistance Numbers 20
FEES AND EXPENSES
The following summary is provided to assist you in
understanding the expenses you will bear directly or indirectly.
Shareholder Transaction Expenses
- --------------------------------------------------------------------
Sales Load Imposed on Purchases None
Sales Load Imposed on Reinvested Dividends None
Deferred Sales Load None
Redemption Fee* None
Exchange Fee None
Annual Fund Operating Expenses (as a percentage of average net assets)
- ----------------------------------------------------------------------
Management Fees .50%
12b-1 Fees None
Other Expenses
Transfer Agent Fees** .19%
Custodian Fees .02%
All Other Expenses .04%
---
Total Other Expenses .25%
---
Total Fund Operating Expenses .75%
===
- ---------------------------------------------------------------------
* A shareholder who requests delivery of redemption
proceeds by wire transfer will be subject to a $10
fee. See Redemption of Shares - Bank Wire.
** The Fund pays USAA Shareholder Account Services an
annual fixed fee per account for its services.
See Transfer Agent in the SAI, page 18.
Example of Effect of Fund Expenses
- ---------------------------------------------------------------------
An investor would pay the following expenses on a $1,000
investment, assuming (1) 5% annual return and (2)
redemption at the end of the periods shown.
1 year - $ 8
3 years - $ 24
5 years - $ 42
10 years - $ 93
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION
OF PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE
BE GREATER OR LESS THAN THOSE SHOWN.
FINANCIAL HIGHLIGHTS
The following per share operating performance for a share
outstanding throughout each of the periods in the nine-
year period ended July 31, 1995, has been audited by KPMG
Peat Marwick LLP. This table should be read in conjunction
with the Fund's financial statements for the year ended
July 31, 1995, and the auditors' report thereon, that appear
in the Fund's Annual Report. Further performance information
is contained in the Annual Report and is available upon
request without charge.
TEN-MONTH
YEAR ENDED PERIOD ENDED
JULY 31, JULY 31, YEAR ENDED SEPTEMBER 30,
1995 1994 1993 1992
---- ---- ---- ----
Net asset value at
beginning of period $ 13.50 $ 14.95 $ 13.42 $ 12.63
Net investment income .74 .60 .71 .71
Net realized and
unrealized gain (loss) 1.69 (1.12) 1.62 .78
Distributions from net
investment income (.75) (.74) (.71) (.70)
Distributions of realized
capital gains (.22) (.19) (.09) -
------ ------ ------ ------
Net asset value at
end of period $ 14.96 $ 13.50 $ 14.95 $ 13.42
====== ====== ====== ======
Total return (%)** 18.83 (3.53) 18.05 12.14
Net assets at end of
period (000) $1,408,371 $1,190,024 $1,043,686 $ 480,733
Ratio of expenses to
average net assets (%) .75 .73(a) .70 .74
Ratio of net investment
income to average net
assets (%) 5.34 5.25(a) 5.43 5.99
Portfolio turnover (%) 34.94 24.82 26.98 15.79
YEAR ENDED SEPTEMBER 30,
1991 1990 1989 1988 1987*
---- ---- ---- ---- ----
Net asset value at
beginning of period $ 10.27 $ 12.32 $ 10.26 $ 10.74 $ 10.00
Net investment income .69 .61 .54 .45 .21
Net realized and
unrealized gain (loss) 2.34 (1.47) 2.01 (.49) .56
Distributions from net
investment income (.67) (.61) (.49) (.42) (.03)
Distributions of realized
capital gains - (.58) - (.02) -
------ ------ ------ ------ ------
Net asset value at
end of period $ 12.63 $ 10.27 $ 12.32 $ 10.26 $ 10.74
====== ====== ====== ====== ======
Total return (%)** 30.45 (7.73) 25.66 (0.10) 7.71
Net assets at end of
period (000) $179,339 $ 80,853 $ 55,296 $ 31,241 $ 21,652
Ratio of expenses to
average net assets (%) .83 1.00 1.00 1.00 1.00(a)
Ratio of net investment
income to average net
assets (%) 6.30 5.75 5.10 4.72 5.22(a)
Portfolio turnover (%) 26.65 49.16 72.30 27.56 7.22
- --------------
* Fund commenced operations May 4, 1987.
** Assumes reinvestment of all dividend income and capital gain
distributions during the period.
(a) Annualized. The ratio is not necessarily indicative of 12 months
of operations.
PERFORMANCE INFORMATION
Performance information should be considered in light of
the Fund's investment objective and policies and market
conditions during the time periods for which it is
reported. Historical performance should not be
considered as representative of the future performance of
the Fund.
The Company may quote the Fund's total return in
advertisements and reports to shareholders or prospective
investors. The Fund's performance may also be compared
to that of other mutual funds with a similar investment
objective and to stock or relevant indexes that are
referenced in Appendix B to the SAI. Standard total
return results reported by the Fund do not take into
account recurring and nonrecurring charges for optional
services which only certain shareholders elect and which
involve nominal fees, such as the $10 fee for a delivery
of redemption proceeds by wire transfer.
The Fund's average annual total return is computed by
determining the average annual compounded rate of return
for a specific period which, when applied to a
hypothetical $1,000 investment in the Fund at the
beginning of the period, would produce the redeemable
value of that investment at the end of the period,
assuming reinvestment of all dividends and distributions
during the period.
Further information concerning the Fund's total return
is included in the SAI.
USAA FAMILY OF NO-LOAD MUTUAL FUNDS
The USAA Family of No-Load Mutual Funds includes a
variety of Funds, each with different objectives and
policies. In combination, these Funds are designed to
provide investors with the opportunity to formulate their
own investment program. You may exchange any shares you
hold in any one USAA Fund for shares in any other USAA
Fund. For more complete information about the Funds in
the USAA Family of Funds, including charges and expenses,
call the Manager for a Prospectus. Be sure to read it
carefully before you invest or send money.
USAA MUTUAL FUND, INC.
Aggressive Growth Fund
Growth Fund
Growth & Income Fund
Income Stock Fund
Income Fund
Short-Term Bond Fund
Money Market Fund
USAA INVESTMENT TRUST
Income Strategy Fund
Growth and Tax Strategy Fund
Balanced Strategy Fund
Cornerstone Strategy Fund
Growth Strategy Fund
Emerging Markets Fund
Gold Fund
International Fund
World Growth Fund
GNMA Trust
Treasury Money Market Trust
USAA TAX EXEMPT FUND, INC.
Long-Term Fund
Intermediate-Term Fund
Short-Term Fund
Tax Exempt Money Market Fund
California Bond Fund*
California Money Market Fund*
New York Bond Fund*
New York Money Market Fund*
Virginia Bond Fund*
Virginia Money Market Fund*
USAA STATE TAX-FREE TRUST
Florida Tax-Free Income Fund*
Florida Tax-Free Money Market Fund*
Texas Tax-Free Income Fund*
Texas Tax-Free Money Market Fund*
* Available for sale only to residents of these specific states.
USING MUTUAL FUNDS IN AN INVESTMENT PROGRAM
I. THE IDEA BEHIND MUTUAL FUNDS
Mutual funds were conceived as a vehicle that could give
small investors some of the advantages enjoyed by wealthy
investors. A relatively small investment buys part of a
widely diversified portfolio. That portfolio is managed
by investment professionals, relieving the shareholder of
the need to make individual stock or bond selections.
The investor also enjoys conveniences, such as daily
pricing, liquidity, and in the case of the USAA Family of
Funds, no sales charge. The portfolio, because of its
size, has lower transaction costs on its trades than most
individuals would have. As a result each shareholder
owns an investment that in earlier times would have been
available only to very wealthy people.
II. USING FUNDS IN AN INVESTMENT PROGRAM
In choosing a mutual fund as an investment vehicle, the
shareholder is foregoing some investment decisions, but
must still make others. The decisions foregone are those
involved with choosing individual securities. The Fund
Manager will perform that function. In addition, the
Manager will arrange for the safekeeping of securities,
auditing the annual financial statements, and daily
valuation of the Fund, as well as other functions.
The shareholder, however, retains at least part of the
responsibility for an equally important decision. This
decision includes determining a portfolio of mutual funds
that balances the investor's investment goals with his or
her tolerance for risk. It is likely that this decision
may involve the use of more than one fund of the USAA
Family of Funds.
For example, assume a shareholder wished to invest in a
widely diversified common stock portfolio. The
shareholder could include the Aggressive Growth Fund,
Growth Fund, Growth & Income Fund, and Income Stock Fund
in such a portfolio. This portfolio would include stocks
of large and small companies, high-dividend stocks and
growth stocks. This is just one example of how an
individual could combine funds to create a portfolio
tailored to his or her own risk and reward goals.
III. USAA'S FAMILY OF FUNDS
The Manager offers investors another alternative in its
asset strategy funds, the Income Strategy, Growth and Tax
Strategy, Balanced Strategy, Cornerstone Strategy, and
Growth Strategy Funds. These unique mutual funds provide
a professionally managed diversified investment portfolio
within a mutual fund. These Funds are designed for the
shareholder who prefers to delegate the asset allocation
process to an investment manager. The Funds are
structured to achieve diversification across a number of
investment categories.
Whether you prefer to create your own mix of mutual
funds or use an asset strategy fund, the USAA Family of
Funds provides a broad range of choices covering just
about any investor's investment objectives. Our sales
representatives stand ready to inform you of your choices
and to help you craft a portfolio which meets your needs.
INVESTMENT OBJECTIVE AND POLICIES
INVESTMENT OBJECTIVE
The Fund's investment objective is current income with
the prospect of increasing dividend income and the
potential for capital appreciation.
The investment objective of the Fund cannot be changed
without shareholder approval. In view of the risks
inherent in all investments in securities, there is no
assurance that this objective will be achieved.
The investment policies and techniques used to pursue
the Fund's objective may be changed without shareholder
approval, except as otherwise noted. Further information
regarding the Fund's investment policies and restrictions
is provided in the SAI.
INVESTMENT POLICIES AND
TECHNIQUES
The Manager will pursue this objective by investing at
least 65% of the Fund's assets in common stocks of well-
established, large companies with above-average dividend
yields. Investments may include preferred stocks,
securities convertible into common stocks or securities
which carry the right to buy common stocks and U.S. Real
Estate Investment Trusts (REITs). The Fund's investments
in REITs may subject the Fund to many of the same risks
associated with the direct ownership of real estate. In
addition, REITs are dependent upon the capabilities of
the REIT manager(s) and have limited diversification.
Convertible securities are bonds, preferred stocks,
and other securities that pay interest or dividends and
offer the buyer the option of converting the security
into common stock. The value of convertible securities
depends partially on interest rate changes and the credit
quality of the issuer. Because a convertible security
affords an investor the opportunity, through its
conversion feature, to participate in the capital
appreciation of the underlying common stock, the value of
convertible securities may also change based on the price
of the common stock. The Fund may invest up to 35% of
its net assets in convertible preferred stocks and up to
5% of its net assets in convertible debt securities,
measured at the time a security is purchased.
The convertible securities in which the Fund will
invest may be rated below investment grade as determined
by Moody's Investors Service, Inc. (Moody's) or Standard
& Poor's Ratings Group (S&P), or unrated but judged by
the Manager to be of comparable quality. For a more
complete description of debt ratings, see Appendix A to
the SAI. Such securities are deemed to be speculative
and involve greater risk of default due to changes in
interest rates, economic conditions, and the issuer's
creditworthiness. As a result, their market prices tend
to fluctuate more than higher-quality securities. During
periods of general economic downturns or rising interest
rates, issuers of such securities may experience
financial difficulties which could affect their ability
to make timely interest and principal payments. The
Fund's ability to timely and accurately value and dispose
of lower quality securities may also be affected by the
absence or periodic discontinuance of liquid trading markets.
The Fund is structured to provide a portfolio with a
yield above the average of the S&P 500 Index and is
expected to produce a growing stream of income over time.
The Manager may write covered call options with respect
to not more than 5% of the Fund's total assets. As a
temporary defensive measure, the Manager may invest up to
100% of Fund assets in high quality short-term debt
instruments, including repurchase agreements.
Repurchase Agreements - The Fund may invest in repurchase
agreements which are collateralized by obligations issued
or guaranteed by the U.S. Government, its agencies and
instrumentalities. A repurchase agreement is a
transaction in which a security is purchased with a
simultaneous commitment to sell the security back to the
seller (a commercial bank or recognized securities
dealer) at an agreed upon price on an agreed upon date,
usually not more than seven days from the date of
purchase. The resale price reflects the purchase price
plus an agreed upon market rate of interest which is
unrelated to the coupon rate or maturity of the purchased
security. The obligation of the seller to pay the agreed
upon price is in effect secured by the value of the
underlying security. In these transactions, the
securities purchased by the Fund will have a total value
equal to or in excess of the amount of the repurchase
obligation and will be held by the Fund's custodian until
repurchased. If the seller defaults and the value of the
underlying security declines, the Fund may incur a loss
and may incur expenses in selling the collateral. If the
seller seeks relief under the bankruptcy laws, the
disposition of the collateral may be delayed or limited.
Liquidity - The Fund may not invest more than 15% of the
value of its net assets in illiquid securities, including
repurchase agreements maturing in more than seven days.
Commercial paper that is subject to restrictions on
transfer, and other securities that may be resold
pursuant to Rule 144A under the Securities Act of 1933,
may be determined to be liquid in accordance with
guidelines established by the Board of Directors.
INVESTMENT RESTRICTIONS
The following restrictions may not be changed without
shareholder approval:
a. The Fund may not borrow money, except for
temporary or emergency purposes in an amount not
exceeding 33 1/3% of its total assets (including
the amount borrowed) less liabilities (other than borrowings).
b. The Fund may not, with respect to 75% of its total
assets, purchase the securities of any issuer
(except Government Securities, as such term is
defined in the 1940 Act) if, as a result, the Fund
would own more than 10% of the outstanding voting
securities of such issuer or the Fund would have
more than 5% of the value of its total assets
invested in the securities of such issuer.
c. The Fund may not invest more than 25% of the value
of its total assets in any one industry. This
limitation does not apply to securities issued or
guaranteed by the U.S. Government or its corporate
instrumentalities.
PURCHASE OF SHARES
OPENING AN ACCOUNT
You may open an account and make an investment by any of
the following methods. A complete, signed application is
required together with a check for each new account.
TAX ID NUMBER
We require that each shareholder named on the account
provide the Company with a social security number or tax
identification number to avoid possible tax withholding requirements.
EFFECTIVE DATE
When you make a purchase, your purchase price will be the
net asset value (NAV) per share next determined after the Fund
receives your request in proper form. If the Fund receives your
request prior to the close of the New York Stock Exchange on a
day on which the Exchange is open, your purchase price will be the
NAV per share determined for that day. If the Fund receives your
request after the time at which the NAV per share is calculated,
the purchase will be effective on the next business day. Because
of the more lengthy clearing process and the need to convert foreign
currency, a check drawn on a foreign bank will not be deemed received
for the purchase of shares until such time as the check has cleared
and the Manager has received good funds, which may take up to 4 to 6 weeks.
Furthermore, a bank charge may be assessed in the clearing process,
which will be deducted from the amount of the purchase. To avoid a
delay in the effectiveness of your purchase, the Manager suggests that
you convert your foreign check to U.S. dollars prior to
investment in the Fund.
Purchase of Shares
Minimum Investments
Initial Purchase (non-IRA): $1,000 or minimum $100 with a minimum $50
monthly electronic investment
After January 31, 1996 $3,000 or minimum $100 with a minimum $50
monthly electronic investment
Additional Purchases: $50
Initial Purchase - IRA: $1,000 or minimum $100 with a minimum $50
monthly electronic investment
$250 for spousal account
After January 31, 1996 $250 or minimum $100 with a minimum $50
monthly electronic investment
Additional Purchases: $50
How to Purchase:
Mail * To open an account, send your application and check to:
USAA Investment Management Company
9800 Fredericksburg Rd., San Antonio, TX 78288
* To add to your account, send your check and the "Invest
by Mail" stub that accompanies your fund's transaction
confirmation to the Transfer Agent:
USAA Shareholder Account Services
9800 Fredericksburg Rd., San Antonio, TX 78288
* To exchange by mail, call 1-800-531-8448 for instructions.
In Person * To open an account, bring your application and check to:
USAA Investment Management Company
USAA Federal Savings Bank
10750 Robert F. McDermott Freeway, San Antonio
Automatically * Additional purchases on a regular basis can be deducted
via from a bank account, paycheck, income-producing investment
Electronic or from a USAA money market account. Sign up for these
Funds services when opening an account or call 1-800-531-8448 to
Transfer add these services.
(EFT) * Purchases through payroll deduction ($25 minimum each pay
period with no initial investment) can be made by any
employee of USAA, its subsidiaries or affiliated companies.
Bank Wire * To add to an account, instruct your bank (which may charge
a fee for the service) to wire the specified amount to the
Fund as follows:
State Street Bank and Trust Company, Boston, MA 02101
ABA#011000028
Attn: USAA Income Stock Fund
USAA AC-69384998
Shareholder(s) Name(s)_________________
Shareholder(s) Account Number___________________
Phone * If you have an existing USAA account and would like to open a
1-800-531-8448 new account or if you would like to exchange to another USAA
fund, call for instructions. The new account must have the
same registration as your existing account.
* To add to an account, intermittent (as-needed) purchases can
be deducted from your bank account through our Buy/Sell
Service. Call for instructions.
Through a * To open a new account through your USAA Asset Management
USAA AMA Account, call USAA Brokerage Services at 1-800-531-8343.
REDEMPTION OF SHARES
You may redeem shares of the Fund by any of the following
methods on any day the NAV per share is calculated.
Redemptions will be effective on the day on which
instructions are received in accordance with the
requirements set forth below. However, if instructions
are received after the NAV per share calculation,
redemption will be effective on the next business day.
REDEMPTION PROCEEDS
Redemption proceeds are distributed within seven days
after the effective date of redemption. Payment for
redemption of shares purchased by check or electronic
funds transfer will not be disbursed until
the purchase check or electronic funds transfer has
cleared, which could take up to 15 days from the purchase
date. If you are considering redeeming shares soon after
purchase, you should purchase by bank wire or certified
check to avoid delay.
In addition, the Company may elect to suspend the
redemption of shares or postpone the date of payment
during any period that the New York Stock Exchange is
closed, or trading in the markets the Company normally
utilizes is restricted, or during any period that
redemption is otherwise permitted to be suspended by the
Securities and Exchange Commission.
How to Redeem:
Written, * Send your written instructions to:
Fax, or USAA Shareholder Account Services
Telegraph 9800 Fredericksburg Rd., San Antonio, TX 78288
* Send a signed fax to 210-498-2889, or send a telegraph to
USAA Shareholder Account Services.
Written redemption requests must include the following:
(1) a letter of instruction or stock assignment, and
stock certificate (if issued), specifying the Fund and
the number of shares or dollar amount to be redeemed;
(2) signatures of all owners of the shares exactly as
their names appear on the account; (3) other supporting
legal documents, if required, as in the case of estates,
trusts, guardianships, custodianships, partnerships,
corporations, and pension and profit-sharing plans; and
(4) method of payment.
Phone * Call toll free 1-800-531-8448, in San Antonio, 210-456-7202.
The Fund will employ reasonable procedures to confirm
that instructions communicated by telephone are genuine,
and if it does not, it may be liable for any losses due
to unauthorized or fraudulent instructions. Information
is obtained prior to any discussion regarding an account
including: (1) USAA number or account number, (2) the
name(s) on the account registration, and (3) social
security number or tax identification number for the
account registration. In addition, all telephone
communications with a shareholder are recorded and
confirmations of all account transactions are sent to the
address of record.
Redemption by telephone, fax, or telegraph is not
available for shares represented by stock certificates.
Through a * Call USAA Brokerage Services at 1-800-531-8343 for more
USAA AMA information.
Methods of Payment:
Bank Wire * Allows redemptions to be sent directly to your bank account.
Establish this service when you apply for your account,
or later upon request. If your account is at a savings
bank, savings and loan association, or credit union,
please obtain precise wiring instructions from your
institution. Specifically, include the name of the
correspondent bank and your institution's account number
at that bank. The Transfer Agent deducts a wire fee from
the account for the redemption by wire. The fee as of
the date of this Prospectus is $10 ($25 for wires to a
foreign bank) and is subject to change at any time. The
fee is paid to State Street Bank and Trust Company and
the Transfer Agent for their services in connection with
the wire redemption. Your bank may also charge a fee for
receiving funds by wire.
Automatically * Systematic (regular) or intermittent (as-needed) redemptions
via EFT can be credited to your bank account.
Establish any of our electronic investing services when
you apply for your account, or later upon request.
Check * A check payable to the registered shareholder(s) will be
Redemption mailed to the address of record.
This check redemption privilege is automatically
established when your application is completed and
accepted. There is a 15-day waiting period before a
check redemption can be processed following a telephone
address change. Should you wish to redeem shares within
the 15 days following a telephone address change, you may
do so by providing written instructions by mail or facsimile.
CONDITIONS OF PURCHASE AND REDEMPTION
NONPAYMENT
If any order to purchase shares is cancelled due to
nonpayment or if the Company does not receive good funds
either by check or electronic funds transfer, the
cancellation will be treated as a redemption of shares
purchased and you will be responsible for any resulting
loss incurred by the Fund or the Manager. If you are a
shareholder, shares can be redeemed from any of your
account(s) as reimbursement for all losses. In addition,
you may be prohibited or restricted from making future
purchases in any of the USAA Family of Funds. A $15 fee
is charged for all returned items, including checks and
electronic funds transfers.
TRANSFER OF SHARES
Fund shares may be transferred to another person by
sending written instructions to the Transfer Agent. The
account must be clearly identified and the shareholder
must include the number of shares to be transferred, the
signatures of all registered owners, and all stock
certificates, if any, which are the subject of transfer.
You also need to send written instructions signed by all
registered owners and supporting documents to change an
account registration due to events such as divorce,
marriage, or death. If a new account needs to be
established, an application must be completed and
returned to the Transfer Agent.
ACCOUNT BALANCE
The Board of Directors may cause the redemption of an
account with a balance of less than 10 shares of the
Fund, subject to certain limitations described in
Additional Information Regarding Redemption of Shares in
the SAI.
COMPANY RIGHTS
The Company reserves the right to:
(1) reject purchase or exchange orders when in the
best interest of the Company;
(2) limit or discontinue the offering of shares of any
portfolio of the Company without notice to the shareholders;
(3) impose a redemption charge of up to 1% of the net
asset value of shares redeemed if circumstances
indicate a charge is necessary for the protection of
remaining investors (for example, if excessive market-timing
share activity unfairly burdens long-term investors);
provided, however, this 1% charge will not be imposed
upon shareholders unless authorized by the Board of
Directors and adequate notice has been given to shareholders;
(4) require a signature guarantee for purchases, redemptions, or
changes in account information in those instances where the
appropriateness of a signature authorization is in question.
The section Additional Information Regarding Redemption of
Shares in the SAI contains information on acceptable guarantors.
EXCHANGES
EXCHANGE PRIVILEGE
The Exchange Privilege is automatically established when
you complete your application. You may exchange shares
among Funds in the USAA Family of Funds, provided you do
not hold these shares in stock certificate form and that
the shares to be acquired are offered in your state of
residence. Exchange redemptions and purchases will be
processed simultaneously at the share prices next
determined after the exchange order is received. For
federal income tax purposes, an exchange between Funds is
a taxable event. Accordingly, a capital gain or loss may
be realized.
The Fund has undertaken certain procedures regarding
telephone transactions. See Redemption of Shares - Phone.
EXCHANGE LIMITATIONS,
EXCESSIVE TRADING
To minimize Fund costs and to protect the Funds and their
shareholders from unfair expense burdens, the Funds
restrict excessive exchanges. Exchanges out of any Fund
in the USAA Family of Funds are limited for each account
to six per calendar year except that there is no
limitation on exchanges out of the Short-Term Bond Fund,
Tax Exempt Short-Term Fund, or any of the money market
funds in the USAA Family of Funds.
OTHER SERVICES
INVESTMENT PLANS
InveStart(registered trademark) - an investment program
for beginning or first-time investors. Like more
experienced investors, InveStart(registered trademark)
customers may choose to establish a systematic investment
plan for their portfolio.
Systematic Investment Plans - you may establish a
systematic investment plan by completing the appropriate
forms. At the time you sign up for any of the following
investment plans that utilize the electronic funds
transfer service, you will choose the day of the month
(the effective date) on which you would like to regularly
purchase shares. When this day falls on a weekend or
holiday, the electronic transfer will take place on the
last business day before the effective date. Call the
Manager to obtain instructions. More information about
these preauthorized plans is contained in the SAI.
* InvesTronic(registered trademark) - an automatic
investment program for the purchase of additional shares
through electronic funds transfer. The investor selects
the day(s) each month that money is transferred from a
checking or savings account. With this program you can
make initial investments as low as $100 and automatic
monthly additions of $50 to the account.
* Direct Purchase Service - the periodic purchase of
shares through electronic funds transfer from a non-
governmental employer, an income-producing investment, or
an account with a participating financial institution.
* Automatic Purchase Plan - the periodic transfer of
funds from a USAA money market fund to purchase shares in
another non-money market USAA mutual fund.
* Buy/Sell Service - the intermittent purchase or
redemption of shares through electronic funds transfer to
or from a checking or savings account.
* Systematic Withdrawal Plan - the periodic redemption of
shares from one of your accounts permitting you to
receive a fixed amount of money monthly or quarterly.
* Retirement Plans - plans are available for IRA
(including SEP/IRA) and 403(b)(7) accounts. Federal
taxes on current income may be deferred if an investor qualifies.
* Directed Dividends - If you own shares in more than one
of the Funds in the USAA Family of Funds, you may direct
that dividends and/or capital gain distributions earned
in one fund be used to automatically purchase shares in
another fund.
SHAREHOLDER STATEMENTS
AND REPORTS
You will receive a confirmation after each transaction in
your account except:
i) a reinvested dividend, or
ii) a payment you make after January 31, 1996 under
the InvesTronic(registered trademark), Direct
Purchase Service, Automatic Purchase Plan, or
Directed Dividends investment plans, or
iii) a redemption you make after January 31, 1996 under
the Systematic Withdrawal Plan.
At the end of each quarter you will receive a
consolidated statement for all of your mutual fund
accounts, regardless of account activity. The fourth
quarter consolidated statement will reflect all account
activity for the prior tax year. There will be a $10 fee
charged for copies of historical statements for other
than the prior tax year for any one account. You will
receive the Fund's financial statements with a summary of
its investments and performance at least semiannually.
In an effort to reduce expenses and respond to
shareholders' requests to reduce mail, the Company
intends to consolidate mailings of Annual and Semiannual Reports
to households having multiple accounts with the same
address of record. One copy of each report will be
furnished to that address. You may request additional
reports by notifying the Company.
TELEPHONE ASSISTANCE
Call our telephone assistance numbers for specific forms,
a copy of the SAI, the most recent Annual Report and/or
Semiannual Report, or if you have any questions
concerning any of the services offered.
SHARE PRICE CALCULATION
The price at which shares of the Fund are purchased and
redeemed by shareholders is equal to the NAV per share
determined on the effective date of the purchase or redemption.
WHEN
The NAV per share for the Fund is calculated at the close
of the regular trading session of the New York Stock
Exchange, which is usually 4:00 p.m. Eastern time. You
may buy and sell Fund shares at the NAV per share without
a sales charge.
HOW
The NAV per share is calculated by adding the value of
all securities and other assets in the Fund, deducting
liabilities, and dividing by the number of shares
outstanding. Portfolio securities, except as otherwise
noted, traded primarily on a securities exchange are
valued at the last sales price on that exchange. If no
sale is reported, the latest bid price is generally used.
Over-the-counter securities are generally priced at the
last sales price or, if not available, at the average of
the bid and asked prices.
Debt securities purchased with maturities of 60 days or
less are stated at amortized cost which approximates
market value. Other debt securities are valued each
business day at their current market value as determined
by a pricing service approved by the Board of Directors.
Securities which 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.
For additional information, see Valuation of Securities
in the SAI.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
Net investment income will be distributed to shareholders
quarterly. Any net capital gain generally will be
distributed at least annually. The Fund intends to make
such additional distributions as may be necessary to
avoid the imposition of any federal income or excise tax.
All income dividends and capital gain distributions are
automatically reinvested, unless the shareholder
specifies otherwise. The share price will be the net
asset value of the Fund shares computed on the ex-
dividend date. Any income dividend or capital gain
distributions paid by the Fund will reduce the NAV per share
by the amount of the dividend or distribution. An investor
should consider carefully the effects of purchasing shares
of the Fund shortly before any dividend or distribution.
Although in effect a return of capital, these distributions
are subject to taxes.
Any dividend or distribution payment returned to the
Manager as not deliverable will be invested in the
shareholder's Fund account at the then-current NAV per share.
If any check for the payment of dividends or distributions
is not cashed within six months from the date on the check,
it becomes void. The amount of the check will then be
invested in the shareholder's account at the then-current
NAV per share.
FEDERAL TAXES
The following discussion relates only to generally
applicable federal income tax provisions in effect as of
the date of this Prospectus. Therefore, shareholders are
urged to consult their own tax advisers about the status
of distributions from the Fund in their own states and localities.
Fund - The Fund intends to qualify as a regulated
investment company under Subchapter M of the Internal
Revenue Code of 1986, as amended (the Code). By
complying with the applicable provisions of the Code, the
Fund will not be subject to federal income tax on its net
investment income and net capital gains (capital gains in
excess of capital losses) distributed to shareholders.
Shareholder - Dividends from taxable net investment
income and distributions of net short-term capital gains
are taxable to shareholders as ordinary income, whether
received in cash or reinvested in additional shares. A
portion of these dividends may qualify for the 70%
dividends received deduction available to corporations.
Distributions of net long-term capital gains are
taxable as long-term capital gains whether received in
cash or reinvested in additional shares, and regardless
of the length of time the investor has held the shares of
the Fund.
Withholding - The Fund is required by federal law to
withhold and remit to the U.S. Treasury a portion of the
income dividends and capital gain distributions and
proceeds of redemptions paid to any non-corporate
shareholder who fails to furnish the Fund with a correct
tax identification number, who underreports dividend or
interest income, or who fails to certify that he is not
subject to withholding. To avoid this withholding
requirement, you must certify on your application, or on
a separate Form W-9 supplied by the Transfer Agent, that
your tax identification number is correct and that you
are not currently subject to backup withholding.
Reporting - Information concerning the status of
dividends and distributions for federal income tax
purposes will be mailed to shareholders annually.
MANAGEMENT OF THE COMPANY
The business affairs of the Company are subject to the
supervision of the Board of Directors.
The Manager, USAA Investment Management Company (IMCO),
was organized in May 1970 and is an affiliate of United
Services Automobile Association (USAA), a large
diversified financial services institution. As of the
date of this Prospectus, the Manager had approximately $29
billion in total assets under management. The Manager's mailing
address is 9800 Fredericksburg Rd., San Antonio, TX 78288.
Officers and employees of the Manager are permitted to
engage in personal securities transactions subject to
restrictions and procedures set forth in the Joint Code
of Ethics adopted by the Company and the Manager. Such
restrictions and procedures include substantially all of
the recommendations of the Advisory Group of the
Investment Company Institute and comply with Securities
and Exchange Commission rules and regulations.
ADVISORY AGREEMENT
The Manager serves as the manager and investment adviser
of the Company, providing services under an Advisory
Agreement. Under the Advisory Agreement, the Manager is
responsible for the management of the Funds, business
affairs, and placement of brokerage orders, subject to
the authority of and supervision by the Board of Directors.
For its services under the Advisory Agreement, the Fund
pays the Manager an annual fee which is computed as a
percentage of the Fund's average net assets (ANA),
accrued daily and paid monthly. The Fund's management
fees were computed and paid at one-half of one percent
(.50%) of ANA for the fiscal year ended July 31, 1995.
OPERATING EXPENSES
For the fiscal year ended July 31, 1995, the total
operating expenses for the Fund as a percentage of the
Fund's ANA equaled .75%.
PORTFOLIO TRANSACTIONS
Purchases and sales of equity securities for the Fund's
portfolio may be accomplished through USAA Brokerage
Services, a discount brokerage service of the Manager.
The Board of Directors has adopted
procedures to ensure that any commissions paid to USAA
Brokerage Services are reasonable and fair.
PORTFOLIO MANAGER
The following individual is primarily responsible for
managing the Fund.
Harry W. Miller, Senior Vice President of Equity
Investments since October of 1987, has managed the Fund
since January 1989. Mr. Miller has 38 years of
experience in investment management and has worked for
IMCO 21 years. Mr. Miller earned the Chartered Financial
Analyst designation in 1968 and is a member of the
Association for Investment Management and Research and
the San Antonio Financial Analysts Society, Inc. He
holds an MBA from the University of Southern California
and a BS from Rider College, New Jersey.
SERVICE PROVIDERS
UNDERWRITER/ USAA Investment Management Company
DISTRIBUTOR 9800 Fredericksburg Rd., San Antonio, Texas 78288.
TRANSFER USAA Shareholder Account Services
AGENT 9800 Fredericksburg Rd., San Antonio, Texas 78288.
CUSTODIAN State Street Bank and Trust Company
P.O. Box 1713, Boston, Massachusetts 02105.
LEGAL Goodwin, Procter & Hoar
COUNSEL Exchange Place, Boston, Massachusetts 02109.
INDEPENDENT KPMG Peat Marwick LLP
AUDITORS 112 East Pecan, Suite 2400, San Antonio, Texas 78205.
DESCRIPTION OF SHARES
The Company is an open-end management investment company
incorporated under the laws of the State of Maryland on
October 14, 1980. The Company is authorized to issue
shares in separate classes, or Funds. The Fund described
in this Prospectus is being offered to the public. The
Fund is classified as a diversified investment company.
Under the Company's charter, the Board of Directors is
authorized to create new Funds in addition to those
already existing without approval of the shareholders of
the Company.
Under provisions of the Bylaws of the Company, no annual
meeting of shareholders is required. Ordinarily, no shareholder
meeting will be held unless required by the Investment
Company Act of 1940. The Directors may fill vacancies on
the Board or appoint new Directors provided that
immediately after such action at least two-thirds of the
Directors have been elected by shareholders.
Shareholders are entitled to one vote per share (with
proportionate voting for fractional shares) irrespective
of the relative net asset value of the shares. For
matters affecting an individual fund, a separate vote of
the shareholders of that fund is required.
TELEPHONE ASSISTANCE
(Call toll free - Central Time)
Monday-Friday 8:00 a.m. to 8:00 p.m.
Saturday: 8:30 a.m. to 5:00 p.m.
For further information on mutual funds:
1-800-531-8181
In San Antonio 210-456-7211
For account servicing, exchanges or redemptions:
1-800-531-8448
In San Antonio 210-456-7202
RECORDED 24 HOUR SERVICE
MUTUAL FUND PRICE QUOTES
(From any phone)
1-800-531-8066
In San Antonio 210-498-8066
MUTUAL FUND TOUCHLINE(registered trademark)
(From Touchtone phones only)
For account balance, last transaction or fund prices:
1-800-531-8777
In San Antonio 210-498-8777
USAA INCOME FUND
December 1, 1995 PROSPECTUS
USAA Income Fund (the Fund) is one of seven no-load
mutual funds offered by USAA Mutual Fund, Inc. (the
Company). The Fund is managed by USAA Investment
Management Company (the Manager).
WHAT ARE THE INVESTMENT
OBJECTIVE AND POLICIES?
The Fund's investment objective is maximum current income without
undue risk to principal. Investments are primarily in
income producing securities. Page 9.
HOW DO YOU BUY?
Fund shares are sold on a continuous basis at the net
asset value per share without a sales charge. Make your
initial investment directly with the Manager by mail, in
person, or in certain instances, by telephone. Page 13.
HOW DO YOU SELL?
You may redeem Fund shares by mail, telephone, fax, or
telegraph on any day that the net asset value is
calculated. Page 15.
This Prospectus, which should be read and retained for
future reference, provides information regarding the
Company and the Fund that you should know before
investing.
SHARES OF THE USAA INCOME FUND ARE NOT DEPOSITS OR
OTHER OBLIGATIONS OF, OR GUARANTEED BY THE USAA FEDERAL
SAVINGS BANK, ARE NOT INSURED BY THE FDIC OR ANY OTHER
GOVERNMENT AGENCY, AND ARE SUBJECT TO MARKET RISKS.
If you would like more information, a STATEMENT OF
ADDITIONAL INFORMATION (SAI) of the Company, dated
December 1, 1995, is available upon request and without
charge by writing to USAA MUTUAL FUND, INC., 9800
Fredericksburg Rd., San Antonio, TX 78288, or by calling
1-800-531-8181. The SAI has been filed with the
Securities and Exchange Commission and is incorporated by
reference into this Prospectus.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
TABLE OF CONTENTS
Page
SUMMARY DATA
Fees and Expenses 3
Financial Highlights 4
Performance Information 6
USING MUTUAL FUNDS
USAA Family of No-Load Mutual Funds 7
Using Mutual Funds in an Investment Program 8
INVESTMENT PORTFOLIO INFORMATION
Investment Objective and Policies 9
SHAREHOLDER INFORMATION
Purchase of Shares 13
Redemption of Shares 15
Conditions of Purchase and Redemption 16
Exchanges 17
Other Services 18
Share Price Calculation 19
Dividends, Distributions and Taxes 20
Management of the Company 21
Service Providers 22
Description of Shares 22
Telephone Assistance Numbers 22
FEES AND EXPENSES
The following summary is provided to assist you in
understanding the expenses you will bear directly or indirectly.
Shareholder Transaction Expenses
- --------------------------------------------------------------------
Sales Load Imposed on Purchases None
Sales Load Imposed on Reinvested Dividends None
Deferred Sales Load None
Redemption Fee* None
Exchange Fee None
Annual Fund Operating Expenses (as a percentage of average net assets)
- ----------------------------------------------------------------------
Management Fees .24%
12b-1 Fees None
Other Expenses
Transfer Agent Fees** .12%
Custodian Fees .02%
All Other Expenses .03%
---
Total Other Expenses .17%
---
Total Fund Operating Expenses .41%
===
- ---------------------------------------------------------------------
* A shareholder who requests delivery of redemption
proceeds by wire transfer will be subject to a $10
fee. See Redemption of Shares - Bank Wire.
** The Fund pays USAA Shareholder Account Services an
annual fixed fee per account for its services.
See Transfer Agent in the SAI, page 18.
Example of Effect of Fund Expenses
- ---------------------------------------------------------------------
An investor would pay the following expenses on a $1,000
investment, assuming (1) 5% annual return and (2)
redemption at the end of the periods shown.
1 year - $ 4
3 years - $ 13
5 years - $ 23
10 years - $ 52
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF
PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR
LESS THAN THOSE SHOWN.
FINANCIAL HIGHLIGHTS
The following per share operating performance for a share
outstanding throughout each of the periods in the ten-
year period ended July 31, 1995, has been audited by KPMG
Peat Marwick LLP. This table should be read in conjunction
with the Fund's financial statements for the year ended
July 31, 1995, and the auditors' report thereon, that appear
in the Fund's Annual Report. Further performance information
is contained in the Annual Report and is available upon
request without charge.
TEN-MONTH
YEAR ENDED PERIOD ENDED
JULY 31, JULY 31, YEAR ENDED SEPTEMBER 30,
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
Net asset value at
beginning of period $ 11.67 $ 13.28 $ 12.76 $ 12.11 $ 11.03
Net investment income .84 .72 .90 .95 .98
Net realized and
unrealized gain (loss) .45 (1.30) .52 .64 1.09
Distributions from net
investment income (.85) (.78) (.90) (.93) (.99)
Distributions of realized
capital gains - (.25) - (.01) -
------- ------- ------- ------- -------
Net asset value at
end of period $ 12.11 $ 11.67 $ 13.28 $ 12.76 $ 12.11
======= ======= ======= ======= =======
Total return (%)* 11.64 (4.52) 11.58 13.72 19.64
Net assets at end of
period (000) $1,755,171 $1,718,934 $1,932,064 $1,359,721 $ 827,505
Ratio of expenses to
average net assets (%) .41 .41(a) .41 .42 .47
Ratio of net investment
income to average net
assets (%) 7.27 6.98(a) 7.00 7.78 8.61
Portfolio turnover (%) 30.86(b) 25.36(b) 44.82 21.78 15.45
YEAR ENDED SEPTEMBER 30,
1990 1989 1988 1987 1986
---- ---- ---- ---- ----
Net asset value at
beginning of period $ 11.50 $ 11.20 $ 10.89 $ 12.08 $ 11.46
Net investment income 1.03 1.05 1.06 1.07 1.15
Net realized and
unrealized gain (loss) (.44) .30 .57 (.96) .61
Distributions from net
investment income (1.03) (1.05) (1.06) (1.24) (1.12)
Distributions of realized
capital gains (.03) - (.26) (.06) (.02)
------- ------- ------- ------- ------
Net asset value at
end of period $ 11.03 $ 11.50 $ 11.20 $ 10.89 $ 12.08
====== ======= ======= ======= =======
Total return (%)* 5.28 12.78 15.87 .56 16.23
Net assets at end of
period (000) $ 434,705 $ 332,140 $ 284,639 $ 249,901 $ 213,608
Ratio of expenses to
average net assets (%) .53 .57 .61 .61 .65
Ratio of net investment
income to average net
assets (%) 9.19 9.36 9.57 9.13 9.69
Portfolio turnover (%) 12.07 13.79 10.66 35.90 37.58
- --------------
* Assumes reinvestment of all dividend income and
capital gain distributions during the period.
(a) Annualized. The ratio is not necessarily
indicative of 12 months of operations.
(b) The Fund may simultaneously purchase and sell the
same securities. These transactions can be high
in volume and are dissimilar to other trade
activity within the Fund. If these transactions
were excluded from the calculation, the portfolio
turnover rate would be as follows:
TEN-MONTH
YEAR ENDED PERIOD ENDED
JULY 31, 1995 JULY 31, 1994
------------- -------------
Portfolio turnover (%) 9.09 16.79
Purchases and sales of this type are as follows:
Purchases (000) $360,943 $155,322
Sales (000) $361,366 $155,497
PERFORMANCE INFORMATION
Performance information should be considered in light of
the Fund's investment objective and policies and market
conditions during the time periods for which it is
reported. Historical performance should not be
considered as representative of the future performance of
the Fund.
The Company may quote the Fund's total return or yield
in advertisements and reports to shareholders or
prospective investors. The Fund's performance may also
be compared to that of other mutual funds with a similar
investment objective and to stock or relevant indexes
that are referenced in Appendix B to the SAI. Standard
total return and yield results reported by the Fund do
not take into account recurring and nonrecurring charges
for optional services which only certain shareholders
elect and which involve nominal fees, such as the $10 fee
for a delivery of redemption proceeds by wire transfer.
The Fund's average annual total return is computed by
determining the average annual compounded rate of return
for a specific period which, when applied to a
hypothetical $1,000 investment in the Fund at the
beginning of the period, would produce the redeemable
value of that investment at the end of the period,
assuming reinvestment of all dividends and distributions
during the period.
The Fund may advertise performance in terms of a 30-day
yield quotation. The yield quotation is computed by
dividing the net investment income per share earned
during the period by the offering price per share on the
last day of the period. This income is then annualized.
Further information concerning the Fund's yield and
total return is included in the SAI.
USAA FAMILY OF NO-LOAD MUTUAL FUNDS
The USAA Family of No-Load Mutual Funds includes a
variety of Funds, each with different objectives and
policies. In combination, these Funds are designed to
provide investors with the opportunity to formulate their
own investment program. You may exchange any shares you
hold in any one USAA Fund for shares in any other USAA
Fund. For more complete information about the Funds in
the USAA Family of Funds, including charges and expenses,
call the Manager for a Prospectus. Be sure to read it
carefully before you invest or send money.
USAA MUTUAL FUND, INC.
Aggressive Growth Fund
Growth Fund
Growth & Income Fund
Income Stock Fund
Income Fund
Short-Term Bond Fund
Money Market Fund
USAA INVESTMENT TRUST
Income Strategy Fund
Growth and Tax Strategy Fund
Balanced Strategy Fund
Cornerstone Strategy Fund
Growth Strategy Fund
Emerging Markets Fund
Gold Fund
International Fund
World Growth Fund
GNMA Trust
Treasury Money Market Trust
USAA TAX EXEMPT FUND, INC.
Long-Term Fund
Intermediate-Term Fund
Short-Term Fund
Tax Exempt Money Market Fund
California Bond Fund*
California Money Market Fund*
New York Bond Fund*
New York Money Market Fund*
Virginia Bond Fund*
Virginia Money Market Fund*
USAA STATE TAX-FREE TRUST
Florida Tax-Free Income Fund*
Florida Tax-Free Money Market Fund*
Texas Tax-Free Income Fund*
Texas Tax-Free Money Market Fund*
* Available for sale only to residents of these specific states.
USING MUTUAL FUNDS IN AN INVESTMENT PROGRAM
I. THE IDEA BEHIND MUTUAL FUNDS
Mutual funds were conceived as a vehicle that could give
small investors some of the advantages enjoyed by wealthy
investors. A relatively small investment buys part of a
widely diversified portfolio. That portfolio is managed
by investment professionals, relieving the shareholder of
the need to make individual stock or bond selections.
The investor also enjoys conveniences, such as daily
pricing, liquidity, and in the case of the USAA Family of
Funds, no sales charge. The portfolio, because of its
size, has lower transaction costs on its trades than most
individuals would have. As a result each shareholder
owns an investment that in earlier times would have been
available only to very wealthy people.
II. USING FUNDS IN AN INVESTMENT PROGRAM
In choosing a mutual fund as an investment vehicle, the
shareholder is foregoing some investment decisions, but
must still make others. The decisions foregone are those
involved with choosing individual securities. The Fund
Manager will perform that function. In addition, the
Manager will arrange for the safekeeping of securities,
auditing the annual financial statements, and daily
valuation of the Fund, as well as other functions.
The shareholder, however, retains at least part of the
responsibility for an equally important decision. This
decision includes determining a portfolio of mutual funds
that balances the investor's investment goals with his or
her tolerance for risk. It is likely that this decision
may involve the use of more than one fund of the USAA
Family of Funds.
For example, assume a shareholder wished to invest in a
widely diversified common stock portfolio. The
shareholder could include the Aggressive Growth Fund,
Growth Fund, Growth & Income Fund, and Income Stock Fund
in such a portfolio. This portfolio would include stocks
of large and small companies, high-dividend stocks and
growth stocks. This is just one example of how an
individual could combine funds to create a portfolio
tailored to his or her own risk and reward goals.
III. USAA'S FAMILY OF FUNDS
The Manager offers investors another alternative in its
asset strategy funds, the Income Strategy, Growth and Tax
Strategy, Balanced Strategy, Cornerstone Strategy, and
Growth Strategy Funds. These unique mutual funds provide
a professionally managed diversified investment portfolio
within a mutual fund. These Funds are designed for the
shareholder who prefers to delegate the asset allocation
process to an investment manager. The Funds are
structured to achieve diversification across a number of
investment categories.
Whether you prefer to create your own mix of mutual
funds or use an asset strategy fund, the USAA Family of
Funds provides a broad range of choices covering just
about any investor's investment objectives. Our sales
representatives stand ready to inform you of your choices
and to help you craft a portfolio which meets your needs.
INVESTMENT OBJECTIVE AND POLICIES
INVESTMENT OBJECTIVE
The investment objective is maximum current income
without undue risk to principal.
The investment objective of the Fund cannot be changed
without shareholder approval. In view of the risks
inherent in all investments in securities, there is no
assurance that this objective will be achieved.
The investment policies and techniques used to pursue
the Fund's objective may be changed without shareholder
approval, except as otherwise noted. Further information
regarding the Fund's investment policies and restrictions
is provided in the SAI.
INVESTMENT POLICIES AND
TECHNIQUES
The Manager will pursue this objective by investing the
Fund's assets primarily in U.S. dollar-denominated
securities selected for their high yields relative to the
risk involved. Consistent with this policy, in periods
of rising interest rates, a greater portion of the
portfolio may be invested in securities the value of
which is believed to be less sensitive to interest rate changes.
The Fund's portfolio may consist of:
(1) Obligations of the U.S. Government, its agencies
and instrumentalities;
(2) Mortgage-backed securities;
(3) Corporate debt securities such as notes, bonds,
and commercial paper;
(4) U.S. bank obligations, including certificates of
deposit and banker's acceptances;
(5) Obligations of state and local governments and
their agencies and instrumentalities;
(6) Asset-backed securities;
(7) Master demand notes;
(8) Dollar-denominated instruments issued outside the
U.S. capital markets by foreign corporations and
financial institutions and by foreign branches of
U.S. corporations and financial institutions
(Eurodollar obligations);
(9) Dollar-denominated instruments issued by foreign
issuers in the U.S. capital markets (Yankee obligations);
(10) Other debt securities;
(11) Convertible securities;
(12) Common stocks;
(13) Preferred stocks.
As a temporary measure, the Manager may invest up to
100% of the Fund's assets in high quality, short-term
debt instruments.
The debt securities in the Fund must be investment
grade at the time of purchase. Investment grade
securities are those issued or guaranteed by the U.S.
Government, its agencies and instrumentalities, those
rated at least Baa by Moody's Investors Service
(Moody's), BBB by Standard & Poor's Ratings Group (S&P),
BBB by Fitch Investors Service (Fitch), or BBB by Duff
and Phelps (D&P), or those judged to be of equivalent
quality by the Manager if not rated. Securities rated in
the lowest level of investment grade have some
speculative characteristics since adverse economic
conditions and changing circumstances are more likely to
have an adverse impact on such securities. If the rating
of a security is downgraded below investment grade, the
Manager will determine whether it is in the best interest
of the Fund's shareholders to continue to hold such
security in the Fund's portfolio. Unless otherwise directed
by the Board of Directors, if downgrades result in more than
5% of the Fund's net assets being invested in securities that
are less than investment grade quality, the Manager will take
immediate action to reduce the Fund's holdings in such
securities to 5% or less of the Fund's net assets. For a
more complete description of debt ratings, see Appendix A
to the SAI.
Mortgage-Backed and Asset-Backed Securities - Mortgage-
backed securities include, but are not limited to,
securities issued by the Government National Mortgage
Association (Ginnie Mae), the Federal National Mortgage
Association (Fannie Mae) and the Federal Home Loan
Mortgage Corporation (Freddie Mac). These securities
represent ownership in a pool of mortgage loans. They
differ from conventional bonds in that principal is paid
back to the investor as payments are made on the
underlying mortgages in the pool. Accordingly, the Fund
receives monthly scheduled payments of principal and
interest along with any unscheduled principal prepayments
on the underlying mortgages. Because these scheduled and
unscheduled principal payments must be reinvested at
prevailing interest rates, mortgage-backed securities do
not provide an effective means of locking in long-term
interest rates for the investor. Like other fixed income
securities, when interest rates rise, the value of a
mortgage-backed security generally will decline; however,
when interest rates are declining, the value of mortgage-
backed securities with prepayment features may not
increase as much as other fixed income securities.
Mortgage-backed securities also include collateralized
mortgage obligations (CMOs). CMOs are obligations fully
collateralized by a portfolio of mortgages or mortgage-
related securities. CMOs are divided into pieces
(tranches) with varying maturities. The cash flow from
the underlying mortgages is used to pay off each tranche
separately. CMOs are designed to provide investors with
more predictable maturities than regular mortgage
securities but such maturities can be difficult to
predict because of the effect of prepayments. Failure to
accurately predict prepayments can adversely affect the
Fund's return on these investments. CMOs may also be
less marketable than other securities.
Asset-backed securities represent a participation in,
or are secured by and payable from, a stream of payments
generated by particular assets, such as credit card,
motor vehicle, or trade receivables. They may be pass-
through certificates, which have characteristics very
similar to mortgage-backed securities, discussed above.
They may also be in the form of asset-backed commercial
paper, which is issued by a special purpose entity,
organized solely to issue the commercial paper and to
purchase interests in the assets. The credit quality of
these securities depends primarily upon the quality of
the underlying assets and the level of credit support and
enhancement provided.
The weighted average life of such securities is likely
to be substantially shorter than their stated final
maturity as a result of scheduled principal payments and
unscheduled principal prepayments.
Master Demand Notes - The Fund may invest in variable
rate master demand notes (Master Demand Notes). Master
demand notes are obligations that permit the investment
of fluctuating amounts by the Fund, at varying rates of
interest using direct arrangements between the Fund, as
lender, and the borrower. These notes permit daily
changes in the amounts borrowed. The Fund has the right
to increase the amount under the note at any time up to
the full amount provided by the note agreement, or to
decrease the amount, and the borrower may repay up to the
full amount of the note without penalty. Frequently,
such obligations are secured by letters of credit or
other credit support arrangements provided by banks.
Because master demand notes are direct lending
arrangements between the lender and borrower, these
instruments generally will not be traded, and there
generally is no secondary market for these notes,
although they are redeemable (and immediately
repayable by the borrower) at face value, plus accrued
interest, at any time. Therefore, where master demand
notes are not secured by bank letters of credit or other
credit support arrangements, the Fund's right to redeem
depends on the ability of the borrower to pay principal
and interest on demand. In connection with master demand
note arrangements, the Fund will continuously monitor the
earning power, cash flow, and other liquidity ratios of
the issuer, and the borrower's ability to pay principal
and interest on demand. Master demand notes, as such,
are not typically rated by credit rating agencies. The
Fund will invest in master demand notes only if the Board
of Directors or its delegate has determined that they are
of credit quality comparable to the debt securities in
which the Fund generally may invest.
Eurodollar and Yankee Obligations - While investments in
Eurodollar and Yankee obligations are intended to reduce
risk by providing further diversification, such
investments involve sovereign risk in addition to credit
and market risk. Sovereign risk includes local political
or economic developments, potential nationalization, and
withholding taxes on dividend or interest payments.
Issuers of Eurodollar and Yankee obligations may be
subject to different or less stringent accounting and
reporting requirements than similar U.S. issuers, thereby
rendering investment analysis more difficult. The Fund
may incur difficulties in obtaining judgements or
effecting collections thereon. Also, securities of
foreign companies may be less liquid or more volatile
than securities of U.S. companies.
In addition, the Fund may invest in Eurodollar and
Yankee obligations of investment-grade emerging market
countries. An emerging market country can be considered
to be a country which is in the initial stages of its
industrial cycle. Investments in emerging market countries
involve exposure to economic structures that are generally
less diverse and mature than in the United States, and to
political systems which may be less stable. In the past,
markets of emerging market countries have been more volatile
than the markets of developed countries.
Repurchase Agreements - The Fund may invest in repurchase
agreements which are collateralized by obligations issued
or guaranteed by the U.S. Government, its agencies and
instrumentalities. A repurchase agreement is a
transaction in which a security is purchased with a
simultaneous commitment to sell the security back to the
seller (a commercial bank or recognized securities
dealer) at an agreed upon price on an agreed upon date,
usually not more than seven days from the date of
purchase. The resale price reflects the purchase price
plus an agreed upon market rate of interest which is
unrelated to the coupon rate or maturity of the purchased
security. The obligation of the seller to pay the agreed
upon price is in effect secured by the value of the
underlying security. In these transactions, the
securities purchased by the Fund will have a total value
equal to or in excess of the amount of the repurchase
obligation and will be held by the Fund's custodian until
repurchased. If the seller defaults and the value of the
underlying security declines, the Fund may incur a loss
and may incur expenses in selling the collateral. If the
seller seeks relief under the bankruptcy laws, the
disposition of the collateral may be delayed or limited.
Variable Rate Securities - The Fund may invest in
securities that bear interest at rates which are adjusted
periodically to market rates. These interest rate
adjustments can both raise and lower the income generated
by such securities. These changes will have the same effect
on the income earned by a Fund depending on the proportion of
such securities held.
The market value of fixed coupon securities fluctuates
with changes in prevailing interest rates, increasing in
value when interest rates decline and decreasing in value
when interest rates rise. The value of variable rate
securities, however, is less affected by changes in
prevailing interest rates because of the periodic
adjustment of their coupons to a market rate. The
shorter the period between adjustments, the smaller the
impact of interest rate fluctuations on the value of
these securities. The market value of variable rate
securities usually tends toward par (100% of face value)
at interest rate adjustment time.
Put Bonds - The Fund may invest in securities (including
securities with variable interest rates) which may be
redeemed or sold back (put) to the issuer of the security
or a third party at face value prior to stated maturity
(Put Bonds). Such securities will normally trade as if
maturity is the earlier put date, even though stated
maturity is longer.
When-Issued Securities - The Fund may invest in new
issues of securities offered on a when-issued basis; that
is, delivery and payment take place after the date of the
commitment to purchase, normally within 45 days. Both
price and interest rate are fixed at the time of
commitment. The Fund does not earn interest on the
securities until settlement, and the market value of the
securities may fluctuate between purchase and settlement.
Such securities can be sold before settlement date.
Cash or high quality liquid debt securities equal to
the amount of the when-issued commitments are segregated
at the Fund's custodian bank. The segregated securities
are valued at market, and daily adjustments are made to
keep the value of the cash and segregated securities at
least equal to the amount of such commitments by the Fund.
On the settlement date, the Fund will meet its obligations
from then available cash, sale of segregated securities,
sale of other securities, or sale of the when-issued
securities themselves.
Liquidity - The Fund may not invest more than 15% of the
value of its net assets in illiquid securities, including
repurchase agreements maturing in more than seven days.
Commercial paper and certain Put Bonds that are subject
to restrictions on transfer, and other securities that
may be resold pursuant to Rule 144A under the Securities
Act of 1933, may be determined to be liquid in accordance
with guidelines established by the Board of Directors.
INVESTMENT RESTRICTIONS
The following restrictions may not be changed without
shareholder approval:
a. The Fund may not borrow money, except for
temporary or emergency purposes in an amount not
exceeding 33 1/3% of its total assets (including
the amount borrowed) less liabilities (other than borrowings).
b. The Fund may not, with respect to 75% of its total
assets, purchase the securities of any issuer
(except Government Securities, as such term is
defined in the 1940 Act) if, as a result, the Fund
would own more than 10% of the outstanding voting
securities of such issuer or the Fund would have
more than 5% of the value of its total assets
invested in the securities of such issuer.
c. The Fund may not invest more than 25% of the value
of its total assets in any one industry. This
limitation does not apply to securities issued or
guaranteed by the U.S. Government or its corporate
instrumentalities.
PURCHASE OF SHARES
OPENING AN ACCOUNT
You may open an account and make an investment by any of
the following methods. A complete, signed application is
required together with a check for each new account.
TAX ID NUMBER
We require that each shareholder named on the account
provide the Company with a social security number or tax
identification number to avoid possible tax withholding requirements.
EFFECTIVE DATE
When you make a purchase, your purchase price will be the
net asset value (NAV) per share next determined after the
Fund receives your request in proper form. If the Fund
receives your request prior to the close of the New York Stock
Exchange on a day on which the Exchange is open, your purchase
price will be the NAV per share determined for that day. If
the Fund receives your request after the time at which the NAV
per share is calculated, the purchase will be effective on the
next business day. Because of the more lengthy clearing process
and the need to convert foreign currency, a check drawn on a foreign
bank will not be deemed received for the purchase of shares until
such time as the check has cleared and the Manager has received good
funds, which may take up to 4 to 6 weeks. Furthermore, a bank charge
may be assessed in the clearing process, which will be deducted
from the amount of the purchase. To avoid a delay in the
effectiveness of your purchase, the Manager suggests that
you convert your foreign check to U.S. dollars prior to
investment in the Fund.
Purchase of Shares
Minimum Investments
Initial Purchase (non-IRA): $1,000
After January 31, 1996 $3,000 or minimum $100 with a minimum $50
monthly electronic investment
Additional Purchases: $50
Initial Purchase - IRA: $1,000
$250 for spousal account
After January 31, 1996 $250 or minimum $100 with a minimum $50
monthly electronic investment
Additional Purchases: $50
How to Purchase:
Mail * To open an account, send your application and check to:
USAA Investment Management Company
9800 Fredericksburg Rd., San Antonio, TX 78288
* To add to your account, send your check and the "Invest by
Mail" stub that accompanies your fund's transaction
confirmation to the Transfer Agent:
USAA Shareholder Account Services
9800 Fredericksburg Rd., San Antonio, TX 78288
* To exchange by mail, call 1-800-531-8448 for instructions.
In Person * To open an account, bring your application and check to:
USAA Investment Management Company
USAA Federal Savings Bank
10750 Robert F. McDermott Freeway, San Antonio
Automatically * Additional purchases on a regular basis can be deducted
via from a bank account, paycheck, income-producing investment
Electronic or from a USAA money market account. Sign up for these
Funds services when opening an account or call 1-800-531-8448 to
Transfer add these services.
(EFT) * Purchases through payroll deduction ($25 minimum each pay
period with no initial investment) can be made by any
employee of USAA, its subsidiaries or affiliated companies.
Bank Wire * To add to an account, instruct your bank (which may charge
a fee for the service) to wire the specified amount to the
Fund as follows:
State Street Bank and Trust Company, Boston, MA 02101
ABA#011000028
Attn: USAA Income Fund
USAA AC-69384998
Shareholder(s) Name(s)_________________
Shareholder(s) Account Number___________________
Phone * If you have an existing USAA account and would like to open a
1-800-531-8448 new account or if you would like to exchange to another USAA
fund, call for instructions. The new account must have the
same registration as your existing account.
* To add to an account, intermittent (as-needed) purchases can
be deducted from your bank account through our Buy/Sell
Service. Call for instructions.
Through a * To open a new account through your USAA Asset Management
USAA AMA Account, call USAA Brokerage Services at 1-800-531-8343.
REDEMPTION OF SHARES
You may redeem shares of the Fund by any of the following
methods on any day the NAV per share is calculated.
Redemptions will be effective on the day on which
instructions are received in accordance with the
requirements set forth below. However, if instructions
are received after the NAV per share calculation,
redemption will be effective on the next business day.
REDEMPTION PROCEEDS
Redemption proceeds are distributed within seven days
after the effective date of redemption. Payment for
redemption of shares purchased by check or electronic
funds transfer will not be disbursed until
the purchase check or electronic funds transfer has
cleared, which could take up to 15 days from the purchase
date. If you are considering redeeming shares soon after
purchase, you should purchase by bank wire or certified
check to avoid delay.
In addition, the Company may elect to suspend the
redemption of shares or postpone the date of payment
during any period that the New York Stock Exchange is
closed, or trading in the markets the Company normally
utilizes is restricted, or during any period that
redemption is otherwise permitted to be suspended by the
Securities and Exchange Commission.
How to Redeem:
Written, * Send your written instructions to:
Fax, or USAA Shareholder Account Services
Telegraph 9800 Fredericksburg Rd., San Antonio, TX 78288
* Send a signed fax to 210-498-2889, or send a telegraph
to USAA Shareholder Account Services.
Written redemption requests must include the following:
(1) a letter of instruction or stock assignment, and
stock certificate (if issued), specifying the Fund and
the number of shares or dollar amount to be redeemed;
(2) signatures of all owners of the shares exactly as
their names appear on the account; (3) other supporting
legal documents, if required, as in the case of estates,
trusts, guardianships, custodianships, partnerships,
corporations, and pension and profit-sharing plans; and
(4) method of payment.
Phone * Call toll free 1-800-531-8448, in San Antonio, 210-456-7202.
The Fund will employ reasonable procedures to confirm
that instructions communicated by telephone are genuine,
and if it does not, it may be liable for any losses due
to unauthorized or fraudulent instructions. Information
is obtained prior to any discussion regarding an account
including: (1) USAA number or account number, (2) the
name(s) on the account registration, and (3) social
security number or tax identification number for the
account registration. In addition, all telephone
communications with a shareholder are recorded and
confirmations of all account transactions are sent to the
address of record.
Redemption by telephone, fax, or telegraph is not
available for shares represented by stock certificates.
Through a * Call USAA Brokerage Services at 1-800-531-8343 for more
USAA AMA information.
Methods of Payment:
Bank Wire * Allows redemptions to be sent directly to your bank account.
Establish this service when you apply for your account,
or later upon request. If your account is at a savings
bank, savings and loan association, or credit union,
please obtain precise wiring instructions from your
institution. Specifically, include the name of the
correspondent bank and your institution's account number
at that bank. The Transfer Agent deducts a wire fee from
the account for the redemption by wire. The fee as of
the date of this Prospectus is $10 ($25 for wires to a
foreign bank) and is subject to change at any time. The
fee is paid to State Street Bank and Trust Company and
the Transfer Agent for their services in connection with
the wire redemption. Your bank may also charge a fee for
receiving funds by wire.
Automatically * Systematic (regular) or intermittent (as-needed) redemptions
via EFT can be credited to your bank account.
Establish any of our electronic investing services when
you apply for your account, or later upon request.
Check * A check payable to the registered shareholder(s) will be
Redemption mailed to the address of record.
This check redemption privilege is automatically
established when your application is completed and
accepted. There is a 15-day waiting period before a
check redemption can be processed following a telephone
address change. Should you wish to redeem shares within
the 15 days following a telephone address change, you may
do so by providing written instructions by mail or facsimile.
CONDITIONS OF PURCHASE AND REDEMPTION
NONPAYMENT
If any order to purchase shares is cancelled due to
nonpayment or if the Company does not receive good funds
either by check or electronic funds transfer, the
cancellation will be treated as a redemption of shares
purchased and you will be responsible for any resulting
loss incurred by the Fund or the Manager. If you are a
shareholder, shares can be redeemed from any of your
account(s) as reimbursement for all losses. In addition,
you may be prohibited or restricted from making future
purchases in any of the USAA Family of Funds. A $15 fee
is charged for all returned items, including checks and
electronic funds transfers.
TRANSFER OF SHARES
Fund shares may be transferred to another person by
sending written instructions to the Transfer Agent. The
account must be clearly identified and the shareholder
must include the number of shares to be transferred, the
signatures of all registered owners, and all stock
certificates, if any, which are the subject of transfer.
You also need to send written instructions signed by all
registered owners and supporting documents to change an
account registration due to events such as divorce,
marriage, or death. If a new account needs to be
established, an application must be completed and
returned to the Transfer Agent.
ACCOUNT BALANCE
The Board of Directors may cause the redemption of an
account with a balance of less than 10 shares of the
Fund, subject to certain limitations described in
Additional Information Regarding Redemption of Shares in
the SAI.
COMPANY RIGHTS
The Company reserves the right to:
(1) reject purchase or exchange orders when in the
best interest of the Company;
(2) limit or discontinue the offering of shares of any
portfolio of the Company without notice to the shareholders;
(3) impose a redemption charge of up to 1% of the net
asset value of shares redeemed if circumstances indicate a
charge is necessary for the protection of remaining
investors (for example, if excessive market-timing
share activity unfairly burdens long-term investors);
provided, however, this 1% charge will not be imposed
upon shareholders unless authorized by the Board of
Directors and adequate notice has been given to shareholders;
(4) require a signature guarantee for purchases, redemptions, or
changes in account information in those instances where the
appropriateness of a signature authorization is in question.
The section Additional Information Regarding Redemption of
Shares in the SAI contains information on acceptable guarantors.
EXCHANGES
EXCHANGE PRIVILEGE
The Exchange Privilege is automatically established when
you complete your application. You may exchange shares
among Funds in the USAA Family of Funds, provided you do
not hold these shares in stock certificate form and that
the shares to be acquired are offered in your state of
residence. Exchange redemptions and purchases will be
processed simultaneously at the share prices next
determined after the exchange order is received. For
federal income tax purposes, an exchange between Funds is
a taxable event. Accordingly, a capital gain or loss may
be realized.
The Fund has undertaken certain procedures regarding
telephone transactions. See Redemption of Shares - Phone.
EXCHANGE LIMITATIONS,
EXCESSIVE TRADING
To minimize Fund costs and to protect the Funds and their
shareholders from unfair expense burdens, the Funds
restrict excessive exchanges. Exchanges out of any Fund
in the USAA Family of Funds are limited for each account
to six per calendar year except that there is no
limitation on exchanges out of the Short-Term Bond Fund,
Tax Exempt Short-Term Fund, or any of the money market
funds in the USAA Family of Funds.
OTHER SERVICES
INVESTMENT PLANS
InveStart(registered trademark) - an investment program
for beginning or first-time investors. Like more
experienced investors, InveStart(registered trademark)
customers may choose to establish a systematic investment
plan for their portfolio.
Systematic Investment Plans - you may establish a
systematic investment plan by completing the appropriate
forms. At the time you sign up for any of the following
investment plans that utilize the electronic funds
transfer service, you will choose the day of the month
(the effective date) on which you would like to regularly
purchase shares. When this day falls on a weekend or
holiday, the electronic transfer will take place on the
last business day before the effective date. Call the
Manager to obtain instructions. More information about
these preauthorized plans is contained in the SAI.
* InvesTronic(registered trademark) - an automatic
investment program for the purchase of additional shares
through electronic funds transfer. The investor selects
the day(s) each month that money is transferred from a
checking or savings account. Effective January 31, 1996,
with this program you can make initial investments as low
as $100 and automatic monthly additions of $50 to the account.
* Direct Purchase Service - the periodic purchase of
shares through electronic funds transfer from a non-
governmental employer, an income-producing investment, or
an account with a participating financial institution.
* Automatic Purchase Plan - the periodic transfer of
funds from a USAA money market fund to purchase shares in
another non-money market USAA mutual fund.
* Buy/Sell Service - the intermittent purchase or
redemption of shares through electronic funds transfer to
or from a checking or savings account.
* Systematic Withdrawal Plan - the periodic redemption of
shares from one of your accounts permitting you to
receive a fixed amount of money monthly or quarterly.
* Retirement Plans - plans are available for IRA
(including SEP/IRA) and 403(b)(7) accounts. Federal
taxes on current income may be deferred if an investor qualifies.
* Directed Dividends - If you own shares in more than one
of the Funds in the USAA Family of Funds, you may direct
that dividends and/or capital gain distributions earned
in one fund be used to automatically purchase shares in
another fund.
SHAREHOLDER STATEMENTS
AND REPORTS
You will receive a confirmation after each transaction in
your account except:
i) a reinvested dividend, or
ii) a payment you make after January 31, 1996 under
the InvesTronic(registered trademark), Direct
Purchase Service, Automatic Purchase Plan, or
Directed Dividends investment plans, or
iii) a redemption you make after January 31, 1996 under
the Systematic Withdrawal Plan.
At the end of each quarter you will receive a
consolidated statement for all of your mutual fund
accounts, regardless of account activity. The fourth
quarter consolidated statement will reflect all account
activity for the prior tax year. There will be a $10 fee
charged for copies of historical statements for other
than the prior tax year for any one account. You will
receive the Fund's financial statements with a summary of
its investments and performance at least semiannually.
In an effort to reduce expenses and respond to
shareholders' requests to reduce mail, the Company intends
to consolidate mailings of Annual and Semiannual Reports
to households having multiple accounts with the same
address of record. One copy of each report will be
furnished to that address. You may request additional
reports by notifying the Company.
TELEPHONE ASSISTANCE
Call our telephone assistance numbers for specific forms,
a copy of the SAI, the most recent Annual Report and/or
Semiannual Report, or if you have any questions
concerning any of the services offered.
SHARE PRICE CALCULATION
The price at which shares of the Fund are purchased and
redeemed by shareholders is equal to the NAV per share
determined on the effective date of the purchase or redemption.
WHEN
The NAV per share for the Fund is calculated at the close
of the regular trading session of the New York Stock
Exchange, which is usually 4:00 p.m. Eastern time. You
may buy and sell Fund shares at the NAV per share without
a sales charge.
HOW
The NAV per share is calculated by adding the value of
all securities and other assets in the Fund, deducting
liabilities, and dividing by the number of shares
outstanding. Portfolio securities, except as otherwise
noted, traded primarily on a securities exchange are
valued at the last sales price on that exchange. If no
sale is reported, the latest bid price is generally used.
Over-the-counter securities are generally priced at the
last sales price or, if not available, at the average of
the bid and asked prices.
Debt securities purchased with maturities of 60 days or
less are stated at amortized cost which approximates
market value. Other debt securities are valued each
business day at their current market value as determined
by a pricing service approved by the Board of Directors.
Securities which 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.
For additional information, see Valuation of Securities
in the SAI.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
Net investment income will be distributed to shareholders
monthly. Any net capital gain generally will be
distributed at least annually. The Fund intends to make
such additional distributions as may be necessary to
avoid the imposition of any federal income or excise tax.
All income dividends and capital gain distributions are
automatically reinvested, unless the shareholder
specifies otherwise. The share price will be the net
asset value of the Fund shares computed on the ex-
dividend date. Any income dividend or capital gain
distributions paid by the Fund will reduce the NAV per share
by the amount of the dividend or distribution. An investor
should consider carefully the effects of purchasing shares
of the Fund shortly before any dividend or distribution.
Although in effect a return of capital, these distributions
are subject to taxes.
Any dividend or distribution payment returned to the
Manager as not deliverable will be invested in the
shareholder's Fund account at the then-current NAV per share.
If any check for the payment of dividends or distributions
is not cashed within six months from the date on the check,
it becomes void. The amount of the check will then be
invested in the shareholder's account at the then-current
NAV per share.
FEDERAL TAXES
The following discussion relates only to generally
applicable federal income tax provisions in effect as of
the date of this Prospectus. Therefore, shareholders are
urged to consult their own tax advisers about the status
of distributions from the Fund in their own states and localities.
Fund - The Fund intends to qualify as a regulated
investment company under Subchapter M of the Internal
Revenue Code of 1986, as amended (the Code). By
complying with the applicable provisions of the Code, the
Fund will not be subject to federal income tax on its net
investment income and net capital gains (capital gains in
excess of capital losses) distributed to shareholders.
Shareholder - Dividends from taxable net investment
income and distributions of net short-term capital gains
are taxable to shareholders as ordinary income, whether
received in cash or reinvested in additional shares.
Distributions of net long-term capital gains are
taxable as long-term capital gains whether received in
cash or reinvested in additional shares, and regardless
of the length of time the investor has held the shares of
the Fund.
Withholding - The Fund is required by federal law to
withhold and remit to the U.S. Treasury a portion of the
income dividends and capital gain distributions and
proceeds of redemptions paid to any non-corporate
shareholder who fails to furnish the Fund with a correct
tax identification number, who underreports dividend or
interest income, or who fails to certify that he is not
subject to withholding. To avoid this withholding
requirement, you must certify on your application, or on
a separate Form W-9 supplied by the Transfer Agent, that
your tax identification number is correct and that you
are not currently subject to backup withholding.
Reporting - Information concerning the status of
dividends and distributions for federal income tax
purposes will be mailed to shareholders annually.
MANAGEMENT OF THE COMPANY
The business affairs of the Company are subject to the
supervision of the Board of Directors.
The Manager, USAA Investment Management Company (IMCO),
was organized in May 1970 and is an affiliate of United
Services Automobile Association (USAA), a large
diversified financial services institution. As of the
date of this Prospectus, the Manager had approximately $29
billion in total assets under management. The Manager's
mailing address is 9800 Fredericksburg Rd., San Antonio, TX 78288.
Officers and employees of the Manager are permitted to
engage in personal securities transactions subject to
restrictions and procedures set forth in the Joint Code
of Ethics adopted by the Company and the Manager. Such
restrictions and procedures include substantially all of
the recommendations of the Advisory Group of the
Investment Company Institute and comply with Securities
and Exchange Commission rules and regulations.
ADVISORY AGREEMENT
The Manager serves as the manager and investment adviser
of the Company, providing services under an Advisory
Agreement. Under the Advisory Agreement, the Manager is
responsible for the management of the Funds, business
affairs, and placement of brokerage orders, subject to
the authority of and supervision by the Board of Directors.
For its services under the Advisory Agreement, the Fund
pays the Manager an annual fee which is computed as a
percentage of the Fund's average net assets (ANA),
accrued daily and paid monthly. The Fund's management
fees were computed and paid at twenty-four one hundredths
of one percent (.24%) of ANA for the fiscal year ended
July 31, 1995.
OPERATING EXPENSES
For the fiscal year ended July 31, 1995, the total
operating expenses for the Fund as a percentage of the
Fund's ANA equaled .41%.
PORTFOLIO MANAGER
The following individual is primarily responsible for
managing the Fund.
John W. Saunders, Jr., Senior Vice President of Fixed
Income Investments since October of 1985, has managed the
Fund since October 1985. Mr. Saunders has 26 years
investment management experience and has worked for IMCO
26 years. Mr. Saunders earned the Chartered Financial
Analyst designation in 1976 and is a member of the
Association for Investment Management and Research and
the San Antonio Financial Analysts Society, Inc. He
holds a BS from Portland State University, Oregon.
SERVICE PROVIDERS
UNDERWRITER/ USAA Investment Management Company
DISTRIBUTOR 9800 Fredericksburg Rd., San Antonio, Texas 78288.
TRANSFER USAA Shareholder Account Services
AGENT 9800 Fredericksburg Rd., San Antonio, Texas 78288.
CUSTODIAN State Street Bank and Trust Company
P.O. Box 1713, Boston, Massachusetts 02105.
LEGAL Goodwin, Procter & Hoar
COUNSEL Exchange Place, Boston, Massachusetts 02109.
INDEPENDENT KPMG Peat Marwick LLP
AUDITORS 112 East Pecan, Suite 2400, San Antonio, Texas 78205.
DESCRIPTION OF SHARES
The Company is an open-end management investment company
incorporated under the laws of the State of Maryland on
October 14, 1980. The Company is authorized to issue
shares in separate classes, or Funds. The Fund described
in this Prospectus is being offered to the public. The
Fund is classified as a diversified investment company.
Under the Company's charter, the Board of Directors is
authorized to create new Funds in addition to those
already existing without approval of the shareholders of
the Company.
Under provisions of the Bylaws of the Company, no annual
meeting of shareholders is required. Ordinarily, no shareholder
meeting will be held unless required by the Investment
Company Act of 1940. The Directors may fill vacancies on
the Board or appoint new Directors provided that
immediately after such action at least two-thirds of the
Directors have been elected by shareholders.
Shareholders are entitled to one vote per share (with
proportionate voting for fractional shares) irrespective
of the relative net asset value of the shares. For
matters affecting an individual fund, a separate vote of
the shareholders of that fund is required.
TELEPHONE ASSISTANCE
(Call toll free - Central Time)
Monday-Friday 8:00 a.m. to 8:00 p.m.
Saturday: 8:30 a.m. to 5:00 p.m.
For further information on mutual funds:
1-800-531-8181
In San Antonio 210-456-7211
For account servicing, exchanges or redemptions:
1-800-531-8448
In San Antonio 210-456-7202
RECORDED 24 HOUR SERVICE
MUTUAL FUND PRICE QUOTES
(From any phone)
1-800-531-8066
In San Antonio 210-498-8066
MUTUAL FUND TOUCHLINE(registered trademark)
(From Touchtone phones only)
For account balance, last transaction or fund prices:
1-800-531-8777
In San Antonio 210-498-8777
[THIS PAGE LEFT BLANK INTENTIONALLY]
[THIS PAGE LEFT BLANK INTENTIONALLY]
USAA SHORT-TERM BOND FUND
December 1, 1995 PROSPECTUS
USAA Short-Term Bond Fund (the Fund) is one of seven no-
load mutual funds offered by USAA Mutual Fund, Inc. (the
Company). The Fund is managed by USAA Investment
Management Company (the Manager).
WHAT ARE THE INVESTMENT
OBJECTIVE AND POLICIES?
The Fund's investment objective is high current income consistent with
preservation of principal. Investments are in a broad range of
investment grade debt securities. The Manager will
maintain a dollar-weighted average portfolio
maturity of 3 years or less. Page 8.
HOW DO YOU BUY?
Fund shares are sold on a continuous basis at the net
asset value per share without a sales charge. Make your
initial investment directly with the Manager by mail, in
person, or in certain instances, by telephone. Page 12.
HOW DO YOU SELL?
You may redeem Fund shares by mail, telephone, fax, or
telegraph on any day that the net asset value is
calculated. Page 14.
This Prospectus, which should be read and retained for
future reference, provides information regarding the
Company and the Fund that you should know before investing.
SHARES OF THE USAA SHORT-TERM BOND FUND ARE NOT
DEPOSITS OR OTHER OBLIGATIONS OF, OR GUARANTEED BY THE
USAA FEDERAL SAVINGS BANK, ARE NOT INSURED BY THE FDIC OR
ANY OTHER GOVERNMENT AGENCY, AND ARE SUBJECT TO MARKET RISKS.
If you would like more information, a STATEMENT OF
ADDITIONAL INFORMATION (SAI) of the Company, dated
December 1, 1995, is available upon request and without
charge by writing to USAA MUTUAL FUND, INC., 9800
Fredericksburg Rd., San Antonio, TX 78288, or by calling
1-800-531-8181. The SAI has been filed with the
Securities and Exchange Commission and is incorporated by
reference into this Prospectus.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
TABLE OF CONTENTS
Page
SUMMARY DATA
Fees and Expenses 3
Financial Highlights 4
Performance Information 5
USING MUTUAL FUNDS
USAA Family of No-Load Mutual Funds 6
Using Mutual Funds in an Investment Program 7
INVESTMENT PORTFOLIO INFORMATION
Investment Objective and Policies 8
SHAREHOLDER INFORMATION
Purchase of Shares 12
Redemption of Shares 14
Conditions of Purchase and Redemption 16
Exchanges 17
Other Services 17
Share Price Calculation 18
Dividends, Distributions and Taxes 19
Management of the Company 20
Service Providers 21
Description of Shares 21
Telephone Assistance Numbers 21
FEES AND EXPENSES
The following summary is provided to assist you in
understanding the expenses you will bear directly or indirectly.
Shareholder Transaction Expenses
- --------------------------------------------------------------------
Sales Load Imposed on Purchases None
Sales Load Imposed on Reinvested Dividends None
Deferred Sales Load None
Redemption Fee* None
Exchange Fee None
Annual Fund Operating Expenses (as a percentage of average net assets (ANA))
- ----------------------------------------------------------------------------
Management Fees, net of reimbursements .00%
12b-1 Fees None
Other Expenses, net of reimbursements
Transfer Agent Fees** .22%
Custodian Fees .09%
All Other Expenses .19%
---
Total Other Expenses .50%
---
Total Fund Operating Expenses, net of reimbursements .50%
===
- -----------------------------------------------------------------------
* A shareholder who requests delivery of redemption
proceeds by wire transfer will be subject to a $10
fee. See Redemption of Shares - Bank Wire.
** The Fund pays USAA Shareholder Account Services an
annual fixed fee per account for its services.
See Transfer Agent in the SAI, page 18.
During the year, the Manager voluntarily limited the
annual expenses of the Fund to .50% of its ANA and
reimbursed the Fund for all expenses in excess of this
limitation. The Management Fees, Other Expenses, and
Total Fund Operating Expenses reflect all such expense
reimbursements by the Manager. Absent such
reimbursements, the amount of the Management Fees, Other
Expenses, and Total Fund Operating Expenses as a
percentage of ANA would have been .24%, .50%, and .74%,
respectively. The Manager has voluntarily agreed to
continue to limit the Fund's annual expenses until
December 1, 1996, to .50% of its ANA and will reimburse
the Fund for all expenses in excess of such limitation.
Example of Effect of Fund Expenses
- -----------------------------------------------------------------------
An investor would pay the following expenses on a $1,000
investment, assuming (1) 5% annual return and (2)
redemption at the end of the periods shown.
1 year - $ 5
3 years - $ 16
5 years - $ 28
10 years - $ 63
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST
OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR LESS THAN
THOSE SHOWN.
FINANCIAL HIGHLIGHTS
The following per share operating performance for a share
outstanding throughout each of the periods in the three-
year period ended July 31, 1995, has been audited by KPMG
Peat Marwick LLP. This table should be read in conjunction
with the Fund's financial statements for the year ended
July 31, 1995, and the auditors' report thereon, that appear
in the Fund's Annual Report. Further performance information
is contained in the Annual Report and is available upon
request without charge.
TEN-MONTH FOUR-MONTH
YEAR ENDED PERIOD ENDED PERIOD ENDED
JULY 31, JULY 31, SEPTEMBER 30,
1995 1994 1993*
---- ---- ----
Net asset value at
beginning of period $ 9.74 $ 10.08 $ 10.00
Net investment income .61 .37 .14
Net realized and
unrealized gain (loss) .13 (.33) .08
Distributions from net
investment income (.61) (.37) (.14)
Distributions of realized
capital gains - (.01) -
------ ------ ------
Net asset value at
end of period $ 9.87 $ 9.74 $ 10.08
====== ====== ======
Total return (%)** 7.90 .39 2.19
Net assets at end of
period (000) $76,190 $48,228 $25,679
Ratio of expenses to
average net assets (%) .50(b) .50(a)(b) .50(a)(b)
Ratio of net investment
income to average net
assets (%) 6.34(b) 4.51(a)(b) 4.21(a)(b)
Portfolio turnover (%) 103.02 142.08 32.49
- --------------
* Fund commenced operations June 1, 1993.
** Assumes reinvestment of all dividend income and
capital gain distributions during the period.
(a) Annualized. The ratio is not necessarily
indicative of 12 months of operations.
(b) The information contained in this table is based
on actual expenses for the period, after giving
effect to reimbursements of expenses by the
Manager. Absent such reimbursements the Fund's
ratios would have been:
TEN-MONTH FOUR-MONTH
YEAR ENDED PERIOD ENDED PERIOD ENDED
JULY 31, JULY 31, SEPTEMBER 30,
1995 1994 1993*
---- ---- ----
Ratio of expenses to average
net assets (%) .74 .87(a) 1.57(a)
Ratio of net investment income
to average net assets (%) 6.10 4.14(a) 3.14(a)
PERFORMANCE INFORMATION
Performance information should be considered in light of
the Fund's investment objective and policies and market
conditions during the time periods for which it is
reported. Historical performance should not be
considered as representative of the future performance of
the Fund.
The Company may quote the Fund's total return or yield
in advertisements and reports to shareholders or
prospective investors. The Fund's performance may also
be compared to that of other mutual funds with a similar
investment objective and to stock or relevant indexes
that are referenced in Appendix B to the SAI. Standard
total return and yield results reported by the Fund do
not take into account recurring and nonrecurring charges
for optional services which only certain shareholders
elect and which involve nominal fees, such as the $10 fee
for a delivery of redemption proceeds by wire transfer.
The Fund's average annual total return is computed by
determining the average annual compounded rate of return
for a specific period which, when applied to a
hypothetical $1,000 investment in the Fund at the
beginning of the period, would produce the redeemable
value of that investment at the end of the period,
assuming reinvestment of all dividends and distributions
during the period.
The Fund may advertise performance in terms of a 30-day
yield quotation. The yield quotation is computed by
dividing the net investment income per share earned
during the period by the offering price per share on the
last day of the period. This income is then annualized.
Further information concerning the Fund's yield and
total return is included in the SAI.
USAA FAMILY OF NO-LOAD MUTUAL FUNDS
The USAA Family of No-Load Mutual Funds includes a
variety of Funds, each with different objectives and
policies. In combination, these Funds are designed to
provide investors with the opportunity to formulate their
own investment program. You may exchange any shares you
hold in any one USAA Fund for shares in any other USAA
Fund. For more complete information about the Funds in
the USAA Family of Funds, including charges and expenses,
call the Manager for a Prospectus. Be sure to read it
carefully before you invest or send money.
USAA MUTUAL FUND, INC.
Aggressive Growth Fund
Growth Fund
Growth & Income Fund
Income Stock Fund
Income Fund
Short-Term Bond Fund
Money Market Fund
USAA INVESTMENT TRUST
Income Strategy Fund
Growth and Tax Strategy Fund
Balanced Strategy Fund
Cornerstone Strategy Fund
Growth Strategy Fund
Emerging Markets Fund
Gold Fund
International Fund
World Growth Fund
GNMA Trust
Treasury Money Market Trust
USAA TAX EXEMPT FUND, INC.
Long-Term Fund
Intermediate-Term Fund
Short-Term Fund
Tax Exempt Money Market Fund
California Bond Fund*
California Money Market Fund*
New York Bond Fund*
New York Money Market Fund*
Virginia Bond Fund*
Virginia Money Market Fund*
USAA STATE TAX-FREE TRUST
Florida Tax-Free Income Fund*
Florida Tax-Free Money Market Fund*
Texas Tax-Free Income Fund*
Texas Tax-Free Money Market Fund*
* Available for sale only to residents of these specific states.
USING MUTUAL FUNDS IN AN INVESTMENT PROGRAM
I. THE IDEA BEHIND MUTUAL FUNDS
Mutual funds were conceived as a vehicle that could give
small investors some of the advantages enjoyed by wealthy
investors. A relatively small investment buys part of a
widely diversified portfolio. That portfolio is managed
by investment professionals, relieving the shareholder of
the need to make individual stock or bond selections.
The investor also enjoys conveniences, such as daily
pricing, liquidity, and in the case of the USAA Family of
Funds, no sales charge. The portfolio, because of its
size, has lower transaction costs on its trades than most
individuals would have. As a result each shareholder
owns an investment that in earlier times would have been
available only to very wealthy people.
II. USING FUNDS IN AN INVESTMENT PROGRAM
In choosing a mutual fund as an investment vehicle, the
shareholder is foregoing some investment decisions, but
must still make others. The decisions foregone are those
involved with choosing individual securities. The Fund
Manager will perform that function. In addition, the
Manager will arrange for the safekeeping of securities,
auditing the annual financial statements, and daily
valuation of the Fund, as well as other functions.
The shareholder, however, retains at least part of the
responsibility for an equally important decision. This
decision includes determining a portfolio of mutual funds
that balances the investor's investment goals with his or
her tolerance for risk. It is likely that this decision
may involve the use of more than one fund of the USAA
Family of Funds.
For example, assume a shareholder wished to invest in a
widely diversified common stock portfolio. The
shareholder could include the Aggressive Growth Fund,
Growth Fund, Growth & Income Fund, and Income Stock Fund
in such a portfolio. This portfolio would include stocks
of large and small companies, high-dividend stocks and
growth stocks. This is just one example of how an
individual could combine funds to create a portfolio
tailored to his or her own risk and reward goals.
III. USAA'S FAMILY OF FUNDS
The Manager offers investors another alternative in its
asset strategy funds, the Income Strategy, Growth and Tax
Strategy, Balanced Strategy, Cornerstone Strategy, and
Growth Strategy Funds. These unique mutual funds provide
a professionally managed diversified investment portfolio
within a mutual fund. These Funds are designed for the
shareholder who prefers to delegate the asset allocation
process to an investment manager. The Funds are
structured to achieve diversification across a number of
investment categories.
Whether you prefer to create your own mix of mutual
funds or use an asset strategy fund, the USAA Family of
Funds provides a broad range of choices covering just
about any investor's investment objectives. Our sales
representatives stand ready to inform you of your choices
and to help you craft a portfolio which meets your needs.
INVESTMENT OBJECTIVE AND POLICIES
INVESTMENT OBJECTIVE
The Fund's investment objective is high current income
consistent with preservation of principal.
The investment objective of the Fund cannot be changed
without shareholder approval. In view of the risks
inherent in all investments in securities, there is no
assurance that this objective will be achieved.
The investment policies and techniques used to pursue
the Fund's objective may be changed without shareholder
approval, except as otherwise noted. Further information
regarding the Fund's investment policies and restrictions
is provided in the SAI.
INVESTMENT POLICIES AND
TECHNIQUES
The Manager will pursue this objective by investing the
Fund's assets primarily in U.S. dollar-denominated
investment grade debt securities. The Manager will
maintain a dollar-weighted average portfolio maturity of
3 years or less.
The Fund's portfolio may consist of:
(1) Obligations of the U.S. Government, its agencies
and instrumentalities, and repurchase agreements
collateralized by such obligations;
(2) Mortgage-backed securities;
(3) Corporate debt securities such as notes, bonds,
and commercial paper;
(4) U.S. bank or foreign bank obligations, including
certificates of deposit and banker's acceptances;
(5) Obligations of state and local governments and
their agencies and instrumentalities;
(6) Asset-backed securities;
(7) Master demand notes;
(8) Dollar-denominated instruments issued outside the
U.S. capital markets by foreign corporations and financial
institutions and by foreign branches of U.S.
corporations and financial institutions (Eurodollar obligations);
(9) Dollar-denominated instruments issued by foreign
issuers in the U.S. capital markets (Yankee obligations);
(10) Other debt securities.
The debt securities in the Fund must be investment
grade at the time of purchase. Investment grade
securities are those issued or guaranteed by the U.S.
Government, its agencies and instrumentalities, those
rated at least Baa, P-3, or MIG 4/VMIG 4 by Moody's
Investors Service (Moody's), BBB, A-3, or SP-2 by
Standard & Poor's Ratings Group (S&P), BBB or F-3 by
Fitch Investors Service (Fitch), or BBB or Duff 3 by Duff
and Phelps (D&P); or those judged to be of equivalent
quality by the Manager if not rated.
Securities rated in the lowest level of investment
grade have some speculative characteristics since adverse
economic conditions and changing circumstances are more
likely to have an adverse impact on such securities. If
the rating of a security is downgraded below investment
grade, the Manager will determine whether it is in the
best interest of the Fund's shareholders to continue to
hold such security in the Fund's portfolio. Unless otherwise
directed by the Board of Directors, if downgrades result in
more than 5% of the Fund's net assets being invested in
securities that are less than investment grade quality, the
Manager will take immediate action to reduce the Fund's
holdings in such securities to 5% or less of the Fund's
net assets. For a more complete description of debt ratings,
see Appendix A to the SAI.
In an effort to control fluctuations in market value,
the Manager will maintain a dollar-weighted average
portfolio maturity of the Fund of 3 years or less. The
Fund may hold individual securities with remaining
maturities longer than 3 years as long as the portfolio
dollar-weighted average maturity is 3 years or less.
There is no minimum weighted average maturity limitation.
In determining a security's maturity for purposes of
calculating the Fund's average maturity, estimates of the
expected time for its principal to be paid may be used.
This can be substantially shorter than its stated final
maturity. For a discussion of the method of calculating
the weighted average maturity of the Fund's portfolio,
see Investment Policies in the SAI.
Mortgage-Backed and Asset-Backed Securities - Mortgage-
backed securities include, but are not limited to,
securities issued by the Government National Mortgage
Association (Ginnie Mae), the Federal National Mortgage
Association (Fannie Mae) and the Federal Home Loan
Mortgage Corporation (Freddie Mac). These securities
represent ownership in a pool of mortgage loans. They
differ from conventional bonds in that principal is paid
back to the investor as payments are made on the
underlying mortgages in the pool. Accordingly, the Fund
receives monthly scheduled payments of principal and
interest along with any unscheduled principal prepayments
on the underlying mortgages. Because these scheduled and
unscheduled principal payments must be reinvested at
prevailing interest rates, mortgage-backed securities do
not provide an effective means of locking in long-term
interest rates for the investor. Like other fixed income
securities, when interest rates rise, the value of a
mortgage-backed security generally will decline; however,
when interest rates are declining, the value of mortgage-
backed securities with prepayment features may not
increase as much as other fixed income securities.
Mortgage-backed securities also include collateralized
mortgage obligations (CMOs). CMOs are obligations fully
collateralized by a portfolio of mortgages or mortgage-
related securities. CMOs are divided into pieces
(tranches) with varying maturities. The cash flow from
the underlying mortgages is used to pay off each tranche
separately. CMOs are designed to provide investors with
more predictable maturities than regular mortgage securities
but such maturities can be difficult to predict because of
the effect of prepayments. Failure to accurately predict
prepayments can adversely affect the Fund's return on
these investments. CMOs may also be less marketable than
other securities.
Asset-backed securities represent a participation in,
or are secured by and payable from, a stream of payments
generated by particular assets, such as credit card,
motor vehicle, or trade receivables. They may be pass-
through certificates, which have characteristics very
similar to mortgage-backed securities, discussed above.
They may also be in the form of asset-backed commercial
paper, which is issued by a special purpose entity,
organized solely to issue the commercial paper and to
purchase interests in the assets. The credit quality of
these securities depends primarily upon the quality of
the underlying assets and the level of credit support and
enhancement provided.
In determining the dollar-weighted average portfolio
maturity of the Fund, the maturities of mortgage-backed
securities and asset-backed securities are determined on
a "weighted average life" basis. The weighted average
life of such securities is likely to be substantially
shorter than their stated final maturity as a result of
scheduled principal payments and unscheduled principal
prepayments.
Master Demand Notes - The Fund may invest in variable
rate master demand notes (Master Demand Notes). Master
demand notes are obligations that permit the investment
of fluctuating amounts by the Fund, at varying rates of
interest using direct arrangements between the Fund, as
lender, and the borrower. These notes permit daily
changes in the amounts borrowed. The Fund has the right
to increase the amount under the note at any time up to
the full amount provided by the note agreement, or to
decrease the amount, and the borrower may repay up to the
full amount of the note without penalty. Frequently, such
obligations are secured by letters of credit or other
credit support arrangements provided by banks. Because
master demand notes are direct lending arrangements
between the lender and borrower, these instruments
generally will not be traded, and there generally is no
secondary market for these notes, although they are
redeemable (and immediately repayable by the borrower) at
face value, plus accrued interest, at any time.
Therefore, where master demand notes are not secured by
bank letters of credit or other credit support
arrangements, the Fund's right to redeem depends on the
ability of the borrower to pay principal and interest on
demand. In connection with master demand note
arrangements, the Fund will continuously monitor the
earning power, cash flow, and other liquidity ratios of
the issuer, and the borrower's ability to pay principal
and interest on demand. Master demand notes, as such,
are not typically rated by credit rating agencies. The
Fund will invest in master demand notes only if the Board
of Directors or its delegate has determined that they are
of credit quality comparable to the debt securities in
which the Fund generally may invest.
Eurodollar and Yankee Obligations -
While investments in Eurodollar and Yankee obligations
are intended to reduce risk by providing further
diversification, such investments involve sovereign risk
in addition to credit and market risk. Sovereign risk
includes local political or economic developments,
potential nationalization, and withholding taxes on
dividend or interest payments. Issuers of Eurodollar and
Yankee obligations may be subject to different or less
stringent accounting and reporting requirements than
similar U.S. issuers, thereby rendering investment
analysis more difficult. The Fund may incur difficulties
in obtaining judgements or effecting collections thereon.
Also, securities of foreign companies may be less liquid
or more volatile than securities of U.S. companies.
In addition, the Fund may invest in Eurodollar and
Yankee obligations of investment grade emerging market
countries. An emerging market country can be considered
to be a country which is in the initial stages of its
industrial cycle. Investments in emerging market
countries involve exposure to economic structures that
are generally less diverse and mature than in the United
States, and to political systems which may be less
stable. In the past, markets of emerging market
countries have been more volatile than the markets of
developed countries.
Repurchase Agreements - The Fund may invest in repurchase
agreements which are collateralized by obligations issued
or guaranteed by the U.S. Government, its agencies and
instrumentalities. A repurchase agreement is a
transaction in which a security is purchased with a
simultaneous commitment to sell the security back to the
seller (a commercial bank or recognized securities
dealer) at an agreed upon price on an agreed upon date,
usually not more than seven days from the date of
purchase. The resale price reflects the purchase price
plus an agreed upon market rate of interest which is
unrelated to the coupon rate or maturity of the purchased
security. The obligation of the seller to pay the agreed
upon price is in effect secured by the value of the
underlying security. In these transactions, the
securities purchased by the Fund will have a total value
equal to or in excess of the amount of the repurchase
obligation and will be held by the Fund's custodian until
repurchased. If the seller defaults and the value of the
underlying security declines, the Fund may incur a loss
and may incur expenses in selling the collateral. If the
seller seeks relief under the bankruptcy laws, the
disposition of the collateral may be delayed or limited.
Variable Rate Securities - The Fund may invest in
securities that bear interest at rates which are adjusted
periodically to market rates. These interest rate
adjustments can both raise and lower the income generated
by such securities. These changes will have the same
effect on the income earned by a Fund depending on the
proportion of such securities held.
The market value of fixed coupon securities fluctuates
with changes in prevailing interest rates, increasing in
value when interest rates decline and decreasing in value
when interest rates rise. The value of variable rate
securities, however, is less affected by changes in
prevailing interest rates because of the periodic
adjustment of their coupons to a market rate. The
shorter the period between adjustments, the smaller the
impact of interest rate fluctuations on the value of
these securities. The market value of variable rate
securities usually tends toward par (100% of face value)
at interest rate adjustment time.
Put Bonds - The Fund may invest in securities (including
securities with variable interest rates) which may be
redeemed or sold back (put) to the issuer of the security
or a third party at face value prior to stated maturity
(Put Bonds). Such securities will normally trade as if
maturity is the earlier put date, even though stated
maturity is longer.
When-Issued Securities - The Fund may invest in new issues of
securities offered on a when-issued basis; that is,
delivery and payment take place after the date of the
commitment to purchase, normally within 45 days. Both
price and interest rate are fixed at the time of
commitment. The Fund does not earn interest on the
securities until settlement, and the market value of the
securities may fluctuate between purchase and settlement.
Such securities can be sold before settlement date.
Cash or high quality liquid debt securities equal to
the amount of the when-issued commitments are segregated
at the Fund's custodian bank. The segregated securities
are valued at market, and daily adjustments are made to
keep the value of the cash and segregated securities at
least equal to the amount of such commitments by the
Fund. On the settlement date, the Fund will meet its
obligations from then available cash, sale of segregated
securities, sale of other securities, or sale of the
when-issued securities themselves.
Liquidity - The Fund may not invest more than 15% of the
value of its net assets in illiquid securities, including
repurchase agreements maturing in more than seven days.
Commercial paper and certain Put Bonds that are subject
to restrictions on transfer, and other securities that
may be resold pursuant to Rule 144A under the Securities
Act of 1933, may be determined to be liquid in accordance
with guidelines established by the Board of Directors.
INVESTMENT RESTRICTIONS
The following restrictions may not be changed without
shareholder approval:
a. The Fund may not borrow money, except for
temporary or emergency purposes in an amount not
exceeding 33 1/3% of its total assets (including
the amount borrowed) less liabilities (other than
borrowings).
b. The Fund may not, with respect to 75% of its total
assets, purchase the securities of any issuer
(except Government Securities, as such term is
defined in the 1940 Act) if, as a result, the Fund
would own more than 10% of the outstanding voting
securities of such issuer or the Fund would have
more than 5% of the value of its total assets
invested in the securities of such issuer.
c. The Fund may not invest more than 25% of the value
of its total assets in any one industry. This
limitation does not apply to securities issued or
guaranteed by the U.S. Government or its corporate
instrumentalities.
PURCHASE OF SHARES
OPENING AN ACCOUNT
You may open an account and make an investment by any of
the following methods. A complete, signed application is
required together with a check for each new account.
TAX ID NUMBER
We require that each shareholder named on the account
provide the Company with a social security number or tax
identification number to avoid possible tax withholding requirements.
EFFECTIVE DATE
When you make a purchase, your purchase price will be the
net asset value (NAV) per share next determined after the
Fund receives your request in proper form. If the Fund receives
your request prior to the close of the New York Stock Exchange
on a day on which the Exchange is open, your purchase price will
be the NAV per share determined for that day. If the Fund receives
your request after the time at which the NAV per share is calculated,
the purchase will be effective on the next business day. Because of
the more lengthy clearing process and the need to convert foreign
currency, a check drawn on a foreign bank will not be deemed received
for the purchase of shares until such time as the check has cleared
and the Manager has received good funds, which may take up to 4 to 6
weeks. Furthermore, a bank charge may be assessed in the clearing process,
which will be deducted from the amount of the purchase. To avoid a
delay in the effectiveness of your purchase, the Manager suggests that
you convert your foreign check to U.S. dollars prior to investment
in the Fund.
Purchase of Shares
Minimum Investments
Initial Purchase (non-IRA): $1,000
After January 31, 1996 $3,000 or minimum $100 with a minimum $50
monthly electronic investment
Additional Purchases: $50
Initial Purchase - IRA: $1,000
$250 for spousal account
After January 31, 1996 $250 or minimum $100 with a minimum $50
monthly electronic investment
Additional Purchases: $50
How to Purchase:
Mail * To open an account, send your application and check to:
USAA Investment Management Company
9800 Fredericksburg Rd., San Antonio, TX 78288
* To add to your account, send your check and the "Invest by
Mail" stub that accompanies your fund's transaction
confirmation to the Transfer Agent:
USAA Shareholder Account Services
9800 Fredericksburg Rd., San Antonio, TX 78288
* To exchange by mail, call 1-800-531-8448 for instructions.
In Person * To open an account, bring your application and check to:
USAA Investment Management Company
USAA Federal Savings Bank
10750 Robert F. McDermott Freeway, San Antonio
Automatically * Additional purchases on a regular basis can be deducted
via from a bank account, paycheck, income-producing investment
Electronic or from a USAA money market account. Sign up for these
Funds services when opening an account or call 1-800-531-8448 to
Transfer add these services.
(EFT) * Purchases through payroll deduction ($25 minimum each pay
period with no initial investment) can be made by any
employee of USAA, its subsidiaries or affiliated companies.
Bank Wire * To add to an account, instruct your bank (which may charge
a fee for the service) to wire the specified amount to the
Fund as follows:
State Street Bank and Trust Company, Boston, MA 02101
ABA#011000028
Attn: USAA Short-Term Bond Fund
USAA AC-69384998
Shareholder(s) Name(s)_________________
Shareholder(s) Account Number___________________
Phone * If you have an existing USAA account and would like to open a
1-800-531-8448 new account or if you would like to exchange to another USAA
fund, call for instructions. The new account must have the
same registration as your existing account.
* To add to an account, intermittent (as-needed) purchases can
be deducted from your bank account through our Buy/Sell
Service. Call for instructions.
Through a * To open a new account through your USAA Asset Management
USAA AMA Account, call USAA Brokerage Services at 1-800-531-8343.
REDEMPTION OF SHARES
You may redeem shares of the Fund by any of the following
methods on any day the NAV per share is calculated.
Redemptions will be effective on the day on which
instructions are received in accordance with the
requirements set forth below. However, if instructions
are received after the NAV per share calculation,
redemption will be effective on the next business day.
REDEMPTION PROCEEDS
Redemption proceeds are distributed within seven days
after the effective date of redemption. Payment for
redemption of shares purchased by check or electronic
funds transfer will not be disbursed until
the purchase check or electronic funds transfer has
cleared, which could take up to 15 days from the purchase
date. If you are considering redeeming shares soon after
purchase, you should purchase by bank wire or certified
check to avoid delay.
In addition, the Company may elect to suspend the
redemption of shares or postpone the date of payment
during any period that the New York Stock Exchange is
closed, or trading in the markets the Company normally
utilizes is restricted, or during any period that
redemption is otherwise permitted to be suspended by the
Securities and Exchange Commission.
How to Redeem:
Written, * Send your written instructions to:
Fax, or USAA Shareholder Account Services
Telegraph 9800 Fredericksburg Rd., San Antonio, TX 78288
* Send a signed fax to 210-498-2889, or send a telegraph to
USAA Shareholder Account Services.
Written redemption requests must include the following:
(1) a letter of instruction or stock assignment, and
stock certificate (if issued), specifying the Fund and
the number of shares or dollar amount to be redeemed;
(2) signatures of all owners of the shares exactly as
their names appear on the account; (3) other supporting
legal documents, if required, as in the case of estates,
trusts, guardianships, custodianships, partnerships,
corporations, and pension and profit-sharing plans; and
(4) method of payment.
Phone * Call toll free 1-800-531-8448, in San Antonio, 210-456-7202.
The Fund will employ reasonable procedures to confirm
that instructions communicated by telephone are genuine,
and if it does not, it may be liable for any losses due
to unauthorized or fraudulent instructions. Information
is obtained prior to any discussion regarding an account
including: (1) USAA number or account number, (2) the
name(s) on the account registration, and (3) social
security number or tax identification number for the
account registration. In addition, all telephone
communications with a shareholder are recorded and
confirmations of all account transactions are sent to the
address of record.
Redemption by telephone, fax, or telegraph is not
available for shares represented by stock certificates.
Through a * Call USAA Brokerage Services at 1-800-531-8343 for more
USAA AMA information.
Methods of Payment:
Bank Wire * Allows redemptions to be sent directly to your bank account.
Establish this service when you apply for your account,
or later upon request. If your account is at a savings
bank, savings and loan association, or credit union,
please obtain precise wiring instructions from your
institution. Specifically, include the name of the
correspondent bank and your institution's account number
at that bank. The Transfer Agent deducts a wire fee from
the account for the redemption by wire. The fee as of
the date of this Prospectus is $10 ($25 for wires to a
foreign bank) and is subject to change at any time. The
fee is paid to State Street Bank and Trust Company and
the Transfer Agent for their services in connection with
the wire redemption. Your bank may also charge a fee for
receiving funds by wire.
Automatically * Systematic (regular) or intermittent (as-needed) redemptions
via EFT can be credited to your bank account.
Establish any of our electronic investing services when
you apply for your account, or later upon request.
Check * A check payable to the registered shareholder(s) will be
Redemption mailed to the address of record.
This check redemption privilege is automatically
established when your application is completed and
accepted. There is a 15-day waiting period before a
check redemption can be processed following a telephone
address change. Should you wish to redeem shares within
the 15 days following a telephone address change, you may
do so by providing written instructions by mail or facsimile.
Checkwriting * Checks can be issued for your Short-Term Bond Fund account.
To establish your checkwriting privilege (CWP),
complete the signature card which accompanies the
application form or Shareholder Services Guide, or
request and complete the signature card separately. A
one-time $5 checkwriting fee is charged to each account
by the Transfer Agent for the establishment of the
privilege. There is no charge for the use of checks nor
for subsequent reorders. This privilege is subject to
SSB's rules and regulations governing checking accounts.
Checks must be written for an amount of at least $250.
Checks written for less than $250 will be returned.
Checkwriting may not be used to close an account because
the value of the account changes daily as dividends are accrued.
When a check is presented to the Transfer Agent for
payment, a sufficient number of full and fractional
shares in the investor's account will be redeemed to
cover the amount of the check. Checks will be returned
if there are insufficient shares to cover the amount of
the check. Presently, there is a $15 processing fee
assessed against an account for any redemption check not
honored by a clearing or paying agent. A check paid
during the month will be returned to the shareholder by
separate mail. Checkwriting fees are subject to change
at any time. The Trust, the Transfer Agent and SSB each
reserve the right to change or suspend the checkwriting
privilege upon 30 days' written notice to participating
shareholders. See the SAI for further information.
You may request that the Transfer Agent stop payment on
a check. The Transfer Agent will use its best efforts to
execute stop payment instructions, but does not guarantee
that such efforts will be effective. A $10 charge will
be made for each stop payment requested by a shareholder.
CONDITIONS OF PURCHASE AND REDEMPTION
NONPAYMENT
If any order to purchase shares is cancelled due to
nonpayment or if the Company does not receive good funds
either by check or electronic funds transfer, the
cancellation will be treated as a redemption of shares
purchased and you will be responsible for any resulting
loss incurred by the Fund or the Manager. If you are a
shareholder, shares can be redeemed from any of your
account(s) as reimbursement for all losses. In addition,
you may be prohibited or restricted from making future
purchases in any of the USAA Family of Funds. A $15 fee
is charged for all returned items, including checks and
electronic funds transfers.
TRANSFER OF SHARES
Fund shares may be transferred to another person by
sending written instructions to the Transfer Agent. The
account must be clearly identified and the shareholder
must include the number of shares to be transferred, the
signatures of all registered owners, and all stock
certificates, if any, which are the subject of transfer.
You also need to send written instructions signed by all
registered owners and supporting documents to change an
account registration due to events such as divorce,
marriage, or death. If a new account needs to be
established, an application must be completed and
returned to the Transfer Agent.
ACCOUNT BALANCE
The Board of Directors may cause the redemption of an
account with a balance of less than 10 shares of the
Fund, subject to certain limitations described in
Additional Information Regarding Redemption of Shares in
the SAI.
COMPANY RIGHTS
The Company reserves the right to:
(1) reject purchase or exchange orders when in the
best interest of the Company;
(2) limit or discontinue the offering of shares of any
portfolio of the Company without notice to the shareholders;
(3) impose a redemption charge of up to 1% of the net
asset value of shares redeemed if circumstances
indicate a charge is necessary for the protection
of remaining investors (for example, if excessive
market-timing share activity unfairly burdens
long-term investors); provided, however, this 1%
charge will not be imposed upon shareholders
unless authorized by the Board of Directors and
adequate notice has been given to shareholders;
(4) require a signature guarantee for purchases, redemptions, or
changes in account information in those instances where the
appropriateness of a signature authorization is in question.
The section Additional Information Regarding Redemption of
Shares in the SAI contains information on acceptable guarantors.
EXCHANGES
EXCHANGE PRIVILEGE
The Exchange Privilege is automatically established when
you complete your application. You may exchange shares
among Funds in the USAA Family of Funds, provided you do
not hold these shares in stock certificate form and that
the shares to be acquired are offered in your state of
residence. Exchange redemptions and purchases will be
processed simultaneously at the share prices next
determined after the exchange order is received. For
federal income tax purposes, an exchange between Funds is
a taxable event. Accordingly, a capital gain or loss may
be realized.
The Fund has undertaken certain procedures regarding
telephone transactions. See Redemption of Shares - Phone.
EXCHANGE LIMITATIONS,
EXCESSIVE TRADING
To minimize Fund costs and to protect the Funds and their
shareholders from unfair expense burdens, the Funds
restrict excessive exchanges. Exchanges out of any Fund
in the USAA Family of Funds are limited for each account
to six per calendar year except that there is no
limitation on exchanges out of the Short-Term Bond Fund,
Tax Exempt Short-Term Fund, or any of the money market
funds in the USAA Family of Funds.
OTHER SERVICES
INVESTMENT PLANS
InveStart(registered trademark) - an investment program
for beginning or first-time investors. Like more
experienced investors, InveStart(registered trademark)
customers may choose to establish a systematic investment
plan for their portfolio.
Systematic Investment Plans - you may establish a
systematic investment plan by completing the appropriate
forms. At the time you sign up for any of the following
investment plans that utilize the electronic funds
transfer service, you will choose the day of the month
(the effective date) on which you would like to regularly
purchase shares. When this day falls on a weekend or
holiday, the electronic transfer will take place on the
last business day before the effective date. Call the
Manager to obtain instructions. More information about
these preauthorized plans is contained in the SAI.
* InvesTronic(registered trademark) - an automatic
investment program for the purchase of additional shares
through electronic funds transfer. The investor selects
the day(s) each month that money is transferred from a
checking or savings account. Effective January 31, 1996,
with this program you can make initial investments as low
as $100 and automatic monthly additions of $50 to the account.
* Direct Purchase Service - the periodic purchase of
shares through electronic funds transfer from a non-
governmental employer, an income-producing investment, or
an account with a participating financial institution.
* Automatic Purchase Plan - the periodic transfer of
funds from a USAA money market fund to purchase shares in
another non-money market USAA mutual fund.
* Buy/Sell Service - the intermittent purchase or
redemption of shares through electronic funds transfer to
or from a checking or savings account.
* Systematic Withdrawal Plan - the periodic redemption of
shares from one of your accounts permitting you to
receive a fixed amount of money monthly or quarterly.
* Retirement Plans - plans are available for IRA
(including SEP/IRA) and 403(b)(7) accounts. Federal taxes
on current income may be deferred if an investor qualifies.
* Directed Dividends - If you own shares in more than one
of the Funds in the USAA Family of Funds, you may direct
that dividends and/or capital gain distributions earned
in one fund be used to automatically purchase shares in
another fund.
SHAREHOLDER STATEMENTS
AND REPORTS
You will receive a confirmation after each transaction in
your account except:
i) a reinvested dividend, or
ii) a payment you make after January 31, 1996 under
the InvesTronic(registered trademark), Direct
Purchase Service, Automatic Purchase Plan, or
Directed Dividends investment plans, or
iii) a redemption you make after January 31, 1996 under
the Systematic Withdrawal Plan.
At the end of each quarter you will receive a consolidated
statement for all of your mutual fund accounts, regardless of
account activity. The fourth quarter consolidated
statement will reflect all account activity for the prior
tax year. There will be a $10 fee charged for copies of
historical statements for other than the prior tax year
for any one account. You will receive the Fund's
financial statements with a summary of its investments
and performance at least semiannually.
In an effort to reduce expenses and respond to
shareholders' requests to reduce mail, the Company
intends to consolidate mailings of Annual and Semiannual
Reports to households having multiple accounts with the
same address of record. One copy of each report will be
furnished to that address. You may request additional
reports by notifying the Company.
TELEPHONE ASSISTANCE
Call our telephone assistance numbers for specific forms,
a copy of the SAI, the most recent Annual Report and/or
Semiannual Report, or if you have any questions
concerning any of the services offered.
SHARE PRICE CALCULATION
The price at which shares of the Fund are purchased and
redeemed by shareholders is equal to the NAV per share
determined on the effective date of the purchase or redemption.
WHEN
The NAV per share for the Fund is calculated at the close
of the regular trading session of the New York Stock
Exchange, which is usually 4:00 p.m. Eastern time. You
may buy and sell Fund shares at the NAV per share without
a sales charge.
HOW
The NAV per share is calculated by adding the value of
all securities and other assets in the Fund, deducting
liabilities, and dividing by the number of shares
outstanding. Portfolio securities, except as otherwise
noted, traded primarily on a securities exchange are
valued at the last sales price on that exchange. If no
sale is reported, the latest bid price is generally used.
Over-the-counter securities are generally priced at the
last sales price or, if not available, at the average of
the bid and asked prices.
Debt securities purchased with maturities of 60 days or
less are stated at amortized cost which approximates
market value. Other debt securities are valued each
business day at their current market value as determined
by a pricing service approved by the Board of Directors.
Securities which 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.
For additional information, see Valuation of Securities
in the SAI.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
Net investment income is accrued daily and paid on the
last business day of the month. Daily dividends are
declared at the time the NAV per share is calculated.
All shares purchased shall begin accruing dividends on
the day following the effective date of the purchase and
shall receive dividends through the effective date of redemption.
When shareholders elect to receive monthly cash
dividends, funds accrued during each month will be sent
to the shareholder following the payment date.
Any net capital gain generally will be distributed at
least annually. Any capital gain distribution paid by
the Fund will reduce the NAV per share by the amount
of the distribution. An investor should consider
carefully the effects of purchasing shares of the Fund
shortly before any distribution. Although in effect a
return of capital, these distributions are subject to taxes.
Any dividend or distribution payment returned to the
Manager as not deliverable will be invested in the
shareholder's Fund account at the then-current NAV per share.
If any check for the payment of dividends or distributions
is not cashed within six months from the date on the check,
it becomes void. The amount of the check will then be
invested in the shareholder's account at the then-current
NAV per share.
FEDERAL TAXES
The following discussion relates only to generally
applicable federal income tax provisions in effect as of
the date of this Prospectus. Therefore, shareholders are
urged to consult their own tax advisers about the status
of distributions from the Fund in their own states and localities.
Fund - The Fund intends to qualify as a regulated
investment company under Subchapter M of the Internal
Revenue Code of 1986, as amended (the Code). By
complying with the applicable provisions of the Code, the
Fund will not be subject to federal income tax on its net
investment income and net capital gains (capital gains in
excess of capital losses) distributed to shareholders.
Shareholder - Dividends from taxable net investment
income and distributions of net short-term capital gains
are taxable to shareholders as ordinary income, whether
received in cash or reinvested in additional shares.
Distributions of net long-term capital gains are
taxable as long-term capital gains whether received in
cash or reinvested in additional shares, and regardless
of the length of time the investor has held the shares of
the Fund.
Withholding - The Fund is required by federal law to
withhold and remit to the U.S. Treasury a portion of the
income dividends and capital gain distributions and
proceeds of redemptions paid to any non-corporate
shareholder who fails to furnish the Fund with a correct
tax identification number, who underreports dividend or
interest income, or who fails to certify that he is not
subject to withholding. To avoid this withholding
requirement, you must certify on your application, or on
a separate Form W-9 supplied by the Transfer Agent, that
your tax identification number is correct and that you
are not currently subject to backup withholding.
Reporting - Information concerning the status of
dividends and distributions for federal income tax
purposes will be mailed to shareholders annually.
MANAGEMENT OF THE COMPANY
The business affairs of the Company are subject to the
supervision of the Board of Directors.
The Manager, USAA Investment Management Company
(IMCO), was organized in May 1970 and is an affiliate of
United Services Automobile Association (USAA), a large
diversified financial services institution. As of the
date of this Prospectus, the Manager had approximately $29
billion in total assets under management. The Manager's
mailing address is 9800 Fredericksburg Rd., San Antonio, TX 78288.
Officers and employees of the Manager are permitted to
engage in personal securities transactions subject to
restrictions and procedures set forth in the Joint Code
of Ethics adopted by the Company and the Manager. Such
restrictions and procedures include substantially all of
the recommendations of the Advisory Group of the
Investment Company Institute and comply with Securities
and Exchange Commission rules and regulations.
ADVISORY AGREEMENT
The Manager serves as the manager and investment adviser
of the Company, providing services under an Advisory
Agreement. Under the Advisory Agreement, the Manager is
responsible for the management of the Funds, business
affairs, and placement of brokerage orders, subject to
the authority of and supervision by the Board of Directors.
For its services under the Advisory Agreement, the Fund
pays the Manager an annual fee which is computed as a
percentage of the Fund's average net assets (ANA),
accrued daily and paid monthly. The Fund's management
fees are computed at twenty-four one hundredths of one
percent (.24%) of ANA. For the fiscal year ended July
31, 1995, the Manager did not receive any management fees
because of the Manager's voluntary expense limitation.
OPERATING EXPENSES
For the fiscal year ended July 31, 1995, the Manager
limited total operating expenses to .50% of the Fund's
ANA. The Manager reimbursed the Fund $136,499 for
expenses in excess of the limitation. The Manager has
voluntarily agreed to continue to limit the Fund's annual
expenses to .50% of its ANA until December 1, 1996, and
will reimburse the Fund for all expenses in excess of
such limitation.
PORTFOLIO MANAGER
The following individual is primarily responsible for
managing the Fund.
Paul H. Lundmark, Executive Director of Fixed Income
Investments since November of 1994, has managed the Fund
since its inception in June 1993. Mr. Lundmark has ten
years investment management experience and has worked for
IMCO four years. He has held various positions in Fixed
Income Investments since January 1992. From May 1990 to
July 1991 he was employed as an Associate with Raymond
James & Associates, Inc., St. Petersburg, Florida. Mr.
Lundmark earned the Chartered Financial Analyst
designation in 1989 and is a member of the Association
for Investment Management and Research and the San
Antonio Financial Analysts Society, Inc. He holds an MBA
and BSB from the University of Minnesota.
SERVICE PROVIDERS
UNDERWRITER/ USAA Investment Management Company
DISTRIBUTOR 9800 Fredericksburg Rd., San Antonio, Texas 78288.
TRANSFER USAA Shareholder Account Services
AGENT 9800 Fredericksburg Rd., San Antonio, Texas 78288.
CUSTODIAN State Street Bank and Trust Company
P.O. Box 1713, Boston, Massachusetts 02105.
LEGAL Goodwin, Procter & Hoar
COUNSEL Exchange Place, Boston, Massachusetts 02109.
INDEPENDENT KPMG Peat Marwick LLP
AUDITORS 112 East Pecan, Suite 2400, San Antonio, Texas 78205.
DESCRIPTION OF SHARES
The Company is an open-end management investment company
incorporated under the laws of the State of Maryland on
October 14, 1980. The Company is authorized to issue
shares in separate classes, or Funds. The Fund described
in this Prospectus is being offered to the public. The
Fund is classified as a diversified investment company.
Under the Company's charter, the Board of Directors is
authorized to create new Funds in addition to those
already existing without approval of the shareholders of
the Company.
Under provisions of the Bylaws of the Company, no annual
meeting of shareholders is required. Ordinarily, no shareholder
meeting will be held unless required by the Investment
Company Act of 1940. The Directors may fill vacancies on
the Board or appoint new Directors provided that
immediately after such action at least two-thirds of the
Directors have been elected by shareholders.
Shareholders are entitled to one vote per share (with
proportionate voting for fractional shares) irrespective
of the relative net asset value of the shares. For
matters affecting an individual fund, a separate vote of
the shareholders of that fund is required.
TELEPHONE ASSISTANCE
(Call toll free - Central Time)
Monday-Friday 8:00 a.m. to 8:00 p.m.
Saturday: 8:30 a.m. to 5:00 p.m.
For further information on mutual funds:
1-800-531-8181
In San Antonio 210-456-7211
For account servicing, exchanges or redemptions:
1-800-531-8448
In San Antonio 210-456-7202
RECORDED 24 HOUR SERVICE
MUTUAL FUND PRICE QUOTES
(From any phone)
1-800-531-8066
In San Antonio 210-498-8066
MUTUAL FUND TOUCHLINE(registered trademark)
(From Touchtone phones only)
For account balance, last transaction or fund prices:
1-800-531-8777
In San Antonio 210-498-8777
[THIS PAGE LEFT BLANK INTENTIONALLY]
[THIS PAGE LEFT BLANK INTENTIONALLY]
[THIS PAGE LEFT BLANK INTENTIONALLY]
USAA MONEY MARKET FUND
December 1, 1995 PROSPECTUS
USAA Money Market Fund (the Fund) is one of seven no-load
mutual funds offered by USAA Mutual Fund, Inc. (the
Company). The Fund is managed by USAA Investment
Management Company (the Manager).
WHAT ARE THE INVESTMENT
OBJECTIVE AND POLICIES?
The Fund's investment objective is the highest income consistent with
preservation of capital and maintenance of liquidity. Investments are
in high quality debt instruments with maturities of 397 days or less.
The Manager will maintain a dollar-weighted average portfolio maturity
of 90 days or less and will endeavor to maintain a constant net asset
value per share of $1.00. Page 9.
HOW DO YOU BUY?
Fund shares are sold on a continuous basis at the net
asset value per share without a sales charge. Make your
initial investment directly with the Manager by mail, in
person, or in certain instances, by telephone. Page 13.
HOW DO YOU SELL?
You may redeem Fund shares by mail, telephone, fax, or
telegraph on any day that the net asset value is
calculated. Page 15.
This Prospectus, which should be read and retained for
future reference, provides information regarding the
Company and the Fund that you should know before
investing.
SHARES OF THE USAA MONEY MARKET FUND ARE NOT DEPOSITS
OR OTHER OBLIGATIONS OF, OR GUARANTEED BY THE USAA
FEDERAL SAVINGS BANK, ARE NOT INSURED BY THE FDIC OR ANY
OTHER GOVERNMENT AGENCY, AND ARE SUBJECT TO MARKET RISKS.
If you would like more information, a STATEMENT OF
ADDITIONAL INFORMATION (SAI) of the Company, dated
December 1, 1995, is available upon request and without
charge by writing to USAA MUTUAL FUND, INC., 9800
Fredericksburg Rd., San Antonio, TX 78288, or by calling
1-800-531-8181. The SAI has been filed with the
Securities and Exchange Commission and is incorporated by
reference into this Prospectus.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
AN INVESTMENT IN THE FUND IS NEITHER INSURED NOR GUARANTEED
BY THE U.S. GOVERNMENT AND THERE CAN BE NO ASSURANCE
THAT THE FUND WILL BE ABLE TO MAINTAIN A STABLE
NET ASSET VALUE OF $1.00 PER SHARE.
TABLE OF CONTENTS
Page
SUMMARY DATA
Fees and Expenses 3
Financial Highlights 4
Performance Information 6
USING MUTUAL FUNDS
USAA Family of No-Load Mutual Funds 7
Using Mutual Funds in an Investment Program 8
INVESTMENT PORTFOLIO INFORMATION
Investment Objective and Policies 9
SHAREHOLDER INFORMATION
Purchase of Shares 13
Redemption of Shares 15
Conditions of Purchase and Redemption 17
Exchanges 18
Other Services 18
Share Price Calculation 19
Dividends, Distributions and Taxes 20
Management of the Company 21
Service Providers 22
Description of Shares 22
Telephone Assistance Numbers 22
FEES AND EXPENSES
The following summary is provided to assist you in
understanding the expenses you will bear directly or indirectly.
Shareholder Transaction Expenses
- ---------------------------------------------------------------------
Sales Load Imposed on Purchases None
Sales Load Imposed on Reinvested Dividends None
Deferred Sales Load None
Redemption Fee* None
Exchange Fee None
Annual Fund Operating Expenses (as a percentage of average net assets (ANA))
- ---------------------------------------------------------------------------
Management Fees, net of reimbursements .23%
12b-1 Fees None
Other Expenses, net of reimbursements
Transfer Agent Fees** .12%
Custodian Fees .03%
All Other Expenses .07%
---
Total Other Expenses .22%
---
Total Fund Operating Expenses, net of reimbursements .45%
===
- -------------------------------------------------------------------------
* A shareholder who requests delivery of redemption
proceeds by wire transfer will be subject to a $10
fee. See Redemption of Shares - Bank Wire.
** The Fund pays USAA Shareholder Account Services an
annual fixed fee per account for its services.
See Transfer Agent in the SAI, page 18.
During the year, the Manager voluntarily limited the
annual expenses of the Fund to .45% of its ANA and
reimbursed the Fund for all expenses in excess of this
limitation. The Management Fees, Other Expenses, and
Total Fund Operating Expenses reflect all such expense
reimbursements by the Manager. Absent such
reimbursements, the amount of the Management Fees, Other
Expenses, and Total Fund Operating Expenses as a
percentage of ANA would have been .24%, .22%, and .46%,
respectively. The Manager has voluntarily agreed to
continue to limit the Fund's annual expenses until
December 1, 1996, to .45% of its ANA and will reimburse
the Fund for all expenses in excess of such limitation.
Example of Effect of Fund Expenses
- -----------------------------------------------------------------------
An investor would pay the following expenses on a $1,000
investment, assuming (1) 5% annual return and (2)
redemption at the end of the periods shown.
1 year - $ 5
3 years - $ 14
5 years - $ 25
10 years - $ 57
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST
OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR LESS THAN
THOSE SHOWN.
FINANCIAL HIGHLIGHTS
The following per share operating performance for a share
outstanding throughout each of the periods in the ten-
year period ended July 31, 1995, has been audited by KPMG
Peat Marwick LLP. This table should be read in conjunction
with the Fund's financial statements for the year ended
July 31, 1995, and the auditors' report thereon, that appear
in the Fund's Annual Report. Further performance information
is contained in the Annual Report and is available upon
request without charge.
TEN-MONTH
YEAR ENDED PERIOD ENDED
JULY 31, JULY 31, YEAR ENDED SEPTEMBER 30,
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
Net asset value at
beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
Net investment income .05 .03 .03 .04 .07
Distributions from net
investment income (.05) (.03) (.03) (.04) (.07)
------ ------ ------ ------ ------
Net asset value at
end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
====== ====== ====== ====== ======
Total return (%)* 5.49 2.74 3.09 4.32 6.71
Net assets at end of
period (000) $1,540,055 $1,006,020 $813,784 $900,312 $984,404
Ratio of expenses to
average net assets (%) .45(b) .46(a) .48 .48 .54
Ratio of net investment
income to average net
assets (%) 5.44 3.28(a) 3.05 4.25 6.52
YEAR ENDED SEPTEMBER 30,
1990 1989 1988 1987 1986
---- ---- ---- ---- ----
Net asset value at
beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
Net investment income .08 .09 .07 .06 .07
Distributions from net
investment income (.08) (.09) (.07) (.06) (.07)
------ ------ ------ ------ ------
Net asset value at
end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
====== ====== ====== ====== ======
Total return (%)* 8.12 8.87 6.94 6.12 6.92
Net assets at end of
period (000) $980,917 $882,694 $679,979 $507,195 $286,632
Ratio of expenses to
average net assets (%) .62 .68 .72 .79 .88
Ratio of net investment
income to average net
assets (%) 7.86 8.55 6.75 6.01 6.72
- --------------
* Assumes reinvestment of all dividend income and
capital gain distributions during the period.
(a) Annualized. The ratio is not necessarily
indicative of 12 months of operations.
(b) The Manager has voluntarily agreed to limit the
annual expenses of the Fund to .45% of its annual
average net assets. Without this limitation, the
Fund's ratio would have been .46%.
PERFORMANCE INFORMATION
Performance information should be considered in light of
the Fund's investment objective and policies and market
conditions during the time periods for which it is
reported. Historical performance should not be
considered as representative of the future performance of
the Fund.
The Company may quote the Fund's yield in
advertisements and reports to shareholders or prospective
investors. The Fund's performance may also be compared
to that of other mutual funds with a similar investment
objective and to stock or relevant indexes that are
referenced in Appendix B to the SAI. Yield results
reported by the Fund do not take into account recurring
and nonrecurring charges for optional services which only
certain shareholders elect and which involve nominal
fees, such as the $10 fee for a delivery of redemption
proceeds by wire transfer.
The Fund may advertise its yield and effective yield.
The yield of the Fund refers to the income generated by
an investment in the Fund over a seven-day period (which
period will be stated in the advertisement). This income
is then annualized, that is, the amount of income generated
by the investment during the week is assumed to be generated
each week over a 52-week period and is shown as a percentage
of the investment.
The effective yield is calculated similarly, but when
annualized, the income earned by an investment in the
Fund is assumed to be reinvested. The effective yield
will be slightly higher than the yield because of the
compounding effect of this assumed reinvestment.
Further information concerning the Fund's yield is
included in the SAI.
USAA FAMILY OF NO-LOAD MUTUAL FUNDS
The USAA Family of No-Load Mutual Funds includes a
variety of Funds, each with different objectives and
policies. In combination, these Funds are designed to
provide investors with the opportunity to formulate their
own investment program. You may exchange any shares you
hold in any one USAA Fund for shares in any other USAA
Fund. For more complete information about the Funds in
the USAA Family of Funds, including charges and expenses,
call the Manager for a Prospectus. Be sure to read it
carefully before you invest or send money.
USAA MUTUAL FUND, INC.
Aggressive Growth Fund
Growth Fund
Growth & Income Fund
Income Stock Fund
Income Fund
Short-Term Bond Fund
Money Market Fund
USAA INVESTMENT TRUST
Income Strategy Fund
Growth and Tax Strategy Fund
Balanced Strategy Fund
Cornerstone Strategy Fund
Growth Strategy Fund
Emerging Markets Fund
Gold Fund
International Fund
World Growth Fund
GNMA Trust
Treasury Money Market Trust
USAA TAX EXEMPT FUND, INC.
Long-Term Fund
Intermediate-Term Fund
Short-Term Fund
Tax Exempt Money Market Fund
California Bond Fund*
California Money Market Fund*
New York Bond Fund*
New York Money Market Fund*
Virginia Bond Fund*
Virginia Money Market Fund*
USAA STATE TAX-FREE TRUST
Florida Tax-Free Income Fund*
Florida Tax-Free Money Market Fund*
Texas Tax-Free Income Fund*
Texas Tax-Free Money Market Fund*
*Available for sale only to residents of these specific states.
USING MUTUAL FUNDS IN AN INVESTMENT PROGRAM
I. THE IDEA BEHIND MUTUAL FUNDS
Mutual funds were conceived as a vehicle that could give
small investors some of the advantages enjoyed by wealthy
investors. A relatively small investment buys part of a
widely diversified portfolio. That portfolio is managed
by investment professionals, relieving the shareholder of
the need to make individual stock or bond selections. The
investor also enjoys conveniences, such as daily pricing,
liquidity, and in the case of the USAA Family of Funds,
no sales charge. The portfolio, because of its size, has
lower transaction costs on its trades than most
individuals would have. As a result each shareholder
owns an investment that in earlier times would have been
available only to very wealthy people.
II. USING FUNDS IN AN INVESTMENT PROGRAM
In choosing a mutual fund as an investment vehicle, the
shareholder is foregoing some investment decisions, but
must still make others. The decisions foregone are those
involved with choosing individual securities. The Fund
Manager will perform that function. In addition, the
Manager will arrange for the safekeeping of securities,
auditing the annual financial statements, and daily
valuation of the Fund, as well as other functions.
The shareholder, however, retains at least part of the
responsibility for an equally important decision. This
decision includes determining a portfolio of mutual funds
that balances the investor's investment goals with his or
her tolerance for risk. It is likely that this decision
may involve the use of more than one fund of the USAA
Family of Funds.
For example, assume a shareholder wished to invest in a
widely diversified common stock portfolio. The
shareholder could include the Aggressive Growth Fund,
Growth Fund, Growth & Income Fund, and Income Stock Fund
in such a portfolio. This portfolio would include stocks
of large and small companies, high-dividend stocks and
growth stocks. This is just one example of how an
individual could combine funds to create a portfolio
tailored to his or her own risk and reward goals.
III. USAA'S FAMILY OF FUNDS
The Manager offers investors another alternative in its
asset strategy funds, the Income Strategy, Growth and Tax
Strategy, Balanced Strategy, Cornerstone Strategy, and
Growth Strategy Funds. These unique mutual funds provide
a professionally managed diversified investment portfolio
within a mutual fund. These Funds are designed for the
shareholder who prefers to delegate the asset allocation
process to an investment manager. The Funds are
structured to achieve diversification across a number of
investment categories.
Whether you prefer to create your own mix of mutual
funds or use an asset strategy fund, the USAA Family of
Funds provides a broad range of choices covering just
about any investor's investment objectives. Our sales
representatives stand ready to inform you of your choices
and to help you craft a portfolio which meets your needs.
INVESTMENT OBJECTIVE AND POLICIES
INVESTMENT OBJECTIVE
The Fund's investment objective is the highest income
consistent with preservation of capital and maintenance
of liquidity.
The investment objective of the Fund cannot be changed
without shareholder approval. In view of the risks
inherent in all investments in securities, there is no
assurance that this objective will be achieved.
The investment policies and techniques used to pursue
the Fund's objective may be changed without shareholder
approval, except as otherwise noted. Further information
regarding the Fund's investment policies and restrictions
is provided in the SAI.
INVESTMENT POLICIES AND
TECHNIQUES
The Manager will pursue this objective by investing the
Fund's assets in high quality U.S. dollar-denominated
debt securities of domestic and foreign issuers which
have been determined to present minimal credit risk. The
following categories of money market instruments are utilized:
(1) Obligations of the U.S. Government, its agencies
and instrumentalities, and repurchase agreements
collateralized by such obligations;
(2) Short-term corporate debt obligations such as
notes, bonds, and commercial paper;
(3) U.S. bank or foreign bank obligations including
certificates of deposit, banker's acceptances, and
time deposits;
(4) Obligations of state and local governments and
their agencies and instrumentalities;
(5) Municipal lease obligations;
(6) Mortgage-backed securities;
(7) Asset-backed securities;
(8) Master demand notes;
(9) Dollar-denominated instruments issued outside the
U.S. capital markets by foreign corporations and
financial institutions and by foreign branches of
U.S. corporations and financial institutions
(Eurodollar obligations);
(10) Dollar-denominated instruments issued by foreign
issuers in the U.S. capital markets (Yankee obligations);
(11) Other short-term debt obligations.
The Fund will purchase only high quality securities
that qualify as "first tier" securities under the
Securities and Exchange Commission rules applicable to
money market mutual funds. In general, a first tier
security is defined as a security that is:
(1) issued or guaranteed by the U.S. Government or any
agency or instrumentality thereof;
(2) rated in the highest category for short-term
securities by at least two Nationally Recognized
Statistical Rating Organizations (NRSROs), or by
one NRSRO if the security is rated by only one
NRSRO;
(3) unrated but issued by an issuer that has other
comparable short-term debt obligations so rated; or
(4) unrated but determined to be of comparable quality
by the Manager.
If a security is downgraded after purchase, the Manager
will follow written procedures adopted by the Fund's
Board of Directors and a determination will be made as to
whether it is in the best interest of the Fund's
shareholders for the Fund to continue to hold the security.
Current NRSROs include Moody's Investors Service, Inc.,
Standard & Poor's Ratings Group, Fitch Investors Service,
Inc., Duff & Phelps Inc., Thompson BankWatch, Inc., and
IBCA Inc. For a description of debt ratings, see
Appendix A to the SAI.
Consistent with regulatory requirements, the Manager
will purchase securities with remaining maturities of 397
days or less and will maintain a dollar-weighted average
portfolio maturity of no more than 90 days. The Fund
will endeavor to maintain a constant net asset value of
$1.00 per share, although there is no assurance that it
will be able to do so. The shares are neither insured
nor guaranteed by the U.S. Government.
The Fund will also comply with diversification requirements
which are generally applicable to money market funds under
regulations of the Securities and Exchange Commission.
Generally, these requirements limit a money market fund's
investments in the securities of any issuer to no more than 5% of
the fund's assets, excluding securities issued or guaranteed by
the U.S. Government or its agencies and instrumentalities.
Municipal Lease Obligations - The Fund may invest in
municipal lease obligations and certificates of
participation in such obligations (collectively, lease
obligations). A lease obligation does not constitute a
general obligation of the municipality for which the
municipality's taxing power is pledged, although the
lease obligation is ordinarily backed by the
municipality's covenant to budget for the payments due
under the lease obligation.
Certain lease obligations contain "non-appropriation"
clauses which provide that the municipality has no
obligation to make lease obligation payments in future
years unless money is appropriated for such purpose on a
yearly basis. Although "non-appropriation" lease
obligations are secured by the leased property,
disposition of the property in the event of foreclosure
might prove difficult. In evaluating a potential
investment in such a lease obligation, the Manager will
consider: (1) the credit quality of the obligor, (2)
whether the underlying property is essential to a
governmental function, and (3) whether the lease
obligation contains covenants prohibiting the obligor
from substituting similar property if the obligor fails
to make appropriations for the lease obligation.
Mortgage-Backed and Asset-Backed Securities - Mortgage-
backed securities include, but are not limited to,
securities issued by the Government National Mortgage
Association (Ginnie Mae), the Federal National Mortgage
Association (Fannie Mae) and the Federal Home Loan
Mortgage Corporation (Freddie Mac). These securities
represent ownership in a pool of mortgage loans. They
differ from conventional bonds in that principal is paid
back to the investor as payments are made on the
underlying mortgages in the pool. Accordingly, the Fund
receives monthly scheduled payments of principal and
interest along with any unscheduled principal prepayments
on the underlying mortgages. Because these scheduled and
unscheduled principal payments must be reinvested at
prevailing interest rates, mortgage-backed securities do
not provide an effective means of locking in long-term
interest rates for the investor. Like other fixed income
securities, when interest rates rise, the value of a
mortgage-backed security generally will decline; however,
when interest rates are declining, the value of mortgage-
backed securities with prepayment features may not
increase as much as other fixed income securities.
Asset-backed securities represent a participation in,
or are secured by and payable from, a stream of payments
generated by particular assets, such as credit card,
motor vehicle, or trade receivables. They may be pass-
through certificates, which have characteristics very
similar to mortgage-backed securities, discussed above.
They may also be in the form of asset-backed commercial
paper, which is issued by a special purpose entity,
organized solely to issue the commercial paper and to
purchase interests in the assets. The credit quality of
these securities depends primarily upon the quality of
the underlying assets and the level of credit support and
enhancement provided.
Master Demand Notes - The Fund may invest in variable
rate master demand notes (Master Demand Notes). Master
demand notes are obligations that permit the investment
of fluctuating amounts by the Fund, at varying rates of
interest using direct arrangements between the Fund, as
lender, and the borrower. These notes permit daily
changes in the amounts borrowed. The Fund has the right
to increase the amount under the note at any time up to
the full amount provided by the note agreement, or to
decrease the amount, and the borrower may repay up to
the full amount of the note without penalty. Frequently,
such obligations are secured by letters of credit or other
credit support arrangements provided by banks. Because master
demand notes are direct lending arrangements between the
lender and borrower, these instruments generally will not
be traded, and there generally is no secondary market for
these notes, although they are redeemable (and
immediately repayable by the borrower) at face value,
plus accrued interest, at any time. Therefore, where
master demand notes are not secured by bank letters of
credit or other credit support arrangements, the Fund's
right to redeem depends on the ability of the borrower to
pay principal and interest on demand. In connection with
master demand note arrangements, the Fund will
continuously monitor the earning power, cash flow, and
other liquidity ratios of the issuer, and the borrower's
ability to pay principal and interest on demand. Master
demand notes, as such, are not typically rated by credit
rating agencies. The Fund will invest in master demand
notes only if the Board of Directors or its delegate has
determined that they are of credit quality comparable to
the debt securities in which the Fund generally may
invest.
Eurodollar and Yankee Obligations - While investments in
Eurodollar and Yankee obligations are intended to reduce
risk by providing further diversification, such
investments involve sovereign risk in addition to credit
and market risk. Sovereign risk includes local political
or economic developments, potential nationalization, and
withholding taxes on dividend or interest payments.
Issuers of Eurodollar and Yankee obligations may be
subject to different or less stringent accounting and
reporting requirements than similar U.S. issuers, thereby
rendering investment analysis more difficult. The Fund
may incur difficulties in obtaining judgements or
effecting collections thereon. Also, securities of
foreign companies may be less liquid or more volatile
than securities of U.S. companies.
In addition, the Fund may invest in Eurodollar and
Yankee obligations of investment grade emerging market
countries. An emerging market country can be considered
to be a country which is in the initial stages of its
industrial cycle. Investments in emerging market
countries involve exposure to economic structures that
are generally less diverse and mature than in the United
States, and to political systems which may be less
stable. In the past, markets of emerging market
countries have been more volatile than the markets of
developed countries.
Repurchase Agreements - The Fund may invest in repurchase
agreements which are collateralized by obligations issued
or guaranteed by the U.S. Government, its agencies and
instrumentalities. A repurchase agreement is a
transaction in which a security is purchased with a
simultaneous commitment to sell the security back to the
seller (a commercial bank or recognized securities
dealer) at an agreed upon price on an agreed upon date,
usually not more than seven days from the date of
purchase. The resale price reflects the purchase price
plus an agreed upon market rate of interest which is
unrelated to the coupon rate or maturity of the purchased
security. The obligation of the seller to pay the agreed
upon price is in effect secured by the value of the
underlying security. In these transactions, the
securities purchased by the Fund will have a total value
equal to or in excess of the amount of the repurchase
obligation and will be held by the Fund's custodian until
repurchased. If the seller defaults and the value of the
underlying security declines, the Fund may incur a loss
and may incur expenses in selling the collateral. If the
seller seeks relief under the bankruptcy laws, the
disposition of the collateral may be delayed or limited.
Variable Rate Securities - The Fund may invest in
securities that bear interest at rates which are adjusted
periodically to market rates. These interest rate
adjustments can both raise and lower the income generated
by such securities. These changes will have the same
effect on the income earned by a Fund depending on the
proportion of such securities held.
The market value of fixed coupon securities fluctuates
with changes in prevailing interest rates, increasing in
value when interest rates decline and decreasing in value
when interest rates rise. The value of variable rate
securities, however, is less affected by changes in
prevailing interest rates because of the periodic
adjustment of their coupons to a market rate. The
shorter the period between adjustments, the smaller the
impact of interest rate fluctuations on the value of
these securities. The market value of variable rate
securities usually tends toward par (100% of face value)
at interest rate adjustment time.
Put Bonds - The Fund may invest in securities (including
securities with variable interest rates) which may be
redeemed or sold back (put) to the issuer of the security
or a third party at face value prior to stated maturity
(Put Bonds). Such securities will normally trade as if
maturity is the earlier put date, even though stated
maturity is longer.
When-Issued Securities - The Fund may invest in new
issues of securities offered on a when-issued basis; that
is, delivery and payment take place after the date of the
commitment to purchase, normally within 45 days. Both
price and interest rate are fixed at the time of
commitment. The Fund does not earn interest on the
securities until settlement, and the market value of the
securities may fluctuate between the purchase and
settlement. Such securities can be sold before
settlement date.
Cash or high quality liquid debt securities equal to
the amount of the when-issued commitments are segregated
at the Fund's custodian bank. The segregated securities
are valued at market, and daily adjustments are made to
keep the value of the cash and segregated securities at
least equal to the amount of such commitments by the
Fund. On the settlement date, the Fund will meet its
obligations from then available cash, sale of segregated
securities, sale of other securities, or sale of the
when-issued securities themselves.
Liquidity - The Fund may not invest more than 10% of the
value of its net assets in illiquid securities, including
repurchase agreements maturing in more than seven days.
Commercial paper and certain Put Bonds that are subject
to restrictions on transfer, securities that may be
resold pursuant to Rule 144A under the Securities Act of
1933, and lease obligations may be determined to be
liquid in accordance with guidelines established by the
Board of Directors.
INVESTMENT RESTRICTIONS
The following restrictions may not be changed without
shareholder approval:
a. The Fund may not borrow money, except for
temporary or emergency purposes in an amount not
exceeding 33 1/3% of its total assets (including
the amount borrowed) less liabilities (other than borrowings).
b. The Fund may not invest more than 25% of the value
of its total assets in any one industry. Banks
are not considered a single industry for purposes
of this policy, nor shall this limitation apply to
securities issued or guaranteed by the U.S.
Government or its corporate instrumentalities.
PURCHASE OF SHARES
OPENING AN ACCOUNT
You may open an account and make an investment by any of
the following methods. A complete, signed application is
required together with a check for each new account.
TAX ID NUMBER
We require that each shareholder named on the account
provide the Company with a social security number or tax
identification number to avoid possible tax withholding
requirements.
EFFECTIVE DATE
When you make a purchase, your purchase price will be
the net asset value (NAV) per share next determined after
the Fund receives your request in proper form. If the Fund
receives your request prior to the close of the New York
Stock Exchange on a day on which the Exchange is open, your
purchase price will be the NAV per share determined for that
day. If the Fund receives your request after the time at
which the NAV per share is calculated, the purchase will be
effective on the next business day. Because of the more
lengthy clearing process and the need to convert foreign
currency, a check drawn on a foreign bank will not be deemed
received for the purchase of shares until such time as the
check has cleared and the Manager has received good funds,
which may take up to 4 to 6 weeks. Furthermore, a bank charge
may be assessed in the clearing process, which will be deducted
from the amount of the purchase. To avoid a delay in the
effectiveness of your purchase, the Manager suggests that you
convert your foreign check to U.S. dollars prior to investment
in the Fund.
Purchase of Shares
Minimum Investments
Initial Purchase (non-IRA): $1,000 or minimum $100 with a minimum $50
monthly electronic investment
After January 31, 1996 $3,000 or minimum $100 with a minimum $50
monthly electronic investment
Additional Purchases: $50 - (Except transfers from brokerage
accounts)
Initial Purchase - IRA: $1,000 or minimum $100 with a minimum $50
monthly electronic investment
$250 for spousal account
After January 31, 1996 $250 or minimum $100 with a minimum $50
monthly electronic investment
Additional Purchases: $50 - (Except transfers from brokerage
accounts)
How to Purchase:
Mail * To open an account, send your application and check to:
USAA Investment Management Company
9800 Fredericksburg Rd., San Antonio, TX 78288
* To add to your account, send your check and the "Invest by
Mail" stub that accompanies your fund's transaction
confirmation to the Transfer Agent:
USAA Shareholder Account Services
9800 Fredericksburg Rd., San Antonio, TX 78288
* To exchange by mail, call 1-800-531-8448 for instructions.
In Person * To open an account, bring your application and check to:
USAA Investment Management Company
USAA Federal Savings Bank
10750 Robert F. McDermott Freeway, San Antonio
Automatically * Additional purchases on a regular basis can be deducted
via from a bank account, paycheck, income-producing investment
Electronic or from a USAA money market account. Sign up for these
Funds services when opening an account or call 1-800-531-8448 to
Transfer add these services.
(EFT) * Purchases through payroll deduction ($25 minimum each pay
period with no initial investment) can be made by any
employee of USAA, its subsidiaries or affiliated companies.
Bank Wire * To add to an account, instruct your bank (which may charge
a fee for the service) to wire the specified amount to the
Fund as follows:
State Street Bank and Trust Company, Boston, MA 02101
ABA#011000028
Attn: USAA Money Market Fund
USAA AC-69384998
Shareholder(s) Name(s)_________________
Shareholder(s) Account Number___________________
Phone * If you have an existing USAA account and would like to open a
1-800-531-8448 new account or if you would like to exchange to another USAA
fund, call for instructions. The new account must have the
same registration as your existing account.
* To add to an account, intermittent (as-needed) purchases can
be deducted from your bank account through our Buy/Sell
Service. Call for instructions.
Through a * To open a new account through your USAA Asset Management
USAA AMA Account, call USAA Brokerage Services at 1-800-531-8343.
REDEMPTION OF SHARES
You may redeem shares of the Fund by any of the following
methods on any day the NAV per share is calculated.
Redemptions will be effective on the day on which
instructions are received in accordance with the
requirements set forth below. However, if instructions
are received after the NAV per share calculation,
redemption will be effective on the next business day.
REDEMPTION PROCEEDS
Redemption proceeds are distributed within seven days
after the effective date of redemption. Payment for
redemption of shares purchased by check or electronic
funds transfer will not be disbursed until
the purchase check or electronic funds transfer has
cleared, which could take up to 15 days from the purchase
date. If you are considering redeeming shares soon after
purchase, you should purchase by bank wire or certified
check to avoid delay.
In addition, the Company may elect to suspend the
redemption of shares or postpone the date of payment
during any period that the New York Stock Exchange is
closed, or trading in the markets the Company normally
utilizes is restricted, or during any period that
redemption is otherwise permitted to be suspended by the
Securities and Exchange Commission.
How to Redeem:
Written, * Send your written instructions to:
Fax, or USAA Shareholder Account Services
Telegraph 9800 Fredericksburg Rd., San Antonio, TX 78288
* Send a signed fax to 210-498-2889, or send a telegraph to
USAA Shareholder Account Services.
Written redemption requests must include the following:
(1) a letter of instruction or stock assignment, and
stock certificate (if issued), specifying the Fund and
the number of shares or dollar amount to be redeemed;
(2) signatures of all owners of the shares exactly as
their names appear on the account; (3) other supporting
legal documents, if required, as in the case of estates,
trusts, guardianships, custodianships, partnerships,
corporations, and pension and profit-sharing plans; and
(4) method of payment.
Phone * Call toll free 1-800-531-8448, in San Antonio, 210-456-7202.
The Fund will employ reasonable procedures to confirm
that instructions communicated by telephone are genuine,
and if it does not, it may be liable for any losses due
to unauthorized or fraudulent instructions. Information
is obtained prior to any discussion regarding an account
including: (1) USAA number or account number, (2) the
name(s) on the account registration, and (3) social
security number or tax identification number for the
account registration. In addition, all telephone
communications with a shareholder are recorded.
Redemption by telephone, fax, or telegraph is not
available for shares represented by stock certificates.
Through a * Call USAA Brokerage Services at 1-800-531-8343 for more
USAA AMA information.
Methods of Payment:
Bank Wire * Allows redemptions to be sent directly to your bank account.
Establish this service when you apply for your account,
or later upon request. If your account is at a savings
bank, savings and loan association, or credit union,
please obtain precise wiring instructions from your
institution. Specifically, include the name of the
correspondent bank and your institution's account number
at that bank. The Transfer Agent deducts a wire fee from
the account for the redemption by wire. The fee as of
the date of this Prospectus is $10 ($25 for wires to a
foreign bank) and is subject to change at any time. The
fee is paid to State Street Bank and Trust Company and
the Transfer Agent for their services in connection with
the wire redemption. Your bank may also charge a fee for
receiving funds by wire.
Automatically * Systematic (regular) or intermittent (as-needed) redemptions
via EFT can be credited to your bank account.
Establish any of our electronic investing services when
you apply for your account, or later upon request.
Check * A check payable to the registered shareholder(s) will be
Redemption mailed to the address of record.
This check redemption privilege is automatically
established when your application is completed and
accepted. There is a 15-day waiting period before a
check redemption can be processed following a telephone
address change. Should you wish to redeem shares within
the 15 days following a telephone address change, you may
do so by providing written instructions by mail or facsimile.
Checkwriting * Checks can be issued for your Money Market Fund account.
To establish your checkwriting privilege (CWP),
complete the signature card which accompanies the
application form or Shareholder Services Guide, or
request and complete the signature card separately. A
one-time $5 checkwriting fee is charged to each account
by the Transfer Agent for the establishment of the
privilege. There is no charge for the use of checks nor
for subsequent reorders. This privilege is subject to
SSB's rules and regulations governing checking accounts.
Checks must be written for an amount of at least $250.
Checks written for less than $250 will be returned.
Checkwriting may not be used to close an account because
the value of the account changes daily as dividends are accrued.
When a check is presented to the Transfer Agent for
payment, a sufficient number of full and fractional
shares in the investor's account will be redeemed to
cover the amount of the check. Checks will be returned
if there are insufficient shares to cover the amount of
the check. Presently, there is a $15 processing fee
assessed against an account for any redemption check not
honored by a clearing or paying agent. A check paid
during the month will be returned to the shareholder by
separate mail. Checkwriting fees are subject to change
at any time. The Trust, the Transfer Agent and SSB each
reserve the right to change or suspend the checkwriting
privilege upon 30 days' written notice to participating
shareholders. See the SAI for further information.
You may request that the Transfer Agent stop payment on
a check. The Transfer Agent will use its best efforts to
execute stop payment instructions, but does not guarantee
that such efforts will be effective. A $10 charge will
be made for each stop payment requested by a shareholder.
CONDITIONS OF PURCHASE AND REDEMPTION
NONPAYMENT
If any order to purchase shares is cancelled due to
nonpayment or if the Company does not receive good funds
either by check or electronic funds transfer, the
cancellation will be treated as a redemption of shares
purchased and you will be responsible for any resulting
loss incurred by the Fund or the Manager. If you are a
shareholder, shares can be redeemed from any of your
account(s) as reimbursement for all losses. In addition,
you may be prohibited or restricted from making future
purchases in any of the USAA Family of Funds. A $15 fee
is charged for all returned items, including checks and
electronic funds transfers.
TRANSFER OF SHARES
Fund shares may be transferred to another person by
sending written instructions to the Transfer Agent. The
account must be clearly identified and the shareholder
must include the number of shares to be transferred, the
signatures of all registered owners, and all stock
certificates, if any, which are the subject of transfer.
You also need to send written instructions signed by all
registered owners and supporting documents to change an
account registration due to events such as divorce,
marriage, or death. If a new account needs to be
established, an application must be completed and
returned to the Transfer Agent.
ACCOUNT BALANCE
The Board of Directors may cause the redemption of an
account with a balance of less than 500 shares of the
Fund, subject to certain limitations described in
Additional Information Regarding Redemption of Shares in
the SAI.
COMPANY RIGHTS
The Company reserves the right to:
(1) reject purchase or exchange orders when in the
best interest of the Company;
(2) limit or discontinue the offering of shares of any
portfolio of the Company without notice to the shareholders;
(3) impose a redemption charge of up to 1% of the net
asset value of shares redeemed if circumstances
indicate a charge is necessary for the protection
of remaining investors (for example, if excessive
market-timing share activity unfairly burdens
long-term investors); provided, however, this 1%
charge will not be imposed upon shareholders
unless authorized by the Board of Directors and
adequate notice has been given to shareholders;
(4) require a signature guarantee for purchases, redemptions, or
changes in account information in those instances where the
appropriateness of a signature authorization is in question.
The section Additional Information Regarding Redemption of
Shares in the SAI contains information on acceptable guarantors.
EXCHANGES
EXCHANGE PRIVILEGE
The Exchange Privilege is automatically established when
you complete your application. You may exchange shares
among Funds in the USAA Family of Funds, provided you do
not hold these shares in stock certificate form and that
the shares to be acquired are offered in your state of
residence. Exchange redemptions and purchases will be
processed simultaneously at the share prices next
determined after the exchange order is received. For
federal income tax purposes, an exchange between Funds is
a taxable event. Accordingly, a capital gain or loss may
be realized.
The Fund has undertaken certain procedures regarding
telephone transactions. See Redemption of Shares - Phone.
EXCHANGE LIMITATIONS,
EXCESSIVE TRADING
To minimize Fund costs and to protect the Funds and their
shareholders from unfair expense burdens, the Funds
restrict excessive exchanges. Exchanges out of any Fund
in the USAA Family of Funds are limited for each account
to six per calendar year except that there is no
limitation on exchanges out of the Short-Term Bond Fund,
Tax Exempt Short-Term Fund, or any of the money market
funds in the USAA Family of Funds.
OTHER SERVICES
INVESTMENT PLANS
InveStart(registered trademark) - an investment program
for beginning or first-time investors. Like more
experienced investors, InveStart(registered trademark)
customers may choose to establish a systematic investment
plan for their portfolio.
Systematic Investment Plans - you may establish a
systematic investment plan by completing the appropriate
forms. At the time you sign up for any of the following
investment plans that utilize the electronic funds
transfer service, you will choose the day of the month
(the effective date) on which you would like to regularly
purchase shares. When this day falls on a weekend or
holiday, the electronic transfer will take place on the
last business day before the effective date. Call the
Manager to obtain instructions. More information about
these preauthorized plans is contained in the SAI.
* InvesTronic(registered trademark) - an automatic
investment program for the purchase of additional shares
through electronic funds transfer. The investor selects
the day(s) each month that money is transferred from a
checking or savings account. With this program you can
make initial investments as low as $100 and automatic
monthly additions of $50 to the account.
* Direct Purchase Service - the periodic purchase of
shares through electronic funds transfer from a non-
governmental employer, an income-producing investment, or
an account with a participating financial institution.
* Automatic Purchase Plan - the periodic transfer of
funds from a USAA money market fund to purchase shares in
another non-money market USAA mutual fund.
* Buy/Sell Service - the intermittent purchase or
redemption of shares through electronic funds transfer to
or from a checking or savings account.
* Systematic Withdrawal Plan - the periodic redemption of
shares from one of your accounts permitting you to
receive a fixed amount of money monthly or quarterly.
* Retirement Plans - plans are available for IRA
(including SEP/IRA) and 403(b)(7) accounts. Federal
taxes on current income may be deferred if an investor qualifies.
* Directed Dividends - If you own shares in more than one
of the Funds in the USAA Family of Funds, you may direct
that dividends and/or capital gain distributions earned
in one fund be used to automatically purchase shares in
another fund.
SHAREHOLDER STATEMENTS
AND REPORTS
You will receive a confirmation for purchases or
redemptions by check and exchanges. If your account had
activity other than reinvested dividends, such as wire
purchases or redemptions or purchases under the
InvesTronic(registered trademark), Direct Purchase
Service, Automatic Purchase Plan or Directed Dividends
investment plans, you will receive a monthly statement that
will reflect quarter-to-date account activity.
At the end of each quarter you will receive a
consolidated statement for all of your mutual fund
accounts, regardless of account activity. The fourth
quarter consolidated statement will reflect all account
activity for the prior tax year. There will be a $10 fee
charged for copies of historical statements for other
than the prior tax year for any one account. You will
receive the Fund's financial statements with a summary of
its investments and performance at least semiannually.
In an effort to reduce expenses and respond to
shareholders' requests to reduce mail, the Company
intends to consolidate mailings of Annual and Semiannual
Reports to households having multiple accounts with the
same address of record. One copy of each report will be
furnished to that address. You may request additional
reports by notifying the Company.
TELEPHONE ASSISTANCE
Call our telephone assistance numbers for specific forms,
a copy of the SAI, the most recent Annual Report and/or
Semiannual Report, or if you have any questions
concerning any of the services offered.
SHARE PRICE CALCULATION
The price at which shares of the Fund are purchased and
redeemed by shareholders is equal to the NAV per share
determined on the effective date of the purchase or redemption.
WHEN
The NAV per share for the Fund is calculated at the close
of the regular trading session of the New York Stock
Exchange, which is usually 4:00 p.m. Eastern time. You
may buy and sell Fund shares at the NAV per share without
a sales charge.
HOW
The NAV per share is calculated by adding the value of
all securities and other assets in the Fund, deducting
liabilities, and dividing by the number of shares
outstanding. Securities are stated at amortized cost
which approximates market value.
For additional information, see Valuation of Securities
in the SAI.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
Net investment income is accrued daily and paid on the
last business day of the month. Daily dividends are
declared at the time the NAV per share is calculated.
All shares purchased shall begin accruing dividends on
the day following the effective date of the purchase and
shall receive dividends through the effective date of redemption.
When shareholders elect to receive monthly cash
dividends, funds accrued during each month will be sent
to the shareholder following the payment date.
Any dividend or distribution payment returned to the
Manager as not deliverable will be invested in the
shareholder's Fund account at the then-current NAV per share.
If any check for the payment of dividends or distributions
is not cashed within six months from the date on the check,
it becomes void. The amount of the check will then be
invested in the shareholder's account at the then-current
NAV per share.
FEDERAL TAXES
The following discussion relates only to generally
applicable federal income tax provisions in effect as of
the date of this Prospectus. Therefore, shareholders are
urged to consult their own tax advisers about the status
of distributions from the Fund in their own states and localities.
Fund - The Fund intends to qualify as a regulated
investment company under Subchapter M of the Internal
Revenue Code of 1986, as amended (the Code). By
complying with the applicable provisions of the Code, the
Fund will not be subject to federal income tax on its net
investment income and net capital gains (capital gains in
excess of capital losses) distributed to shareholders.
Shareholder - Dividends from taxable net investment
income and distributions of net short-term capital gains
are taxable to shareholders as ordinary income, whether
received in cash or reinvested in additional shares.
Distributions of net long-term capital gains are
taxable as long-term capital gains whether received in
cash or reinvested in additional shares, and regardless
of the length of time the investor has held the shares of
the Fund.
Withholding - The Fund is required by federal law to
withhold and remit to the U.S. Treasury a portion of the
income dividends and capital gain distributions and
proceeds of redemptions paid to any non-corporate
shareholder who fails to furnish the Fund with a correct
tax identification number, who underreports dividend or
interest income, or who fails to certify that he is not
subject to withholding. To avoid this withholding
requirement, you must certify on your application, or on
a separate Form W-9 supplied by the Transfer Agent, that
your tax identification number is correct and that you
are not currently subject to backup withholding.
Reporting - Information concerning the status of
dividends and distributions for federal income tax
purposes will be mailed to shareholders annually.
MANAGEMENT OF THE COMPANY
The business affairs of the Company are subject to the
supervision of the Board of Directors.
The Manager, USAA Investment Management Company
(IMCO), was organized in May 1970 and is an affiliate of
United Services Automobile Association (USAA), a large
diversified financial services institution. As of the
date of this Prospectus, the Manager had approximately $29
billion in total assets under management. The Manager's
mailing address is 9800 Fredericksburg Rd., San Antonio, TX 78288.
Officers and employees of the Manager are permitted to
engage in personal securities transactions subject to
restrictions and procedures set forth in the Joint Code
of Ethics adopted by the Company and the Manager. Such
restrictions and procedures include substantially all of
the recommendations of the Advisory Group of the
Investment Company Institute and comply with Securities
and Exchange Commission rules and regulations.
ADVISORY AGREEMENT
The Manager serves as the manager and investment adviser
of the Company, providing services under an Advisory
Agreement. Under the Advisory Agreement, the Manager is
responsible for the management of the Funds, business
affairs, and placement of brokerage orders, subject to
the authority of and supervision by the Board of Directors.
For its services under the Advisory Agreement, the Fund
pays the Manager an annual fee which is computed as a
percentage of the Fund's average net assets (ANA),
accrued daily and paid monthly. The Fund's management
fees are computed at twenty-four one hundredths of one
percent (.24%) of ANA. For the fiscal year ended July
31, 1995, the fees paid to the Manager, net of
reimbursement, were .23% of ANA.
OPERATING EXPENSES
For the fiscal year ended July 31, 1995, the Manager
limited total operating expenses to .45% of the Fund's
ANA. The Manager reimbursed the Fund $154,109 for
expenses in excess of the limitation. The Manager has
voluntarily agreed to continue to limit the Fund's annual
expenses until December 1, 1996, to .45% of its ANA and
will reimburse the Fund for all expenses in excess of the
limitation.
PORTFOLIO MANAGER
The following individual is primarily responsible for
managing the Fund.
J. Eric Thorderson, Executive Director of Fixed Income
Investments since March of 1994, has managed the Fund
since March 1994. Mr. Thorderson has eight years
investment management experience and has worked for IMCO
five years where he has held various positions in Fixed
Income Investments. Mr. Thorderson earned the Chartered
Financial Analyst designation in 1989 and is a member of
the Association for Investment Management and Research
and the San Antonio Financial Analysts Society, Inc. He
holds an MBA from the University of Illinois and a BA
from Wayne State University of Michigan.
SERVICE PROVIDERS
UNDERWRITER/ USAA Investment Management Company
DISTRIBUTOR 9800 Fredericksburg Rd., San Antonio, Texas 78288.
TRANSFER USAA Shareholder Account Services
AGENT 9800 Fredericksburg Rd., San Antonio, Texas 78288.
CUSTODIAN State Street Bank and Trust Company
P.O. Box 1713, Boston, Massachusetts 02105.
LEGAL Goodwin, Procter & Hoar
COUNSEL Exchange Place, Boston, Massachusetts 02109.
INDEPENDENT KPMG Peat Marwick LLP
AUDITORS 112 East Pecan, Suite 2400, San Antonio, Texas 78205.
DESCRIPTION OF SHARES
The Company is an open-end management investment company
incorporated under the laws of the State of Maryland on
October 14, 1980. The Company is authorized to issue
shares in separate classes, or Funds. The Fund described
in this Prospectus is being offered to the public. The
Fund is classified as a diversified investment company.
Under the Company's charter, the Board of Directors is
authorized to create new Funds in addition to those
already existing without approval of the shareholders of
the Company.
Under provisions of the Bylaws of the Company, no annual
meeting of shareholders is required. Ordinarily, no shareholder
meeting will be held unless required by the Investment
Company Act of 1940. The Directors may fill vacancies on
the Board or appoint new Directors provided that
immediately after such action at least two-thirds of the
Directors have been elected by shareholders.
Shareholders are entitled to one vote per share (with
proportionate voting for fractional shares) irrespective
of the relative net asset value of the shares. For
matters affecting an individual fund, a separate vote of
the shareholders of that fund is required.
TELEPHONE ASSISTANCE
(Call toll free - Central Time)
Monday-Friday 8:00 a.m. to 8:00 p.m.
Saturday: 8:30 a.m. to 5:00 p.m.
For further information on mutual funds:
1-800-531-8181
In San Antonio 210-456-7211
For account servicing, exchanges or redemptions:
1-800-531-8448
In San Antonio 210-456-7202
RECORDED 24 HOUR SERVICE
MUTUAL FUND PRICE QUOTES
(From any phone)
1-800-531-8066
In San Antonio 210-498-8066
MUTUAL FUND TOUCHLINE(registered trademark)
(From Touchtone phones only)
For account balance, last transaction or fund prices:
1-800-531-8777
In San Antonio 210-498-8777
[THIS PAGE LEFT BLANK INTENTIONALLY]
[THIS PAGE LEFT BLANK INTENTIONALLY]
(LOGO OF USAA STATEMENT OF
THE USAA MUTUAL ADDITIONAL INFORMATION
EAGLE HERE) FUND, INC. December 1, 1995
- ------------------------------------------------------------------------
USAA MUTUAL FUND, INC.
USAA MUTUAL FUND, INC. (the Company) is a registered investment
company offering shares of seven no-load mutual funds which are
described in this Statement of Additional Information (SAI): the
Aggressive Growth Fund, Growth Fund, Growth & Income Fund, Income
Stock Fund, Income Fund, Short-Term Bond Fund, and Money Market
Fund (collectively, the Funds). Each Fund is classified as a
diversified investment company and has its own investment
objective designed to meet different investment goals.
A Prospectus for the Funds dated December 1, 1995, which provides
the basic information you should know before investing in the
Funds, may be obtained without charge upon written request to
USAA Mutual Fund, Inc., 9800 Fredericksburg Rd., San Antonio, TX
78288, or by calling toll free 1-800-531-8181. This SAI is not a
Prospectus and contains information in addition to and more
detailed than that set forth in each Fund's Prospectus. It is
intended to provide you with additional information regarding the
activities and operations of the Company and the Funds, and
should be read in conjunction with each Fund's Prospectus.
- -------------------------------------------------------------------------
TABLE OF CONTENTS
Page
2 Valuation of Securities
3 Additional Information Regarding Redemption of Shares
4 Investment Plans
5 Investment Policies
9 Investment Restrictions
10 Portfolio Transactions
12 Further Description of Shares
13 Tax Considerations
14 Directors and Officers of the Company
17 The Company's Manager
18 General Information
19 Calculation of Performance Data
20 Appendix A - Long-Term and Short-Term Debt Ratings
24 Appendix B - Comparison of Portfolio Performance
27 Appendix C - Dollar-Cost Averaging
VALUATION OF SECURITIES
Shares of each Fund are offered on a continuing best efforts
basis through USAA Investment Management Company (IMCO or the
Manager). The offering price for shares of each Fund is equal to
the current net asset value (NAV) per share. The NAV per share
of each Fund is calculated by adding the value of all its
portfolio securities and other assets, deducting its liabilities,
and dividing by the number of shares outstanding.
A Fund's NAV per share is calculated each day, Monday
through Friday, except days on which the New York Stock Exchange
(NYSE) is closed. The NYSE is currently scheduled to be closed
on New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving, and Christmas, and on
the preceding Friday or subsequent Monday when one of these
holidays falls on a Saturday or Sunday, respectively.
The value of the securities of the Aggressive Growth,
Growth, Growth & Income, Income Stock, Income, and Short-Term
Bond Funds is determined by one or more of the following methods:
(1) Portfolio securities, except as otherwise noted, traded
primarily on a domestic securities exchange are valued at
the last sales price on that exchange. Portfolio securities
traded primarily on foreign securities exchanges are
generally valued at the closing values of such securities on
the exchange where primarily traded. If no sale is
reported, the latest bid price is generally used depending
upon local custom or regulation.
(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 at the time trading closes on the NYSE.
(3) Debt securities purchased with maturities of 60 days or less
are stated at amortized cost which approximates market
value. Repurchase agreements are valued at cost.
(4) Other debt securities may be valued each business day by a
pricing service (the Service) approved by the Board of
Directors. The Service uses the mean between quoted bid and
asked prices or the last sales price to price securities
when, in the Service's judgment, these prices are readily
available and are representative of the securities' market
values. For many securities, such prices are not readily
available. The Service generally prices those 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.
(5) Securities which 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.
Securities trading in foreign markets may not take place on all
days on which the NYSE is open. Further, trading takes place in
various foreign markets on days on which the NYSE is not open.
The calculation of a Fund's NAV therefore may not take place
contemporaneously with the determination of the prices of
securities held by a Fund. Events affecting the values of
portfolio securities that occur between the time their prices are
determined and the close of normal trading on the NYSE on a day a
Fund's NAV is calculated will not be reflected in a Fund's NAV,
unless the Manager determines that the particular event would
materially affect NAV. In such a case, the Fund's Manager, under
the supervision of the Board of Directors, will use all relevant
available information to determine a fair value for the affected
portfolio securities.
The value of the Money Market Fund's securities is stated at
amortized cost which approximates market value. This involves
valuing a security at its cost and thereafter assuming a constant
amortization to maturity of any discount or premium, regardless
of the impact of fluctuating interest rates. While this method
provides certainty in valuation, it may result in periods during
which the value of an instrument, as determined by amortized
cost, is higher or lower than the price the Fund would receive
upon the sale of the instrument.
The valuation of the Money Market Fund's portfolio
instruments based upon their amortized cost is subject to the
Fund's adherence to certain procedures and conditions.
Consistent with regulatory requirements, the Manager will
purchase securities with remaining maturities of 397 days or less
and will maintain a dollar-weighted average portfolio maturity of
no more than 90 days. The Manager will invest only in securities
that have been determined to present minimal credit risk and that
satisfy the quality and diversification requirements of
applicable rules and regulations of the Securities and Exchange
Commission (SEC).
The Board of Directors has established procedures designed
to stabilize the Money Market Fund's price per share, as computed
for the purpose of sales and redemptions, at $1.00. There can be
no assurance, however, that the Fund will at all times be able to
maintain a constant $1.00 NAV per share. Such procedures include
review of the Fund's holdings at such intervals as is deemed
appropriate to determine whether the Fund's NAV calculated by
using available market quotations deviates from $1.00 per share
and, if so, whether such deviation may result in material
dilution or is otherwise unfair to existing shareholders. In the
event that it is determined that such a deviation exists, the
Board of Directors will take such corrective action as it regards
as necessary and appropriate. Such action may include selling
portfolio instruments prior to maturity to realize capital gains
or losses or to shorten average portfolio maturity, withholding
dividends, or establishing a NAV per share by using available
market quotations.
ADDITIONAL INFORMATION REGARDING REDEMPTION OF SHARES
The value of a shareholder's investment at the time of redemption
may be more or less than the cost at purchase, depending on the
value of the securities held in each Fund's portfolio. Requests
for redemption which are subject to any special conditions, or
which specify an effective date other than as provided herein,
cannot be accepted. A gain or loss for tax purposes may be
realized on the sale of shares, depending upon the price when redeemed.
The Board of Directors may cause the redemption of an
account with a balance of less than 10 shares of the Aggressive
Growth, Growth, Growth & Income, Income Stock, Income, or Short-
Term Bond Funds and less than 500 shares of the Money Market Fund
provided (1) the value of the account has been reduced, for
reasons other than market action, below the minimum initial
investment in such Fund at the time of the establishment of the
account, (2) the account has remained below the minimum level for
six months, and (3) 60 days' prior written notice of the proposed
redemption has been sent to the shareholder. Shares will be
redeemed at the NAV on the date fixed for redemption by the Board
of Directors. Prompt payment will be made by mail to the last
known address of the shareholder.
The Company reserves the right to suspend the right of
redemption or postpone the date of payment (1) for any periods
during which the NYSE is closed, (2) when trading in the markets
the Company normally utilizes is restricted, or an emergency
exists as determined by the SEC so that disposal of the Company's
investments or determination of its net asset value is not
reasonably practicable, or (3) for such other periods as the SEC
by order may permit for protection of the Company's shareholders.
For the mutual protection of the investor and the Funds, a
guarantee of signature may be required by the Company. If
required, each signature on the account registration must be
guaranteed. Signature guarantees are acceptable from FDIC member
banks, brokers, dealers, municipal securities dealers, municipal
securities brokers, government securities dealers, government
securities brokers, credit unions, national securities exchanges,
registered securities associations, clearing agencies and savings
associations. A signature guarantee for active duty military
personnel stationed abroad may be provided by an officer of the
United States Embassy or Consulate, a staff officer of the Judge
Advocate General, or an individual's commanding officer.
Redemption By Check
Shareholders in the Short-Term Bond Fund or Money Market Fund may
request that checks be issued for their accounts. A one-time $5
checkwriting fee is charged to each account by the Transfer Agent
for the use of the privilege. Checks must be written in the
amount of at least $250.
Checks issued to shareholders of either Fund will be sent
only to the person in whose name the account is registered and
only to the address of record. The checks must be manually
signed by the registered owner(s) exactly as the account is
registered. For joint accounts the signature of either or both
joint owners will be required on the check, according to the
election made on the signature card. Dividends will continue to
be earned by the shareholder until the shares are redeemed by the
presentation of a check.
When a check is presented to the Transfer Agent for payment,
a sufficient number of full and fractional shares in the
investor's account will be redeemed to cover the amount of the
check. If an investor's account is not adequate to cover the
amount of a check, the check will be returned unpaid. A check
drawn on an account in the Short-Term Bond Fund may be returned
for insufficient funds if the net asset value per share of that
Fund declines over the time between the date the check was
written and the date it was presented for payment. Because the
value of the account in either the Short-Term Bond Fund or Money
Market Fund changes as dividends are accrued on a daily basis,
checks may not be used to close an account.
After clearance, checks paid during the month will be
returned to the shareholder by separate mail. The checkwriting
privilege will be subject to the customary rules and regulations
of State Street Bank and Trust Company (State Street Bank or the
Custodian) governing checking accounts. Other than the initial
one-time fee, there is no charge to the shareholder for the use
of the checks or for subsequent reorders of checks.
Additional Information Regarding Redemption of Shares, cont.
The Company reserves the right to assess a processing fee
against a shareholder's account for any redemption check not
honored by a clearing or paying agent. Currently, this fee is
$15 and is subject to change at any time. Some examples of such
dishonor are improper endorsement, checks written for an amount
less than the minimum check amount, and insufficient or
uncollectible funds.
The Company, the Transfer Agent, and State Street Bank each
reserve the right to change or suspend the checkwriting privilege
upon 30 days' written notice to participating shareholders.
INVESTMENT PLANS
The following investment plans are made available by the Company
to shareholders of all the Funds. At the time you sign up for
any of the following investment plans that utilize the electronic
funds transfer service, you will choose the day of the month (the
effective date) on which you would like to regularly purchase
shares. When this day falls on a weekend or holiday, the
electronic transfer will take place on the last business day
before the effective date. You may terminate your participation
in a plan at any time. Please call the Manager for details and
necessary forms or applications.
Systematic Purchase of Shares
InvesTronic(registered trademark) - an automatic investment
program for the purchase of additional shares through electronic
funds transfer. The investor selects the day(s) each month that
money is transferred from a checking or savings account. By
completing an application, which may be obtained from the
Manager, you invest a specific amount each month ($50 minimum) in
any of your accounts.
Direct Purchase Service - the periodic purchase of shares through
electronic funds transfer from a non-governmental employer, an
income-producing investment, or an account with a participating
financial institution.
Automatic Purchase Plan - the periodic transfer of funds from a
USAA money market fund to purchase shares in another non-money
market USAA mutual fund. There is a minimum investment required
for this program of $5,000, with a monthly transaction minimum of
$50. The minimum initial investment requirement for the other
USAA mutual fund must be satisfied before the first transfer.
Buy/Sell Service - the intermittent purchase or redemption of
shares through electronic funds transfer to or from a checking or
savings account.
Participation in these systematic purchase plans will permit
a shareholder to engage in dollar-cost averaging. For additional
information concerning the benefits of dollar-cost averaging, see
Appendix C.
Systematic Withdrawal Plan
If a shareholder in a single investment account (accounts in
different Funds cannot be aggregated for this purpose) owns
shares having a net asset value of $5,000 or more, the
shareholder may request that enough shares to produce a fixed
amount of money be liquidated from the account monthly or
quarterly. The amount of each withdrawal must be at least $50.
Using the electronic funds transfer service, shareholders may
choose to have withdrawals electronically deposited at their bank
or other financial institution. They may also elect to have
checks mailed to a designated address.
Such a plan may be initiated by depositing shares worth at
least $5,000 with the Transfer Agent and by completing a
Systematic Withdrawal Plan application, which may be requested
from the Manager. The shareholder may terminate participation in
the plan at any time. There is no charge to the shareholder for
withdrawals under the Systematic Withdrawal Plan. The Company
will not bear any expenses in administering the plan beyond the
regular transfer agent and custodian costs of issuing and
redeeming shares. Any additional expenses of administering the
plan will be borne by the Manager.
Withdrawals will be made by redeeming full and fractional
shares on the date selected by the shareholder at the time the
plan is established. Withdrawal payments made under this plan
may exceed dividends and distributions and, to this extent, will
involve the use of principal and could reduce the dollar value of
a shareholder's investment and eventually exhaust the account.
Reinvesting dividends and distributions helps replenish the
account. Because share values and net investment income can
fluctuate, shareholders should not expect withdrawals to be
offset by rising income or share value gains.
Each redemption of shares may result in a gain or loss,
which must be reported on the shareholder's income tax return.
Therefore, a shareholder should keep an accurate record of any
gain or loss on each withdrawal.
Tax-Deferred Retirement Plans
Federal taxes on current income may be deferred if an investor
qualifies for certain types of retirement programs. For the
convenience of the investor, the following plans are made
available by the Manager: IRA (including SEP/IRA) and 403(b)(7)
accounts. The minimum initial investment in each of these plans
is $1,000 for each Fund with the exception of spousal IRAs for
which the minimum investment is $250. Subsequent investments of
$50 or more per account may be made at any time. Effective after
Janaury 31, 1996, the minimum initial investment for these plans
will decrease to $250 or minimum $100 with a minimum $50 monthly
electronic investment. Investments may be made in one or any
combination of the portfolios described in the Prospectus of each
Fund of USAA Mutual Fund, Inc. and USAA Investment Trust (not
available in the Growth and Tax Strategy Fund).
Retirement plan applications for the IRA and 403(b)(7)
programs should be sent directly to USAA Shareholder Account
Services, 9800 Fredericksburg Rd., San Antonio, TX 78288. State
Street Bank serves as Custodian for these tax-deferred retirement
plans under the programs made available by the Manager.
Applications for these retirement plans received by the Manager
will be forwarded to the Custodian for acceptance.
An administrative fee of $20 is deducted from the proceeds
of a distribution closing an account. Exceptions to the fee are:
partial distributions, total transfer within USAA, and
distributions due to disability or death. This charge is subject
to change as provided in the various agreements. There may be
additional charges, as mutually agreed upon between the investor
and the Custodian, for further services requested of the
Custodian.
Each employer or individual establishing a tax-deferred
retirement plan is advised to consult with a tax adviser before
establishing the plan. Detailed information about the plans may
be obtained from the Manager.
INVESTMENT POLICIES
The section captioned Investment Objective and Policies in each
Fund's Prospectus describes the fundamental investment objective
and the investment policies applicable to each Fund and the
following is provided as additional information.
Tax-Exempt Securities
These securities include general obligation bonds, which are
secured by the issuer's pledge of its faith, credit and taxing
power for the payment of principal and interest; revenue bonds,
which are payable from the revenue derived from a particular
facility or class of facilities or, in some cases, from the
proceeds of a special excise tax or other specific revenue
source, but not from the general taxing power; and certain types
of industrial development bonds issued by or on behalf of public
authorities to obtain funds for privately-operated facilities,
provided that the interest paid on such securities qualifies as
exempt from federal income taxes.
Section 4(2) Commercial Paper and Rule 144A Securities
Each Fund may invest in commercial paper issued in reliance on
the "private placement" exemption from registration afforded by
Section 4(2) of the Securities Act of 1933 (Section 4(2)
Commercial Paper). Section 4(2) Commercial Paper is restricted
as to disposition under the federal securities laws; therefore,
any resale of Section 4(2) Commercial Paper must be effected in a
transaction exempt from registration under the Securities Act of
1933. Section 4(2) Commercial Paper is normally resold to other
investors through or with the assistance of the issuer or
investment dealers who make a market in Section 4(2) Commercial
Paper, thus providing liquidity.
Each Fund may also purchase restricted securities eligible
for resale to "qualified institutional buyers" pursuant to Rule
144A under the Securities Act of 1933 (Rule 144A Securities).
Rule 144A provides a non-exclusive safe harbor from the
registration requirements of the Securities Act of 1933 for
resales of certain securities to institutional investors.
Liquidity Determinations
The Board of Directors has established guidelines pursuant to
which Municipal Lease Obligations, Section 4(2) Commercial Paper,
Rule 144A Securities, and certain restricted debt securities that
are subject to unconditional put or demand features exercisable
within seven days (Restricted Put Bonds) may be determined to be
liquid for purposes of complying with the Funds' investment
restrictions applicable to
Investment Policies, cont.
investments in illiquid securities. In determining the liquidity
of Municipal Lease Obligations, Section 4(2) Commercial Paper and
Rule 144A Securities, the Manager will consider the following
factors, among others, established by the Board of Directors:
(1) the frequency of trades and quotes for the security, (2) the
number of dealers willing to purchase or sell the security and
the number of other potential purchasers, (3) dealer undertakings
to make a market in the security, and (4) the nature of the
security and the nature of the marketplace trades, including the
time needed to dispose of the security, the method of soliciting
offers, and the mechanics of transfer. Additional factors
considered by the Manager in determining the liquidity of a
municipal lease obligation are: (1) whether the lease
obligation is of a size that will be attractive to institutional
investors, (2) whether the lease obligation contains a non-
appropriation clause and the likelihood that the obligor will
fail to make an appropriation therefor, and (3) such other
factors as the Manager may determine to be relevant to such
determination. In determining the liquidity of Restricted Put
Bonds, the Manager will evaluate the credit quality of the party
(the Put Provider) issuing (or unconditionally guaranteeing
performance on) the unconditional put or demand feature of the
Restricted Put Bond. In evaluating the credit quality of the Put
Provider, the Manager will consider all factors that it deems
indicative of the capacity of the Put Provider to meet its
obligations under the Restricted Put Bond based upon a review of
the Put Provider's outstanding debt and financial statements and
general economic conditions.
Certain foreign securities (including Eurodollar
obligations) may be eligible for resale pursuant to Rule 144A in
the United States and may also trade without restriction in one
or more foreign markets. Such securities may be determined to be
liquid based upon these foreign markets without regard to their
eligibility for resale pursuant to Rule 144A. In such cases,
these securities will not be treated as Rule 144A securities for
purposes of the liquidity guidelines established by the Board of
Directors and will not be considered "restricted securities" for
purposes of a Fund's investment restriction.
Calculation of Portfolio Weighted Average Maturity
Weighted average maturity is derived by multiplying the value of
each investment by the number of days remaining to its maturity,
adding these calculations, and then dividing the total by the
value of the Fund's portfolio. An obligation's maturity is
typically determined on a stated final maturity basis, although
there are some exceptions to this rule.
With respect to obligations held by the Funds, if it is
probable that the issuer of an instrument will take advantage of
a maturity-shortening device, such as a call, refunding, or
redemption provision, the date on which the instrument will
probably be called, refunded, or redeemed may be considered to be
its maturity date. Also, the maturities of mortgage-backed
securities, some asset-backed securities and securities subject
to sinking fund arrangements, are determined on a weighted
average life basis, which is the average time for principal to be
repaid. For mortgage-backed and some asset-backed securities,
this average time is calculated by assuming a constant prepayment
rate (CPR) for the life of the mortgages or assets backing the
security. The CPR for a security can vary depending upon the
level and volatility of interest rates. This, in turn, can
affect the weighted average life of the security. The weighted
average lives of these securities will be shorter than their
stated final maturities. In addition, for purposes of the Fund's
investment policies, an instrument will be treated as having a
maturity earlier than its stated maturity date if the instrument
has technical features such as puts or demand features which, in
the judgment of the Manager, will result in the instrument being
valued in the market as though it has the earlier maturity.
The Money Market Fund will determine the maturity of an
obligation in its portfolio in accordance with Rule 2a-7 under
the Investment Company Act of 1940, as amended (1940 Act).
Writing Covered Call Options
The Income Stock Fund may write (sell) covered call options and purchase
options to close out options previously written by the Fund. The
purpose of writing covered call options is to generate additional
premium income for the Fund. This premium income will serve to
enhance the Fund's total return and will reduce the effect of any
price decline of the security involved in the option. Covered
call options will generally be written on securities which, in
the Manager's opinion, are not expected to make any major price
moves in the near future but which, over the long term, are
deemed to be attractive investments for the Fund.
A call option gives the holder (buyer) the right to purchase
a security at a specified price (the exercise price) at any time
until a certain date (the expiration date). So long as the
obligation of the writer of a call option continues, he may be
assigned an exercise notice by the broker-dealer through whom
such option was sold, requiring him to deliver the underlying
security against payment of the exercise price. This obligation
terminates upon the expiration of the call option, or such
earlier time at which the writer effects a closing purchase
transaction by repurchasing the option which he previously sold.
To secure his obligation to deliver the underlying security in
the case of a call option, a writer is required to deposit in
escrow the underlying security or other assets in accordance
with the rules of the particular clearing corporations and of the
exchanges. The Fund will write only covered call options. This
means that the Fund will only write a call option on a security
which the Fund already owns. The Fund will not write call
options on when-issued securities. The Fund will write covered
call options in standard contracts which may be quoted on NASDAQ,
or on national securities exchanges. In order to comply with the
requirements of the securities laws in several states, the Fund
will not write a covered call option if, as a result, the
aggregate market value of all portfolio securities covering call
options exceeds 5% of the market value of the Fund's total assets.
Portfolio securities on which call options may be written
will be purchased solely on the basis of investment
considerations consistent with the Fund's investment objectives.
The writing of covered call options is a conservative investment
technique believed to involve relatively little risk (in contrast
to the writing of naked or uncovered options, which the Fund will
not do), but capable of enhancing the Fund's total return. When
writing a covered call option, the Fund, in return for the
premium, gives up the opportunity for profit from a price
increase in the underlying security above the exercise price, but
conversely retains the risk of loss should the price of the
security decline. Unlike one who owns securities not subject to
an option, the Fund has no control over when it may be required
to sell the underlying securities, since it may be assigned an
exercise notice at any time prior to the expiration of its
obligation as a writer. If a call option which the Fund has
written expires, the Fund will realize a gain in the amount of
the premium; however, such gain may be offset by a decline in the
market value of the underlying security during the option period.
If the call option is exercised, the Fund will realize a gain or
loss from the sale of the underlying security. The security
covering the call will be maintained in a segregated account of
the Fund's custodian. The Fund does not consider a security
covered by a call to be pledged as that term is used in the
Fund's policy which limits the pledging or mortgaging of its assets.
The premium received is the market value of an option. The
premium the Fund will receive from writing a call option will
reflect, among other things, the current market price of the
underlying security, the relationship of the exercise price to
such market price, the historical price volatility of the
underlying security, and the length of the option period. In
determining whether a particular call option should be written on
a particular security, the Manager will consider the
reasonableness of the anticipated premium and the likelihood that
a liquid secondary market will exist for those options. The
premium received by the Fund for writing covered call options
will be recorded as a liability in the Fund's statement of assets
and liabilities. This liability will be adjusted daily to the
option's current market value, which will be the latest sale
price at the time at which the net asset value per share of the
Fund is computed (close of the New York Stock Exchange), or in
the absence of such sale, the latest asked price. The liability
will be extinguished upon expiration of the option, the purchase
of an identical option in a closing transaction, or delivery of
the underlying security upon the exercise of the option.
Closing transactions may be effected in order to realize a
profit on an outstanding call option, to prevent an underlying
security from being called, or to permit the sale of the
underlying security. Furthermore, effecting a closing
transaction will permit the Fund to write another call option on
the underlying security with either a different exercise price or
expiration date or both.
If the Fund desires to sell a particular security from its
portfolio on which it has written a call option, it will seek to
effect a closing transaction prior to, or concurrently with, the
sale of the security. There is, of course, no assurance that the
Fund will be able to effect such closing transactions at a
favorable price. If the Fund cannot enter into such a
transaction, it may be required to hold a security that it might
otherwise have sold, in which case it would continue to be at
market risk on the security. This could result in higher
transaction costs, including brokerage commissions. The Fund
will pay brokerage commissions in connection with the writing of
options to close out previously written options. Such brokerage
commissions are normally higher than those applicable to
purchases and sales of portfolio securities.
Call options written by the Fund will normally have
expiration dates of less than nine months from the date written.
The exercise price of the options may be below, equal to, or
above the current market values of the underlying securities at
the time the options are written. From time to time, the Fund
may purchase an underlying security for delivery in accordance
with an exercise notice of a call option assigned to it, rather
than delivering such security from its portfolio. In such cases,
additional brokerage commissions will be incurred.
The Fund will realize a profit or loss from a closing
purchase transaction if the cost of the transaction is less or
more than the premium received from the writing of the option.
Because increases in the market price of a call option will
generally reflect increases in the market price of the underlying
security, any loss resulting from the repurchase of a call option
is likely to be offset in whole or in part by appreciation of the
underlying security owned by the Fund.
Investment Policies, cont.
Forward Currency Contracts
The Aggressive Growth Fund may enter into forward currency
contracts in order to protect against uncertainty in the level of
future foreign exchange rates.
A forward contract involves an agreement to purchase or sell
a specific currency at a specified future date or over a
specified time period at a price set at the time of the contract.
These contracts are usually traded directly between currency
traders (usually large commercial banks) and their customers. A
forward contract generally has no deposit requirements, and no
commissions are charged.
The Fund may enter into forward currency contracts under two
circumstances. First, when the Fund enters into a contract for
the purchase or sale of a security denominated in a foreign
currency, it may desire to "lock in" the U.S. dollar price of the
security. By entering into such a contract, the Fund will be
able to protect itself against a possible loss resulting from an
adverse change in the relationship between the U.S. dollar and
the foreign currency from the date the security is purchased or
sold to the date on which payment is made or received. Second,
when management of the Fund believes that the currency of a
specific country may deteriorate relative to the U.S. dollar, it
may enter into a forward contract to sell that currency. The
Fund may not hedge with respect to a particular currency for an
amount greater than the aggregate market value (determined at the
time of making any sale of forward currency) of the securities
held in its portfolio denominated or quoted in, or bearing a
substantial correlation to, such currency.
The use of forward contracts involves certain risks. The
precise matching of contract amounts and the value of securities
involved generally will not be possible since the future value of
such securities in currencies more than likely will change
between the date the contract is entered into and the date it
matures. The projection of short-term currency market movements
is extremely difficult and successful execution of a short-term
hedging strategy is uncertain. Under normal circumstances,
consideration of the prospect for currency parities will be
incorporated into the longer term investment strategies. The
Manager believes it is important, however, to have the
flexibility to enter into such contracts when it determines it is
in the best interest of the Fund to do so. It is impossible to
forecast what the market value of portfolio securities will be at
the expiration of a contract. Accordingly, it may be necessary
for the Fund to purchase additional currency (and bear the
expense of such purchase) if the market value of the security is
less than the amount of currency the Fund is obligated to
deliver, and if a decision is made to sell the security and make
delivery of the currency. Conversely, it may be necessary to
sell some of the foreign currency received on the sale of the
portfolio security if its market value exceeds the amount of
currency the Fund is obligated to deliver.
The Fund is not required to enter into such transactions and
will not do so unless deemed appropriate by the Manager.
Although the Fund values its assets each business day in
terms of U.S. dollars, it does not intend to convert its foreign
currencies into U.S. dollars on a daily basis. It will do so
from time to time, and shareholders should be aware of currency
conversion costs. Although foreign exchange dealers do not
charge a fee for conversion, they do realize a profit based on
the difference (spread) between the prices at which they are
buying and selling various currencies. Thus, a dealer may offer
to sell a foreign currency to the Fund at one rate, while
offering a lesser rate of exchange should the Fund desire to
resell that currency to the dealer.
Investments in Real Estate Investment Trusts (REITs)
Because the Aggressive Growth, Growth, Growth & Income, and
Income Stock Funds may invest their assets in REITs, the Funds
may also be subject to certain risks associated with direct
investments in REITs. REITs may be affected by changes in the
value of their underlying properties and by defaults by borrowers
or tenants. Furthermore, REITs are dependent upon specialized
management skills of their managers and may have limited
geographic diversification, thereby, subjecting them to risks
inherent in financing a limited number of projects. REITs depend
generally on their ability to generate cash flow to make
distributions to shareholders, and certain REITs have self-
liquidation provisions by which mortgages held may be paid in
full and distributions of capital returns may be made at any time.
Convertible Securities
Convertible securities are bonds, preferred stocks, and other
securities that pay interest or dividends and offer the buyer the
option of converting the security into common stock. The value
of convertible securities depends partially on interest rate
changes and the credit quality of the issuer. Because a
convertible security affords an investor the opportunity, through
its conversion feature, to participate in the capital appreciation
of the underlying common stock, the value of convertible securities
may also change based on the price of the common stock.
The convertible securities in which the Funds will invest
may be rated below investment grade as determined by Moody's
Investors Service, Inc. (Moody's) or Standard & Poor's Ratings
Group (S&P), or unrated but judged by the Manager to be of
comparable quality (commonly called junk bonds). For a more
complete description of debt ratings, see Appendix A. Such
securities are deemed to be speculative and involve greater risk
of default due to changes in interest rates, economic conditions,
and the issuer's creditworthiness. As a result, their market
prices tend to fluctuate more than higher-quality securities.
During periods of general economic downturns or rising interest
rates, issuers of such securities may experience financial
difficulties which could affect their ability to make timely
interest and principal payments. The Fund's ability to timely
and accurately value and dispose of lower quality securities may
also be affected by the absence or periodic discontinuance of
liquid trading markets.
INVESTMENT RESTRICTIONS
The following investment restrictions have been adopted by the
Company for and are applicable to each Fund. Except with respect
to the Growth & Income Fund, Income Stock Fund, and Short-Term
Bond Fund, these restrictions may not be changed for any given
Fund without approval by the lesser of (1) 67% or more of the
voting securities present at a meeting of the Fund if more than
50% of the outstanding voting securities of the Fund are present
or represented by proxy or (2) more than 50% of the Fund's
outstanding voting securities. With respect to the Growth &
Income Fund, Income Stock Fund, and Short-Term Bond Fund, only
restrictions 3, 4, 6, 7, 10, 13, 16 and 17 may not be changed
without approval of shareholders, as defined herein. The
investment restrictions of one Fund may be changed without
affecting those of any other Fund.
A Fund:
(1) May not purchase or retain securities of any issuer if any
officer or Director of the Company or its Manager own
individually more than one-half of one percent ( 1/2%) of
the securities of that issuer, and collectively the officers
and Directors of the Company and Manager together own more
than 5% of the securities of that issuer.
(2) May not purchase from or sell to any officer or Director of
the Company or its Manager any securities other than shares
of the capital stock of the Funds.
(3) May not underwrite securities of other issuers, except that
the Company may be deemed to be a statutory underwriter in
the distribution of any restricted securities or not readily
marketable securities.
(4) May not borrow money, except for temporary or emergency
purposes in an amount not exceeding 33 1/3% of its total
assets (including the amount borrowed) less liabilities
(other than borrowings).
(5) May not invest in companies for the purpose of exercising
control or management.
(6) May not, with respect to 75% of its total assets, purchase
the securities of any issuer (except Government Securities,
as such term is defined in the 1940 Act) if, as a result,
the Fund would own more than 10% of the outstanding voting
securities of such issuer or the Fund would have more than
5% of the value of its total assets invested in the
securities of such issuer.
(7) May not lend any securities or make any loan if, as a
result, more than 33 1/3% of its total assets would be lent
to other parties, except that this limitation does not apply
to purchases of debt securities or to repurchase agreements.
(8) May not invest in warrants more than 2% of the value of its
assets, taken at the lower of cost or market value.
Warrants initially attached to securities and acquired by
the Fund upon original issuance thereof shall be deemed to
be without value.
(9) May not mortgage, pledge, or hypothecate any of its assets,
except for the Income Stock Fund. A security covered by a
call is not considered pledged.
(10) May not concentrate its investments in any one industry
although it may invest up to 25% of the value of its total
assets in any one industry. Banks are not considered a
single industry for purposes of this policy (solely with
respect to the Money Market Fund), nor shall this
limitation apply to securities issued or guaranteed by the
U.S. Government or its corporate instrumentalities.
(11) May not acquire securities of other open-end investment
companies, except in connection with a merger,
consolidation, or acquisition of assets approved by the
shareholders.
(12) May not invest more than 5% of the value of its total assets
in any closed-end investment company and will not hold more
than 3% of the outstanding voting stock of any closed-end
investment company.
(13) May not purchase or sell commodities, commodity contracts,
or real estate, although a Fund may invest in the securities
of real estate investment trusts.
Investment Restrictions, cont.
(14) May not engage in margin transactions or arbitrage or short
sales, or in put, call, straddle, or spread activities,
except the Income Stock Fund may write covered call options
as described under Investment Objective and Policies in the
Prospectus and Investment Policies in this Statement of
Additional Information.
(15) May not allow its Manager or officers or Directors of itself
or its Manager to take long or short positions in shares of
a Fund, except that such persons may purchase shares for
their own account for investment purposes only at the price
available to the public at the moment of such purchase.
(16) May not change the nature of its business so as to cease to
be an investment company.
(17) May not issue senior securities, as defined in the
Investment Company Act of 1940, as amended (the 1940 Act),
except as permitted by Section 18(f)(2) and rules thereunder.
With respect to the Money Market Fund's exclusion of
investment in banks for purposes of industry concentration limits
contained in investment restriction 10, certificates of deposit,
time deposits, bankers acceptances, and other similar money
market instruments issued by domestic banks may be excluded from
the industry concentration limits set forth in that restriction.
Additional Restrictions
The following restrictions are not considered to be fundamental
policies of the Funds. Nevertheless, the Company and each Fund
will comply with them as long as they are required by any state
where the Funds' shares are offered for sale. These additional
restrictions may be changed by the Board of Directors of the
Company without notice to or approval by the shareholders.
A Fund:
(1) May not invest any part of its assets in interests in oil,
gas, or other mineral explorations, or developmental programs.
(2) May not redeem shares in kind except that the Money Market
Fund may, pursuant to Board of Directors action, redeem
shares in kind at any given time to maintain a $1.00 per
share price for the Money Market Fund.
(3) May not invest more than 15% (10% with respect to the Money
Market Fund) of the value of its net assets in illiquid
securities, including repurchase agreements maturing in more
than seven days.
(4) May not purchase any security while borrowings representing
more than 5% of the Fund's total assets are outstanding.
(5) May not invest more than 5% of the value of its assets in
securities of companies having a record of less than three
years' continuous operations, except that the Aggressive
Growth Fund may invest up to 75% of its assets in such companies.
(6) May not, on a joint or joint and several basis, participate
in any trading account in securities.
PORTFOLIO TRANSACTIONS
The Manager, pursuant to the Advisory Agreement dated September
21, 1990 and subject to the general control of the Company's
Board of Directors, places all orders for the purchase and sale
of Fund securities. In executing portfolio transactions and
selecting brokers and dealers, it is the Company's policy to seek
the best overall terms available. The Manager shall consider
such factors as it deems relevant, including the breadth of the
market in the security, the financial condition and execution
capability of the broker or dealer, and the reasonableness of the
commission, if any, for the specific transaction or on a
continuing basis. Securities purchased or sold in the over-the-
counter market will be executed through principal market makers,
except when, in the opinion of the Manager, better prices and
execution are available elsewhere.
In the allocation of brokerage business, preference may be
given to those broker-dealers who provide research or other
services to the Manager. Such research and other services may
include, for example: advice concerning the value of securities,
the advisability of investing in, purchasing, or selling securities,
and the availability of securities or the purchasers or sellers of
securities; analyses and reports concerning issuers, industries,
securities, economic factors and trends, portfolio strategy, and
performance of accounts; and various functions incidental to effecting
securities transactions, such as clearance and settlement. In return
for such services, a Fund may pay to those brokers a higher commission
than may be charged by other brokers, provided that the Manager
determines in good faith that such commission is reasonable in terms
of either that particular transaction or of the overall responsibility
of the Manager to the Funds and its other clients. The receipt
of research from broker-dealers that execute transactions on
behalf of the Company may be useful to the Manager in rendering
investment management services to other clients (including
affiliates of the Manager), and conversely, such research provided
by broker-dealers who have executed transaction orders on behalf of
other clients may be useful to the Manager in carrying out its
obligations to the Company. While such research is available to and may
be used by the Manager in providing investment advice to all its clients
(including affiliates of the Manager), not all of such research
may be used by the Manager for the benefit of the Company. Such
research and services will be in addition to and not in lieu of
research and services provided by the Manager, and the expenses
of the Manager will not necessarily be reduced by the receipt of
such supplemental research. See The Company's Manager.
Securities of the same issuer may be purchased, held, or
sold at the same time by the Company for any or all of its Funds,
or other accounts or companies for which the Manager acts as the
investment adviser (including affiliates of the Manager). On
occasions when the Manager deems the purchase or sale of a
security to be in the best interest of the Company, as well as
the Manager's other clients, the Manager, to the extent permitted
by applicable laws and regulations, may aggregate such securities
to be sold or purchased for the Company with those to be sold or
purchased for other customers in order to obtain best execution
and lower brokerage commissions, if any. In such event,
allocation of the securities so purchased or sold, as well as the
expenses incurred in the transaction, will be made by the Manager
in the manner it considers to be most equitable and consistent
with its fiduciary obligations to all such customers, including
the Company. In some instances, this procedure may impact the
price and size of the position obtainable for the Company.
Brokerage Commissions
During the last three fiscal years, the Funds paid the following
brokerage fees:
FUND 1993 1994** 1995
---- ------- ------- -------
Aggressive Growth $ 808,862 $ 575,190 $ 441,669
Growth 1,208,950 1,919,577 1,482,224
Growth & Income 84,342* 108,355 154,393
Income Stock 1,271,007 1,224,292 1,157,186
Income 291,848 60,180 46,000
During the last three fiscal years, the Funds paid the following
brokerage fees to USAA Brokerage Services, a discount brokerage
service of the Manager:
FUND 1993 1994** 1995***
---- ------- ------- -------
Aggressive Growth $ 14,900 $ 20,000 $ --
Growth 24,000 30,000 110,000
Growth & Income 9,412* 19,351 21,268
Income Stock 37,000 23,318 32,512
Income 179,596 50,400 16,000
- -----------
* From date of inception, June 1, 1993 to September 30, 1993.
** For the ten-month period ended July 31, 1994.
*** These amounts are 7.4%, 13.8%, 2.8%, and 34.8%, respectively, of
brokerage fees paid by each Fund and 4.5%, 14.9%, 1.8%, and 34.1%,
respectively, of the aggregate dollar amount of transactions
involving the payment of commissions.
The Manager directed a portion of the Fund's brokerage
transactions to certain broker-dealers that provided the Manager
with research, analysis, advice and similar services. Such
transactions amounted to $37,740,213, $278,440,112, $31,695,151,
$157,990,350, and $5,608,970, and the related brokerage
commissions were $66,750, $396,640, $49,855, $234,505, and
$10,000 for the Aggressive Growth, Growth, Growth & Income,
Income Stock, and Income Funds, respectively.
Portfolio Turnover Rates
The rate of portfolio turnover will not be a limiting factor when
the Manager deems changes in the Aggressive Growth, Growth,
Growth & Income, Income Stock, Income, and Short-Term Bond Funds'
portfolios appropriate in view of each Fund's investment
objective. Although no Fund (other than the Income Fund) will
purchase or sell securities solely to achieve short-term trading
profits, a Fund may sell portfolio securities without regard to
the length of time held if consistent with the Fund's investment
objective. The Income Fund may engage in riskless principal and
similar transactions for the purchase and sale of tax-exempt debt
securities. A higher degree of portfolio activity will increase
brokerage costs to a Fund.
The portfolio turnover rate is computed by dividing the
dollar amount of securities purchased or sold (whichever is
smaller) by the average value of securities owned during the
year. Short-term investments such as commercial paper and short-
term U.S. Government securities are not considered when computing
the turnover rate.
Portfolio Transactions, cont.
For the last two fiscal years, the Funds' portfolio turnover
rates were as follows:
FUND 1994* 1995
---- ------ ------
Aggressive Growth 98.99% 138.32%
Growth 117.80% 69.64%
Growth & Income 13.90% 19.45%
Income Stock 24.82% 34.94%
Income** 25.36% 30.86%
Short-Term Bond 142.08% 103.02%
- ---------
* For the ten-month period ended July 31, 1994.
** The Fund may simultaneously purchase and sell the same
securities. These transactions can be high in volume
and dissimilar to other trade activity within the Fund.
If these transactions were excluded from the calculation,
the portfolio turnover rate would be as follows:
TEN-MONTH
PERIOD ENDED YEAR ENDED
JULY 31, 1994 JULY 31, 1995
------------- -------------
Portfolio turnover 16.79% 9.09%
Purchases and sales of this type are as follows:
Purchases (000) $155,322 $360,943
Sales (000) $155,497 $361,366
FURTHER DESCRIPTION OF SHARES
The Company is authorized to issue shares in separate classes, or
Funds. Seven Funds have been established which are described in
this SAI. Under the Articles of Incorporation, the Board of
Directors is authorized to create new Funds in addition to those
already existing without shareholder approval. The Growth,
Income, and Money Market Funds were established in the Fall of
1980 and commenced public offering of their shares on February 2,
1981. The Aggressive Growth Fund was established by the Board of
Directors on July 8, 1981 and commenced public offering of its
shares on October 19, 1981. The Income Stock Fund was
established by the Board of Directors on January 23, 1987 and
commenced public offering of its shares on May 4, 1987. The
Growth & Income and Short-Term Bond Funds were established by the
Board of Directors on March 23, 1993 and commenced public
offering of their shares on June 1, 1993.
The assets of each Fund and all income, earnings, profits,
and proceeds thereof, subject only to the rights of creditors,
are specifically allocated to such Fund. They constitute the
underlying assets of each Fund, are required to be segregated on
the books of account, and are to be charged with the expenses of
such Fund. Any general expenses of the Company not readily
identifiable as belonging to a particular Fund are allocated on
the basis of the Funds' relative net assets during the fiscal
year or in such other manner as the Board determines to be fair
and equitable. Each share of each Fund represents an equal
proportionate interest in that Fund with every other share and is
entitled to such dividends and distributions out of the net
income and capital gains belonging to that Fund when declared by
the Board.
Under the provisions of the Bylaws of the Company, no annual
meeting of shareholders is required. Thus, there will ordinarily
be no shareholder meeting unless required by the 1940 Act. Under
certain circumstances, however, shareholders may apply for
shareholder information in order to obtain signatures to request
a special shareholder meeting. Moreover, pursuant to the Bylaws
of the Company, any Director may be removed by the affirmative
vote of a majority of the outstanding Company shares; and holders
of 25% or more of the outstanding shares of the Company can
require Directors to call a meeting of shareholders for the
purpose of voting on the removal of one or more Directors. On
any matter submitted to the shareholders, the holder of each Fund
share is entitled to one vote per share (with proportionate
voting for fractional shares) regardless of the relative net
asset values of the Funds' shares. However, on matters affecting
an individual Fund, a separate vote of the shareholders of that
Fund is required. Shareholders of a Fund are not entitled to
vote on any matter which does not affect that Fund but which
requires a separate vote of another Fund. Shares do not have
cumulative voting rights, which means that holders of more than
50% of the shares voting for the election of Directors can elect
100% of the Company's Board of Directors, and the holders of less
than 50% of the shares voting for the election of Directors will
not be able to elect any person as a Director.
Shareholders of a particular Fund might have the power to
elect all of the Directors of the Company because that Fund has a
majority of the total outstanding shares of the Company. When
issued, each Fund's shares are fully paid and nonassessable, have
no pre-emptive or subscription rights, and are fully
transferable. There are no conversion rights.
TAX CONSIDERATIONS
Each Fund intends to qualify as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as
amended (the Code). Accordingly, each Fund will not be liable
for federal income taxes on its taxable net investment income and
net capital gains (capital gains in excess of capital losses)
that are distributed to shareholders, provided that each Fund
distributes at least 90% of its net investment income and net
short-term capital gain for the taxable year.
To qualify as a regulated investment company, a Fund must,
among other things, (1) derive in each taxable year at least 90%
of its gross income from dividends, interest, payments with
respect to securities loans, gains from the sale or other
disposition of stock, securities or foreign currencies, or other
income derived with respect to its business of investing in such
stock, securities, or currencies (the 90% test), (2) derive in
each taxable year less than 30% of its gross income from the sale
or other disposition of stock or securities held less than three
months (the 30% test), and (3) satisfy certain diversification
requirements, at the close of each quarter of the Fund's taxable year.
The Code imposes a nondeductible 4% excise tax on a
regulated investment company that fails to distribute during each
calendar year an amount at least equal to the sum of (1) 98% of
its taxable net investment income for the calendar year, (2) 98%
of its capital gain net income for the twelve month period ending
on October 31, and (3) any prior amounts not distributed. Each
Fund intends to make such distributions as are necessary to avoid
imposition of the excise tax.
Taxable distributions are generally included in a
shareholder's gross income for the taxable year in which they are
received. Dividends declared in October, November, or December
and made payable to shareholders of record in such a month will
be deemed to have been received on December 31, if the Fund pays
the dividend during the following January. If a shareholder of a
Fund receives a distribution taxable as long-term capital gain
with respect to shares of a Fund and redeems or exchanges the
shares before he has held them for more than six months, any loss
on the redemption or exchanges that is less than or equal to the
amount of the distribution will be treated as long-term capital loss.
DIRECTORS AND OFFICERS OF THE COMPANY
The Board of Directors of the Company consists of eight
Directors. Set forth below are the Directors and officers of the
Company, their respective offices and principal occupations
during the last five years. Unless otherwise indicated, the
business address of each is 9800 Fredericksburg Rd., San Antonio, TX 78288.
Hansford T. Johnson 1, 2
Director and Chairman of the Board of Directors
Age: 59
Director, Vice Chairman and Deputy Attorney-in-Fact, United
Services Automobile Association (USAA) and President, Chief
Executive Officer, Director and Vice Chairman of the Board of
Directors of USAA Capital Corporation and of its various
subsidiaries and affiliates (9/93-present); Chief of Staff, USAA
(1/93-8/93); Executive Vice President, USAA (10/92-12/92);
Commander-in-Chief, CINCTRANS, Department of Defense -Pentagon
(9/89-9/92). Mr. Johnson currently serves as a Trustee and
Chairman of the Boards of Trustees of USAA Investment Trust and
USAA State Tax-Free Trust and as Director and Chairman of the
Boards of Directors of USAA Investment Management Company (IMCO),
USAA Tax Exempt Fund, Inc., USAA Shareholder Account Services,
USAA Federal Savings Bank and USAA Real Estate Company.
Michael J.C. Roth 1, 2
Director, President and Vice Chairman of the Board of Directors
Age: 54
Chief Executive Officer, IMCO (10/93-present); President,
Director and Vice Chairman of the Board of Directors, IMCO (1/90-
present); Director, USAA Federal Savings Bank (12/83-8/91). Mr.
Roth currently serves as President, Trustee and Vice Chairman of
the Boards of Trustees of USAA Investment Trust and USAA State
Tax-Free Trust, as President, Director and Vice Chairman of the
Boards of Directors of USAA Tax Exempt Fund, Inc. and USAA
Shareholder Account Services, as Director of USAA Life Insurance
Company and as Trustee and Vice Chairman of USAA Life Investment Trust.
John W. Saunders, Jr. 1, 2, 4
Director and Vice President
Age: 60
Senior Vice President, Investments, IMCO (10/85-present);
Director, BHC Financial, Inc. and BHC Securities, Inc. (1/87-
present). Mr. Saunders currently serves as Trustee and Vice
President of USAA Investment Trust and USAA State Tax-Free Trust,
Director and Vice President of USAA Tax Exempt Fund, Inc.,
Director of IMCO, as Senior Vice President of USAA Shareholder
Account Services, and as Vice President of USAA Life Investment Trust.
C. Dale Briscoe 4, 5
7829 Timber Top Drive
Boerne, TX 78006
Director
Age: 74
Retired. Mr. Briscoe currently serves as a Trustee of USAA
Investment Trust and USAA State Tax-Free Trust and as a Director
of USAA Tax Exempt Fund, Inc.
George E. Brown 3, 4, 5
5829 Northgap Drive
San Antonio, TX 78239
Director
Age: 77
Retired. Mr. Brown currently serves as a Trustee of USAA
Investment Trust and USAA State Tax-Free Trust and as a Director
of USAA Tax Exempt Fund, Inc.
Howard L. Freeman, Jr. 2, 3, 5
2710 Hopeton
San Antonio, TX 78230
Director
Age: 60
Assistant General Manager for Finance, San Antonio City Public
Service Board (1976-present). Mr. Freeman currently serves as a
Trustee of USAA Investment Trust and USAA State Tax-Free Trust
and as a Director of USAA Tax Exempt Fund, Inc.
Richard A. Zucker 3, 4, 5
407 Arch Bluff
San Antonio, TX 78216
Director
Age: 52
Vice President, Beldon Roofing and Remodeling (1985-present).
Mr. Zucker currently serves as a Trustee of USAA Investment Trust
and USAA State Tax-Free Trust and as a Director of USAA Tax
Exempt Fund, Inc.
Barbara B. Dreeben 3, 5
200 Patterson #1008
San Antonio, TX 78209
Director
Age: 50
President, Postal Addvantage (7/92-present); Consultant, Nancy
Harkins Stationer (8/91-present); Merchandise Manager, Nancy
Harkins Stationer (7/82-8/91). Mrs. Dreeben currently serves as
a Trustee of USAA Investment Trust and USAA State Tax-Free Trust
and as a Director of USAA Tax Exempt Fund, Inc.
Michael D. Wagner 1
Secretary
Age: 47
Vice President, Corporate Counsel, USAA (1982-present). Mr.
Wagner has held various positions in the legal department of USAA
since 1970 and currently serves as Vice President, Secretary and
Counsel, IMCO and USAA Shareholder Account Services, Secretary,
USAA Investment Trust, USAA State Tax-Free Trust, and USAA Tax
Exempt Fund, Inc. and as Vice President, Corporate Counsel for
various other USAA subsidiaries and affiliates.
Alex M. Ciccone 1
Assistant Secretary
Age: 45
Vice President, Compliance, IMCO (12/94-present); Vice President
and Chief Operating Officer, Commonwealth Shareholder Services
(6/94-11/94); Vice President, Compliance, IMCO (12/91-5/94); Vice
President, Compliance, Fund Management Co. (10/89-11/91); and
Vice President, Compliance, AIM Distributors, Inc. (4/82-11/91).
Mr. Ciccone currently serves as Assistant Secretary of USAA
Investment Trust, USAA State Tax-Free Trust, and USAA Tax Exempt
Fund, Inc.
Sherron A. Kirk 1
Treasurer
Age: 50
Vice President, Controller, IMCO (10/92-present); Vice President,
Corporate Financial Analysis, USAA (9/92-10/92); Assistant Vice
President, Financial Plans and Support, USAA (8/91-9/92);
Assistant Vice President, Real Estate Accounting, USAA Real
Estate Company (5/90-7/91). Mrs. Kirk currently serves as
Treasurer of USAA Investment Trust, USAA State Tax-Free Trust,
and USAA Tax Exempt Fund, Inc., and as Vice President, Controller
of USAA Shareholder Account Services.
Dean R. Pantzar 1
Assistant Treasurer
Age: 36
Executive Director, Mutual Fund Accounting, IMCO (10/95-present);
Director, Mutual Fund Accounting, IMCO (12/94-10/95); Senior
Manager, KPMG Peat Marwick LLP (7/88-12/94). Mr. Pantzar
currently serves as Assistant Treasurer of USAA Investment Trust,
USAA State Tax-Free Trust, and USAA Tax Exempt Fund, Inc.
- -----------------
1 Indicates those Directors and officers who are employees of
the Manager or affiliated companies and are considered
"interested persons" under the 1940 Act.
2 Member of Executive Committee
3 Member of Audit Committee
4 Member of Pricing and Investment Committee
5 Member of Corporate Governance Committee
Directors and Officers of the Company, cont.
Between the meetings of the Board of Directors and while the
Board is not in session, the Executive Committee of the Board of
Directors has all the powers and may exercise all the duties of
the Board of Directors in the management of the business of the
Company which may be delegated to it by the Board. The Pricing
and Investment Committee of the Board of Directors acts upon
various investment-related issues and other matters which have
been delegated to it by the Board. The Audit Committee of the
Board of Directors reviews the financial statements and the
auditor's reports and undertakes certain studies and analyses as
directed by the Board. The Corporate Governance Committee of the
Board of Directors maintains oversight of the organization,
performance, and effectiveness of the Board and independent Directors.
In addition to the previously listed Directors and/or
officers of the Company who also serve as Directors and/or
officers of the Manager, the following individuals are Directors
and/or executive officers of the Manager: Josue Robles, Jr.,
Senior Vice President, Chief Financial Officer/Controller, USAA;
William McCrae, Senior Vice President, General Counsel and
Secretary, USAA; Harry W. Miller, Senior Vice President,
Investments (Equity); and John J. Dallahan, Senior Vice
President, Investment Services. There are no family
relationships among the Directors, officers, and managerial level
employees of the Company or its Manager.
The following table sets forth information describing the
compensation of the current Directors of the Company for their
services as Directors for the fiscal year ended July 31, 1995.
Name Aggregate Total Compensation
of Compensation from the USAA
Director from the Company Family of Funds (c)
- -------- ---------------- -------------------
C. Dale Briscoe $4,612 $18,500
George E. Brown (a) 4,612 18,500
Barbara B. Dreeben 4,612 18,500
Howard L. Freeman, Jr. 4,612 18,500
Hansford T. Johnson None (b) None (b)
Michael J.C. Roth None (b) None (b)
John W. Saunders, Jr. None (b) None (b)
Richard A. Zucker 4,612 18,500
- ----------------
(a) The USAA Family of Funds has accrued deferred compensation
for Mr. Brown in an amount (plus earnings thereon) of
$20,481. The compensation was deferred by Mr. Brown
pursuant to a non-qualified Deferred Compensation Plan,
under which deferred amounts accumulate interest quarterly
based on the annualized U.S. Treasury Bill rate in effect on
the last day of the quarter. Amounts deferred and
accumulated earnings thereon are not funded and are general
unsecured liabilities of the USAA Funds until paid. The
Deferred Compensation Plan was terminated in 1988 and no
compensation has been deferred by any Director/Trustee of
the USAA Family of Funds since the Plan was terminated.
(b) Hansford T. Johnson, Michael J.C. Roth, and John W.
Saunders, Jr. are affiliated with the Company's investment
adviser, IMCO, and, accordingly, receive no remuneration
from the Company or any other Fund of the USAA Family of Funds.
(c) At July 31, 1995, the USAA Family of Funds consisted of 4
registered investment companies offering 29 individual
funds. Each Director presently serves as a Director or
Trustee of each investment company in the USAA Family of
Funds. In addition, Michael J.C. Roth presently serves as a
Trustee of USAA Life Investment Trust, a registered
investment company advised by IMCO, consisting of five funds
offered to investors in a fixed and variable annuity
contract with USAA Life Insurance Company. Mr. Roth
receives no compensation as Trustee of USAA Life Investment Trust.
All of the above Directors are also Directors/Trustees of
the other funds for which IMCO serves as investment adviser. No
compensation is paid by any fund to any Director/Trustee who is a
director, officer, or employee of IMCO or its affiliates. No
pension or retirement benefits are accrued as part of fund
expenses. The Company reimburses certain expenses of the
Directors who are not affiliated with the investment adviser. As
of August 31, 1995, the officers and Directors of the Company and
their families as a group owned beneficially or of record less
than 1% of the outstanding shares of the Company.
As of August 31, 1995, USAA and its affiliates (including
related employee benefit plans) owned 2,051,236 shares (13.7%) of
the Aggressive Growth Fund, 759,415 shares (1.5%) of the Growth
Fund, 2,863,922 shares (3.0%) of the Income Stock Fund,
15,681,734 shares (10.8%) of the Income Fund, and 1,623,033
shares (.1%) of the Money Market Fund, for an aggregate total of
22,979,340 shares (1.2%) of the Company.
The Company knows of no other persons who, as of August 31,
1995, held of record or owned beneficially 5% or more of any
Fund's shares.
THE COMPANY'S MANAGER
As described in each Fund's Prospectus, USAA Investment
Management Company is the Manager and investment adviser,
providing services under the Advisory Agreement. The Manager was
organized in May 1970 and has served as investment adviser and
underwriter for USAA Mutual Fund, Inc. from its inception.
In addition to managing the Company's assets, the Manager
advises and manages the investments for USAA and its affiliated
companies as well as those of USAA Tax Exempt Fund, Inc., USAA
Investment Trust, and USAA State Tax-Free Trust, and USAA Life
Investment Trust. As of the date of this SAI, total assets under
management by the Manager were approximately $29 billion, of
which approximately $16 billion were in mutual fund portfolios.
Advisory Agreement
Under the Advisory Agreement, the Manager provides an investment
program, carries out the investment policy, and manages the
portfolio assets for each Fund. The Manager is authorized,
subject to the control of the Board of Directors of the Company,
to determine the selection, amount, and time to buy or sell
securities for each Fund. In addition to providing investment
services, the Manager pays for office space, facilities, business
equipment, and accounting services (in addition to those provided
by the Custodian) for the Company. The Manager compensates all
personnel, officers, and Directors of the Company if such persons
are also employees of the Manager or its affiliates. For these
services under the Advisory Agreement, the Company has agreed to
pay the Manager a fee computed as described under Management of
the Company in the Prospectus. Management fees are computed and
accrued daily and are payable monthly.
Except for the services and facilities provided by the
Manager, the Funds pay all other expenses incurred in their
operations. Expenses for which the Funds are responsible include
taxes (if any), brokerage commissions on portfolio transactions
(if any), expenses of issuance and redemption of shares, charges
of transfer agents, custodians and dividend disbursing agents,
costs of preparing and distributing proxy material, costs of
printing and engraving stock certificates, auditing and legal
expenses, certain expenses of registering and qualifying shares
for sale, fees of Directors who are not interested persons (not
affiliated) of the Manager, costs of typesetting, printing and
mailing the Prospectus, SAI and periodic reports to existing
shareholders, and any other charges or fees not specifically
enumerated. The Manager pays the cost of printing and mailing
copies of the Prospectus, the SAI, and reports to prospective
shareholders.
The Advisory Agreement will remain in effect until June 30,
1996 for each Fund and will continue in effect from year to year
thereafter for each such Fund as long as it is approved at least
annually by a vote of the outstanding voting securities of such
Fund (as defined by the 1940 Act) or by the Board of Directors
(on behalf of such Fund) including a majority of the Directors
who are not interested persons of the Manager or (otherwise than
as Directors) of the Company, at a meeting called for the purpose
of voting on such approval. The Advisory Agreement may be
terminated at any time by either the Company or the Manager on 60
days' written notice. It will automatically terminate in the
event of its assignment (as defined in the 1940 Act).
Under the terms of the Advisory Agreement, the Manager is
required to reimburse each Fund in the event that the total
annual expenses, inclusive of the management fees, but exclusive
of the interest, taxes and brokerage fees, excess custodian costs
attributable to investments in foreign securities, and extraordinary
items, incurred by that Fund exceeds any applicable state expense
limitation. At the current time, the most restrictive expense
limitation is 2.5% of the first $30,000,000 of average net assets
(ANA), 2% of the next $70,000,000 ANA, and 1.5% of the remaining ANA.
From time to time the Manager may, without prior notice to
shareholders, waive all or any portion of fees or agree to
reimburse expenses incurred by a Fund. The Manager has
voluntarily agreed to continue to limit the annual expenses of
the Short-Term Bond Fund to .50% and the Money Market Fund to
.45%, of the Fund's ANA, respectively, until December 1, 1996 and
will reimburse the Funds for all expenses in excess of such
limitations. After December 1, 1996, any such waiver or
reimbursement may be terminated by the Manager at any time
without prior notice to the shareholders.
For the last three fiscal years, management fees were as follows:
FUND 1993 1994** 1995
---- ---------- ---------- ----------
Aggressive Growth $1,286,313 $1,063,619 $1,343,754
Growth 4,026,390 3,786,405 5,642,341
Growth & Income 75,078* 542,868 976,982
Income Stock 3,693,180 4,766,394 6,261,966
Income 3,920,478 3,683,946 4,032,989
Short-Term Bond 7,231* 86,181 136,870
Money Market 2,064,395 1,752,509 3,056,189
The Company's Manager, cont.
As a result of the Short-Term Bond and Money Market Funds'
expenses exceeding the expense limitations, the Manager did not
receive fees to which it would have been entitled as follows:
FUND 1993 1994** 1995
---- --------- --------- ---------
Short-Term Bond $ 7,231* $ 86,181 $ 136,499
Money Market - - $ 154,109
- --------
* From date of inception, June 1, 1993 to September 30, 1993.
** For the ten-month period ended July 31, 1994.
Underwriter
The Company has an agreement with the Manager for exclusive
underwriting and distribution of the Funds' shares on a
continuing best efforts basis. This agreement provides that the
Manager will receive no fee or other compensation for such
distribution services.
Transfer Agent
USAA Shareholder Account Services performs transfer agent
services for the Company under a Transfer Agency Agreement.
Services include maintenance of shareholder account records,
handling of communications with shareholders, distribution of
Fund dividends, and production of reports with respect to account
activity for shareholders and the Company. For its services
under the Transfer Agency Agreement, USAA Shareholder Account
Services is paid an annual fixed fee per account ranging from
$23.50 to $26.00 by each Fund. This fee is subject to change at
any time.
The fee to the Transfer Agent includes processing of all
transactions and correspondence. Fees are billed on a monthly
basis at the rate of one-twelfth of the annual fee. In addition,
the Funds pay all out-of-pocket expenses of the Transfer Agent
and other expenses which are incurred at the specific direction
of the Company.
GENERAL INFORMATION
Custodian
State Street Bank and Trust Company, P.O. Box 1713, Boston, MA
02105, is the Company's Custodian. The Custodian is responsible
for, among other things, safeguarding and controlling the
Company's cash and securities, handling the receipt and delivery
of securities, and collecting interest on the Company's
investments.
Counsel
Goodwin, Procter & Hoar, Exchange Place, Boston, MA 02109, will
review certain legal matters for the Company in connection with
the shares offered by the Prospectus.
Independent Auditors
KPMG Peat Marwick LLP, 112 East Pecan, Suite 2400, San Antonio,
TX 78205, is the Company's independent auditor. In this
capacity, the firm is responsible for auditing the annual
financial statements of the Funds and reporting thereon.
Financial Statements
The financial statements for each of the Funds of USAA Mutual
Fund, Inc. and the Independent Auditors' Reports thereon for the
fiscal year ended July 31, 1995, are included in the Annual
Reports to Shareholders of that date and are incorporated herein
by reference. A copy of the Fund's Annual Report will be
delivered free of charge with each SAI requested from the Manager
at the address set forth on page 1 of this statement.
CALCULATION OF PERFORMANCE DATA
Information regarding the total return and yield of each Fund is
provided under Performance Information in its Prospectus. See
Valuation of Securities herein for a discussion of the manner in
which each Fund's price per share is calculated.
Yield - Money Market Fund
When the Money Market Fund quotes a current annualized yield, it
is based on a specified recent seven-calendar-day period. It is
computed by (1) determining the net change, exclusive of capital
changes, in the value of a hypothetical preexisting account
having a balance of one share at the beginning of the period, (2)
dividing the net change in account value by the value of the
account at the beginning of the base period to obtain the base
return, then (3) multiplying the base period by 52.14 (365
divided by 7). The resulting yield figure is carried to the
nearest hundredth of one percent.
The calculation includes (1) the value of additional shares
purchased with dividends on the original share, and dividends
declared on both the original share and any such additional
shares, and (2) any fees charged to all shareholder accounts, in
proportion to the length of the base period and Fund's average
account size.
The capital changes excluded from the calculation are
realized capital gains and losses from the sale of securities and
unrealized appreciation and depreciation. The Fund's effective
(compounded) yield will be computed by dividing the seven-day
annualized yield as defined above by 365, adding 1 to the
quotient, raising the sum to the 365th power, and subtracting 1
from the result.
Current and effective yields fluctuate daily and will vary
with factors such as interest rates and the quality, length of
maturities, and type of investments in the portfolio.
Yield For 7-day Period Ended 7/31/95 . . . 5.61%
Effective Yield For 7-day Period Ended 7/31/95 . . . 5.77%
Yield - Income Fund and Short-Term Bond Fund
The Funds may advertise performance in terms of a 30-day yield
quotation. The 30-day yield quotation is computed by dividing
the net investment income per share earned during the period by
the maximum offering price per share on the last day of the
period, according to the following formula:
YIELD = 2((((a - b)/(cd) + 1)^6) - 1)
Where: a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursement)
c = the average daily number of shares outstanding during
the period that were entitled to receive dividends
d = the maximum offering price per share on the last day
of the period
The 30-day yields for the year ended July 31, 1995 for the
Income Fund and Short-Term Bond Fund were 6.94% and 6.70%, respectively.
Total Return
The Funds, other than the Money Market Fund, may each advertise
performance in terms of average annual total return for 1, 5 and
10 year periods, or for such lesser periods as any of such Funds
have been in existence. Average annual total return is computed
by finding the average annual compounded rates of return over the
periods that would equate the initial amount invested to the
ending redeemable value, according to the following formula:
P(1 + T)^n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical
$1,000 payment made at the beginning of the
1, 5 or 10 year periods at the end of the
year or period
Calculation of Performance Data, cont.
The calculation assumes any charges are deducted from the
initial $1,000 payment and assumes all dividends and
distributions by such Fund are reinvested at the price stated in
the Prospectus on the reinvestment dates during the period, and
includes all recurring fees that are charged to all shareholder
accounts.
Average Annual Total Returns
For Periods Ended 7/31/95
1 5 10 From
Fund year years years Inception*
---- ---- ----- ----- ---------
Aggressive Growth 49.98% 14.75% 10.92% -
Growth 26.46% 13.03% 12.15% -
Growth & Income 20.30% - - 11.64%
Income Stock 18.83% 12.77% - 11.57%
Income 11.64% 9.65% 10.13% -
Short-Term Bond 7.90% - - 4.79%
- -------
* Data from inception is shown for Funds that are less than
five or ten years old. Income Stock Fund commenced
operations on May 4, 1987. Growth & Income and Short-Term
Bond Funds commenced operations on June 1, 1993.
APPENDIX A - LONG-TERM AND SHORT-TERM DEBT RATINGS
1. Long-Term Debt Ratings:
Moody's Investors Service, Inc. (Moody's)
Aaa Bonds which are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment risk
and are generally referred to as "gilt edge." Interest
payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various
protective elements are likely to change, such changes as
can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa Bonds which are rated Aa are judged to be of high quality by
all standards. Together with the Aaa group they comprise
what are generally known as high grade bonds. They are
rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater
amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than in Aaa securities.
A Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade
obligations. Factors giving security to principal and
interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa Bonds which are rated Baa are considered as medium grade
obligations; i.e., they are neither highly protected nor
poorly secured. Interest payments and principal security
appear adequate for the present but certain protective
elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and in fact have
speculative characteristics as well.
Ba Bonds which are rated Ba are judged to have speculative
elements; their future cannot be considered as well assured.
Often the protection of interest and principal payments may
be very moderate, and thereby not well safeguarded during
other good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B Bonds which are rated B generally lack characteristics of
the desirable investment. Assurance of interest and
principal payments or of maintenance of other terms of the
contract over any long period of time may be small.
Caa Bonds which are rated Caa are of poor standing. Such issues
may be in default or there may be present elements of danger
with respect to principal or interest.
Ca Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in
default or have other marked shortcomings.
C Bonds which are rated C are the lowest rated class of bonds,
and issues so rated can be regarded as having extremely poor
prospects of ever attaining any real investment standing.
Standard & Poor's Ratings Group (S&P)
AAA Debt rated AAA has the highest rating assigned by S&P.
Capacity to pay interest and repay principal is extremely strong.
AA Debt rated AA has a very strong capacity to pay interest and
repay principal and differs from the highest rated issues
only in small degree.
A Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the
adverse effects of changes in circumstances and economic
conditions than debt in higher rated categories.
BBB Debt rated BBB is regarded as having an adequate capacity to
pay interest and repay principal. Whereas it normally
exhibits adequate protection parameters, adverse economic
conditions or changing circumstances are more likely to lead
to a weakened capacity to pay interest and repay principal
for debt in this category than in higher rated categories.
BB Debt rated BB has less near-term vulnerability to default
than other speculative issues. However, it faces major
ongoing uncertainties or exposure to adverse business,
financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal
payments. This rating category is also used for debt
subordinated to senior debt that is assigned an actual or
implied BBB- rating.
B Debt rated B has a greater vulnerability to default but
currently has the capacity to meet interest payments and
principal repayments. Adverse business, financial, or
economic conditions will likely impair capacity or
willingness to pay interest and repay principal. This
rating category is also used for debt subordinated to senior
debt that is assigned an actual or implied BB or BB- rating.
CCC Debt rated CCC has a currently identifiable vulnerability to
default, and is dependent upon favorable business,
financial, and economic conditions to meet timely payment of
interest and repayment of principal. In the event of
adverse business, financial, or economic conditions, these
bonds are not likely to have the capacity to pay interest
and repay principal. The CCC rating category is also used
for debt subordinated to senior debt that is assigned an
actual or implied B or B- rating.
CC The rating CC is typically applied to debt subordinated to
senior debt that is assigned an actual or implied CCC rating.
C The rating C typically is applied to debt subordinated to
senior debt which is assigned an actual or implied CCC- debt
rating. This rating may be used to cover a situation where
a bankruptcy petition has been filed, but debt service
payments are continued.
CI The rating CI is reserved for income bonds on which no
interest is being paid.
D Debt rated D is in payment default. This rating category is
used when interest payments or principal payments are not
made on the date due even if the applicable grace period has
not expired, unless S&P believes that such payments will be
made during such grace period. This rating also will be
used upon the filing of a bankruptcy petition if debt
service payments are jeopardized.
Plus (+) or Minus (-): The ratings from AA to CCC may be
modified by the addition of a plus or minus sign to show relative
standing within the major rating categories.
Fitch Investors Service, Inc. (Fitch)
AAA Bonds considered to be investment grade and of the highest
credit quality. The obligor has an exceptionally strong
ability to pay interest and repay principal, which is
unlikely to be affected by reasonably foreseeable events.
AA Bonds considered to be investment grade and of very high
credit quality. The obligor's ability to pay interest and
repay principal is very strong, although not quite as strong
as bonds rated AAA. Because bonds rated in the AAA and AA
categories are not significantly vulnerable to foreseeable
future developments, short-term debt of these issuers is
generally rated F-1+.
A Bonds considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay
principal is considered to be strong, but may be more
vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB Bonds considered to be investment grade and of satisfactory
credit quality. The obligor's ability to pay interest and
repay principal is considered to be adequate. Adverse
changes in economic conditions and circumstances, however,
are more likely to have adverse impact on these bonds, and
therefore, impair timely payment.
Appendix A, cont.
Duff & Phelps (D&P)
AAA Highest credit quality. The risk factors are negligible,
being only slightly more than for risk-free U.S. Treasury debt.
AA High credit quality. Protection factors are strong. Risk
is modest but may vary slightly from time to time because of
economic conditions.
A Protection factors are average but adequate. However, risk
factors are variable and greater in periods of economic stress.
BBB Below average protection factors but still considered
sufficient for prudent investment. Considerable variability
in risk during economic cycles.
2. Short-Term Debt Ratings:
Moody's Corporate and Government
Prime-1 Issuers have a superior ability for repayment of senior
short-term debt obligations. Prime-1 repayment ability
will often be evidenced by many of the following characteristics:
- Leading market positions in well-established industries.
- High rates of return on funds employed.
- Conservative capitalization structure with moderate
reliance on debt and ample asset protection.
- Broad margins in earnings coverage of fixed financial
charges and high internal cash generation.
- Well-established access to a range of financial markets
and assured sources of alternate liquidity.
Prime-2 Issuers have a strong ability for repayment of senior
short-term debt obligations. This will normally be
evidenced by many of the characteristics cited above
but to a lesser degree. Earnings trends and coverage
ratios, while sound, will be more subject to variation.
Capitalization characteristics, while still
appropriate, may be more affected by external
conditions. Ample alternate liquidity is maintained.
Prime-3 Issuers (or supporting institutions) have an acceptable
capacity for repayment of short-term promissory
obligations. The effect of industry characteristics
and market composition may be more pronounced.
Variability in earnings and profitability may result in
changes in the level of debt protection measurements
and the requirement for relatively high financial
leverage. Adequate alternate liquidity is maintained.
Moody's Municipal
MIG 1/VMIG 1 This designation denotes best quality. There is
present strong protection by established cash
flows, superior liquidity support or demonstrated
broadbased access to the market for refinancing.
MIG 2/VMIG 2 This designation denotes high quality. Margins of
protection are ample although not so large as in
the preceding group.
MIG 3/VMIG 3 This designation denotes favorable quality. All
security elements are accounted for but there is
lacking the undeniable strength of the preceding
grades. Liquidity and cash flow protection may be
narrow and market access for refinancing is likely
to be less well established.
MIG 4/VMIG 4 This designation denotes adequate quality.
Protection commonly regarded as required of an investment
security is present and although not distinctly or
predominantly speculative, there is specific risk.
S&P Corporate and Government
A-1 This highest category indicates that the degree of safety
regarding timely payment is strong. Those issues determined
to possess extremely strong safety characteristics are
denoted with a plus (+) sign designation.
A-2 Capacity for timely payment on issues with this designation
is satisfactory. However, the relative degree of safety is
not as high as for issues designated A-1.
A-3 Designation indicates a satisfactory capacity for timely
payment. Issues with this designation, however, are
somewhat more vulnerable to the adverse effects of changes
in circumstances than obligations carrying the higher designations.
S&P Municipal
SP-1 Strong capacity to pay principal and interest. Issues
determined to possess very strong characteristics are given
a plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest, with
some vulnerability to adverse financial and economic changes
over the term of the notes.
Fitch
F-1+ Exceptionally strong credit quality. Issues assigned this
rating are regarded as having the strongest degree of
assurance for timely payment.
F-1 Very strong credit quality. Issues assigned this rating
reflect an assurance for timely payment only slightly less
in degree than issues rated F-1+.
F-2 Good credit quality. Issues assigned this rating have a
satisfactory degree of assurance for timely payments, but
the margin of safety is not as great as the F-1+ and F-1 Ratings.
F-3 Fair credit quality. Issues assigned this rating have
characteristics suggesting that the degree of assurance for
timely payment is adequate, however, near-term adverse change is
likely to cause these securities to be rated below investment grade.
Duff & Phelps Inc.
Duff 1+ Highest certainty of timely payment. Short-term
liquidity, including internal operating factors and/or
ready access to alternative sources of funds, is
outstanding, and safety is just below risk-free U.S.
Treasury short-term obligations.
Duff 1 Very high certainty of timely payment. Liquidity
factors are excellent and supported by good fundamental
protection factors. Risk factors are minor.
Duff 1- High certainty of timely payment. Liquidity factors
are strong and supported by good fundamental protection
factors. Risk factors are very small.
Duff 2 Good certainty of timely payment. Liquidity factors
and company fundamentals are sound. Although ongoing
funding needs may enlarge total financing requirements,
access to capital markets is good. Risk factors are small.
Duff 3 Satisfactory liquidity and other protection factors
qualify issue as to investment grade. Risk factors are
larger and subject to more variation. Nevertheless,
timely payment is expected.
Thompson BankWatch, Inc.
TBW-1 The highest category; indicates a very high likelihood
that principal and interest will be paid on a timely basis.
TBW-2 The second highest category; while the degree of safety
regarding timely repayment of principal and interest is
strong, the relative degree of safety is not as high as
for issues rated TBW-1.
TBW-3 The lowest investment grade category; indicates that
while the obligation is more susceptible to adverse
developments (both internal and external) than
obligations with higher ratings, the capacity to
service principal and interest in a timely fashion is
considered adequate.
TBW-4 The lowest rating category; this rating is regarded as
non-investment grade and therefore speculative.
IBCA Inc.
A1 Obligations supported by the highest capacity for timely
repayment. Where issues possess a particularly strong
credit feature, a rating of A1+ is assigned.
A2 Obligations supported by a good capacity for timely repayment.
A3 Obligations supported by a satisfactory capacity for timely repayment.
B Obligations for which there is an uncertainty as to the
capacity to ensure timely repayment.
C Obligations for which there is a high risk of default or
which are currently in default.
APPENDIX B - COMPARISON OF PORTFOLIO PERFORMANCE
Occasionally, we may make comparisons in advertising and sales
literature between the Funds contained in this SAI and other
Funds in the USAA Family of Funds. These comparisons may include
such topics as risk and reward, investment objectives, investment
strategies, and performance.
Fund performance also may be compared to the performance of
broad groups of mutual funds with similar investment goals or
unmanaged indexes of comparable securities. Evaluations of Fund
performance made by independent sources may also be used in
advertisements concerning the Fund, including reprints of, or
selections from, editorials or articles about the Fund. The Fund
or its performance may also be compared to products and services
not constituting securities subject to registration under the
Securities Act of 1933 such as, but not limited to, certificates
of deposit and money market accounts. Sources for performance
information and articles about the Fund may include the following:
AAII Journal, a monthly association magazine for members of the
American Association of Individual Investors.
Arizona Republic, a newspaper which may cover financial and investment news.
Austin American-Statesman, a newspaper which may cover financial news.
Bank Rate Monitor, a service which publishes rates on various bank products
such as CDs, MMDAs and credit cards.
Barron's, a Dow Jones and Company, Inc. business and financial weekly that
periodically reviews mutual fund performance data.
Business Week, a national business weekly that periodically reports the
performance rankings and ratings of a variety of mutual funds.
Chicago Tribune, a newspaper which may cover financial news.
Consumer Reports, a monthly magazine which from time to time reports on
companies in the mutual fund industry.
Dallas Morning News, a newspaper which may cover financial news.
Denver Post, a newspaper which may quote financial news.
Financial Planning, a monthly magazine which may periodically review mutual
fund companies.
Financial Services Week, a weekly newspaper which covers financial news.
Financial World, a monthly magazine that periodically features companies in
the mutual fund industry.
Forbes, a national business publication that periodically reports the
performance of companies in the mutual fund industry.
Fortune, a national business publication that periodically rates the
performance of a variety of mutual funds.
Fund Action, a mutual fund news report.
Houston Chronicle, a newspaper which may cover financial news.
Houston Post, a newspaper which may cover financial news.
IBC/Donoghue's Moneyletter, a biweekly newsletter which covers
financial news and from time to time rates specific mutual funds.
IBC's Money Market Insight, a monthly money market industry analysis prepared
by IBC USA, Inc.
Income and Safety, a monthly newsletter that rates mutual funds.
InvesTech, a bimonthly investment newsletter.
Investment Advisor, a monthly publication directed primarily to the advisor
community; includes ranking of mutual funds using a proprietary methodology.
Investment Company Institute, the national association of the American
investment company industry.
Investor's Business Daily, a newspaper which covers financial news.
Kiplinger's Personal Finance Magazine, a monthly investment advisory
publication that periodically features the performance of a variety of
securities.
Lipper Analytical Services, Inc.'s Fixed Income Fund Performance Analysis,
a monthly publication of industry-wide mutual fund performance averages by
type of fund.
Lipper Analytical Services, Inc.'s Mutual Fund Performance Analysis, a
monthly publication of industry-wide mutual fund averages by type of fund.
Los Angeles Times, a newspaper which may cover financial news.
Louis Rukeyser's Wall Street, a publication for investors.
Medical Economics, a monthly magazine providing information to
the medical profession.
Money, a monthly magazine that features the performance of both
specific funds and the mutual fund industry as a whole.
Money Fund Report, a weekly publication of the Donoghue
Organization, Inc., reporting on the performance of the nation's
money market funds, summarizing money market fund activity, and
including certain averages as performance benchmarks,
specifically "Donoghue's Taxable First Tier Fund Average."
Morningstar 5 Star Investor, a monthly newsletter by Morningstar,
Inc. which covers financial news and rates mutual funds.
Mutual Fund Forecaster, a monthly newsletter that ranks mutual funds.
Mutual Fund Investing, a newsletter covering mutual funds.
Mutual Fund Performance Report, a monthly publication of mutual
fund performance and rankings, produced by Morningstar, Inc.
Mutual Funds Magazine, a monthly publication reporting on mutual
fund investing.
Mutual Fund Source Book, an annual publication produced by
Morningstar, Inc. which describes and rates mutual funds.
Mutual Fund Values, a biweekly guidebook to mutual funds produced by
Morningstar, Inc. (a data service which tracks open-end mutual funds).
Newsweek, a national business weekly.
New York Times, a newspaper which may cover financial news.
No Load Fund Investor, a newsletter covering companies in the
mutual fund industry.
Personal Investor, a monthly magazine which from time to time
features mutual fund companies and the mutual fund industry.
San Antonio Business Journal, a weekly newspaper that
periodically covers mutual fund companies as well as financial news.
San Antonio Express-News, a newspaper which may cover financial news.
San Francisco Chronicle, a newspaper which may cover financial news.
Smart Money, a monthly magazine featuring news and articles on investing
and mutual funds.
USA Today, a newspaper which may cover financial news.
U.S. News and World Report, a national business weekly that periodically
reports mutual fund performance data.
Wall Street Journal, a Dow Jones and Company, Inc. newspaper
which covers financial news.
Washington Post, a newspaper which may cover financial news.
Weisenberger Mutual Funds Investment Report, a monthly newsletter
that reports on both specific mutual fund companies and the
mutual fund industry as a whole.
Worth, a magazine which covers financial and investment subjects
including mutual funds.
Your Money, a monthly magazine directed toward the novice investor.
Among the organizations cited above, Lipper Analytical
Services, Inc.'s tracking results may be used. A Fund will be
compared to Lipper's appropriate fund category according to fund
objective and portfolio holdings. The Aggressive Growth Fund
will be compared to funds in Lipper's small company growth funds
category, the Growth Fund to funds in Lipper's growth fund
category, the Growth & Income Fund to Lipper's growth & income
funds category, the Income Stock Fund to Lipper's equity income
category, the Income Fund to funds in Lipper's flexible income
category, the Short-Term Bond Fund to Lipper's short investment
grade debt funds category, and the Money Market Fund to Lipper's
taxable money market funds category. Footnotes in advertisements
and other marketing literature will include the time period
applicable for any ranking used.
Appendix B, cont.
For comparative purposes, unmanaged indexes of comparable securities
or economic data may be cited. Examples include the following:
- Ibbotson Associates, Inc., Stocks, Bonds, Bills, and Inflation Yearbook.
- Lehman Brothers 1-3 year Government/Corporate Index is an
unmanaged index of all the government, agency, and corporate
bonds longer than one year and less than three years.
- Lehman Brothers Aggregate Bond Index is an unmanaged index of
the Government/Corporate Index, the Mortgage Backed Securities
Index, and the Asset-Backed Securities Index.
- NASDAQ Industrials, a composite index of approximately 3000 unmanaged
securities of industrial corporations traded over the counter.
- Russell 2000(registered trademark) Index is an index which
consists of the 2,000 smallest companies in the Russell
3000(registered trademark) Index, a widely regarded small cap index.
- S&P 500 Index, a broadbased composite unmanaged index that
represents the average performance of a group of 500 widely held,
publicly traded stocks.
Other sources for total return and other performance data
which may be used by a Fund or by those publications listed
previously are Morningstar, Inc., Schabaker Investment
Management, and Investment Company Data, Inc. These are services
that collect and compile data on mutual fund companies.
APPENDIX C - DOLLAR-COST AVERAGING
Dollar-cost averaging is a systematic investing method which can
be used by investors as a disciplined technique for investing. A
fixed amount of money is invested in a security (such as a stock
or mutual fund) on a regular basis over a period of time,
regardless of whether securities markets are moving up or down.
This practice reduces average share costs to the investor
who acquires more shares in periods of lower securities prices
and fewer shares in periods of higher prices.
While dollar-cost averaging does not assure a profit or
protect against loss in declining markets, this investment
strategy is an effective way to help calm the effect of
fluctuations in the financial markets. Systematic investing
involves continuous investment in securities regardless of
fluctuating price levels of such securities. Investors should
consider their financial ability to continue purchases through
periods of low and high price levels.
As the following chart illustrates, dollar-cost averaging
tends to keep the overall cost of shares lower. This example is
for illustration only, and different trends would result in
different average costs.
HOW DOLLAR-COST AVERAGING WORKS
$100 Invested Regularly for 5 Periods
Market Trend
--------------------------------------------------------------
Down Up Mixed
---------------- ---------------- ----------------
Share Shares Share Shares Share Shares
Investment Price Purchased Price Purchased Price Purchased
---------------- ---------------- ----------------
$100 10 10 6 16.67 10 10
100 9 11.1 7 14.29 9 11.1
100 8 12.5 7 14.29 8 12.5
100 8 12.5 9 11.1 9 11.1
100 6 16.67 10 10 10 10
--- -- ----- -- ----- -- -----
$500 ***41 62.77 ***39 66.35 ***46 54.7
*Avg. Cost: $7.97 *Avg. Cost: $7.54 *Avg. Cost: $9.14
----- ----- -----
**Avg. Price: $8.20 **Avg. Price: $7.80 **Avg. Price: $9.20
----- ----- -----
* Average Cost is the total amount invested divided by shares purchased.
** Average Price is the sum of the prices paid divided by number
of purchases.
*** Cumulative total of share prices used to compute average prices.
06143-1295
