As filed with the Securities and Exchange Commission on October 1, 1996.
1933 Act File No. 2-49560
1940 Act File No. 811-2429
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 X
Pre-Effective Amendment No.
Post-Effective Amendment No. 43
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 X
Amendment No. 31
USAA MUTUAL FUND, INC.
-------------------------------------------------
(Exact Name of Registrant as Specified in Charter)
9800 Fredericksburg Rd., San Antonio, TX 78288
------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code (210) 498-0600
Michael D. Wagner, Secretary
USAA MUTUAL FUND, INC.
9800 Fredericksburg Rd.
San Antonio, TX 78288-0227
---------------------------------------
(Name and Address of Agent for Service)
Approximate Date of Proposed Public Offering: As soon as practicable after
the effective date of this Registration Statement.
It is proposed that this filing will become effective under Rule 485
___ immediately upon filing pursuant to paragraph (b)
___ on (date) pursuant to paragraph (b)
___ 60 days after filing pursuant to paragraph (a)(1)
_X_ on December 1, 1996, pursuant to paragraph (a)(1)
___ 75 days after filing pursuant to paragraph (a)(2)
___ on (date) pursuant to paragraph (a)(2)
If appropriate, check the following box:
This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
DECLARATION PURSUANT TO RULE 24f-2
The Registrant has heretofore registered an indefinite number of shares of the
Aggressive Growth Fund, Growth Fund, Growth & Income Fund, Income Stock Fund,
Income Fund, Short-Term Bond Fund, and Money Market Fund pursuant to Rule 24f-
2 under the Investment Company Act of 1940. With respect to these Funds, the
Registrant filed its Rule 24f-2 notice for the fiscal year ended July 31, 1996
on September 26, 1996. The Registrant has heretofore registered an indefinite
number of shares of the S&P 500 Index Fund pursuant to Rule 24f-2(a)(1) under
the Act. With respect to the S&P 500 Index Fund, the Registrant will file its
Rule 24f-2 notice for the fiscal year ended December 31, 1996 on or about
February 19, 1997. The S&P 500 Index Fund is a "feeder fund" within a
"master-feeder structure."
Exhibit Index on Pages 202-204
Page 1 of 226
USAA MUTUAL FUND, INC.
CROSS REFERENCE SHEET
Part A
FORM N-1A ITEM NO. SECTION IN PROSPECTUS
1. Cover Page. . . . . . . . . . . . Same
2. Synopsis. . . . . . . . . . . . . Fees and Expenses
3. Condensed Financial
Information . . . . . . . . . Financial Highlights
Performance Information
4. General Description
of Registrant. . . . . . . . . Investment Objective and Policies
Description of Shares
5. Management of the Fund. . . . . . Management of the Company
Service Providers
6. Capital Stock and Other
Securities . . . . . . . . . . Dividends, Distributions and Taxes
Description of Shares
7. Purchase of Securities
Being Offered. . . . . . . . . Purchase of Shares
Conditions of Purchase and Redemption
Exchanges
Other Services
Share Price Calculation
8. Redemption or Repurchase. . . . . Redemption of Shares
Conditions of Purchase and Redemption
Exchanges
Other Services
9. Legal Proceedings . . . . . . . . Not Applicable
USAA MUTUAL FUND, INC.
CROSS REFERENCE SHEET
Part B
FORM N-1A ITEM NO. SECTION IN STATEMENT OF ADDITIONAL
INFORMATION
10. Cover Page. . . . . . . . . . . Same
11. Table of Contents . . . . . . . Same
12. General Information and
History. . . . . . . . . . . Not Applicable
13. Investment Objectives
and Policies . . . . . . . . Investment Policies
Investment Restrictions
Portfolio Transactions and
Brokerage Commissions
14. Management of the
Registrant . . . . . . . . . Directors and Officers of the Company
15. Control Persons and
Principal Holders
of Securities. . . . . . . . Directors and Officers of the Company
16. Investment Advisory and
Other Services . . . . . . . Directors and Officers of the Company
The Company's Manager
General Information
17. Brokerage Allocation and
Other Practices. . . . . . . Portfolio Transactions and
Brokerage Commissions
18. Capital Stock and Other
Securities . . . . . . . . . Further Description of Shares
19. Purchase, Redemption and
Pricing of Securities
Being Offered. . . . . . . . Valuation of Securities
Additional Information Regarding
Redemption of Shares
Investment Plans
20. Tax Status. . . . . . . . . . . Tax Considerations
21. Underwriters . . . . . . . . . General Information
22. Calculation of Performance
Data . . . . . . . . . . . . Calculation of Performance Data
23. Financial Statements . . . . . General Information
Part A
Prospectuses for the
Aggressive Growth Fund, Growth Fund,
Growth & Income Fund, Income Stock Fund, Income Fund,
Short-Term Bond Fund, and Money Market Fund
are included herein
Part A
Prospectus for the
Aggressive Growth Fund
is included herein
USAA AGGRESSIVE GROWTH FUND
December 1, 1996 PROSPECTUS
USAA AGGRESSIVE GROWTH FUND (the Fund) is one of eight 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
INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.
If you would like more information about the Fund, you may call
1-800-531-8181 to request a free copy of the most recent financial report
and/or the Fund's Statement of Additional Information (SAI), dated December 1,
1996. The SAI has been filed with the Securities and Exchange Commission (SEC)
and is incorporated by reference into this Prospectus (meaning it is legally a
part of the 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 21
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 as a Fund investor.
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 .75%
12b-1 Fees None
Other Expenses
Transfer Agent Fees** .22%
Custodian Fees .04%
All Other Expenses .07%
---
Total Other Expenses .33%
---
Total Fund Operating Expenses 1.08%
====
- -------------------------------------------------------------------------------
* 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.
The percentages expressing annual fund operating expenses, except with respect
to Management Fees, are based on actual Fund expenses incurred for the year
ended July 31, 1996. The Management Fee of .75% of the Fund's ANA will become
effective January 1, 1997. Management Fees, Total Other Expenses, and Total
Fund Operating Expenses were .41%, .33%, and .74% of the Fund's ANA based on
actual expenses for the year ended July 31, 1996.
Example of Effect of Fund Expenses
- -------------------------------------------------------------------------------
You would pay the following expenses on a $1,000 investment in the Fund,
assuming (1) 5% annual return and (2) redemption at the end of the periods
shown.
1 year - $ 11
3 years - $ 34
5 years - $ 60
10 years - $ 132
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, 1996, 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,
1996, 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.
<TABLE>
<CAPTION>
TEN-MONTH
PERIOD ENDED
YEAR ENDED JULY 31, JULY 31, YEAR ENDED SEPTEMBER 30,
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net asset value at
beginning of period $ 24.49 $ 17.74 $ 20.40 $ 18.85 $ 20.60
Net investment income
(loss) (.12)(b) (.05)(b) (.02)(b) .02 (.01)(b)
Net realized and
unrealized gain (loss) 5.12 8.35 (1.37) 3.67 (1.73)
Distributions from net
investment income - - (.02) - (.01)
Distributions of
realized capital gains (1.61) (1.55) (1.25) (2.14) -
-------- -------- -------- -------- ---------
Net asset value at
end of period $ 27.88 $ 24.49 $ 17.74 $ 20.40 $ 18.85
======== ======== ======== ======== =========
Total return (%)* 21.16 49.98 (7.31) 21.32 (8.45)
Net assets at end of
period (000) $607,437 $363,390 $248,953 $277,198 $234,967
Ratio of expenses to
average net assets (%) .74 .86 .83(a) .86 .82
Ratio of net investment
income (loss) to average
net assets (%) (.42) (.28) (.10)(a) .10 (.05)
Portfolio turnover (%) 43.75 138.32 98.99 113.01 74.08
Average commission rate
paid per share $ .049
- ----------------
</TABLE>
* 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.
FINANCIAL HIGHLIGHTS CONT.
YEAR ENDED SEPTEMBER 30,
1991 1990 1989 1988 1987
---- ---- ---- ---- ----
Net asset value at
beginning of period $ 12.34 $ 19.78 $ 17.23 $ 21.79 $ 17.29
Net investment income
(loss) .03 .11 .14 .13 .11
Net realized and
unrealized gain (loss) 8.33 (4.74) 3.02 (2.71) 4.81
Distributions from net
investment income (.10) (.19) (.14) (.12) (.07)
Distributions of realized
capital gains - (2.62) (.47) (1.86) (.35)
-------- -------- -------- -------- --------
Net asset value at
end of period $ 20.60 $ 12.34 $ 19.78 $ 17.23 $ 21.79
======== ======== ======== ======== ========
Total return (%)* 68.22 (27.00) 19.20 (9.73) 28.92
Net assets at end of
period (000) $208,084 $114,674 $157,467 $139,260 $149,826
Ratio of expenses to
average net assets (%) .87 .94 .91 1.00 .97
Ratio of net investment
income (loss) to average
net assets (%) .17 .68 .78 .82 .54
Portfolio turnover (%) 50.12 77.60 98.15 67.56 35.34
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
S&P 500 Index 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.
** S&P is a trademark of The McGraw-Hill Companies, Inc. and has been
licensed for use. The product is not sponsored, sold or promoted
by Standard & Poor's and Standard & Poor's makes no representation
regarding the advisability of investing in the product.
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 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:
(1) 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).
(2) 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.
(3) 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. The NAV of the Fund is determined at the close of the regular trading
session of the NYSE each day on which the Exchange is open. If
the Fund receives your request prior to that time, 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 four to six 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): $3,000 or minimum $100 with a minimum $50
monthly electronic investment
Additional Purchases: $50
Initial Purchase - IRA: $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
1-800-531-8448 a 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.
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 NYSE 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 SEC.
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 1-800-292-8177, 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, 456-7202.
Telephone redemption is automatically established when you complete your
application. 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.
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. USAA Shareholder Account
Services (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)
VIA EFT redemptions 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 you 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.
Beginning in September 1998, and occurring each September thereafter,
the Transfer Agent will assess a small balance account fee of $12 to each
shareholder account with a balance, at the time of assessment, of less than
$2,000. The fee will be used to reduce total transfer agency fees paid by the
Fund to the Transfer Agent. Accounts exempt from the fee include: (1) any
account regularly purchasing additional shares each month through an automatic
investment plan; (2) any account registered under the Uniform Gifts/Transfers
to Minors Act (UGMA or UTMA); (3) all (non IRA) money market fund accounts;
(4) any account whose registered owner has an aggregate balance of $50,000 or
more invested in USAA mutual funds; and (5) all IRA accounts (for the first
year the account is open).
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 the required 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
Automatic Investment Plans - you may establish an automatic 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.
* InveStart (registered trademark) - a low initial investment purchase plan.
With this plan the regular minimum initial investment amount is waived if you
make an initial investment as low as $100 with subsequent monthly additions of
at least $50 through electronic funds transfer from a checking or savings
account.
* InvesTronic (registered trademark) - the regular purchase of additional
shares through electronic funds transfer from a checking or savings account.
You may invest as little as $50 per month.
* Direct Purchase Service - the periodic purchase of shares through electronic
funds transfer from an employer (including government allotments), 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 purchase shares automatically in
another fund.
SHAREHOLDER STATEMENTS
AND REPORTS
You will receive a confirmation after each transaction in your account except:
(1) a payment you make under the InveStart (registered trademark),
InvesTronic (registered trademark), Automatic Purchase Plan, or Direct
Purchase Service investment plans, or
(2) a redemption you make 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 NYSE, 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. Net
capital gains, if any, 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 investment 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 Fund 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.
Redemptions, including exchanges, are subject to income tax, based on
the difference between the cost of shares when purchased and the price
received upon redemption or exchange.
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 $---- 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 SEC 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 ANA, accrued
daily and paid monthly. Effective January 1, 1997, the Fund's management fees
are computed at three-fourths of one percent (.75%) of the ANA. The fees paid
to the Manager for the fiscal year ended July 31, 1996 were equal to .41% of
ANA, based on .50% of the first $200,000,000 of ANA, .40% of that portion of
ANA over $200,000,000 but not over $300,000,000, and .33% of that portion of
ANA over $300,000,000.
OPERATING EXPENSES
For the fiscal year ended July 31, 1996, the total operating expenses for the
Fund as a percentage of the Fund's ANA equaled .74%. Giving effect to the
Fund's new management fees effective January 1, 1997, the Fund's total
operating expenses for the current fiscal year are expected to approximate
1.08% of the Fund's ANA.
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, Assistant Vice Presidents of Equity
Investments since September 1996, have managed the Fund since March 1995. Mr.
Cabell has 18 years investment management experience and has worked seven
years as a Senior Securities Analyst in Equity Investments for IMCO. His
business experience during the past five years also included the following
position: Chief Economist for Retirement Systems of Alabama from March 1991 to
March 1994. 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 21 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 series or Funds. Eight such Funds have
been established, one of which is described in this Prospectus. 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 LLP
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 456-7211
For account servicing, exchanges or redemptions:
1-800-531-8448
In San Antonio 456-7202
RECORDED 24 HOUR SERVICE
MUTUAL FUND PRICE QUOTES
(From any phone)
1-800-531-8066
In San Antonio 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 498-8777
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Part A
Prospectus for the
Growth Fund
is included herein
USAA GROWTH FUND
December 1, 1996 PROSPECTUS
USAA GROWTH FUND (the Fund) is one of eight 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 OBJECTIVES 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 INVESTMENT RISKS, INCLUDING
POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.
If you would like more information about the Fund, you may call
1-800-531-8181 to request a free copy of the most recent financial report
and/or the Fund's Statement of Additional Information (SAI), dated December 1,
1996. The SAI has been filed with the Securities and Exchange Commission (SEC)
and is incorporated by reference into this Prospectus (meaning it is legally a
part of the 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 Objectives 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 17
Management of the Company 19
Description of Shares 20
Service Providers 20
Telephone Assistance Numbers 20
FEES AND EXPENSES
The following summary, which is based on actual expenses and average net
assets (ANA) of the Fund for the year ended July 31, 1996, is provided to
assist you in understanding the expenses you will bear directly or indirectly
as a Fund investor.
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 ANA)
- -------------------------------------------------------------------------------
Management Fees .75%
12b-1 Fees None
Other Expenses
Transfer Agent Fees** .19%
Custodian Fees .02%
All Other Expenses .05%
---
Total Other Expenses .26%
---
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
- -------------------------------------------------------------------------------
You would pay the following expenses on a $1,000 investment in the Fund,
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 ten-year period ended July 31, 1996, 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,
1996, 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
PERIOD ENDED YEAR ENDED
YEAR ENDED JULY 31, JULY 31, SEPTEMBER 30,
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Net asset value at
beginning of period $ 19.06 $ 17.63 $ 19.76 $ 17.49 $ 16.28
Net investment income .33 .26 .19 .19 .36
Net realized and
unrealized gain (loss) 1.92 3.95 (.17) 2.67 1.26
Distributions from net
investment income (.29) (.27) (.16) (.32) (.41)
Distributions of realized
capital gains (.97) (2.51) (1.99) (.27) -
---------- -------- -------- -------- --------
Net asset value at
end of period $ 20.05 $ 19.06 $ 17.63 $ 19.76 $ 17.49
========== ======== ======== ======== ========
Total return (%)* 12.44 26.46 .31 16.77 10.17
Net assets at end of
period (000) $1,162,262 $922,821 $618,685 $605,457 $432,125
Ratio of expenses to
average net assets (%) 1.01 1.04 1.04(a) 1.07 1.07
Ratio of net investment
income to average net
assets (%) 1.70 1.63 1.33(a) 1.07 2.27
Portfolio turnover (%) 62.30 69.64 117.80 96.19 39.39
Average commission rate
paid per share $ .050
- --------------
* 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.
FINANCIAL HIGHLIGHTS CONT.
YEAR ENDED SEPTEMBER 30,
1991 1990 1989 1988 1987
---- ---- ---- ---- ----
Net asset value at
beginning of period $ 13.25 $ 14.68 $ 11.68 $ 19.63 $ 15.94
Net investment income .46 .41 .41 .29 .38
Net realized and
unrealized gain (loss) 3.03 (1.38) 2.93 ( 3.99 ) 5.09
Distributions from net
investment income (.46) (.46) (.34) (.37) (.19)
Distributions of realized
capital gains - - - (3.88) (1.59)
-------- -------- -------- -------- --------
Net asset value at
end of period $ 16.28 $ 13.25 $ 14.68 $ 11.68 $ 19.63
======== ======== ======== ======== ========
Total return (%)* 27.12 (6.78) 29.37 (18.28) 37.93
Net assets at end of
period (000) $318,846 $223,051 $229,547 $208,129 $272,257
Ratio of expenses to
average net assets (%) 1.11 1.18 1.19 1.22 1.09
Ratio of net investment
income to average net
assets (%) 3.18 2.95 3.02 2.40 2.14
Portfolio turnover (%) 36.99 55.77 95.28 109.22 124.26
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
S&P 500 Index 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.
** S&P is a trademark of The McGraw-Hill Companies, Inc. and has been
licensed for use. The product is not sponsored, sold or promoted
by Standard & Poor's and Standard & Poor's makes no representation
regarding the advisability of investing in the product.
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 OBJECTIVES
The Fund's primary investment objective is long-term growth of capital with
secondary objectives of regular income and conservation of principal.
The Fund's investment objectives cannot be changed without shareholder
approval. In view of the risks inherent in all investments in securities,
there is no assurance that these objectives will be achieved.
The investment policies and techniques used to pursue the Fund's
objectives 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 these objectives by investing the Fund's assets
primarily in common stocks or in securities that are convertible into common
stocks. The Manager also may invest in warrants, rights and real estate
investment trusts and in nonconvertible debt securities when these securities
seem to offer a good prospect for appreciation. The Fund limits its
investments in convertible securities, at the time of acquisition, to 5% of
the value of its net assets.
Generally, the Manager invests in stocks that are deemed to be out of
favor or undervalued. These investments have at least one of the following
characteristics:
(1) a recent significant market price decline,
(2) sustained poor performance relative to the market or their industry,
(3) extremely pessimistic appraisal by most investors, or
(4) a market price that is low relative to earnings, cash flow, assets or
book value.
The Manager does 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:
(1) 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).
(2) 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.
(3) 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. The NAV of the Fund is determined at the close of the regular trading
session of the NYSE each day on which the Exchange is open. If
the Fund receives your request prior to that time, 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 four to six 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): $3,000 or minimum $100 with a minimum $50
monthly electronic investment
Additional Purchases: $50
Initial Purchase - IRA: $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 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
1-800-531-8448 a 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.
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 NYSE 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 SEC.
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 1-800-292-8177, 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, 456-7202.
Telephone redemption is automatically established when you complete your
application. 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.
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. USAA Shareholder Account
Services (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)
VIA EFT redemptions 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 you 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.
Beginning in September 1998, and occurring each September thereafter,
the Transfer Agent will assess a small balance account fee of $12 to each
shareholder account with a balance, at the time of assessment, of less than
$2,000. The fee will be used to reduce total transfer agency fees paid by the
Fund to the Transfer Agent. Accounts exempt from the fee include: (1) any
account regularly purchasing additional shares each month through an automatic
investment plan; (2) any account registered under the Uniform Gifts/Transfers
to Minors Act (UGMA or UTMA); (3) all (non IRA) money market fund accounts;
(4) any account whose registered owner has an aggregate balance of $50,000 or
more invested in USAA mutual funds; and (5) all IRA accounts (for the first
year the account is open).
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 the required 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
Automatic Investment Plans - you may establish an automatic 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.
* InveStart (registered trademark) - a low initial investment purchase plan.
With this plan the regular minimum initial investment amount is waived if you
make an initial investment as low as $100 with subsequent monthly additions of
at least $50 through electronic funds transfer from a checking or savings
account.
* InvesTronic (registered trademark) - the regular purchase of additional
shares through electronic funds transfer from a checking or savings account.
You may invest as little as $50 per month.
* Direct Purchase Service - the periodic purchase of shares through electronic
funds transfer from an employer (including government allotments), 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 purchase shares automatically in
another fund.
SHAREHOLDER STATEMENTS
AND REPORTS
You will receive a confirmation after each transaction in your account except:
(1) a payment you make under the InveStart (registered trademark),
InvesTronic (registered trademark), Automatic Purchase Plan, or Direct
Purchase Service investment plans, or
(2) a redemption you make 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 NYSE, 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. Net
capital gains, if any, 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 Fund 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.
Redemptions, including exchanges, are subject to income tax, based on
the difference between the cost of shares when purchased and the price
received upon redemption or exchange.
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 $---- 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 SEC 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 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,
1996. 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, 1996, 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.
David G. Parsons, Assistant Vice President of Equity Investments since March
1995, has managed the Fund since January 1994. Mr. Parsons has 13 years
investment management experience working for IMCO. 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.
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 series or Funds. Eight such Funds have
been established, one of which is described in this Prospectus. 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 LLP
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 456-7211
For account servicing, exchanges or redemptions:
1-800-531-8448
In San Antonio 456-7202
RECORDED 24 HOUR SERVICE
MUTUAL FUND PRICE QUOTES
(From any phone)
1-800-531-8066
In San Antonio 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 498-8777
Part A
Prospectus for the
Growth & Income Fund
is included herein
USAA GROWTH & INCOME FUND
December 1, 1996 PROSPECTUS
USAA GROWTH & INCOME FUND (the Fund) is one of eight 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
INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.
If you would like more information about the Fund, you may call
1-800-531-8181 to request a free copy of the most recent financial report
and/or the Fund's Statement of Additional Information (SAI), dated December 1,
1996. The SAI has been filed with the Securities and Exchange Commission (SEC)
and is incorporated by reference into this Prospectus (meaning it is legally a
part of the 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 16
Management of the Company 18
Description of Shares 19
Service Providers 19
Telephone Assistance Numbers 19
FEES AND EXPENSES
The following summary, which is based on actual expenses and average net
assets (ANA) of the Fund for the year ended July 31, 1996, is provided to
assist you in understanding the expenses you will bear directly or indirectly
as a Fund investor.
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 ANA)
- -------------------------------------------------------------------------------
Management Fees .60%
12b-1 Fees None
Other Expenses
Transfer Agent Fees** .24%
Custodian Fees .03%
All Other Expenses .08%
---
Total Other Expenses .35%
---
Total Fund Operating Expenses .95%
====
- -------------------------------------------------------------------------------
* 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
- -------------------------------------------------------------------------------
You would pay the following expenses on a $1,000 investment in the Fund,
assuming (1) 5% annual return and (2) redemption at the end of the periods
shown.
1 year - $ 10
3 years - $ 30
5 years - $ 53
10 years - $ 117
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 four-year period ended July 31, 1996,
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,
1996, 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
PERIOD ENDED PERIOD ENDED
YEAR ENDED JULY 31, JULY 31, SEPTEMBER 30,
1996 1995 1994 1993*
---- ---- ---- -----
Net asset value at
beginning of period $ 12.07 $ 10.36 $ 10.23 $ 10.00
Net investment income .24(b) .24(b) .17(b) .03
Net realized and
unrealized gain 1.51 1.81 .16 .20
Distributions from net
investment income (.23) (.23) (.18) -
Distributions of realized
capital gains (.13) (.11) (.02) -
-------- -------- --------- -------
Net asset value at
end of period $ 13.46 $ 12.07 $ 10.36 $ 10.23
======== ======== ========= =======
Total return (%)** 14.68 20.30 3.28 2.30
Net assets at end of
period (000) $371,801 $208,490 $134,622 $69,606
Ratio of expenses to
average net assets (%) .95 1.01 1.12(a) 1.63(a)
Ratio of net investment
income to average net
assets (%) 1.84 2.21 1.95(a) 1.87(a)
Portfolio turnover (%) 16.13 19.45 13.90 10.68
Average commission rate
paid per share $ .050
- --------------
* 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
S&P 500 Index 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.
** S&P is a trademark of The McGraw-Hill Companies, Inc. and has been
licensed for use. The product is not sponsored, sold or promoted
by Standard & Poor's and Standard & Poor's makes no representation
regarding the advisability of investing in the product.
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
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 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:
(1) 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).
(2) 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.
(3) 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. The NAV of the Fund is determined at the close of the regular trading
session of the NYSE each day on which the Exchange is open. If
the Fund receives your request prior to that time, 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 four to six 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): $3,000 or minimum $100 with a minimum $50
monthly electronic investment
Additional Purchases: $50
Initial Purchase - IRA: $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
1-800-531-8448 a 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.
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 NYSE 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 SEC.
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 1-800-292-8177, 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, 456-7202.
Telephone redemption is automatically established when you complete your
application. 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.
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. USAA Shareholder Account
Services (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)
VIA EFT redemptions 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 you 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.
Beginning in September 1998, and occurring each September thereafter,
the Transfer Agent will assess a small balance account fee of $12 to each
shareholder account with a balance, at the time of assessment, of less than
$2,000. The fee will be used to reduce total transfer agency fees paid by the
Fund to the Transfer Agent. Accounts exempt from the fee include: (1) any
account regularly purchasing additional shares each month through an automatic
investment plan; (2) any account registered under the Uniform Gifts/Transfers
to Minors Act (UGMA or UTMA); (3) all (non IRA) money market fund accounts;
(4) any account whose registered owner has an aggregate balance of $50,000 or
more invested in USAA mutual funds; and (5) all IRA accounts (for the first
year the account is open).
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 the required 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
Automatic Investment Plans - you may establish an automatic 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.
* InveStart (registered trademark) - a low initial investment purchase plan.
With this plan the regular minimum initial investment amount is waived if you
make an initial investment as low as $100 with subsequent monthly additions of
at least $50 through electronic funds transfer from a checking or savings
account.
* InvesTronic (registered trademark) - the regular purchase of additional
shares through electronic funds transfer from a checking or savings account.
You may invest as little as $50 per month.
* Direct Purchase Service - the periodic purchase of shares through electronic
funds transfer from an employer (including government allotments), 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 purchase shares automatically in
another fund.
SHAREHOLDER STATEMENTS
AND REPORTS
You will receive a confirmation after each transaction in your account except:
(1) a reinvested dividend, or
(2) a payment you make under the InveStart (registered trademark),
InvesTronic (registered trademark), Direct Purchase Service, Automatic
Purchase Plan, or Directed Dividends investment plans, or
(3) a redemption you make 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 Reportsto 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 NYSE, 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. Net
capital gains, if any, 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 Fund 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.
Redemptions, including exchanges, are subject to income tax, based on
the difference between the cost of shares when purchased and the price
received upon redemption or exchange.
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 $--- 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 SEC 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 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,
1996.
OPERATING EXPENSES
For the fiscal year ended July 31, 1996, the total operating expenses for the
Fund as a percentage of the Fund's ANA equaled .95%.
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
1994, has managed the Fund since its inception in June 1993. Mr. Ullom has 21
years investment management experience and has worked for IMCO for ten years.
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.
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 series or Funds. Eight such Funds have
been established, one of which is described in this Prospectus. 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 LLP
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 456-7211
For account servicing, exchanges or redemptions:
1-800-531-8448
In San Antonio 456-7202
RECORDED 24 HOUR SERVICE
MUTUAL FUND PRICE QUOTES
(From any phone)
1-800-531-8066
In San Antonio 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 498-8777
[THIS PAGE LEFT BLANK INTENTIONALLY]
Part A
Prospectus for the
Income Stock Fund
is included herein
USAA INCOME STOCK FUND
December 1, 1996 PROSPECTUS
USAA INCOME STOCK FUND (the Fund) is one of eight 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
INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.
If you would like more information about the Fund, you may call
1-800-531-8181 to request a free copy of the most recent financial report
and/or the Fund's Statement of Additional Information (SAI), dated December 1,
1996. The SAI has been filed with the Securities and Exchange Commission (SEC)
and is incorporated by reference into this Prospectus (meaning it is legally a
part of the 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
Description of Shares 20
Service Providers 20
Telephone Assistance Numbers 20
FEES AND EXPENSES
The following summary, which is based on actual expenses and average net
assets (ANA) of the Fund for the year ended July 31, 1996, is provided to
assist you in understanding the expenses you will bear directly or indirectly
as a Fund investor.
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 ANA)
- -------------------------------------------------------------------------------
Management Fees .50%
12b-1 Fees None
Other Expenses
Transfer Agent Fees** .17%
Custodian Fees .01%
All Other Expenses .04%
----
Total Other Expenses .22%
----
Total Fund Operating Expenses .72%
====
- -------------------------------------------------------------------------------
* 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
- -------------------------------------------------------------------------------
You would pay the following expenses on a $1,000 investment in the Fund,
assuming (1) 5% annual return and (2) redemption at the end of the periods
shown.
1 year - $ 7
3 years - $ 23
5 years - $ 40
10 years - $ 89
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, 1996, 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,
1996, 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.
<TABLE>
<CAPTION>
TEN-MONTH
PERIOD ENDED
YEAR ENDED JULY 31, JULY 31, YEAR ENDED SEPTEMBER 30,
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net asset value at
beginning of period $ 14.96 $ 13.50 $ 14.95 $ 13.42 $ 12.63
Net investment income .77 .74 .60 .71 .71
Net realized and
unrealized gain (loss) 1.16 1.69 (1.12) 1.62 .78
Distributions from net
investment income (.77) (.75) (.74) (.71) (.70)
Distributions of realized
capital gains (.27) (.22) (.19) (.09) -
---------- ---------- ---------- ---------- --------
Net asset value at
end of period $ 15.85 $ 14.96 $ 13.50 $ 14.95 $ 13.42
========== ========== ========== ========== ========
Total return (%)** 13.21 18.83 (3.53) 18.05 12.14
Net assets at end of
period (000) $1,710,769 $1,408,371 $1,190,024 $1,043,686 $480,733
Ratio of expenses to
average net assets (%) .72 .75 .73(a) .70 .74
Ratio of net investment
income to average net
assets (%) 4.84 5.34 5.25(a) 5.43 5.99
Portfolio turnover (%) 32.38 34.94 24.82 26.98 15.79
Average commission rate
paid per share $ .050
- ----------------
</TABLE>
* 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.
FINANCIAL HIGHLIGHTS CONT.
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 (.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
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
S&P 500 Index 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.
** S&P is a trademark of The McGraw-Hill Companies, Inc. and has been
licensed for use. The product is not sponsored, sold or promoted
by Standard & Poor's and Standard & Poor's makes no representation
regarding the advisability of investing in the product.
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 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:
(1) 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).
(2) 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.
(3) 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. The NAV of the Fund is determined at the close of the regular trading
session of the NYSE each day on which the Exchange is open. If
the Fund receives your request prior to that time, 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 four to six 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): $3,000 or minimum $100 with a minimum $50
monthly electronic investment
Additional Purchases: $50
Initial Purchase - IRA: $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
1-800-531-8448 a 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.
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 NYSE 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 SEC.
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 1-800-292-8177, 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, 456-7202.
Telephone redemption is automatically established when you complete your
application. 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.
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. USAA Shareholder Account
Services (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)
VIA EFT redemptions 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 you 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.
Beginning in September 1998, and occurring each September thereafter,
the Transfer Agent will assess a small balance account fee of $12 to each
shareholder account with a balance, at the time of assessment, of less than
$2,000. The fee will be used to reduce total transfer agency fees paid by the
Fund to the Transfer Agent. Accounts exempt from the fee include: (1) any
account regularly purchasing additional shares each month through an automatic
investment plan; (2) any account registered under the Uniform Gifts/Transfers
to Minors Act (UGMA or UTMA); (3) all (non IRA) money market fund accounts;
(4) any account whose registered owner has an aggregate balance of $50,000 or
more invested in USAA mutual funds; and (5) all IRA accounts (for the first
year the account is open).
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 the required 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
Automatic Investment Plans - you may establish an automatic 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.
* InveStart (registered trademark) - a low initial investment purchase plan.
With this plan the regular minimum initial investment amount is waived if you
make an initial investment as low as $100 with subsequent monthly additions of
at least $50 through electronic funds transfer from a checking or savings
account.
* InvesTronic (registered trademark) - the regular purchase of additional
shares through electronic funds transfer from a checking or savings account.
You may invest as little as $50 per month.
* Direct Purchase Service - the periodic purchase of shares through electronic
funds transfer from an employer (including government allotments), 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 purchase shares automatically in
another fund.
SHAREHOLDER STATEMENTS
AND REPORTS
You will receive a confirmation after each transaction in your account except:
(1) a reinvested dividend, or
(2) a payment you make under the InveStart (registered trademark),
InvesTronic (registered trademark), Direct Purchase Service, Automatic
Purchase Plan, or Directed Dividends investment plans, or
(3) a redemption you make 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 NYSE, 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. Net
capital gains, if any, 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 Fund 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.
Redemptions, including exchanges, are subject to income tax, based on
the difference between the cost of shares when purchased and the price
received upon redemption or exchange.
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 $---- 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 SEC 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 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, 1996.
OPERATING EXPENSES
For the fiscal year ended July 31, 1996, the total operating expenses for the
Fund as a percentage of the Fund's ANA equaled .72%.
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
1987, has managed the Fund since January 1989. Mr. Miller has 39 years of
experience in investment management and has worked for IMCO for 22 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 University, New Jersey.
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 series or Funds. Eight such Funds have
been established, one of which is described in this Prospectus. 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 LLP
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 456-7211
For account servicing, exchanges or redemptions:
1-800-531-8448
In San Antonio 456-7202
RECORDED 24 HOUR SERVICE
MUTUAL FUND PRICE QUOTES
(From any phone)
1-800-531-8066
In San Antonio 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 498-8777
Part A
Prospectus for the
Income Fund
is included herein
USAA INCOME FUND
December 1, 1996 PROSPECTUS
USAA INCOME FUND (the Fund) is one of eight 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 INVESTMENT RISKS, INCLUDING
POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.
If you would like more information about the Fund, you may call
1-800-531-8181 to request a free copy of the most recent financial report
and/or the Fund's Statement of Additional Information (SAI), dated December 1,
1996. The SAI has been filed with the Securities and Exchange Commission (SEC)
and is incorporated by reference into this Prospectus (meaning it is legally a
part of the 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 19
Management of the Company 21
Description of Shares 22
Service Providers 22
Telephone Assistance Numbers 22
FEES AND EXPENSES
The following summary, which is based on actual expenses and average net
assets (ANA) of the Fund for the year ended July 31, 1996, is provided to
assist you in understanding the expenses you will bear directly or indirectly
as a Fund investor.
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 ANA)
- -------------------------------------------------------------------------------
Management Fees .24%
12b-1 Fees None
Other Expenses
Transfer Agent Fees** .12%
Custodian Fees .02%
All Other Expenses .02%
---
Total Other Expenses .16%
---
Total Fund Operating Expenses .40%
===
- -------------------------------------------------------------------------------
* 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
- -------------------------------------------------------------------------------
You would pay the following expenses on a $1,000 investment in the Fund,
assuming (1) 5% annual return and (2) redemption at the end of the periods
shown.
1 year - $ 4
3 years - $ 13
5 years - $ 22
10 years - $ 51
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, 1996, 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,
1996, 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.
<TABLE>
<CAPTION>
TEN-MONTH
PERIOD ENDED
YEAR ENDED JULY 31, JULY 31, YEAR ENDED SEPTEMBER 30,
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net asset value at
beginning of period $ 12.11 $ 11.67 $ 13.28 $ 12.76 $ 12.11
Net investment income .83 .84 .72 .90 .95
Net realized and
unrealized gain (loss) (.13) .45 (1.30) .52 .64
Distributions from net
investment income (.84) (.85) (.78) (.90) (.93)
Distributions of realized
capital gains - - (.25) - (.01)
---------- ---------- ---------- ---------- ----------
Net asset value at
end of period $ 11.97 $ 12.11 $ 11.67 $ 13.28 $ 12.76
========== ========== ========== ========== ==========
Total return (%)* 5.78 11.64 (4.52) 11.58 13.72
Net assets at end of
period (000) $1,737,306 $1,755,171 $1,718,934 $1,932,064 $1,359,721
Ratio of expenses to
average net assets (%) .40 .41 .41(a) .41 .42
Ratio of net investment
income to average net
assets (%) 6.64 7.27 6.98(a) 7.00 7.78
Portfolio turnover (%) 81.26(b) 30.86(b) 25.36(b) 44.82 21.78
Average commission rate
paid per share $ .047
- ----------------------
</TABLE>
* 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 JULY 31, PERIOD ENDED
1996 1995 JULY 31, 1994
---- ---- -------------
Portfolio turnover (%) 44.69 9.09 16.79
Purchases and sales of this type are as follows:
Purchases (000) $648,396 $360,943 $155,322
Sales (000) $649,193 $361,366 $155,497
FINANCIAL HIGHLIGHTS CONT.
YEAR ENDED SEPTEMBER 30,
1991 1990 1989 1988 1987
---- ---- ---- ---- ----
Net asset value at
beginning of period $ 11.03 $ 11.50 $ 11.20 $ 10.89 $ 12.08
Net investment income .98 1.03 1.05 1.06 1.07
Net realized and
unrealized gain (loss) 1.09 (.44) .30 .57 (.96)
Distributions from net
investment income (.99) (1.03) (1.05) (1.06) (1.24)
Distributions of realized
capital gains - (.03) - (.26) (.06)
-------- -------- --------- -------- --------
Net asset value at
end of period $ 12.11 $ 11.03 $ 11.50 $ 11.20 $ 10.89
======== ======== ========= ======== ========
Total return (%)* 19.64 5.28 12.78 15.87 .56
Net assets at end of
period (000) $827,505 $434,705 $332,140 $284,639 $249,901
Ratio of expenses to
average net assets (%) .47 .53 .57 .61 .61
Ratio of net investment
income to average net
assets (%) 8.61 9.19 9.36 9.57 9.13
Portfolio turnover (%) 15.45 12.07 13.79 10.66 35.90
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
S&P 500 Index 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.
** S&P is a trademark of The McGraw-Hill Companies, Inc. and has been
licensed for use. The product is not sponsored, sold or promoted
by Standard & Poor's and Standard & Poor's makes no representation
regarding the advisability of investing in the product.
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
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 - The Fund may invest in 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 - The Fund may invest in 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 judgments 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 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:
(1) 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).
(2) 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.
(3) 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. The NAV of the Fund is determined at the close of the regular trading
session of the NYSE each day on which the Exchange is open. If
the Fund receives your request prior to that time, 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 four to six 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): $3,000 or minimum $100 with a minimum $50
monthly electronic investment
Additional Purchases: $50
Initial Purchase - IRA: $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
TRANSFER to 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
1-800-531-8448 a 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.
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 NYSE 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 SEC.
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 1-800-292-8177, 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, 456-7202.
Telephone redemption is automatically established when you complete your
application. 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.
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. USAA Shareholder Account
Services (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)
VIA EFT redemptions 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 you 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.
Beginning in September 1998, and occurring each September thereafter,
the Transfer Agent will assess a small balance account fee of $12 to each
shareholder account with a balance, at the time of assessment, of less than
$2,000. The fee will be used to reduce total transfer agency fees paid by the
Fund to the Transfer Agent. Accounts exempt from the fee include: (1) any
account regularly purchasing additional shares each month through an automatic
investment plan; (2) any account registered under the Uniform Gifts/Transfers
to Minors Act (UGMA or UTMA); (3) all (non IRA) money market fund accounts;
(4) any account whose registered owner has an aggregate balance of $50,000 or
more invested in USAA mutual funds; and (5) all IRA accounts (for the first
year the account is open).
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 the required
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
Automatic Investment Plans - you may establish an automatic 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.
* InveStart (registered trademark) - a low initial investment purchase plan.
With this plan the regular minimum initial investment amount is waived if you
make an initial investment as low as $100 with subsequent monthly additions of
at least $50 through electronic funds transfer from a checking or savings
account.
* InvesTronic (registered trademark) - the regular purchase of additional
shares through electronic funds transfer from a checking or savings account.
You may invest as little as $50 per month.
* Direct Purchase Service - the periodic purchase of shares through electronic
funds transfer from an employer (including government allotments), 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 purchase shares automatically in
another fund.
SHAREHOLDER STATEMENTS
AND REPORTS
You will receive a confirmation after each transaction in your account except:
(1) a reinvested dividend, or
(2) a payment you make under the InveStart (registered trademark),
InvesTronic (registered trademark), Direct Purchase Service, Automatic
Purchase Plan, or Directed Dividends investment plans, or
(3) a redemption you make 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 NYSE, 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
The Fund distributes net investment income to shareholders monthly based on
its projection of its annual net investment income. Therefore, the amount of
each monthly distribution may differ from actual net investment income. The
purpose of this distribution procedure is to attempt to provide as level a
monthly distribution payment as possible. If the total distributions in a
year exceed the Fund's current year net investment income, a portion of the
distributions received by shareholders of the Fund could be a return of
capital for federal income tax purposes and thereby reduce the shareholder's
cost basis in shares of the Fund. If distributions are received in additional
shares rather than cash, the capital returned would be automatically
reinvested, and the shareholder's total cost basis in the Fund would remain
the same.
Net capital gains, if any, 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 Fund 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.
Redemptions, including exchanges, are subject to income tax, based on
the difference between the cost of shares when purchased and the price
received upon redemption or exchange.
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 $---- 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 SEC 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 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, 1996.
OPERATING EXPENSES
For the fiscal year ended July 31, 1996, the total operating expenses for the
Fund as a percentage of the Fund's ANA equaled .40%.
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.
John W. Saunders, Jr., Senior Vice President of Fixed Income Investments since
October 1985, has managed the Fund since October 1985. Mr. Saunders has 27
years investment management experience and has worked for IMCO for 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.
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 series or Funds. Eight such Funds have
been established, one of which is described in this Prospectus. 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 LLP
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 456-7211
For account servicing, exchanges or redemptions:
1-800-531-8448
In San Antonio 456-7202
RECORDED 24 HOUR SERVICE
MUTUAL FUND PRICE QUOTES
(From any phone)
1-800-531-8066
In San Antonio 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 498-8777
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Part A
Prospectus for the
Short-Term Bond Fund
is included herein
USAA SHORT-TERM BOND FUND
December 1, 1996 PROSPECTUS
USAA SHORT-TERM BOND FUND (the Fund) is one of eight 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
INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.
If you would like more information about the Fund, you may call
1-800-531-8181 to request a free copy of the most recent financial report
and/or the Fund's Statement of Additional Information (SAI), dated December 1,
1996. The SAI has been filed with the Securities and Exchange Commission (SEC)
and is incorporated by reference into this Prospectus (meaning it is legally a
part of the 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
Description of Shares 20
Management of the Company 21
Service Providers 22
Telephone Assistance Numbers 22
FEES AND EXPENSES
The following summary, which is based on actual expenses and average net
assets (ANA) of the Fund for the year ended July 31, 1996, is provided to
assist you in understanding the expenses you will bear directly or indirectly
as a Fund investor.
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 ANA)
- -------------------------------------------------------------------------------
Management Fees, net of reimbursements .08%
12b-1 Fees None
Other Expenses
Transfer Agent Fees** .22%
Custodian Fees .06%
All Other Expenses .14%
---
Total Other Expenses .42%
---
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 and Total Fund Operating Expenses
reflect all such expense reimbursements by the Manager. Absent such
reimbursements, the amount of the Management Fees and Total Fund Operating
Expenses as a percentage of ANA would have been .24% and .66%, respectively.
The Manager has voluntarily agreed to continue to limit the Fund's annual
expenses until December 1, 1997, to .50% of its ANA and will reimburse the
Fund for all expenses in excess of such limitation.
Example of Effect of Fund Expenses
- -------------------------------------------------------------------------------
You would pay the following expenses on a $1,000 investment in the Fund,
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 four-year period ended July 31, 1996,
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,
1996, 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
PERIOD ENDED PERIOD ENDED
YEAR ENDED JULY 31, JULY 31, SEPTEMBER 30,
1996 1995 1994 1993*
---- ---- ---- -----
Net asset value at
beginning of period $ 9.87 $ 9.74 $ 10.08 $ 10.00
Net investment income .62 .61 .37 .14
Net realized and
unrealized gain (loss) (.08) .13 (.33) .08
Distributions from net
investment income (.62) (.61) (.37) (.14)
Distributions of realized
capital gains - - (.01) -
-------- -------- -------- -------
Net asset value at
end of period $ 9.79 $ 9.87 $ 9.74 $ 10.08
======== ======== ======== =======
Total return (%)** 5.62 7.90 .39 2.19
Net assets at end of
period (000) $101,032 $76,190 $48,228 $25,679
Ratio of expenses to
average net assets (%) .50(c) .50(c) .50(a)(c) .50(a)(c)
Ratio of net investment
income to average net
assets (%) 6.29(c) 6.34(c) 4.51(a)(c) 4.21(a)(c)
Portfolio turnover (%) 66.81(b) 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) Effective for 1996, portfolio turnover rates have been calculated
excluding short-term variable rate securities, which are those with put
date intervals of less than one year.
(c) 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
PERIOD ENDED PERIOD ENDED
YEAR ENDED JULY 31, JULY 31, SEPTEMBER 30,
1996 1995 1994 1993*
---- ---- ---- -----
Ratio of expenses to average
net assets (%) .66 .74 .87(a) 1.57(a)
Ratio of net investment income
to average net assets (%) 6.13 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
S&P 500 Index 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.
** S&P is a trademark of The McGraw-Hill Companies, Inc. and has been
licensed for use. The product is not sponsored, sold or promoted
by Standard & Poor's and Standard & Poor's makes no representation
regarding the advisability of investing in the product.
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
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 - The Fund may invest in 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 - The Fund may invest in 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 judgments 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 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:
(1) 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).
(2) 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.
(3) 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. The NAV of the Fund is determined at the close of the regular trading
session of the NYSE each day on which the Exchange is open. If the Fund
receives your request prior to that time, 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 four to six 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
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Initial Purchase (non-IRA): $3,000 or minimum $100 with a minimum $50
monthly electronic investment
Additional Purchases: $50
Initial Purchase - IRA: $250 or minimum $100 with a minimum $50 monthly
electronic investment
Additional Purchases: $50
How to Purchase:
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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
1-800-531-8448 a 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.
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 NYSE 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 SEC.
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 1-800-292-8177, 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, 456-7202.
Telephone redemption is automatically established when you complete your
application. 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.
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. USAA Shareholder Account
Services (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 (SSB) 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)
VIA EFT redemptions 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 you 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.
Beginning in September 1998, and occurring each September thereafter,
the Transfer Agent will assess a small balance account fee of $12 to each
shareholder account with a balance, at the time of assessment, of less than
$2,000. The fee will be used to reduce total transfer agency fees paid by
the Fund to the Transfer Agent. Accounts exempt from the fee include:
(1) any account regularly purchasing additional shares each month through an
automatic investment plan; (2) any account registered under the Uniform
Gifts/Transfers to Minors Act (UGMA or UTMA); (3) all (non IRA) money
market fund accounts; (4) any account whose registered owner has an aggregate
balance of $50,000 or more invested in USAA mutual funds; and (5) all IRA
accounts (for the first year the account is open).
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 the required 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
Automatic Investment Plans - you may establish an automatic 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.
* InveStart (registered trademark) - a low initial investment purchase plan.
With this plan the regular minimum initial investment amount is waived if you
make an initial investment as low as $100 with subsequent monthly additions of
at least $50 through electronic funds transfer from a checking or savings
account.
* InvesTronic (registered trademark) - the regular purchase of additional
shares through electronic funds transfer from a checking or savings account.
You may invest as little as $50 per month.
* Direct Purchase Service - the periodic purchase of shares through electronic
funds transfer from an employer (including government allotments), 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 purchase shares automatically in
another fund.
SHAREHOLDER STATEMENTS
AND REPORTS
You will receive a confirmation after each transaction in your account except:
(1) a reinvested dividend, or
(2) a payment you make under the InveStart (registered trademark),
InvesTronic (registered trademark), Direct Purchase Service, Automatic
Purchase Plan, or Directed Dividends investment plans, or
(3) a redemption you make 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 NYSE, 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.
Net capital gains, if any, 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 Fund 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.
Redemptions, including exchanges, are subject to income tax, based on
the difference between the cost of shares when purchased and the price
received upon redemption or exchange.
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.
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 series or Funds. Eight such Funds have
been established, one of which is described in this Prospectus. 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.
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 $---- 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 SEC 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 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, 1996, the fees paid to the Manager, net of reimbursement, were
.08% of ANA.
OPERATING EXPENSES
For the fiscal year ended July 31, 1996, the Manager limited total operating
expenses to .50% of the Fund's ANA. The Manager reimbursed the Fund $145,849
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, 1997, 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 1994, has managed the Fund since its inception in June 1993. Mr.
Lundmark has ten years investment management experience and has worked for
IMCO for five years. He has held various positions in Fixed Income
Investments since January 1992. 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 LLP
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 456-7211
For account servicing, exchanges or redemptions:
1-800-531-8448
In San Antonio 456-7202
RECORDED 24 HOUR SERVICE
MUTUAL FUND PRICE QUOTES
(From any phone)
1-800-531-8066
In San Antonio 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 498-8777
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Part A
Prospectus for the
Money Market Fund
is included herein
USAA MONEY MARKET FUND
December 1, 1996 PROSPECTUS
USAA MONEY MARKET FUND (the Fund) is one of eight 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
INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.
If you would like more information about the Fund, you may call
1-800-531-8181 to request a free copy of the most recent financial report
and/or the Fund's Statement of Additional Information (SAI), dated December 1,
1996. The SAI has been filed with the Securities and Exchange Commission (SEC)
and is incorporated by reference into this Prospectus (meaning it is legally a
part of the 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
Description of Shares 22
Service Providers 22
Telephone Assistance Numbers 22
FEES AND EXPENSES
The following summary, which is based on actual expenses and average net
assets (ANA) of the Fund for the year ended July 31, 1996, is provided to
assist you in understanding the expenses you will bear directly or indirectly
as a Fund investor.
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 ANA)
- -------------------------------------------------------------------------------
Management Fees, net of reimbursements .18%
12b-1 Fees None
Other Expenses
Transfer Agent Fees** .19%
Custodian Fees .03%
All Other Expenses .05%
---
Total Other Expenses .27%
---
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 and Total Fund Operating Expenses
reflect all such expense reimbursements by the Manager. Absent such
reimbursements, the amount of the Management Fees and Total Fund Operating
Expenses as a percentage of ANA would have been .24% and .51%, respectively.
The Manager has voluntarily agreed to continue to limit the Fund's annual
expenses until December 1, 1997, to .45% of its ANA and will reimburse the
Fund for all expenses in excess of such limitation.
Example of Effect of Fund Expenses
- -------------------------------------------------------------------------------
You would pay the following expenses on a $1,000 investment in the Fund,
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, 1996, 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,
1996, 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.
<TABLE>
<CAPTION>
TEN-MONTH
PERIOD ENDED
YEAR ENDED JULY 31, JULY 31, YEAR ENDED SEPTEMBER 30,
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net asset value at
beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
Net investment income .05 .05 .03 .03 .04
Distributions from net
investment income (.05) (.05) (.03) (.03) (.04)
---------- ---------- ---------- -------- --------
Net asset value at
end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
========== ========== ========== ======== ========
Total return (%)* 5.41 5.49 2.74 3.09 4.32
Net assets at end of
period (000) $1,828,749 $1,540,055 $1,006,020 $813,784 $900,312
Ratio of expenses to
average net assets (%) .45(b) .45(b) .46(a) .48 .48
Ratio of net investment
income to average net
assets (%) 5.27(b) 5.44(b) 3.28(a) 3.05 4.25
- -----------------
* Assumes reinvestment of all dividend income distributions during the
period.
(a) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
(b) The information contained in the above table is based on actual expenses
for the period, after giving effect to reimbursement of expenses by the
Manager. Absent such reimbursement the Fund's ratios would have been:
YEAR ENDED JULY 31,
1996 1995
---- ----
Ratio of expenses to average net assets (%) .51 .46
Ratio of net investment income to average net assets (%) 5.21 5.43
</TABLE>
FINANCIAL HIGHLIGHTS CONT.
YEAR ENDED SEPTEMBER 30,
1991 1990 1989 1988 1987
---- ---- ---- ---- ----
Net asset value at
beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
Net investment income .07 .08 .09 .07 .06
Distributions from net
investment income (.07) (.08) (.09) (.07) (.06)
-------- -------- -------- ------- --------
Net asset value at
end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======= ========
Total return (%)* 6.71 8.12 8.87 6.94 6.12
Net assets at end of
period (000) $984,404 $980,917 $882,694 $679,979 $507,195
Ratio of expenses to
average net assets (%) .54 .62 .68 .72 .79
Ratio of net investment
income to average net
assets (%) 6.52 7.86 8.55 6.75 6.01
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
S&P 500 Index 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.
** S&P is a trademark of The McGraw-Hill Companies, Inc. and has been
licensed for use. The product is not sponsored, sold or promoted
by Standard & Poor's and Standard & Poor's makes no representation
regarding the advisability of investing in the product.
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 SEC 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. Moreover, because the
Fund invests in securities backed by banks and other financial institutions,
changes in the credit quality of these institutions could cause losses to the
Fund and affect its share price.
The Fund will also comply with diversification requirements which are
generally applicable to money market funds under regulations of the SEC.
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 - The Fund may invest in 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 - The Fund may invest in 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 judgments 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 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:
(1) 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).
(2) 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. The NAV of the Fund is determined at the close of the regular trading
session of the NYSE each day on which the Exchange is open. If the Fund
receives your request prior to that time, 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 four to six 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): $3,000 or minimum $100 with a minimum $50
monthly electronic investment
Additional Purchases: $50 - (Except transfers from brokerage accounts)
Initial Purchase - IRA: $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
1-800-531-8448 a 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.
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 NYSE 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 SEC.
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 1-800-292-8177, 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, 456-7202.
Telephone redemption is automatically established when you complete your
application. 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.
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. USAA Shareholder Account
Services (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 (SSB) 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)
VIA EFT redemptions 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 you 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.
Beginning in September 1998, and occurring each September thereafter,
the Transfer Agent will assess a small balance account fee of $12 to each
shareholder account with a balance, at the time of assessment, of less than
$2,000. The fee will be used to reduce total transfer agency fees paid by the
Fund to the Transfer Agent. Accounts exempt from the fee include: (1) any
account regularly purchasing additional shares each month through an automatic
investment plan; (2) any account registered under the Uniform Gifts/Transfers
to Minors Act (UGMA or UTMA); (3) all (non IRA) money market fund accounts;
(4) any account whose registered owner has an aggregate balance of $50,000 or
more invested in USAA mutual funds; and (5) all IRA accounts (for the first
year the account is open).
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 the required 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
Automatic Investment Plans - you may establish an automatic 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.
* InveStart (registered trademark) - a low initial investment purchase plan.
With this plan the regular minimum initial investment amount is waived if you
make an initial investment as low as $100 with subsequent monthly additions of
at least $50 through electronic funds transfer from a checking or savings
account.
* InvesTronic (registered trademark) - the regular purchase of additional
shares through electronic funds transfer from a checking or savings account.
You may invest as little as $50 per month.
* Direct Purchase Service - the periodic purchase of shares through electronic
funds transfer from an employer (including government allotments), 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 purchase shares automatically 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 InveStart (registered
trademark), 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 NYSE, 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 Fund 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 $----- 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 SEC 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 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, 1996, the fees paid to the Manager, net of reimbursement, were
.18% of ANA.
OPERATING EXPENSES
For the fiscal year ended July 31, 1996, the Manager limited total operating
expenses to .45% of the Fund's ANA. The Manager reimbursed the Fund
$1,002,670 for expenses in excess of the limitation. The Manager has
voluntarily agreed to continue to limit the Fund's annual expenses until
December 1, 1997, 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.
Pamela K. Bledsoe, Executive Director of Money Market Funds since June 1995,
has managed the Fund since May 1996. Ms. Bledsoe has eight years investment
management experience and has worked for IMCO for five years where she has
held various positions in Fixed Income Investments. Ms. Bledsoe earned the
Chartered Financial Analyst designation in 1992 and is a member of the
Association for Investment Management and Research and the San Antonio
Financial Analysts Society, Inc. She holds an MBA from Texas Christian
University and a BS from Louisiana Tech University.
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 series or Funds. Eight such Funds have
been established, one of which is described in this Prospectus. 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 LLP
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 456-7211
For account servicing, exchanges or redemptions:
1-800-531-8448
In San Antonio 456-7202
RECORDED 24 HOUR SERVICE
MUTUAL FUND PRICE QUOTES
(From any phone)
1-800-531-8066
In San Antonio 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 498-777
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Part B
Statement of Additional Information for the
Aggressive Growth Fund, Growth Fund,
Growth & Income Fund, Income Stock Fund, Income Fund,
Short-Term Bond Fund, and Money Market Fund
is included herein
[Logo of USAA STATEMENT OF
USAA Eagle MUTUAL ADDITIONAL INFORMATION
appears here] FUND, INC. December 1, 1996
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USAA MUTUAL FUND, INC.
USAA MUTUAL FUND, INC. (the Company) is a registered investment company
offering shares of eight no-load mutual funds, seven of 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
objectives designed to meet different investment goals.
You may obtain a free copy of a Prospectus for any Fund dated December 1,
1996, by writing to USAA Mutual Fund, Inc., 9800 Fredericksburg Rd., San
Antonio, TX 78288, or by calling toll free 1-800-531-8181. The Prospectus
provides the basic information you should know before investing in the Funds.
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.
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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
26 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 only 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 USAA Shareholder Account Services (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.
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.
Automatic Purchase of Shares
InveStart (registered trademark) - a low initial investment purchase plan.
With this plan the regular minimum initial investment amount is waived if you
make an initial investment as low as $100 with subsequent monthly additions of
at least $50 through electronic funds transfer from a checking or savings
account.
InvesTronic (registered trademark) - the regular purchase of additional
shares through electronic funds transfer from a checking or savings account.
You may invest as little as $50 per month.
Direct Purchase Service - the periodic purchase of shares through electronic
funds transfer from an employer, (including government allotments) 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 in the money
market fund, with a monthly transaction minimum of $50.
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 automatic 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 NAV 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 $250 or minimum $100 with a minimum $50 monthly electronic investment.
Subsequent investments of $50 or more per account may be made at any time.
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
(1933 Act). 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 1933 Act
(Rule 144A Securities). Rule 144A provides a non-exclusive safe harbor from
the registration requirements of the 1933 Act 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 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.
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.
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.
(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 each Fund's concentration policies as described above
and in its Prospectus, the Manager uses industry classifications for
industries based on categories established by Standard & Poor's Corporation
(Standard &Poor's) for the Standard & Poor's 500 Composite Index, with certain
modifications. Because the Manager has determined that certain categories
within, or in addition to, those set forth by Standard &Poor's have unique
investment characteristics, additional industries are included as industry
classifications. The Manager classifies municipal obligations by projects
with similar characteristics, such as toll road revenue bonds, housing bonds
or higher education revenue bonds.
In addition, 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 1994* 1995 1996
------ ----------- ----------- -----------
Aggressive Growth $ 575,190 $ 441,669 $ 124,620
Growth 1,919,577 1,482,224 2,149,922
Growth & Income 108,355 154,393 332,154
Income Stock 1,224,292 1,157,186 1,668,406
Income 60,180 46,000 78,950
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 1994* 1995 1996**
------ ----------- ----------- -----------
Aggressive Growth $ 20,000 $ -- $ --
Growth 30,000 110,000 21,360
Growth & Income 19,351 21,268 4,576
Income Stock 23,318 32,512 8,000
Income 50,400 16,000 21,200
- -------------
* For the ten-month period ended July 31, 1994.
** These amounts are 1.0%, 1.4%, .5%, and 26.9%, respectively, of
brokerage fees paid by each Fund.
For the year ended July 31, 1996, .5%, 2.2%, 1.0%, and 34.3% of the aggregate
dollar amounts of transactions involving the payment of commissions by the
Growth, Growth & Income, Income Stock, and Income Funds, respectively, were
effected through USAA Brokerage Services.
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 $54,135,
$383,174,138, $111,410,922, $325,357,204, and $18,045,484, and the related
brokerage commissions or underwriting commissions were $135, $647,375,
$167,793, $371,701, and $81,103 for the Aggressive Growth, Growth, Growth &
Income, Income Stock, and Income Funds, respectively for the year ended July
31, 1996.
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 objectives. 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 objectives. 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.
For the last two fiscal years, the Funds' portfolio turnover rates were as
follows:
FUND 1995 1996
----- -------- --------
Aggressive Growth 138.32% 43.75%
Growth 69.64% 62.30%
Growth & Income 19.45% 16.13%
Income Stock 34.94% 32.38%
Income* 30.86% 81.26%
Short-Term Bond 103.02% 66.81%**
- -------------
* 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:
YEAR ENDED JULY 31,
1995 1996
---- ----
Portfolio turnover 9.09% 44.69%
Purchases and sales of this
type are as follows:
Purchases (000) $360,943 $648,396
Sales (000) $361,366 $649,193
** Effective for 1996, portfolio turnover rates have been calculated
excluding short-term variable rate securities, which are those with put
date intervals of less than one year.
FURTHER DESCRIPTION OF SHARES
The Company is authorized to issue shares in separate series or Funds. Eight
Funds have been established, seven of 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 seven 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.
M. Staser Holcomb 1, 2
Director and Chairman of the Board of Directors
Age: 64
President, Chief Executive Officer, Director and Vice Chairman of the Board of
Directors of USAA Capital Corporation and several of its subsidiaries and
affiliates (1/96-present); Executive Vice President, Chief Information
Officer, United Services Automobile Association (USAA) (2/94-12/95); and
Executive Vice President, Chief Financial Officer, USAA and President,
Director and Vice Chairman of the Board of Directors, USAA Capital Corporation
(9/91-1/94). Mr. Holcomb also will serve as a Trustee and Chairman of the
Board of Trustees of USAA Investment Trust and USAA State Tax-Free Trust and
as a 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: 55
Chief Executive Officer, IMCO (10/93-present); President, Director and Vice
Chairman of the Board of Directors, IMCO (1/90-present). 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: 61
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.
George E. Brown 3, 4, 5
5829 Northgap Drive
San Antonio, TX 78239
Director
Age: 78
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, 4, 5
2710 Hopeton
San Antonio, TX 78230
Director
Age: 61
Retired. Assistant General Manager for Finance, San Antonio City Public
Service Board (1976-1996). 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: 53
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, 4, 5
200 Patterson #1008
San Antonio, TX 78209
Director
Age: 51
President, Postal Addvantage (7/92-present); Consultant, Nancy Harkins
Stationer (8/91-12/95). 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: 48
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: 46
Vice President, Compliance, IMCO (12/94-present); Vice President and Chief
Operating Officer, Commonwealth Shareholder Services (6/94-11/94); and Vice
President, Compliance, IMCO (12/91-5/94). 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: 51
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). 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: 37
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
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:
Harry W. Miller, Senior Vice President, Investments (Equity); Carl W.
Shirley, Senior Vice President, Insurance Company Portfolios; 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, 1996.
Name Aggregate Total Compensation
of Compensation from the USAA
Director from the Company Family of Funds (c)
- -------- ------------------- --------------------
C. Dale Briscoe* $2,389 $ 9,700
George E. Brown (a) 6,885 27,900
Barbara B. Dreeben 6,885 27,900
Howard L. Freeman, Jr. 6,885 27,900
M. Staser Holcomb* None (b) None (b)
Michael J.C. Roth None (b) None (b)
John W. Saunders, Jr. None (b) None (b)
Richard A. Zucker 6,885 27,900
- ----------------
* Effective January 1, 1996, M. Staser Holcomb replaced Hansford T.
Johnson as Director and Chairman of the Board of Directors and C. Dale
Briscoe retired from the Board of Directors.
(a) The USAA Family of Funds has accrued deferred compensation for Mr. Brown
in an amount (plus earnings thereon) of $21,525. 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) M. Staser Holcomb, 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, 1996, the USAA Family of Funds consisted of four registered
investment companies offering 33 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 September 13, 1996,
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 September 13, 1996, USAA and its affiliates (including related
employee benefit plans) owned 2,118,736 shares (9.2%) of the Aggressive Growth
Fund, 1,521,131 shares (2.2%) of the Growth Fund, 3,750,053 shares (35.6%) of
the S&P 500 Index Fund, 4,126,751 shares (3.7%) of the Income Stock Fund,
18,784,639 shares (13.0%) of the Income Fund, and 3,736,611 shares (.2%) of
the Money Market Fund and no shares of the Growth & Income Fund and Short-Term
Bond Fund.
The Company knows of no other persons who, as of September 13, 1996,
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 $---- billion, of
which approximately $---- 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 each Fund's 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, 1997, 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, 1997, and will
reimburse the Funds for all expenses in excess of such limitations. After
December 1, 1997, 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 1994* 1995 1996
---- ---------- ---------- ----------
Aggressive Growth $1,063,619 $1,343,754 $2,039,878
Growth 3,786,405 5,642,341 8,232,258
Growth & Income 542,868 976,982 1,761,482
Income Stock 4,766,394 6,261,966 8,097,232
Income 3,683,946 4,032,989 4,325,452
Short-Term Bond 86,181 136,870 218,705
Money Market 1,752,509 3,056,189 4,027,320
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 1994* 1995 1996
---- ---------- ---------- ----------
Short-Term Bond $ 86,181 $ 136,499 $ 145,849
Money Market - 154,109 1,002,670
- -------------
* 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
The Transfer Agent 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 LLP, 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,
1996, are included in the Annual Reports to Shareholders of that date and are
incorporated herein by reference. The Manager will deliver a copy of the
Fund's Annual Report free of charge with each SAI requested.
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 return 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 7/31/96 . . . 5.03%
Effective Yield For 7-day Period Ended 7/31/96 . . . 5.16%
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 yields for the 30-day period ended July 31, 1996, for the Income
Fund and Short-Term Bond Fund were 6.89% and 6.63%, respectively.
Total Return
The Funds may 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
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 7/31/96
1 5 10 From
Fund year years years Inception*
----- ---- ----- ----- ----------
Aggressive Growth 21.16% 14.87% 11.50% -
Growth 12.44% 13.36% 11.61% -
Growth & Income 14.68% - - 12.59%
Income Stock 13.21% 12.01% - 11.74%
Income 5.78% 8.35% 9.19% -
Short-Term Bond 5.62% - - 5.05%
- --------------
* Data from inception is shown for Funds that are less than 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.
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 1933 Act 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 which covers financial news
and rates mutual funds by Morningstar, Inc. (a data service which tracks
open-end 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.
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 fixed income funds 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.
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.
06143-1296
USAA MUTUAL FUND, INC.
PART C. OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements:
Financial Statements included in Parts A and B (Prospectuses and
Statement of Additional Information) of this Registration Statement:
Financial Statements and Independent Auditors' Report are incorporated
by reference to the USAA Aggressive Growth, Growth, Growth & Income,
Income Stock, Income, Short-Term Bond, and Money Market Funds' Annual
Reports to Shareholders for the fiscal year ended July 31, 1996.
(b) Exhibits:
Exhibit No. Description of Exhibits
1 (a) Articles of Incorporation dated October 10, 1980 (1)
(b) Articles of Amendment dated January 14, 1981 (1)
(c) Articles Supplementary dated July 28, 1981 (1)
(d) Articles Supplementary dated November 3, 1982 (1)
(e) Articles of Amendment dated May 18, 1983 (1)
(f) Articles Supplementary dated August 8, 1983 (1)
(g) Articles Supplementary dated July 27, 1984 (1)
(h) Articles Supplementary dated November 5, 1985 (1)
(I) Articles Supplementary dated January 23, 1987 (1)
(j) Articles Supplementary dated May 13, 1987 (1)
(k) Articles Supplementary dated January 25, 1989 (1)
(l) Articles Supplementary dated May 2, 1991 (1)
(m) Articles Supplementary dated November 14, 1991 (1)
(n) Articles Supplementary dated April 14, 1992 (1)
(o) Articles Supplementary dated November 4, 1992 (1)
(p) Articles Supplementary dated March 23, 1993 (1)
(q) Articles Supplementary dated May 5, 1993 (1)
(r) Articles Supplementary dated November 8, 1993 (1)
(s) Articles Supplementary dated January 18, 1994 (1)
(t) Articles Supplementary dated November 9, 1994 (1)
(u) Articles Supplementary dated November 8, 1995 (2)
(v) Articles Supplementary dated February 6, 1996 (3)
(w) Articles Supplementary dated March 12, 1996 (4)
2 Bylaws, as amended March 12, 1996 (4)
3 Voting trust agreement - Not Applicable
4 Specimen certificates for shares of
(a) Growth Fund (1)
(b) Income Fund (1)
(c) Money Market Fund (1)
(d) Aggressive Growth Fund (1)
(e) Income Stock Fund (1)
(f) Growth & Income Fund (1)
(g) Short-Term Bond Fund (1)
(h) S&P 500 Index Fund (4)
Exhibit No. Description of Exhibits
5 (a) Advisory Agreement dated September 21, 1990 (1)
(b) Letter Agreement dated June 1, 1993 adding Growth & Income
Fund and Short-Term Bond Fund (1)
(c) Management Agreement dated May 1, 1996 with respect to the
S&P 500 Index Fund (5)
(d) Administration Agreement dated May 1, 1996 with respect to
the S&P 500 Index Fund (5)
(e) Letter Agreement to the Management Agreement dated May 1,
1996 with respect to the S&P 500 Index Fund (5)
6 (a) Underwriting Agreement dated July 25, 1990 (1)
(b) Letter Agreement dated June 1, 1993 adding Growth & Income
Fund and Short-Term Bond Fund (1)
(c) Letter Agreement dated May 1, 1996 adding S&P 500 Index Fund (5)
7 Not Applicable
8 (a) Custodian Agreement dated November 3, 1982 (1)
(b) Letter Agreement dated April 20, 1987 adding Income Stock
Fund (1)
(c) Amendment No. 1 to the Custodian Contract dated October 30,
1987 (1)
(d) Amendment to the Custodian Contract dated November 3, 1998 (1)
(e) Amendment to the Custodian Contract dated February 6, 1989 (1)
(f) Amendment to the Custodian Contract dated November 8, 1993 (1)
(g) Letter Agreement dated June 1, 1993 adding Growth & Income
Fund and Short-Term Bond Fund (1)
(h) Subcustodian Agreement dated March 24, 1994 (3)
(i) Custodian Agreement dated May 1, 1996 with respect to the
S&P 500 Index Fund (5)
(j) Subcustodian Agreement with dated May 1, 1996 respect to the
S&P 500 Index Fund (5)
(k) Letter Agreement to the Custodian Agreement dated May 1, 1996
with respect to the S&P 500 Index Fund (5)
(l) Amendment to Custodian Contract dated May 13, 1996 (5)
9 (a) Articles of Merger dated January 30, 1981 (1)
(b) Transfer Agency Agreement dated January 23, 1992 (1)
(c) Letter Agreement dated June 1, 1993 to Transfer Agency
Agreement adding Growth & Income Fund and Short-Term Bond
Fund (1)
(d) Amendments dated May 3, 1995 to the Transfer Agency
Agreement Fee Schedules for Growth Fund, Aggressive Growth
Fund, Income Fund, Growth & Income Fund, Income Stock Fund,
Money Market Fund, and Short-Term Bond Fund (1)
(e) Amendment No. 1 to Transfer Agency Agreement dated November
14, 1995 (2)
(f) Third Party Feeder Fund Agreement dated May 1, 1996 with
respect to the S&P 500 Index Fund (5)
(g) Letter Agreement to Transfer Agency Agreement dated May 1,
1996 adding S&P 500 Index Fund (5)
(h) Transfer Agency Agreement Fee Schedule dated May 1, 1996
for S&P 500 Index Fund (5)
(i) Master Revolving Credit Facility Agreement with USAA Capital
Corporation dated January 15, 1996 (5)
(j) Letter Agreement dated April 18, 1996 to the Master
Revolving Credit Facility Agreement with USAA Capital
Corporation (5)
(k) Master Revolving Credit Facility Agreement with NationsBank
of Texas dated January 16, 1996 (5)
(l) Letter Agreement dated April 18, 1996 to the Master Revolving
Credit Facility Agreement with NationsBank of Texas (5)
Exhibit No. Description of Exhibits
10 (a) Opinion of Counsel with respect to the Growth Fund, Income
Fund, Money Market Fund, Income Stock Fund, Growth &
Income Fund, and Short-Term Bond Fund (2)
(b) Opinion of Counsel with respect to the S&P 500 Index Fund (3)
(c) Consent of Counsel with respect to the S&P 500 Index Fund (5)
(d) Opinion and Consent of Counsel with respect to the Aggressive
Growth Fund (filed herewith)
(e) Consent of Counsel with respect Growth Fund, Income Fund,
Money Market Fund, Income Stock Fund, Growth & Income Fund,
and Short-Term Bond Fund (filed herewith)
11 Independent Auditors' Consent (filed herewith)
12 Financial Statements omitted from prospectus - Not
Applicable
13 (a) Subscription and Investment Letter for Growth & Income Fund
and Short-Term Bond Fund (1)
(b) Subscription and Investment Letter for S&P 500 Index Fund (5)
14 Prototype Plans
(a) USAA INVESTMENT MANAGEMENT COMPANY IRA Handbook (1)
(b) USAA INVESTMENT MANAGEMENT COMPANY SEP-IRA Handbook (1)
(c) USAA INVESTMENT MANAGEMENT COMPANY 403(b)(7) Handbook (1)
15 12b-1 Plans - Not Applicable
16 Schedule for Computation of Performance Quotation (1)
17 Financial Data Schedule
(a) Growth Fund (filed herewith)
(b) Aggressive Growth Fund (filed herewith)
(c) Income Fund (filed herewith)
(d) Money Market Fund (filed herewith)
(e) Income Stock Fund (filed herewith)
(f) Growth & Income Fund (filed herewith)
(g) Short-Term Bond Fund (filed herewith)
(h) S&P 500 Index Fund (filed herewith)
18 Plan Adopting Multiple Classes of Shares - Not Applicable
19 Powers of Attorney
(a) Powers of Attorney for Michael J.C. Roth, Sherron A. Kirk,
John W. Saunders, Jr., George E. Brown, Howard L. Freeman,
Jr., and Richard A. Zucker dated November 8, 1993 (1)
(b) Power of Attorney for Barbara B. Dreeben dated September 12,
1995 (1)
(c) Power of Attorney for M. Staser Holcomb dated February 6,
1996 (3)
(d) With respect to the S&P 500 Index Fund, Powers of Attorney
for Philip W. Coolidge, John R. Elder, Charles P. Biggar,
S. Leland Dill, and Philip Saunders, Jr. dated February 9,
1996 (3)
(1) Previously filed with Post-Effective Amendment No. 38 of the Registrant
(No. 2-49560) filed with the Securities and Exchange Commission on
September 29, 1995.
(2) Previously filed with Post-Effective Amendment No. 39 of the Registrant
(No. 2-49560) filed with the Securities and Exchange Commission on
November 21, 1995.
(3) Previously filed with Post-Effective Amendment No. 40 of the Registrant
(No. 2-49560) filed with the Securities and Exchange Commission on
February 15, 1996.
(4) Previously filed with Post-Effective Amendment No. 41 of the Registrant
(No. 2-49560) filed with the Securities and Exchange Commission on April
26, 1996.
(5) Previously filed with Post-Effective Amendment No. 42 of the Registrant
(No. 2-49560) filed with the Securities and Exchange Commission on
September 11, 1996.
Item 25. Persons Controlled by or Under Common Control with Registrant
Information pertaining to persons controlled by or under common control
with Registrant is hereby incorporated by reference to the section
captioned "Management of the Company" in the Prospectus and the section
captioned "Directors and Officers of the Company" in the Statement of
Additional Information.
Item 26. Number of Holders of Securities
Set forth below are the number of record holders, as of July 31, 1996,
of each class of securities of the Registrant.
Title of Class Number of Record Holders
-------------- ------------------------
Aggressive Growth Fund 59,491
Growth Fund 92,404
Income Stock Fund 107,858
Income Fund 74,976
Money Market Fund 118,279
Growth & Income Fund 35,160
Short-Term Bond Fund 7,363
S&P 500 Index Fund 4,865
Item 27. Indemnification
Protection for the liability of the adviser and underwriter and for the
officers and directors of the Registrant is provided by two methods:
(a) The Director and Officer Liability Policy. This policy covers all
losses incurred by the Registrant, its adviser and its underwriter
from any claim made against those entities or persons during the
policy period by any shareholder or former shareholder of the Fund
by reason of any alleged negligent act, error or omission
committed in connection with the administration of the investments
of said Registrant or in connection with the sale or redemption of
shares issued by said Registrant.
(b) Statutory Indemnification Provisions. Under Section 2-418 of the
Maryland General Corporation Law, the Registrant is authorized to
indemnify any past or present director, officer, agent or employee
against judgments, penalties, fines, settlements and reasonable
expenses actually incurred by him in connection with any
proceeding in which he is a party by reason of having served as a
director, officer, agent or employee, if he acted in good faith
and reasonably believed that, (i) in the case of conduct in his
official capacity with the Registrant, that his conduct was in the
best interests of the Registrant, or (ii) in all other cases, that
his conduct was at least not opposed to the best interests of the
Registrant. In the case of any criminal proceeding, said
director, officer, agent or employee must in addition have had no
reasonable cause to believe that his conduct was unlawful. In the
case of a proceeding by or in the right of the Registrant,
indemnification may only be made against reasonable expenses and
may not be made in respect of any proceeding in which the
director, officer, agent or employee shall have been adjudged to
be liable to the Registrant. The termination of any proceeding
by judgment, order, settlement, conviction, or upon a plea of nolo
contendere or its equivalent creates a rebuttable presumption that
the director, officer, agent or employee did not meet the
requisite standard of conduct for indemnification. No
indemnification may be made in respect of any proceeding charging
improper personal benefit to the director, officer, agent or
employee whether or not involving action in such person's official
capacity, if such person was adjudged to be liable on the basis
that improper personal benefit was received. If such director,
officer, agent or employee is successful, on the merits or
otherwise, in defense of any such proceeding against him, he
shall be indemnified against the reasonable expenses incurred by
him (unless such indemnification is limited by the Registrant's
charter, which it is not). Additionally, a court of appropriate
jurisdiction may order indemnification in certain circumstances
even if the appropriate standard of conduct set forth above was
not met.
Indemnification may not be made unless authorized in the specific case
after determination that the applicable standard of conduct has been met.
Such determination shall be made by either: (i) the board of directors by
either (x) a majority vote of a quorum consisting of directors not parties to
the proceeding or (y) if such a quorum cannot be obtained, then by a majority
vote of a committee of the board consisting solely of two or more directors
not at the time parties to such proceeding who were duly designated to act in
the matter by a majority vote of the full board in which the designated
directors who are parties may participate; (ii) special legal counsel selected
by the board of directors or a committee of the board by vote as set forth in
(i) above, or, if the requisite quorum of the board cannot be obtained
therefore and the committee cannot be established, by a majority vote of the
full board in which directors who are parties may participate; or (iii) the
stockholders.
Reasonable expenses may be reimbursed or paid by the Registrant in
advance of final disposition of a proceeding after a determination, made in
accordance with the procedures set forth in the preceding paragraph, that the
facts then known to those making the determination would not preclude
indemnification under the applicable standards provided the Registrant
receives (i) a written affirmation of the good faith belief of the person
seeking indemnification that the applicable standard of conduct necessary for
indemnification has been met, and (ii) a written undertaking to repay the
advanced sums if it is ultimately determined that the applicable standard of
conduct has not been met.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the Registrant's Articles of Incorporation or
otherwise, the Registrant has been advised that, in the opinion of the
Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer
or controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, then
the Registrant will, unless in the opinion of its counsel the matter has been
settled by a controlling precedent, submit to a court of appropriate
jurisdiction the question of whether indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication
of such issue.
Item 28. Business and Other Connections of Investment Adviser
Information pertaining to business and other connections of the
Registrant's investment adviser is hereby incorporated by reference to the
section of the Prospectus captioned "Management of the Company" and to the
section of the Statement of Additional Information captioned "Directors and
Officers of the Company."
Item 29. Principal Underwriters
(a) USAA Investment Management Company (the "Adviser") acts as
principal underwriter and distributor of the Registrant's shares
on a best-efforts basis and receives no fee or commission for its
underwriting services. The Adviser, wholly-owned by United Services
Automobile Association, also serves as principal underwriter for USAA
Tax Exempt Fund, Inc., USAA Investment Trust, and USAA State Tax-Free
Trust.
(b) Set forth below is information concerning each director and
executive officer of USAA Investment Management Company.
Name and Principal Position and Offices Position and Offices
Business Address with Underwriter with Registrant
- ------------------ -------------------- --------------------
M. Staser Holcomb Director and Chairman Director and
9800 Fredericksburg Rd. of the Board of Chairman of the
San Antonio, TX 78288 Directors Board of Directors
Michael J.C. Roth Chief Executive Officer, President, Director
9800 Fredericksburg Rd. President, Director, and and Vice Chairman of
San Antonio, TX 78288 Vice Chairman of the Board of Directors
the Board of Directors
John W. Saunders, Jr. Senior Vice President, Vice President and
9800 Fredericksburg Rd. Fixed Income Investments, Director
San Antonio, TX 78288 and Director
Harry W. Miller Senior Vice President, None
9800 Fredericksburg Rd. Equity Investments,
San Antonio, TX 78288 and Director
John J. Dallahan Senior Vice President, None
9800 Fredericksburg Rd. Investment Services
San Antonio, TX 78288
Carl W. Shirley Senior Vice President, None
9800 Fredericksburg Rd. Insurance Company Portfolios
San Antonio, TX 78288
Michael D. Wagner Vice President, Secretary Secretary
9800 Fredericksburg Rd. and Counsel
San Antonio, TX 78288
Sherron A. Kirk Vice President and Treasurer
9800 Fredericksburg Rd. Controller
San Antonio, TX 78288
Alex M. Ciccone Vice President, Assistant
9800 Fredericksburg Rd. Compliance Secretary
San Antonio, TX 78288
(c) Not Applicable
Item 30. Location of Accounts and Records
The following entities prepare, maintain and preserve the records
required by Section 31(a) of the Investment Company Act of 1940 (the
"1940 Act") for the Registrant. These services are provided to the
Registrant through written agreements between the parties to the effect
that such services will be provided to the Registrant for such periods
prescribed by the Rules and Regulations of the Securities and Exchange
Commission under the 1940 Act and such records are the property of the
entity required to maintain and preserve such records and will be
surrendered promptly on request:
USAA Investment Management Company
9800 Fredericksburg Rd.
San Antonio, Texas 78288
USAA Shareholder Account Services
10750 Robert F. McDermott Freeway
San Antonio, Texas 78288
State Street Bank and Trust Company
1776 Heritage Drive
North Quincy, Massachusetts 02171
Item 31. Management Services
Not Applicable
Item 32. Undertakings
The Registrant hereby undertakes to provide each person to whom a
prospectus is delivered a copy of the Registrant's latest annual
report(s) to shareholders upon request and without charge.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it has duly
caused this amendment to its Registration Statement to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of San Antonio and
State of Texas on the 30th day of September, 1996.
USAA MUTUAL FUND, INC.
*
----------------------------
Michael J.C. Roth
President
Pursuant to the requirements of the Securities Act of 1933, this
amendment to its Registration Statement has been signed below by the following
persons in the capacities and on the date indicated.
(Signature) (Title) (Date)
* Chairman of the September 30, 1996
- ------------------------ Board of Directors
M. Staser Holcomb
* Vice Chairman of the Board September 30, 1996
- ------------------------ of Directors and President
Michael J.C. Roth (Principal Executive Officer)
* Treasurer (Principal September 30, 1996
- ------------------------ Financial and
Sherron A. Kirk Accounting Officer)
* Director September 30, 1996
- ------------------------
John W. Saunders, Jr.
* Director September 30, 1996
- ------------------------
George E. Brown
* Director September 30, 1996
- ------------------------
Howard L. Freeman, Jr.
* Director September 30, 1996
- ------------------------
Richard A. Zucker
* Director September 30, 1996
- ------------------------
Barbara B. Dreeben
* By: /s/ Michael D. Wagner
------------------------
Michael D. Wagner, Attorney-in-Fact, under Powers of Attorney dated November
8, 1993, September 12, 1995, and February 6, 1996, incorporated by reference
to Post- Effective Amendments Nos. 38 and 40 filed with the Securities and
Exchange Commission on September 29, 1995, and February 15, 1996,
respectively.
Exhibit Index
Exhibit Item Page No. *
1 (a) Articles of Incorporation dated October 10, 1980 (1)
(b) Articles of Amendment dated January 14, 1981 (1)
(c) Articles Supplementary dated July 28, 1981 (1)
(d) Articles Supplementary dated November 3, 1982 (1)
(e) Articles of Amendment dated May 18, 1983 (1)
(f) Articles Supplementary dated August 8, 1983 (1)
(g) Articles Supplementary dated July 27, 1984 (1)
(h) Articles Supplementary dated November 5, 1985 (1)
(i) Articles Supplementary dated January 23, 1987 (1)
(j) Articles Supplementary dated May 13, 1987 (1)
(k) Articles Supplementary dated January 25, 1989 (1)
(l) Articles Supplementary dated May 2, 1991 (1)
(m) Articles Supplementary dated November 14, 1991 (1)
(n) Articles Supplementary dated April 14, 1992 (1)
(o) Articles Supplementary dated November 4, 1992 (1)
(p) Articles Supplementary dated March 23, 1993 (1)
(q) Articles Supplementary dated May 5, 1993 (1)
(r) Articles Supplementary dated November 8, 1993 (1)
(s) Articles Supplementary dated January 18, 1994 (1)
(t) Articles Supplementary dated November 9, 1994 (1)
(u) Articles Supplementary dated November 8, 1995 (2)
(v) Articles Supplementary dated February 6, 1996 (3)
(w) Articles Supplementary dated March 12, 1996 (4)
2 Bylaws, as amended March 12, 1996 (4)
3 Voting trust agreement - Not Applicable
4 Specimen certificates for shares of
(a) Growth Fund (1)
(b) Income Fund (1)
(c) Money Market Fund (1)
(d) Aggressive Growth Fund (1)
(e) Income Stock Fund (1)
(f) Growth & Income Fund (1)
(g) Short-Term Bond Fund (1)
(h) S&P 500 Index Fund (4)
5 (a) Advisory Agreement dated September 21, 1990 (1)
(b) Letter Agreement dated June 1, 1993 adding Growth & Income Fund
and Short-Term Bond Fund (1)
(c) Management Agreement dated May 1, 1996 with respect to the
S&P 500 Index Fund (5)
(d) Administration Agreement dated May 1, 1996 with respect to the
S&P 500 Index Fund (5)
(e) Letter Agreement to the Management Agreement dated May 1,
1996 with respect to the S&P 500 Index Fund (5)
6 (a) Underwriting Agreement dated July 25, 1990 (1)
(b) Letter Agreement dated June 1, 1993 adding Growth & Income Fund
and Short-Term Bond Fund (1)
(c) Letter Agreement dated May 1, 1996 adding S&P 500 Index Fund (5)
7 Not Applicable
8 (a) Custodian Agreement dated November 3, 1982 (1)
(b) Letter Agreement dated April 20, 1987 adding Income Stock Fund (1)
(c) Amendment No. 1 to the Custodian Contract dated October 30, 1987 (1)
(d) Amendment to the Custodian Contract dated November 3, 1988 (1)
(e) Amendment to the Custodian Contract dated February 6, 1989 (1)
(f) Amendment to the Custodian Contract dated November 8, 1993 (1)
(g) Letter Agreement dated June 1, 1993 adding Growth & Income Fund
and Short-Term Bond Fund (1)
(h) Subcustodian Agreement dated March 24, 1994 (3)
Exhibit Index, cont.
Exhibit Item Page No. *
(i) Custodian Agreement dated May 1, 1996 with respect to the
S&P 500 Index Fund (5)
(j) Subcustodian Agreement dated May 1, 1996 with respect to
the S&P 500 Index Fund (5)
(k) Letter Agreement to the Custodian Agreement dated May 1, 1996
with respect to the S&P 500 Index Fund (5)
(l) Amendment to Custodian Contract dated May 13, 1996 (5)
9 (a) Articles of Merger dated January 30, 1981 (1)
(b) Transfer Agency Agreement dated January 23, 1992 (1)
(c) Letter Agreement dated June 1, 1993 to Transfer Agency Agreement
adding Growth & Income Fund and Short-Term Bond Fund (1)
(d) Amendments dated May 3, 1995 to the Transfer Agency Agreement Fee
Schedules for Growth Fund, Aggressive Growth Fund, Income Fund,
Growth & Income Fund, Income Stock Fund, Money Market Fund, and
Short-Term Bond Fund (1)
(e) Amendment No. 1 to Transfer Agency Agreement dated November 14,
1995 (2)
(f) Third Party Feeder Fund Agreement dated May 1, 1996 with respect
to the S&P 500 Index Fund (5)
(g) Letter Agreement to Transfer Agency Agreement dated May 1, 1996
adding S&P 500 Index Fund (5)
(h) Transfer Agency Agreement Fee Schedule dated May 1, 1996 for
S&P 500 Index Fund (5)
(i) Master Revolving Credit Facility Agreement with USAA Capital
Corporation dated January 15, 1996 (5)
(j) Letter Agreement dated April 18, 1996 to the Master Revolving
Credit Facility Agreement with USAA Capital Corporation (5)
(k) Master Revolving Credit Facility Agreement with NationsBank
of Texas dated January 16, 1996 (5)
(l) Letter Agreement dated April 18, 1996 to the Master Revolving
Credit Facility Agreement with NationsBank of Texas (5)
10 (a) Opinion of Counsel with respect to the Growth Fund, Income
Fund, Money Market Fund, Income Stock Fund, Growth &
Income Fund, and Short-Term Bond Fund (2)
(b) Opinion of Counsel with respect to the S&P 500 Index Fund (3)
(c) Consent of Counsel with respect to the S&P 500 Index Fund (5)
(d) Opinion and Consent of Counsel with respect to the Aggressive
Growth Fund (filed herewith) 205
(e) Consent of Counsel with respect Growth Fund, Income Fund,
Money Market Fund, Income Stock Fund, Growth & Income Fund,
and Short-Term Bond Fund (filed herewith) 207
11 Independent Auditors' Consent (filed herewith) 209
12 Financial Statements omitted from prospectus - Not Applicable
13 (a) Subscription and Investment Letter for Growth & Income Fund
and Short-Term Bond Fund (1)
(b) Subscription and Investment Letter for S&P 500 Index Fund (5)
14 Prototype Plans
(a) USAA INVESTMENT MANAGEMENT COMPANY IRA Handbook (1)
(b) USAA INVESTMENT MANAGEMENT COMPANY SEP-IRA Handbook (1)
(c) USAA INVESTMENT MANAGEMENT COMPANY 403(b)(7) Handbook (1)
15 12b-1 Plans - Not Applicable
16 Schedule for Computation of Performance Quotation (1)
Exhibit Index, cont.
Exhibit Item Page No. *
17 Financial Data Schedule
(a) Growth Fund (filed herewith) 211
(b) Aggressive Growth Fund (filed herewith) 213
(c) Income Fund (filed herewith) 215
(d) Money Market Fund (filed herewith) 217
(e) Income Stock Fund (filed herewith) 219
(f) Growth & Income Fund (filed herewith) 221
(g) Short-Term Bond Fund (filed herewith) 223
(h) S&P 500 Index Fund (filed herewith) 225
18 Plan Adopting Multiple Classes of Shares - Not Applicable
19 Powers of Attorney
(a) Powers of Attorney for Michael J.C. Roth, Sherron A. Kirk,
John W. Saunders, Jr., George E. Brown, Howard L. Freeman,
Jr., and Richard A. Zucker dated November 8, 1993 (1)
(b) Power of Attorney for Barbara B. Dreeben dated September 12, 1995
(1)
(c) Power of Attorney for M. Staser Holcomb dated February 6, 1996 (3)
(d) With respect to the S&P 500 Index Fund, Powers of Attorney for
Philip W. Coolidge, John R. Elder, Charles P. Biggar, S. Leland
Dill, and Philip Saunders, Jr. dated February 9, 1996 (3)
(1) Previously filed with Post-Effective Amendment No. 38 of the Registrant
(No. 2-49560) filed with the Securities and Exchange Commission on
September 29, 1995.
(2) Previously filed with Post-Effective Amendment No. 39 of the Registrant
(No. 2-49560) filed with the Securities and Exchange Commission on
November 21, 1995.
(3) Previously filed with Post-Effective Amendment No. 40 of the Registrant
(No. 2-49560) filed with the Securities and Exchange Commission on
February 15, 1996.
(4) Previously filed with Post-Effective Amendment No. 41 of the Registrant
(No. 2-49560) filed with the Securities and Exchange Commission on April
26, 1996.
(5) Previously filed with Post-Effective Amendment No. 42 of the Registrant
(No. 2-49560) filed with the Securities and Exchange Commission on
September 11, 1996.
* Refers to sequentially numbered pages
EXHIBIT 10(d)
GOODWIN, PROCTER & HOAR LLP
COUNSELLORS AT LAW
EXCHANGE PLACE
BOSTON, MASSACHUSETTS 02109-2881
TELEPHONE (617) 670-1000
TELECOPIER (617) 523-1231
September 30, 1996
USAA Mutual fund, Inc.
USAA Building
9800 Fredericksburg Road
San Antonio, Texas 78288
Ladies and Gentlemen:
As counsel to USAA Mutual Fund, Inc. (the "Company"), a Maryland
corporation, we have been asked to render our opinion with respect to the
issuance of shares of capital stock, $.01 par value per share, of the
Aggressive Growth Fund (the "Shares"), a class of capital stock of the
Company which has been established and designated in the Company's
Articles of Incorporation and Articles Supplementary to the Articles of
Incorporation, as amended (collectively, the "Articles"), all as more
fully described in the Prospectus and the Statement of Additional Information
contained in Post-Effective Amendment No. 43 (the "Amendment") to the
Registration Statement (No. 2-49560) on Form N-1A (the Registration Statement")
to be filed by the Company with the Securities and Exchange Commission.
We have examined the Articles, the By-Laws of the Company, as amended,
the minutes of certain meetings of the Board of Directors of the Company, the
Prospectus and Statement of Additional Information contained in the Amendment
and such other documents, records and certificates as we deemed necessary for
the purposes of this opinion.
Based upon the foregoing, and assuming that not more than 50,000,000
Shares of the Aggressive Growth Fund will be issued and outstanding at any
time, we are of the opinion that the Shares will, when sold in accordance with
the terms of the Prospectus and Statement of Additional Information in effect
at the time of the sale, be legally issued, fully paid and non-assessable.
We hereby consent to the reference to this firm in the Prospectuses
under the heading "Legal Counsel" and in the Statement of Additional
Information under the heading "General Information--Counsel" which form a part
of the Amendment and to the filing of this consent as an exhibit to the
Amendment.
Very truly yours,
/s/ GOODWIN, PROCTER & HOAR LLP
-----------------------------------------
GOODWIN, PROCTER & HOAR LLP
EXHIBIT 10(e)
GOODWIN, PROCTER & HOAR LLP
COUNSELLORS AT LAW
EXCHANGE PLACE
BOSTON, MASSACHUSETTS 02109-2881
TELEPHONE (617) 670-1000
TELECOPIER (617) 523-1231
September 30, 1996
USAA Mutual fund, Inc.
USAA Building
9800 Fredericksburg Road
San Antonio, Texas 78288
Ladies and Gentlemen:
We hereby consent to the reference in Post-Effective Amendment No. 43
(the "Amendment") to the Registration Statement (No. 2-49560) on Form N-1A of
USAA Mutual Fund, Inc. (the "Registrant"), a Maryland corporation, to our
opinion with respect to the legality of the shares of the Registrant
representing interests in the Growth Fund, Growth & Income Fund, Income
Stock Fund, Income Fund, Short-Term Bond Fund and Money Market Fund series
of the Registrant, which opinion was filed with Post-Effective Amendment
No. 39 to the Registration Statement.
We also hereby consent to the reference to this firm in the Prospectuses
under the heading "Legal Counsel" and in the Statement of Additional
Information under the heading "General Information--Counsel" which form a part
of the Amendment and to the filing of this consent as an exhibit to the
Amendment.
Very truly yours,
/s/ GOODWIN, PROCTER & HOAR LLP
------------------------------------
GOODWIN, PROCTER & HOAR LLP
EXHIBIT 11
The Shareholders and Board of Directors
USAA Mutual Fund, Inc.:
We consent to the use of our reports dated September 6, 1996 on the financial
statements of the Growth Fund, Aggressive Growth Fund, Income Fund, Income
Stock Fund, Growth & Income Fund, Short-Term Bond Fund and Money Market Fund,
separate Funds of USAA Mutual Fund, Inc. (the Company), as of and for the year
ended July 31, 1996 included in the Company's Annual Reports to Shareholders
for the year ended July 31, 1996 incorporated herein by reference and to the
references to our firm under the headings "Financial Highlights" and
"Independent Auditors" as part of Post-Effective Amendment No. 43 under the
Securities Act of 1933, as amended, and Amendment No. 31 under the Investment
Company Act of 1940, as amended, the Company's Registration Statement on Form
N-1A.
/s/ KPMG Peat Marwick LLP
-----------------------------
KPMG Peat Marwick LLP
San Antonio, Texas
October 1, 1996
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<NAME> USAA AGGRESSIVE GROWTH FUND
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<NET-ASSETS> 607,436,631
<DIVIDEND-INCOME> 346,881
<INTEREST-INCOME> 1,257,700
<OTHER-INCOME> 0
<EXPENSES-NET> (3,677,712)
<NET-INVESTMENT-INCOME> (2,073,131)
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<NET-CHANGE-FROM-OPS> 70,486,590
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<PER-SHARE-NAV-BEGIN> 24.49
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</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000102401
<NAME> USAA MUTUAL FUND, INC.
<SERIES>
<NUMBER> 3
<NAME> USAA INCOME FUND
<S> <C>
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<FISCAL-YEAR-END> JUL-31-1996
<PERIOD-END> JUL-31-1996
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<INVESTMENTS-AT-VALUE> 1,712,972,825
<RECEIVABLES> 74,912,562
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<SHARES-COMMON-PRIOR> 144,913,546
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</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000102401
<NAME> USAA MUTUAL FUND, INC.
<SERIES>
<NUMBER> 4
<NAME> USAA MONEY MARKET FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-31-1996
<PERIOD-END> JUL-31-1996
<INVESTMENTS-AT-COST> 1,834,055,966
<INVESTMENTS-AT-VALUE> 1,834,055,966
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</TABLE>
<TABLE> <S> <C>
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<CIK> 0000102401
<NAME> USAA MUTUAL FUND, INC.
<SERIES>
<NUMBER> 6
<NAME> USAA INCOME STOCK FUND
<S> <C>
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<PER-SHARE-DIVIDEND> (0.77)
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</TABLE>
<TABLE> <S> <C>
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<CIK> 0000102401
<NAME> USAA MUTUAL FUND, INC.
<SERIES>
<NUMBER> 7
<NAME> USAA GROWTH & INCOME FUND
<S> <C>
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<PERIOD-END> JUL-31-1996
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<DIVIDEND-INCOME> 7,383,930
<INTEREST-INCOME> 802,800
<OTHER-INCOME> 0
<EXPENSES-NET> (2,793,058)
<NET-INVESTMENT-INCOME> 5,393,672
<REALIZED-GAINS-CURRENT> 10,781,146
<APPREC-INCREASE-CURRENT> 16,959,260
<NET-CHANGE-FROM-OPS> 33,134,078
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (5,121,698)
<DISTRIBUTIONS-OF-GAINS> (2,448,856)
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<NUMBER-OF-SHARES-REDEEMED> (44,439,794)
<SHARES-REINVESTED> 7,354,277
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<OVERDIST-NET-GAINS-PRIOR> 0
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<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,793,058
<AVERAGE-NET-ASSETS> 293,390,142
<PER-SHARE-NAV-BEGIN> 12.07
<PER-SHARE-NII> 0.24
<PER-SHARE-GAIN-APPREC> 1.51
<PER-SHARE-DIVIDEND> (0.23)
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<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000102401
<NAME> USAA MUTUAL FUND, INC.
<SERIES>
<NUMBER> 8
<NAME> USAA SHORT-TERM BOND FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-31-1996
<PERIOD-END> JUL-31-1996
<INVESTMENTS-AT-COST> 100,860,668
<INVESTMENTS-AT-VALUE> 99,821,928
<RECEIVABLES> 1,392,859
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<TOTAL-LIABILITIES> 288,372
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<PAID-IN-CAPITAL-COMMON> 102,448,006
<SHARES-COMMON-STOCK> 10,322,559
<SHARES-COMMON-PRIOR> 7,722,046
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (377,155)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (1,038,740)
<NET-ASSETS> 101,032,111
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 6,188,160
<OTHER-INCOME> 0
<EXPENSES-NET> (455,654)
<NET-INVESTMENT-INCOME> 5,732,506
<REALIZED-GAINS-CURRENT> 179,929
<APPREC-INCREASE-CURRENT> (1,032,178)
<NET-CHANGE-FROM-OPS> 4,880,257
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (5,732,506)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
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