USAA S&P 500 INDEX FUND
May 1, 1996 PROSPECTUS
USAA S&P 500 INDEX 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 IS THE INVESTMENT OBJECTIVE?
The Fund's investment objective is to seek to provide investment results
that, before expenses, correspond to the total return of common
stocks publicly traded in the United States, as represented
by the Standard & Poor's 500 Composite Stock Price
Index (S&P 500 or Index). Page 7.
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 S&P 500 INDEX FUND ARE NOT DEPOSITS
OR OTHER OBLIGATIONS OF, OR GUARANTEED BY THE USAA FEDERAL
SAVINGS BANK, ARE NOT INSURED BY THE FDIC OR AND OTHER
GOVERNMENT AGENCY, AND ARE SUBJECT TO INVESTMENT RISKS,
INCLUDING POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.
THE USAA S&P 500 INDEX FUND SEEKS TO ACHIEVE ITS
INVESTMENT OBJECTIVE BY INVESTING ALL OF ITS INVESTABLE
ASSETS IN THE EQUITY 500 INDEX PORTFOLIO (THE PORTFOLIO),
WHICH IS A SEPARATE MUTUAL FUND ADVISED BY BANKERS TRUST
COMPANY WITH AN IDENTICAL INVESTMENT OBJECTIVE. THE
INVESTMENT PERFORMANCE OF THE FUND WILL CORRESPOND DIRECTLY
TO THE INVESTMENT PERFORMANCE OF THE PORTFOLIO. PAGE 10.
If you would like more information, a STATEMENT OF
ADDITIONAL INFORMATION (SAI) of the Fund, dated May 1,
1996, is available upon request and without charge by
writing to USAA MUTUAL FUND, INC., 9800 Fredericksburg
Rd., San Antonio, TX 78288, or by calling 1-800-531-8181.
The SAI has been filed with the Securities and Exchange
Commission (SEC) and is incorporated by reference into
this Prospectus.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
TABLE OF CONTENTS
Page
SUMMARY DATA
Fees and Expenses 3
Performance Information 4
USING MUTUAL FUNDS
USAA Family of No-Load Mutual Funds 5
Using Mutual Funds in an Investment Program 6
INVESTMENT PORTFOLIO INFORMATION
Investment Objective and Policies 7
Additional Information 23
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 18
Management of the Company and Portfolio 19
Service Providers 22
Description of Shares 22
Telephone Assistance Numbers 25
FEES AND EXPENSES
The following table provides a summary of expenses
relating to purchases and sales of the shares of the
Fund, and the aggregate annual operating expenses of the
Fund and the Equity 500 Index Portfolio (the Portfolio),
as a percentage of average net assets of the Fund. These
expenses are estimated for the Fund's first year of
operations. THE COMPANY'S DIRECTORS BELIEVE THAT THE
AGGREGATE PER SHARE EXPENSES OF THE FUND AND THE
PORTFOLIO WILL BE LESS THAN OR APPROXIMATELY EQUAL TO THE
EXPENSES WHICH THE FUND WOULD INCUR IF THE INVESTABLE
ASSETS (ASSETS) OF THE FUND WERE INVESTED DIRECTLY IN THE
TYPES OF SECURITIES BEING HELD BY THE PORTFOLIO.
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
Account Maintenance Fee** $10
Annual Fund Operating Expenses (as a percentage of average net assets (ANA))
- ----------------------------------------------------------------------------
Investment Advisory Fees, net of reimbursements .07%
12b-1 Fees None
Other Expenses, net of reimbursements (estimated) .11%
----
Total Operating Expenses, net of reimbursements .18%
====
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* A shareholder who requests delivery of redemption proceeds by wire transfer
will be subject to a $10 fee. See REDEMPTION OF SHARES - BANK WIRE.
** USAA Shareholder Account Services assesses this annual fee to allocate part
of the fixed costs of maintaining shareholder accounts equally to all
accounts. This fee is deducted from the dividends paid to each shareholder
at a rate of $2.50 per quarter. See DIVIDENDS, DISTRIBUTIONS AND TAXES.
The Manager has voluntarily agreed to limit the
Fund's annual expenses to .18% of its ANA for the Fund's
first year of operations and will reimburse the Fund for
all expenses in excess of the limitation. In addition,
Bankers Trust Company (Bankers Trust), which provides various
services to the Portfolio, has voluntarily agreed to limit its
fees under its agreements with the Portfolio to .10% of the
Portfolio's ANA. The Investment Advisory Fees, Other Expenses,
and Total Operating Expenses reflect all such expense
reimbursements by the Manager and Bankers Trust. Absent
such reimbursements, the amount of Investment Advisory
Fees, Other Expenses and Total Operating Expenses as a
percentage of the Fund's ANA would be .10%, .33% and
.43%, respectively.
Example of Effect of Fund Expenses
- ----------------------------------------------------------------------------
An investor would pay the following expenses on a $1,000
investment, assuming (1) 5% annual return and (2)
redemption at the end of the periods shown. The example
includes the $10 account maintenance fee. For
investments larger than $1,000 an investor's total
expenses will be substantially lower in percentage terms
than this illustration implies.
1 year 3 years
$12 $36
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.
The expense table and the example above are provided to
assist you in understanding the expenses you will bear
directly or indirectly as a shareholder in the Fund. For
more information with respect to the expenses of the Fund
and the Portfolio, see MANAGEMENT OF THE COMPANY AND
PORTFOLIO on page 19.
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, such as the
S&P 500, that are referenced in APPENDIX A to the SAI.
Standard total return results reported by the Fund
include the effect of the $10 account maintenance
fee, but do not take into account 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.
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. An
investment adviser 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, S&P 500 Index 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 seeks to provide investment results that, before
expenses, correspond to the total return (i.e., the
combination of capital changes and income) of common
stocks publicly traded in the United States, as
represented by the S&P 5001. The Fund offers investors a
convenient means of diversifying their holdings of common
stocks while relieving those investors of the
administrative burdens typically associated with
purchasing and holding these instruments.
The Company seeks to achieve the investment
objective of the Fund by investing all the Assets of the
Fund in the Portfolio, which has the same investment
objective as the Fund. There can be no assurances that
the investment objective of either the Fund or the
Portfolio will be achieved. The investment objective of
both the Fund and the Portfolio is not a fundamental
policy and may be changed upon notice to but without the
approval of the Fund's shareholders or the Portfolio's
investors, respectively. See SPECIAL INFORMATION
CONCERNING MASTER-FEEDER FUND STRUCTURE on page 10 herein.
EQUITY 500 INDEX PORTFOLIO
The Portfolio is not managed according to traditional
methods of "active" investment management, which involve
the buying and selling of securities based upon economic,
financial, and market analyses and investment judgment.
Instead, the Portfolio, utilizing a "passive" or
"indexing" investment approach, attempts to replicate,
before expenses, the performance of the S&P 500.
- --------------
1 "Standard & Poor's(registered trademark),"
S&P(registered trademark)," "Standard & Poor's 500," S&P
500(registered trademark)," and "500" are trademarks of
The McGraw-Hill Companies, Inc. and have been licensed
for use by Bankers Trust Company.
Under normal conditions when the Portfolio's assets
are above $10 million, the Portfolio will invest at least
80% of its assets in common stocks of companies which
compose the S&P 500. In seeking to replicate the
performance of the S&P 500, Bankers Trust, the
Portfolio's investment adviser, will attempt over time to
allocate the Portfolio's portfolio of investments among
common stocks in approximately the same weightings as the
S&P 500, beginning with the heaviest-weighted stocks that
make up a larger portion of the Index's value. Over the
long term, Bankers Trust seeks a correlation between the
performance of the Portfolio, before expenses, and that
of the S&P 500 of 0.98 or better (0.95 or better if
Portfolio asset levels are below $10 million). A figure
of 1.00 would indicate perfect correlation. In the
unlikely event that the correlation is not achieved, the
Portfolio's Board of Trustees will consider alternative
structures.
Bankers Trust utilizes a two-stage sampling approach in
seeking to achieve its objective. Stage one, which encompasses
large cap stocks, maintains the stock holdings at or near their
benchmark weights. Large capitalization stocks are defined as
those securities which represent 0.10% or more of the Index. In
stage two, smaller stocks are analyzed and selected using risk
characteristics and industry weights in order to match the sector
and risk characteristics of the smaller companies in the S&P 500.
This approach helps to maximize portfolio liquidity while
minimizing costs.
Bankers Trust generally will seek to match the
composition of the S&P 500 but usually will not invest
the Portfolio's stock portfolio to mirror the Index
exactly. Because of the difficulty and expense of
executing relatively small stock transactions, the
Portfolio may not always be invested in the less heavily
weighted S&P 500 stocks, and may at times have its
portfolio weighted differently from the S&P 500,
particularly if the Portfolio has a low level of assets.
When the Portfolio's size is greater, Bankers Trust
expects to purchase more of the stocks in the S&P 500 and
to match the relative weighting of the S&P 500 more
closely, and anticipates that the Portfolio will be able
to mirror, before expenses, the performance of the S&P
500 with little variance at asset levels of $10 million
or more. In addition, the Portfolio may omit or remove
any S&P 500 stock from the Portfolio if, following
objective criteria, Bankers Trust judges the stock to be
insufficiently liquid or believes the merit of the investment
has been substantially impaired by extraordinary events or
financial conditions. Bankers Trust will not purchase
the stock of Bankers Trust New York Corporation, which is
included in the Index, and instead will overweight its
holdings of companies engaged in similar businesses.
Under normal conditions, Bankers Trust will attempt
to invest as much of the Portfolio's assets as is
practical in common stocks included in the S&P 500.
However, the Portfolio may maintain up to 20% of its
assets in short-term debt securities and money market
instruments hedged with stock index futures and options
to meet redemption requests or to facilitate the
investment in common stocks. See ADDITIONAL INFORMATION
for further information.
When the Portfolio has cash from new investments in
the Portfolio or holds a portion of its assets in money
market instruments, it may enter into stock index futures
or options to attempt to increase its exposure to the
stock market. Strategies the Portfolio could use to
accomplish this include purchasing futures contracts,
writing put options, and purchasing call options. When
the Portfolio wishes to sell securities, because of
shareholder redemptions or otherwise, it may use stock
index futures or options thereon to hedge against market risk
until the sale can be completed. These strategies could
include selling and buying futures contracts, writing
call options, and purchasing put options.
Bankers Trust will choose among futures and options
strategies based on its judgment of how best to meet the
Portfolio's goals. In selecting these derivative
instruments, Bankers Trust will assess such factors as
current and anticipated stock prices, relative liquidity
and price levels in the options and futures markets compared
to the securities markets, and the Portfolio's cash flow
and cash management needs. If Bankers Trust judges
these factors incorrectly, or if price changes in the
Portfolio's futures and options positions are not well
correlated with those of its other investments, the
Portfolio could be hindered in the pursuit of its
objective and could suffer losses. The Portfolio could
also be exposed to risk if it could not close out its
futures or options positions because of an illiquid
secondary market. A description of the futures and
options that the Portfolio may use and some of their
associated risks is found under ADDITIONAL INFORMATION.
Short-Term Instruments - The Portfolio intends to stay
invested in the securities described above to the extent
practical in light of its objective and long-term
investment perspective. However, the Portfolio's assets
may be invested in short-term instruments with remaining
maturities of 397 days or less to meet anticipated
redemptions and expenses or for day-to-day operating purposes.
Short-term instruments consist of: (i) short-term obligations of the
U.S. Government, its agencies, instrumentalities, authorities or
political subdivisions; (ii) other short-term debt securities rated
Aa or higher by Moody's Investors Service, Inc. (Moody's)
or AA or higher by Standard & Poor's Corporation (S&P)
or, if unrated, of comparable quality in the opinion of
Bankers Trust; (iii) commercial paper; (iv) bank
obligations, including negotiable certificates of
deposit, time deposits and bankers' acceptances; and (v)
repurchase agreements. At the time the Portfolio invests
in commercial paper, bank obligations or repurchase
agreements, the issuer or the issuer's parent must have
outstanding debt rated Aa or higher by Moody's or AA or
higher by S&P or outstanding commercial paper or bank
obligations rated Prime-1 by Moody's or A-1
by S&P; or, if no such ratings are available, the
instrument must be of comparable quality in the opinion
of Bankers Trust.
ADDITIONAL INVESTMENT LIMITATIONS
As a diversified fund, no more than 5% of the assets of the Portfolio
may be invested in the securities of any one issuer (other than U.S.
Government securities), except that up to 25% of the Portfolio's assets
may be invested without regard to this limitation. The Portfolio will
not invest more than 25% of its assets in the securities of issuers in
any one industry. In the unlikely event that the S&P 500 should
concentrate to an extent greater than that amount, the Portfolio's ability
to achieve its investment objective may be impaired. These are fundamental
investment policies of the Portfolio which may not be
changed without shareholder approval. No more than 15%
of the Portfolio's net assets may be invested in illiquid
or not readily marketable securities (including repurchase
agreements and time deposits with remaining maturities
of more than seven calendar days.) Additional investment
policies of the Portfolio are contained in the SAI.
ABOUT THE S&P 500 INDEX
The S&P 500 is a well-known stock market index that
includes common stocks of 500 companies from several
industrial sectors representing a significant portion of
the market value of all common stocks publicly traded in
the United States, most of which are listed on the New
York Stock Exchange Inc. (the NYSE). Stocks in the S&P
500 are weighted according to their market capitalization
(i.e., the number of shares outstanding multiplied by the
stock's current price). Bankers Trust believes that the
performance of the S&P 500 is representative of the
performance of publicly traded common stocks in general.
The composition of the S&P 500 is determined by S&P and
is based on such factors as the market capitalization and
trading activity of each stock and its adequacy as a
representation of stocks in a particular industry group,
and may be changed from time to time.
The Fund and the Portfolio are not sponsored,
endorsed, sold or promoted by S&P. S&P makes no
representation or warranty, express or implied, to the
owners of the Fund or the Portfolio or any member of the
public regarding the advisability of investing in
securities generally or in the Fund and the Portfolio
particularly or the ability of the S&P 500 to track
general stock market performance. S&P's only
relationship to the Fund or the Portfolio is the
licensing of certain trademarks and trade names of S&P
and the S&P 500, which is determined, composed and
calculated by S&P without regard to the Fund or the
Portfolio. S&P does not guarantee the accuracy and/or
the completeness of the S&P 500 or any data included therein.
S&P MAKES NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE
RESULTS TO BE OBTAINED BY THE FUND OR THE PORTFOLIO,
OWNERS OF THE FUND OR THE PORTFOLIO, OR ANY OTHER PERSON
OR ENTITY FROM THE USE OF THE S&P 500 OR ANY DATA
INCLUDED THEREIN. S&P MAKES NO EXPRESS OR IMPLIED
WARRANTIES AND HEREBY EXPRESSLY DISCLAIMS ALL SUCH
WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR
PURPOSE OR USE WITH RESPECT TO THE S&P 500 OR ANY DATA
INCLUDED HEREIN.
The following table shows the performance of the S&P
500 for the ten years from 1986 through 1995. Stock
prices fluctuated widely during the period but were
higher at the end than at the beginning in eight of the
ten years shown. The results shown should not be
considered as a representation of the income or capital
gain or loss which may be generated by the S&P 500 in the
future. Nor should this be considered as a representation
of the past or future performance of the Fund.
_____________________________________________________________________
Standard & Poor's 500 Composite Stock Price Index*
_____________________________________________________________________
Year End Price Changes Dividend Total
Year Index Value in Index for Year Reinvestment Return
_____________________________________________________________________
1995 615.93 34.11% 3.43% 37.54%
1994 459.27 -1.54% 2.86% 1.32%
1993 466.45 7.06% 2.98% 10.04%
1992 435.71 4.46% 3.15% 7.61%
1991 417.09 26.31% 4.09% 30.40%
1990 330.22 -6.56% 3.46% -3.10%
1989 353.40 27.25% 4.37% 31.62%
1988 277.72 12.40% 4.16% 16.56%
1987 247.08 2.03% 3.22% 5.25%
1986 242.17 14.62% 4.05% 18.67%
_____________________________________________________________________
*Source: Bloomberg. Total returns for the S&P 500
include the change in price of S&P 500 stocks and assume
reinvestment of all dividends paid by S&P 500 stocks.
RISK FACTORS
By itself, the Fund does not constitute a balanced
investment plan. The Fund is designed as a relatively
low-cost means for investors to diversify their
investment portfolios. As described above, the Portfolio
invests in a portfolio of securities that is
representative of the stock market as a whole. While the
performance of the S&P 500 has fluctuated considerably,
the long-term performance of the S&P 500 has been greater
than inflation. Thus, the Fund may make sense for you if
you can afford to ride out changes in the stock market.
The Fund's share price, yield and total return will
fluctuate and your investment may be worth more or less
than your original cost when you redeem your shares.
The ability of the Fund and the Portfolio to meet
their investment objective depends to some extent on the
cash flow experienced by the Fund and by the other
investors in the Portfolio, since investments and
redemptions by shareholders of the Fund will generally
require the Portfolio to purchase or sell securities.
Bankers Trust will make investment changes to accommodate
cash flow in an attempt to maintain the similarity of the
Portfolio to the S&P 500. You should also be aware that
the performance of the S&P 500 is a hypothetical number
which does not take into account brokerage commissions
and other costs of investing, unlike the Portfolio which
must bear these costs. Finally, since the Portfolio
seeks to track the S&P 500, Bankers Trust generally will
not attempt to judge the merits of any particular stock
as an investment.
PORTFOLIO TURNOVER
The frequency of portfolio transactions -- the Portfolio's
turnover rate -- will vary from year to year depending on
market conditions and the Portfolio's cash flows. The
Portfolio's annual turnover rate is not expected to
exceed 100%. The Portfolio's turnover rates for the years
ended December 31, 1995 and 1994 were 6% and 21%,
respectively. The decrease in the Portfolio's turnover
rate from the year ended 1994 to 1995 was due to the
growth of assets in the period.
SPECIAL INFORMATION CONCERNING MASTER-FEEDER FUND STRUCTURE
Unlike other mutual funds which directly acquire and
manage their own portfolio securities, the Fund seeks to
achieve its investment objective by investing all of its
Assets in the Portfolio, a separate registered investment
company with the same investment objective as the Fund.
Therefore, an investor's interest in the Portfolio's
securities is indirect. In addition to selling a
beneficial interest to the Fund, the Portfolio may sell
beneficial interests to other mutual funds or
institutional investors. Such investors will invest in
the Portfolio under the same terms and conditions and will
pay a proportionate share of the Portfolio's expenses.
However, the other investors investing in the Portfolio
are not required to sell their shares at the same public
offering price as the Fund due to variations in sales
commissions and other operating expenses. Therefore,
investors in the Fund should be aware that these
differences may result in differences in returns
experienced by investors in the different funds that
invest in the Portfolio. Such differences in returns are
also present in other mutual fund structures. Information
concerning other holders of interests in the Portfolio is
available from Bankers Trust at (800) 368-4031.
Smaller funds investing in the Portfolio may be
materially affected by the actions of larger funds
investing in the Portfolio. For example, if a large fund
withdraws from the Portfolio, the remaining funds may
experience higher pro rata operating expenses, thereby
producing lower returns (however, this possibility exists
as well for traditionally structured funds which have
large institutional investors). Additionally, the
Portfolio may become less diverse, resulting in increased
portfolio risk. Also, funds with a greater pro rata
ownership in the Portfolio could have effective voting
control of the operations of the Portfolio.
Except as permitted by the SEC,
whenever the Fund is requested to vote on matters
pertaining to the Portfolio, the Fund will hold a meeting
of its shareholders and will cast all of its votes in the
same proportion as the votes of its shareholders. The
percentage of the Company's votes representing the Fund's
shareholders not voting will be voted by the Directors or
officers of the Company in the same proportion as the
Fund shareholders who do, in fact, vote.
Certain changes in the Portfolio's investment
objective, policies or restrictions may require the Fund
to withdraw its interest in the Portfolio. Any such
withdrawal could result in a distribution "in kind" of
portfolio securities (as opposed to a cash distribution
from the Portfolio). If securities are distributed, the
Fund generally would incur brokerage, tax or other
charges in converting the securities to cash. In
addition, the distribution in kind may result in a less
diversified portfolio of investments or adversely affect
the liquidity of the Fund.
The Fund may withdraw its investment from the
Portfolio at any time, if the Board of Directors of the
Company determines that it is in the best interest of the
shareholders of the Fund to do so. Upon any such withdrawal,
the Manager would become responsible for directly managing
the assets of the Fund. In addition, the Board of Directors
of the Company may consider other actions that might be taken,
including the investment of all the Assets of the Fund in another
pooled investment entity having the same investment
objective as the Fund.
The Fund's investment objective is not a fundamental
policy and may be changed upon notice to but without the
approval of the Fund's shareholders. If there is a
change in the Fund's investment objective, the Fund's
shareholders should consider whether the Fund remains an
appropriate investment in light of their then-current
needs. The investment objective of the Portfolio is also
not a fundamental policy. Shareholders of the Fund will
receive 30 days prior written notice with respect to any
change in the investment objective of the Fund or the
Portfolio. See INVESTMENT OBJECTIVE AND POLICIES -
ADDITIONAL INVESTMENT LIMITATIONS for a description of
the fundamental policies of the Portfolio that cannot be
changed without approval by the holders of "a majority of
the outstanding voting securities" (as defined in the
1940 Act) of the Portfolio.
For descriptions of the investment objective,
policies and restrictions of the Portfolio, see
INVESTMENT OBJECTIVES AND POLICIES herein. For
descriptions of the management of the Portfolio, see
MANAGEMENT OF THE COMPANY AND PORTFOLIO herein and
INVESTMENT ADVISER and ADMINISTRATOR in the SAI. For
descriptions of the expenses of the Portfolio, see
MANAGEMENT OF THE COMPANY AND PORTFOLIO herein.
PURCHASE OF SHARES
OPENING AN ACCOUNT
You may open an account and make an investment by any of
the following methods. A complete, signed application is
required together with a check for each new account.
TAX ID NUMBER
We require that each shareholder named on the account
provide the Company with a social security number or tax
identification number to avoid possible tax withholding
requirements.
EFFECTIVE DATE
When you make a purchase, your purchase price will be the
net asset value (NAV) per share next determined after the
Fund receives your request in proper form. If the Fund
receives your request prior to the close of the NYSE
on a day on which the Exchange is open, your purchase
price will be the NAV per share determined for that
day. If the Fund receives your request after the
time at which the NAV per share is calculated, the
purchase will be effective on the next business day.
Because of the more lengthy clearing process and the need
to convert foreign currency, a check drawn on a foreign
bank will not be deemed received for the purchase of
shares until such time as the check has cleared and the
Manager has received good funds, which may take up to 4
to 6 weeks. Furthermore, a bank charge may be assessed
in the clearing process, which will be deducted from the
amount of the purchase. To avoid a delay in the
effectiveness of your purchase, the Manager suggests that
you convert your foreign check to U.S. dollars prior to
investment in the Fund.
Purchase of Shares
Minimum Investments
- -------------------
Initial Purchase (non-IRA): $3,000
Additional Purchases: $50
Initial Purchase - IRA: $2,000
Additional Purchases: $50
How to Purchase:
- ----------------
Mail * To open an account, send your application and check to:
USAA Investment Management Company
9800 Fredericksburg Rd., San Antonio, TX 78288
* To add to your account, send your check and the "Invest by
Mail" stub that accompanies your fund's transaction
confirmation to the Transfer Agent:
USAA Shareholder Account Services
9800 Fredericksburg Rd., San Antonio, TX 78288
* To exchange by mail, call 1-800-531-8448 for instructions.
In Person * To open an account, bring your application and check to:
USAA Investment Management Company
USAA Federal Savings Bank
10750 Robert F. McDermott Freeway, San Antonio
Automatically * Additional purchases on a regular basis can be deducted from
via a bank account, paycheck, income-producing investment or from
Electronic a USAA money market account. Sign up for these services when
Funds opening an account or call 1-800-531-8448 to add these
Transfer services.
(EFT) * Purchases through payroll deduction ($25 minimum each pay
period with no initial investment) can be made by any
employee of USAA, its subsidiaries or affiliated companies.
Bank Wire * To add to an account, instruct your bank (which may charge a
fee for the service) to wire the specified amount to the Fund
as follows:
State Street Bank and Trust Company, Boston, MA 02101
ABA#011000028
Attn: USAA S&P 500 Index Fund
USAA AC-69384998
Shareholder(s) Name(s)_________________
Shareholder(s) Account Number___________________
Phone * If you have an existing USAA account and would like to open a
1-800-531-8448 new account or if you would like to exchange to another USAA
fund, call for instructions. The new account must have the
same registration as your existing account.
* To add to an account, intermittent (as-needed) purchases can
be deducted from your bank account through our Buy/Sell
Service. Call for instructions.
Through a * To open a new account through your USAA Asset Management
USAA AMA Account, call USAA Brokerage Services at 1-800-531-8343.
REDEMPTION OF SHARES
You may redeem shares of the Fund by any of the following
methods on any day the NAV per share is calculated.
Redemptions will be effective on the day on which
instructions are received in accordance with the
requirements set forth below. However, if instructions
are received after the NAV per share calculation,
redemption will be effective on the next business day.
REDEMPTION PROCEEDS
Redemption proceeds are distributed within seven days
after the effective date of redemption. Payment for
redemption of shares purchased by check or electronic
funds transfer will not be disbursed until
the purchase check or electronic funds transfer has
cleared, which could take up to 15 days from the purchase
date. If you are considering redeeming shares soon after
purchase, you should purchase by bank wire or certified
check to avoid delay.
In addition, the Company may elect to suspend
the redemption of shares or postpone the date of
payment during any period that the 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 800-292-8177, or send a telegram
to USAA Shareholder Account Services.
Written redemption requests must include the
following: (1) a letter of instruction or stock
assignment, and stock certificate (if issued), specifying
the Fund and the number of shares or dollar amount to be
redeemed; (2) signatures of all owners of the shares
exactly as their names appear on the account; (3) other
supporting legal documents, if required, as in the case
of estates, trusts, guardianships, custodianships,
partnerships, corporations, and pension and profit-
sharing plans; and (4) method of payment.
Phone * Call toll free 1-800-531-8448, in San Antonio, 210-456-7202.
The Fund will employ reasonable procedures to
confirm that instructions communicated by telephone are
genuine, and if it does not, it may be liable for any
losses due to unauthorized or fraudulent instructions.
Information is obtained prior to any discussion regarding
an account including: (1) USAA number or account number,
(2) the name(s) on the account registration, and (3)
social security number or tax identification number for
the account registration. In addition, all telephone
communications with a shareholder are recorded and
confirmations of all account transactions are sent to the
address of record.
Redemption by telephone, fax, or telegraph is not
available for shares represented by stock certificates.
Through a * Call USAA Brokerage Services at 1-800-531-8343 for more
USAA AMA information.
Methods of Payment:
- ------------------
Bank Wire * Allows redemptions to be sent directly to your bank account.
Establish this service when you apply for your
account, or later upon request. If your account is at a
savings bank, savings and loan association, or credit
union, please obtain precise wiring instructions from
your institution. Specifically, include the name of the
correspondent bank and your institution's account number
at that bank. The Transfer Agent deducts a wire fee from
the account for the redemption by wire. The fee as of
the date of this Prospectus is $10 ($25 for wires to a
foreign bank) and is subject to change at any time. The
fee is paid to State Street Bank and Trust Company and
the Transfer Agent for their services in connection with
the wire redemption. Your bank may also charge a fee for
receiving funds by wire.
Automatically * Systematic (regular) or intermittent (as-needed) redemptions
via EFT can be credited to your bank account.
Establish any of our electronic investing services
when you apply for your account, or later upon request.
Check * A check payable to the registered shareholder(s) will be
Redemption mailed to the address of record.
This check redemption privilege is automatically
established when your application is completed and
accepted. There is a 15-day waiting period before a
check redemption can be processed following a telephone
address change. Should you wish to redeem shares within
the 15 days following a telephone address change, you may
do so by providing written instructions by mail or facsimile.
CONDITIONS OF PURCHASE AND REDEMPTION
NONPAYMENT
If any order to purchase shares is cancelled due to
nonpayment or if the Company does not receive good funds
either by check or electronic funds transfer, the
cancellation will be treated as a redemption of shares
purchased and you will be responsible for any resulting
loss incurred by the Fund or the Manager. If you are a
shareholder, shares can be redeemed from any of your
account(s) as reimbursement for all losses. In addition,
you may be prohibited or restricted from making future
purchases in any of the USAA Family of Funds. A $15 fee
is charged for all returned items, including checks and
electronic funds transfers.
TRANSFER OF SHARES
Fund shares may be transferred to another person by
sending written instructions to the Transfer Agent. The
account must be clearly identified and the shareholder
must include the number of shares to be transferred, the
signatures of all registered owners, and all stock
certificates, if any, which are the subject of transfer.
You also need to send written instructions signed by all
registered owners and supporting documents to change an
account registration due to events such as divorce,
marriage, or death. If a new account needs to be
established, an application must be completed and
returned to the Transfer Agent.
ACCOUNT BALANCE
The Board of Directors may cause the redemption of an
account with a balance of less than 10 shares of the
Fund, subject to certain limitations described in
ADDITIONAL INFORMATION REGARDING REDEMPTION OF SHARES
in the SAI.
COMPANY RIGHTS
The Company reserves the right to:
(1) reject purchase or exchange orders when in the best
interest of the Company;
(2) limit or discontinue the offering of shares of any
portfolio of the Company without notice to the shareholders;
(3) impose a redemption charge of up to 1% of the net
asset value of shares redeemed if circumstances indicate
a charge is necessary for the protection of remaining
investors (for example, if excessive market-timing
share activity unfairly burdens long-term
investors); provided, however, this 1% charge will
not be imposed upon shareholders unless authorized
by the Board of Directors and adequate notice has
been given to shareholders;
(4) require a signature guarantee for purchases,
redemptions, or changes in account information in
those instances where the appropriateness of a
signature authorization is in question. The section
ADDITIONAL INFORMATION REGARDING REDEMPTION OF SHARES
in the SAI contains information on acceptable guarantors.
EXCHANGES
EXCHANGE PRIVILEGE
The Exchange Privilege is automatically established when
you complete your application. You may exchange shares
among Funds in the USAA Family of Funds, provided you do
not hold these shares in stock certificate form and that
the shares to be acquired are offered in your state of
residence. Exchange redemptions and purchases will be
processed simultaneously at the share prices next
determined after the exchange order is received. For
federal income tax purposes, an exchange between Funds is
a taxable event. Accordingly, a capital gain or loss may
be realized.
The Fund has undertaken certain procedures regarding
telephone transactions. See REDEMPTION OF SHARES - PHONE.
EXCHANGE LIMITATIONS,
EXCESSIVE TRADING
To minimize Fund costs and to protect the Funds and their
shareholders from unfair expense burdens, the Funds
restrict excessive exchanges. Exchanges out of any Fund
in the USAA Family of Funds are limited for each account
to six per calendar year except that there is no
limitation on exchanges out of the Short-Term Bond Fund,
Tax Exempt Short-Term Fund, or any of the money market
funds in the USAA Family of Funds.
OTHER SERVICES
INVESTMENT PLANS
Systematic Investment Plans - you may establish a
systematic investment plan by completing the appropriate
forms. At the time you sign up for any of the following
investment plans that utilize the electronic funds
transfer service, you will choose the day of the month
(the effective date) on which you would like to regularly
purchase shares. When this day falls on a weekend or
holiday, the electronic transfer will take place on the
last business day before the effective date. Call the
Manager to obtain instructions. More information about
these preauthorized plans is contained in the SAI.
* InvesTronic(registered trademark) - an automatic
investment program for the purchase of additional shares
through electronic funds transfer. The investor selects
the day(s) each month that money is transferred from a
checking or savings account.
* Direct Purchase Service - the periodic purchase of
shares through electronic funds transfer from an
employer, an income-producing investment, or an account
with a participating financial institution.
* Automatic Purchase Plan - the periodic transfer of
funds from a USAA money market fund to purchase shares in
another non-money market USAA mutual fund.
* Buy/Sell Service - the intermittent purchase or
redemption of shares through electronic funds transfer to
or from a checking or savings account.
* Systematic Withdrawal Plan - the periodic redemption of
shares from one of your accounts permitting you to
receive a fixed amount of money monthly or quarterly.
* Retirement Plans - plans are available for IRA
(including SEP/IRA) and 403(b)(7) accounts. Federal
taxes on current income may be deferred if an investor
qualifies.
* Directed Dividends - If you own shares in more than one
of the Funds in the USAA Family of Funds, you may direct
that dividends and/or capital gain distributions earned
in one fund be used to automatically purchase shares in
another fund.
SHAREHOLDER STATEMENTS
AND REPORTS
You will receive a confirmation after each transaction in
your account except:
i) a reinvested dividend, or
ii) a payment you make under the InvesTronic(registered
trademark), Direct Purchase Service, Automatic
Purchase Plan, or Directed Dividends investment
plans, or
iii) 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
the Fund's assets (i.e., the value of its investment in
the Portfolio and other assets), deducting liabilities,
and dividing by the number of shares outstanding. The
Portfolio's securities and other assets are valued
primarily on the basis of market quotations or, if
quotations are not readily available, by a method which
the Portfolio's Board of Trustees believes accurately
reflects fair value.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
Net investment income will be distributed to shareholders
quarterly. Any net capital gain generally will be
distributed at least annually. The Fund intends to make
such additional distributions as may be necessary to
avoid the imposition of any federal income or excise tax.
All income dividends and capital gain distributions
are automatically reinvested, unless the shareholder
specifies otherwise. The share price will be the net
asset value of the Fund shares computed on the ex-
dividend date. Any income dividend or capital gain
distributions paid by the Fund will reduce the NAV per
share by the amount of the dividend or distribution. An
investor should consider carefully the effects of
purchasing shares of the Fund shortly before any dividend
or distribution. Although in effect a return of
capital, these distributions are subject to taxes.
USAA Shareholder Account Services
automatically deducts a $10 annual account maintenance
fee from the dividend income paid to each shareholder
account. The $10 account maintenance fee is
deducted at a rate of $2.50 per quarter from the
dividend. If the dividend to be paid to an account is
less than the fee to be deducted, sufficient shares may
be redeemed from an account to make up the difference.
The annual account maintenance fee may be changed upon
not less than 30 days notice to account holders.
Any dividend or distribution payment returned to the
Manager as not deliverable will be invested in the
shareholder's Fund account at the then-current NAV per
share. If any check for the payment of dividends or
distributions is not cashed within six months from the
date on the check, it becomes void. The amount of the
check will then be invested in the shareholder's account
at the then-current NAV per share.
FEDERAL TAXES
The following discussion relates only to generally applicable
federal income tax provisions in effect as of the date of this
Prospectus. Therefore, shareholders are urged to consult their
own tax advisers about the status of distributions from the Fund
in their own states and localities.
Fund - The Fund intends to qualify as a regulated
investment company under Subchapter M of the Internal
Revenue Code of 1986, as amended (the Code). By
complying with the applicable provisions of the Code, the
Fund will not be subject to federal income tax on its net
investment income and net capital gains (capital gains in
excess of capital losses) distributed to shareholders.
In order to qualify as a regulated investment
company under the Code, the Fund must satisfy certain
requirements relating to the sources of its income, the
distribution of its income, and the diversification of
its assets. In satisfying these requirements, the Fund
will treat itself as owning its proportionate share of
the Portfolio's assets and is entitled to the income of
the Portfolio properly attributable to such share. As a
partnership under the Code, the Portfolio does not pay
Federal income or excise taxes.
Shareholder - Dividends from taxable net investment
income and distributions of net short-term capital gains
are taxable to shareholders as ordinary income, whether
received in cash or reinvested in additional shares. A
portion of these dividends may qualify for the 70%
dividends received deduction available to corporations.
Distributions of net long-term capital gains are
taxable as long-term capital gains whether received in
cash or reinvested in additional shares, and regardless
of the length of time the investor has held the shares of
the Fund.
Redemptions, including exchanges, are subject to
capital gains tax, based on the difference between the
cost of shares held and the price received upon sale.
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 AND PORTFOLIO
The business affairs of the Company are subject to the
supervision of its Board of Directors, while the business
affairs of the Portfolio are subject to the supervision
of its Board of Trustees. No Director of the Company
also serves as a Trustee of the Portfolio. For more
information with respect to Directors of the Company and
Trustees of the Portfolio, see DIRECTORS AND OFFICERS OF
THE COMPANY and TRUSTEES AND OFFICERS OF THE PORTFOLIO in
the SAI.
INVESTMENT ADVISER
USAA INVESTMENT MANAGEMENT COMPANY
The Manager serves as the manager and investment adviser
of the Fund, providing services under a Management
Agreement. Under the Management Agreement, the Manager
is responsible for monitoring the services provided to
the Portfolio by Bankers Trust, subject to the authority
of and supervision by the Board of Directors. The
Manager receives no fee for providing these
monitoring services. In the event the Fund's Board of
Directors determines it is in the best interests of the
Fund's shareholders to withdraw its investment in the
Portfolio, the Manager would become responsible for
directly managing the assets of the Fund. In such event,
the Fund would pay the Manager an annual fee of .10% of
the Fund's ANA, accrued daily and paid monthly.
The Manager, USAA Investment Management Company
(IMCO), was organized in May 1970 and is an affiliate of
United Services Automobile Association (USAA), a large
diversified financial services institution. As of the
date of this Prospectus, the Manager had approximately
$29 billion in total assets under management. The
Manager's mailing address is 9800 Fredericksburg Rd., San
Antonio, TX 78288.
Officers and employees of the Manager are permitted
to engage in personal securities transactions subject to
restrictions and procedures set forth in the Joint Code
of Ethics adopted by the Company and the Manager. Such
restrictions and procedures include substantially all of
the recommendations of the Advisory Group of the
Investment Company Institute and comply with SEC rules
and regulations.
BANKERS TRUST COMPANY
At the present time, the Company seeks to achieve the
investment objective of the Fund by investing all the
Assets of the Fund in the Portfolio. The Portfolio has
retained the services of Bankers Trust as investment
adviser. Mr. Frank Salerno, Managing Director of Bankers
Trust, is responsible for the day-to-day management of
the Portfolio. Mr. Salerno has been employed at Bankers
Trust since prior to 1989 and has managed the Portfolio's
assets since the Portfolio commenced operations.
Bankers Trust, a New York banking corporation with
principal offices at 280 Park Avenue, New York, New York
10017, is a wholly owned subsidiary of Bankers Trust New
York Corporation. Bankers Trust is a worldwide merchant
bank that conducts a variety of general banking and trust
activities and is a major wholesale supplier of financial
services to the international and domestic institutional
markets. Investment management is a core business of
Bankers Trust with approximately $200 billion in assets
under management globally. Of that total, approximately
$82 billion are in U.S. equity index assets. When bond
and international funds are included, Bankers Trust
manages over $94 billion in total index assets. This
makes Bankers Trust one of the nation's leading managers
of index funds.
Bankers Trust has been advised by its counsel that,
in counsel's opinion, Bankers Trust currently may perform
the services for the Company and the Portfolio described
in this Prospectus and the SAI without violation of the
Glass-Steagall Act or other applicable banking laws or
regulations. State laws on this issue may differ from
the interpretations of relevant Federal law and banks and
financial institutions may be required to register as
dealers pursuant to state securities laws.
Bankers Trust, subject to the supervision and
direction of the Board of Trustees of the Portfolio,
manages the Portfolio in accordance with the Portfolio's
investment objectives and stated investment policies,
makes investment decisions for the Portfolio, places
orders to purchase and sell securities and other
financial instruments on behalf of the Portfolio and
employs professional investment managers and securities
analysts who provide research services to the Portfolio.
Bankers Trust may utilize the expertise of any of its
worldwide subsidiaries and affiliates to assist in its
role as investment adviser. All orders for investment
transactions on behalf of the Portfolio are placed
by Bankers Trust with broker-dealers and other
financial intermediaries that it selects, including those
affiliated with Bankers Trust. A Bankers Trust affiliate
will be used in connection with a purchase or sale of an
investment for the Portfolio only if Bankers Trust
believes that the affiliate's charge for the transaction
does not exceed usual and customary levels. The
Portfolio will not invest in obligations for which
Bankers Trust or any of its affiliates is the ultimate
obligor or accepting bank. The Portfolio may, however,
invest in the obligations of correspondents and customers
of Bankers Trust.
Under its Investment Advisory Agreement, Bankers
Trust receives a fee from the Portfolio, computed daily
and paid monthly, at the annual rate of .10% (before
waiver) of the average daily net assets of the Portfolio.
ADMINISTRATOR
Under its Administration Agreement with the Fund, the
Manager calculates the NAV of the Fund and generally
assists the Board of Directors of the Company in all
aspects of the administration and operation of the Fund.
The Administration Agreement provides for the Fund to pay
the Manager a fee, computed daily and paid monthly, at
the annual rate of .02% of the average daily net assets
of the Fund. Under the Administration Agreement with the
Fund, the Manager may delegate one or more of its
responsibilities to others, at the Manager's expense.
Under an Administration and Services Agreement with
the Portfolio, Bankers Trust calculates the value of the
assets of the Portfolio and generally assists the Board
of Trustees of the Portfolio in all aspects of the
administration and operation of the Portfolio. The
Administration and Services Agreement provides for the
Portfolio to pay Bankers Trust a fee, computed daily and
paid monthly, at the rate of .05% (before waiver) of the
average daily net assets of the Portfolio. Under the
Administration and Services Agreement, Bankers Trust may
delegate one or more of its responsibilities to others,
at Bankers Trust's expense. For more information, see
ADMINISTRATOR in the SAI.
OPERATING EXPENSES
The Fund bears its own expenses. Operating expenses for
the Fund generally consist of all costs not specifically
borne by the Manager or Bankers Trust, including
administration and service fees, fees for necessary
professional services, and costs associated with
regulatory compliance and maintaining legal existence and
shareholder relations. The Portfolio bears its own
expenses. Operating expenses for the Portfolio generally
consist of all costs not specifically borne by Bankers
Trust, including investment advisory and administration
and services fees, fees for necessary professional
services, the costs associated with regulatory compliance
and maintaining legal existence and investor relations.
SERVICE PROVIDERS
Underwriter/Distributor
USAA Investment Management Company, 9800 Fredericksburg
Rd., San Antonio, Texas 78288, serves as the distributor
of the Fund's shares.
Transfer Agent
USAA Shareholder Account Services, 9800 Fredericksburg
Rd., San Antonio, Texas 78288, serves as transfer agent
of the Fund's shares.
Custodian
Bankers Trust serves as custodian of the Fund's and the
Portfolio's assets.
Legal Counsel
Goodwin, Procter & Hoar, LLP, Exchange Place, Boston,
Massachusetts 02109, serves as counsel to the Fund.
Willkie Farr & Gallagher, One Citicorp Center, 153 East
53rd Street, New York, New York 10022-4669, serves as
counsel to the Portfolio.
Independent Accountants
Coopers & Lybrand L.L.P., 1100 Main Street, Suite 900,
Kansas City, Missouri 64105, has been selected as the
Independent Accountants for the Fund and the Portfolio.
DESCRIPTION OF SHARES
The Company is an open-end management investment company
incorporated under the laws of the State of Maryland on
October 14, 1980. The Company is authorized to issue
shares in separate classes, or Funds. The Fund described
in this Prospectus is being offered to the public. The
Fund is classified as a diversified investment company.
Under the Company's charter, the Board of Directors is
authorized to create new Funds in addition to those
already existing without approval of the shareholders of
the Company.
Under provisions of the Bylaws of the Company, no
annual meeting of shareholders is required. Ordinarily,
no shareholder meeting will be held unless required by
the Investment Company Act of 1940 (1940 Act). 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.
The Portfolio, in which all the Assets of the Fund
will be invested, is organized as a trust under the laws
of the State of New York. The Portfolio's Declaration of
Trust provides that the Fund and other entities investing
in the Portfolio (e.g., other investment companies,
insurance company separate accounts, and common and
commingled trust funds) will each be liable for all
obligations of the Portfolio. However, the risk of the
Fund incurring financial loss on account of such
liability is limited to circumstances in which both
inadequate insurance exists and the Portfolio itself was
unable to meet its obligations. Accordingly, the
Company's Directors believe that neither the Fund nor its
shareholders will be adversely affected by reason of the
Fund's investing in the Portfolio.
ADDITIONAL INFORMATION
Repurchase Agreements - In a repurchase agreement the
Portfolio buys a security and simultaneously agrees to
sell it back at a higher price. In the event of the
bankruptcy of the other party to either a repurchase
agreement or a securities loan, the Portfolio could
experience delays in recovering either its cash or the
securities it lent. To the extent that, in the meantime,
the value of the securities repurchased had decreased or
the value of securities lent had increased, the Portfolio
could experience a loss. In all cases, Bankers Trust
must find the creditworthiness of the other party to the
transaction satisfactory. A repurchase agreement is
considered a collateralized loan under the 1940 Act.
Securities Lending - The Portfolio is permitted to lend
up to 30% of the total value of its securities. These
loans must be secured continuously by cash or equivalent
collateral or by a letter of credit at least equal to the
market value of the securities loaned plus accrued
income. By lending its securities, the Portfolio can
increase its income by continuing to receive income on
the loaned securities as well as by the opportunity to
receive interest on the collateral. Any gain or loss in
the market price of the borrowed securities which occurs
during the term of the loan inures to the Portfolio and
its investors. In lending securities to brokers, dealers
and other organizations, the Portfolio is subject to risk
which, like those associated with other extensions of
credit, includes delays in recovery and possible loss of
rights in the collateral should the borrower fail financially.
When-Issued and Delayed Delivery Securities - The
Portfolio may purchase securities on a when-issued or
delayed delivery basis. Delivery of and payment for
these securities may take place as long as a month
or more after the date of the purchase commitment.
The value of these securities is subject to market
fluctuation during this period and no income accrues to
the Portfolio until settlement takes place. The
Portfolio maintains with the custodian a segregated
account containing high grade liquid securities in an
amount at least equal to these commitments. When
entering into a when-issued or delayed delivery
transaction, the Portfolio will rely on the other party
to consummate the transaction; if the other party fails
to do so, the Portfolio may be disadvantaged.
Options on Stock Indices - The Portfolio may purchase and
write put and call options on stock indices listed on
stock exchanges. A stock index fluctuates with changes
in the market values of the stocks included in the index.
Options on stock indices are generally similar to
options on stock except that the delivery requirements
are different. Instead of giving the right to take or
make delivery of stock at a specified price, an option on
a stock index gives the holder the right to receive a
cash "exercise settlement amount" equal to (a) the
amount, if any, by which the fixed exercise price of the
option exceeds (in the case of a put) or is less than (in
the case of a call) the closing value of the underlying
index on the date of exercise, multiplied by (b) a fixed
"index multiplier." Receipt of this cash amount will
depend upon the closing level of the stock index upon
which the option is based being greater than, in the case
of a call, or less than, in the case of a put, the
exercise price of the option. The amount of cash
received will be equal to such difference between the
closing price of the index and the exercise price of the
option expressed in dollars times a specified multiple.
The writer of the option is obligated, in return for the
premium received, to make delivery of this amount.
The writer may offset its position in stock index options
prior to expiration by entering into a closing
transaction on an exchange or the option may expire unexercised.
Because the value of an index option depends upon
movements in the level of the index rather than the price
of a particular stock, whether the Portfolio will realize
a gain or loss from the purchase or writing of options on
an index depends upon movements in the level of stock
prices in the stock market generally or, in the case of
certain indices, in an industry or market segment.
Accordingly, successful use by the Portfolio of options
on stock indices will be subject to Bankers Trust's
ability to predict correctly movements in the direction
of the stock market generally or of a particular
industry. This requires different skills and techniques
than predicting changes in the price of individual stocks.
Futures Contracts on Stock Indices - The Portfolio may
enter into contracts providing for the making and
acceptance of a cash settlement based upon changes in the
value of an index of securities (Futures Contracts).
This investment technique is designed only to hedge
against anticipated future changes in general market
prices which otherwise might either adversely affect the
value of securities held by the Portfolio or adversely
affect the prices of securities which are intended to be
purchased at a later date for the Portfolio. A Futures
Contract may also be entered into to close out or offset
an existing futures position.
In general, each transaction in Futures Contracts
involves the establishing of a position which will move
in a direction opposite to that of the investment being
hedged. If these hedging transactions are successful,
the futures positions taken for the Portfolio will rise
in value by an amount which approximately offsets the
decline in value of the portion of the Portfolio's investments
that are being hedged. Should general market prices move in
an unexpected manner, the full anticipated benefits of
Futures Contracts may not be achieved or a loss may be
realized.
Although Futures Contracts would be entered into for
cash management purposes only, such transactions do involve
certain risks. These risks could include a lack of
correlation between the Futures Contracts and the equity
market being hedged, a potential lack of liquidity in the
secondary market and incorrect assessments of market
trends which may result in poorer overall performance
than if a Futures Contract had not been entered into.
Brokerage costs will be incurred and "margin" will be required to
be posted and maintained as a good-faith deposit against performance of
obligations under Futures Contracts written for the Portfolio. The
Portfolio may not purchase or sell a Futures Contract or options thereon
if immediately thereafter its margin deposits on its outstanding Futures
Contracts and its premium paid on outstanding options thereon
would exceed 5% of the market value of the Portfolio's total assets.
Options on Futures Contracts - The Portfolio may invest
in options on such Futures Contracts for similar purposes.
Asset Coverage - The Portfolio will cover transactions in
futures and related options, as well as when-issued and
delayed-delivery securities, as required under applicable
interpretations of the SEC, either by owning the
underlying securities or by establishing a segregated
account with the Portfolio's custodian containing high
grade liquid debt securities in an amount at all times
equal to or exceeding the Portfolio's commitment with
respect to these instruments or contracts.
TELEPHONE ASSISTANCE
(Call toll free - Central Time)
Monday-Friday 8:00 a.m. to 8:00 p.m.
Saturday 8:30 a.m. to 5:00 p.m.
For further information on mutual funds:
1-800-531-8181
In San Antonio 210-456-7211
For account servicing, exchanges or redemptions:
1-800-531-8448
In San Antonio 210-456-7202
RECORDED 24 HOUR SERVICE
MUTUAL FUND PRICE QUOTES
(From any phone)
1-800-531-8066
In San Antonio 210-498-8066
MUTUAL FUND TOUCHLINE(registered trademark)
(From Touchtone phones only)
For account balance, last transaction or fund prices:
1-800-531-8777
In San Antonio 210-498-8777
[Logo of USAA STATEMENT OF
USAA MUTUAL ADDITIONAL INFORMATION
Eagle is FUND, INC. May 1, 1996
here]
- --------------------------------------------------------------------
USAA MUTUAL FUND, INC.
S&P 500 Index Fund
USAA MUTUAL FUND, INC. (the Company) is a registered investment
company offering shares of eight no-load mutual funds, one of
which is described in this Statement of Additional Information
(SAI): the S&P 500 Index Fund. The Fund is classified as a
diversified investment company and has its own investment
objective designed to meet its investment goals.
The Fund's investment objective is to seek to provide investment
results that, before expenses, correspond to the total return of common
stocks publicly traded in the United States, as represented by the
Standard & Poor's 500 Composite Stock Price Index (S&P 500 or Index).
As described in the Prospectus, the Company seeks to achieve
the investment objective of the Fund by investing all the
investable assets of the Fund in an open-end management
investment company having the same investment objective as the
Fund. The investment company is the Equity 500 Index Portfolio
(the Portfolio) advised by Bankers Trust Company (Bankers Trust).
Since the investment characteristics of the Fund will
correspond directly to those of the Portfolio in which the Fund
invests all of its investable assets, the following includes a
discussion of the various investments of and techniques employed
by the Portfolio.
A Prospectus for the Fund dated May 1, 1996, which provides
the basic information you should know before investing in the
Fund, may be obtained without charge upon written request to USAA
Mutual Fund, Inc., 9800 Fredericksburg Rd., San Antonio, TX
78288, or by calling toll free 1-800-531-8181. This SAI is not a
Prospectus and contains information in addition to and more
detailed than that set forth in the Fund's Prospectus. It is
intended to provide you with additional information regarding the
activities and operations of the Company and the Fund, and should
be read in conjunction with the Fund's Prospectus.
- ----------------------------------------------------------------------
TABLE OF CONTENTS
Page
2 Valuation of Securities
2 Additional Information Regarding Redemption of Shares
3 Investment Plans
4 Investment Policies
8 Investment Restrictions
11 Portfolio Transactions and Brokerage Commissions
12 Further Description of Shares
13 Tax Considerations
14 Directors and Officers of the Company
17 Trustees and Officers of the Portfolio
18 Investment Adviser
19 Administrator
20 General Information
21 Calculation of Performance Data
21 Appendix A - Comparison of Fund Performance
23 Appendix B - Dollar-Cost Averaging
24 Audited Financial Statements and Independent Accountants' Report
to the Equity 500 Index Portfolio
VALUATION OF SECURITIES
Shares of the Fund are offered on a continuing best efforts basis
through USAA Investment Management Company (IMCO or the Manager).
The offering price for shares of the Fund is equal to the current
net asset value (NAV) per share. The NAV per share of the Fund
is calculated by adding the value of the Fund's assets (i.e., the
value of its investments in the Portfolio and other assets),
deducting liabilities, and dividing by the number of shares outstanding.
The 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 Portfolio values its equity and debt securities (other
than short-term debt obligations maturing in 60 days or less),
including listed securities and securities for which price
quotations are available, on the basis of market valuations
furnished by a pricing service. Short-term debt obligations and
money market securities maturing in 60 days or less are valued at
amortized cost, which approximates market value. Other assets
are valued at fair value using methods determined in good faith
by the Portfolio's Board of Trustees.
Each investor in the Portfolio, including the Fund, may add
to or reduce its investment in the Portfolio on each day that the
NYSE is open for business and New York charter banks are not
closed owing to customary or local holidays. As of the close of
the NYSE, currently 4:00 p.m. (New York time or earlier if the
NYSE closes earlier) on each such day, the value of each
investor's interest in the Portfolio will be determined by
multiplying the net asset value of the Portfolio by the
percentage representing that investor's share of the aggregate
beneficial interests in the Portfolio. Any additions or
reductions which are to be effected on that day will then be
effected. The investor's percentage of the aggregate beneficial
interests in the Portfolio will then be recomputed as the
percentage equal to the fraction (i) the numerator of which is
the value of such investor's investment in the Portfolio as of
the close of the NYSE on such day plus or minus, as the case may
be, the amount of net additions to or reductions in the
investor's investment in the Portfolio effected on such day and
(ii) the denominator of which is the aggregate net asset value of
the Portfolio as of 4:00 p.m. or the close of the NYSE on such
day plus or minus, as the case may be, the amount of net
additions to or reductions in the aggregate investments in the
Portfolio by all investors in the Portfolio. The percentage so
determined will then be applied to determine the value of the
investor's interest in the Portfolio as of 4:00 p.m. or the close
of the NYSE on the following day the NYSE is open for trading.
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 the 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 Portfolio reserves the right, if conditions exist which
make cash payments undesirable, to honor any request for
redemption or repurchase order by making payment in whole or in
part in readily marketable securities chosen by the Portfolio and
valued as they are for purposes of computing the Portfolio's NAV
(a redemption in kind). If payment is made to the Fund in
securities, the Fund may incur transaction expenses in converting
these securities into cash. The Portfolio has elected, however,
to be governed by Rule 18f-1 under the Investment Company Act of
1940, as amended (1940 Act) as a result of which the Portfolio is
obligated to redeem beneficial interests with respect to any one
investor during any 90-day period, solely in cash up to the
lesser of $250,000 or 1% of the NAV of the Portfolio at the
beginning of the period. For purposes of determining compliance
with Rule 18f-1, each shareholder of the Fund redeeming shares
of the Fund on a particular day will be treated as a direct
holder in the interest in the Portfolio being redeemed that day.
In the event the Company withdraws or redeems all of the
Fund's interest in the Portfolio, the Portfolio will effect such
redemption in kind and in such a manner that the securities
delivered to the Fund will mirror, as closely as practicable, the
composition of the Portfolio immediately prior to such
redemption.
The Board of Directors may cause the redemption of an
account with a balance of less than 10 shares of the 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 Securities and Exchange Commission
(SEC) so that disposal of the Company's investments or
determination of its NAV 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 Fund, 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.
INVESTMENT PLANS
The following investment plans are made available by the Company
to shareholders of the Fund. At the time you sign up for any of
the following investment plans that utilize the electronic funds
transfer service, you will choose the day of the month (the
effective date) on which you would like to regularly purchase
shares. When this day falls on a weekend or holiday, the
electronic transfer will take place on the last business day
before the effective date. You may terminate your participation
in a plan at any time. Please call the Manager for details and
necessary forms or applications.
Systematic Purchase of Shares
InvesTronic(registered trademark) - an automatic investment
program for the purchase of additional shares through electronic
funds transfer. The investor selects the day(s) each month that
money is transferred from a checking or savings account. By
completing an application, which may be obtained from the
Manager, you invest a specific amount each month ($50 minimum) in
any of your accounts.
Direct Purchase Service - the periodic purchase of shares through
electronic funds transfer from an employer, an income-producing
investment, or an account with a participating financial institution.
Automatic Purchase Plan - the periodic transfer of funds from a
USAA money market fund to purchase shares in another non-money
market USAA mutual fund. There is a minimum investment required
for this program of $5,000, with a monthly transaction minimum of
$50. The minimum initial investment requirement for the other
USAA mutual fund must be satisfied before the first transfer.
Buy/Sell Service - the intermittent purchase or redemption of
shares through electronic funds transfer to or from a checking or
savings account.
Participation in these systematic purchase plans will permit
a shareholder to engage in dollar-cost averaging. For additional
information concerning the benefits of dollar-cost averaging, see
APPENDIX B.
Systematic Withdrawal Plan
If a shareholder in a single investment account (accounts in
different Funds cannot be aggregated for this purpose) owns
shares having a net asset value of $5,000 or more, the
shareholder may request that enough shares to produce a fixed
amount of money be liquidated from the account monthly or
quarterly. The amount of each withdrawal must be at least $50.
Using the electronic funds transfer service, shareholders may
choose to have withdrawals electronically deposited at their bank
or other financial institution. They may also elect to have
checks mailed to a designated address.
Such a plan may be initiated by depositing shares worth at
least $5,000 with the Transfer Agent and by completing a
Systematic Withdrawal Plan application, which may be requested
from the Manager. The shareholder may terminate participation in
the plan at any time. There is no charge to the shareholder for
withdrawals under the Systematic Withdrawal Plan. The Company
will not bear any expenses in administering the plan beyond the
regular transfer agent and custodian costs of issuing and
redeeming shares. Any additional expenses of administering the
plan will be borne by the Manager.
Withdrawals will be made by redeeming full and fractional
shares on the date selected by the shareholder at the time the
plan is established. Withdrawal payments made under this plan
may exceed dividends and distributions and, to this extent, will
involve the use of principal and could reduce the dollar value of
a shareholder's investment and eventually exhaust the account.
Reinvesting dividends and distributions helps replenish the
account. Because share values and net investment income can
fluctuate, shareholders should not expect withdrawals to be
offset by rising income or share value gains.
Each redemption of shares may result in a gain or loss,
which must be reported on the shareholder's income tax return.
Therefore, a shareholder should keep an accurate record of any
gain or loss on each withdrawal.
Tax-Deferred Retirement Plans
Federal taxes on current income may be deferred if an investor
qualifies for certain types of retirement programs. For the
convenience of the investor, the following plans are made
available by the Manager: IRA (including SEP/IRA) and 403(b)(7)
accounts. The minimum initial investment in each of these plans
is $2,000. 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 Funds 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 investment objective of the Fund is described in the Fund's
Prospectus. There can, of course, be no assurance that the Fund
will achieve its investment objective.
The Fund seeks to achieve its investment objective by
investing all of its investable assets in the Portfolio. The
Company may withdraw the Fund's investment from the Portfolio at
any time if the Board of Directors of the Company determines that
it is in the best interest of the Fund to do so.
Since the investment characteristics of the Fund will
correspond directly to those of the Portfolio, the following is a
discussion of the various investments of and techniques employed
by the Portfolio.
CERTIFICATES OF DEPOSIT AND BANKERS' ACCEPTANCES.
Certificates of deposit are receipts issued by a depository
institution in exchange for the deposit of funds. The issuer
agrees to pay the amount deposited plus interest to the bearer of
the receipt on the date specified on the certificate. The
certificate usually can be traded in the secondary market prior
to maturity. Bankers' acceptances typically arise from
short-term credit arrangements designed to enable businesses to
obtain funds to finance commercial transactions. Generally, an
acceptance is a time draft drawn on a bank by an exporter or an
importer to obtain a stated amount of funds to pay for specific
merchandise. The draft is then "accepted" by a bank that, in
effect, unconditionally guarantees to pay the face value of the
instrument on its maturity date. The acceptance may then be held
by the accepting bank as an earning asset or it may be sold in
the secondary market at the going rate of discount for a specific
maturity. Although maturities for acceptances can be as long as
270 days, most acceptances have maturities of six months or less.
COMMERCIAL PAPER. Commercial paper consists of short-term
(usually from 1 to 270 days) unsecured promissory notes issued by
corporations in order to finance their current operations. A
variable amount master demand note (which is a type of commercial
paper) represents a direct borrowing arrangement involving
periodically fluctuating rates of interest under a letter
agreement between a commercial paper issuer and an institutional
lender pursuant to which the lender may determine to invest
varying amounts.
ILLIQUID SECURITIES. Historically, illiquid securities have
included securities subject to contractual or legal restrictions
on resale because they have not been registered under the
Securities Act of 1933, as amended (the 1933 Act), securities
which are otherwise not readily marketable and repurchase
agreements having a remaining maturity of longer than seven
calendar days. Securities which have not been registered under
the 1933 Act are referred to as private placements or restricted
securities and are purchased directly from the issuer or in the
secondary market. Mutual funds do not typically hold a
significant amount of these restricted or other illiquid
securities because of the potential for delays on resale and
uncertainty in valuation. Limitations on resale may have an
adverse effect on the marketability of portfolio securities and a
mutual fund might be unable to dispose of restricted or other
illiquid securities promptly or at reasonable prices and might
thereby experience difficulty satisfying redemptions within seven
calendar days. A mutual fund might also have to register such
restricted securities in order to dispose of them resulting in
additional expense and delay. Adverse market conditions could
impede such a public offering of securities.
In recent years, however, a large institutional market has
developed for certain securities that are not registered under
the 1933 Act, including repurchase agreements, commercial paper,
foreign securities, municipal securities, and corporate bonds and
notes. Institutional investors depend on an efficient
institutional market in which the unregistered security can be
readily resold or on an issuer's ability to honor a demand for
repayment. The fact that there are contractual or legal
restrictions on resale of such investments to the general public
or to certain institutions may not be indicative of their
liquidity.
LENDING OF PORTFOLIO SECURITIES. The Portfolio has the
authority to lend portfolio securities to brokers, dealers and
other financial organizations. The Portfolio will not lend
securities to Bankers Trust, Signature Financial Group (SFG),
Sub-Administrator to the Portfolio, or their affiliates. By
lending its securities, a Portfolio can increase its income by
continuing to receive interest on the loaned securities as well
as by either investing the cash collateral in short-term
securities or obtaining yield in the form of interest paid by the
borrower when U.S. Government obligations are used as collateral.
There may be risks of delay in receiving additional collateral or
risks of delay in recovery of the securities or even loss of
rights in the collateral should the borrower of the securities
fail financially. The Portfolio will adhere to the following
conditions whenever its securities are loaned: (i) the Portfolio
must receive at least 100 percent cash collateral or equivalent
securities from the borrower; (ii) the borrower must increase
this collateral whenever the market value of the securities
including accrued interest rises above the level of the
collateral; (iii) the Portfolio must be able to terminate the
loan at any time; (iv) the Portfolio must receive reasonable
interest on the loan, as well as any dividends, interest or other
distributions on the loaned securities, and any increase in
market value; (v) the Portfolio may pay only reasonable custodian
fees in connection with the loan; and (vi) voting rights on the
loaned securities may pass to the borrower; provided, however,
that if a material event adversely affecting the investment
occurs, the Portfolio's Board of Trustees must terminate the loan
and regain the right to vote the securities.
Index Futures Contracts and Options on Index Futures Contracts and
Securities Indices
Futures Contracts. The Portfolio may enter into contracts
for the purchase or sale for future delivery of the Index. U.S.
futures contracts have been designed by exchanges which have been
designated "contracts markets" by the Commodity Futures Trading
Commission (CFTC), and must be executed through a futures
commission merchant, or brokerage firm, which is a member of the
relevant contract market. Futures contracts trade on a number of
exchange markets, and, through their clearing corporations, the
exchanges guarantee performance of the contracts as between the
clearing members of the exchange.
At the same time a futures contract or the Index is
purchased or sold, the Portfolio must allocate cash or securities
as a deposit payment (initial deposit). It is expected that the
initial deposit would be approximately 1 1/2% to 5% of a
contract's face value. Daily thereafter, the futures contract is
valued and the payment of "variation margin" may be required,
since each day the Portfolio would provide or receive cash that
reflects any decline or increase in the contract's value.
Although futures contracts by their terms call for the
actual delivery or acquisition of securities, in most cases the
contractual obligation is fulfilled before the date of the
contract without having to make or take delivery of the
securities. The offsetting of a contractual obligation is
accomplished by buying (or selling, as the case may be) on a
commodities exchange an identical futures contract calling for
delivery in the same month. Such a transaction, which is
effected through a member of an exchange, cancels the obligation
to make or take delivery of the securities. Since all
transactions in the futures market are made, offset or fulfilled
through a clearinghouse associated with the exchange on which the
contracts are traded, the Portfolio will incur brokerage fees
when it purchases or sells futures contracts.
The ordinary spreads between prices in the cash and futures
market, due to differences in the nature of those markets, are
subject to distortions. First, all participants in the futures
market are subject to initial deposit and variation margin
requirements. Rather than meeting additional variation margin
requirements, investors may close futures contracts through
offsetting transactions which could distort the normal
relationship between the cash and futures markets. Second, the
liquidity of the futures market depends on participants entering
into offsetting transactions rather than making or taking
delivery. To the extent participants decide to make or take
delivery, liquidity in the futures market could be reduced, thus
producing distortion. Third, from the point of view of
speculators, the margin deposit requirements in the futures
market are less onerous than margin requirements in the
securities market. Therefore, increased participation by
speculators in the futures market may cause temporary price
distortions. Due to the possibility of distortion, a correct
forecast of securities price trends by Bankers Trust may still
not result in a successful transaction.
In addition, futures contracts entail risks. Although
Bankers Trust believes that use of such contracts will benefit
the Portfolio, if Bankers Trust's investment judgment about the
general direction of the Index is incorrect, the Portfolio's
overall performance would be poorer than if it had not entered
into any such contract. For example, if the Portfolio has hedged
against the possibility of a decrease in the Index which would
adversely affect the value of securities held in its portfolio
and securities prices increase instead, the Portfolio will lose
part or all of the benefit of the increased value of its
securities which it has hedged because it will have offsetting
losses in its futures positions. In addition, in such
situations, if the Portfolio has insufficient cash, it may have
to sell securities from its portfolio to meet daily variation
margin requirements. Such sales of securities may be, but will
not necessarily be, at increased prices which reflect
the rising market. The Portfolio may have to sell securities at
a time when it may be disadvantageous to do so.
Options on Index Futures Contracts. The Portfolio may
purchase and write options on futures contracts with respect to
the Index. The purchase of a call option on an index futures
contract is similar in some respects to the purchase of a call
option on such an index. Depending on the pricing of the option
compared to either the price of the futures contract upon which
it is based or the price of the underlying securities, it may or
may not be less risky than ownership of the futures contract or
underlying securities. As with the purchase of futures
contracts, when the Portfolio is not fully invested it may
purchase a call option on a futures contract to hedge against a
market advance.
The writing of a call option on a futures contract with
respect to the Index constitutes a partial hedge against
declining prices of the underlying securities which are
deliverable upon exercise of the futures contract. If the
futures price at expiration of the option is below the exercise
price, the Portfolio will retain the full amount of the option
premium which provides a partial hedge against any decline that
may have occurred in the Portfolio's holdings. The writing of a
put option on an index futures contract constitutes a partial
hedge against increasing prices of the underlying securities
which are deliverable upon exercise of the futures contract. If
the futures price at expiration of the option is higher than the
exercise price, the Portfolio will retain the full amount of the
option premium which provides a partial hedge against any
increase in the price of securities which the Portfolio intends
to purchase. If a put or call option the Portfolio has written
is exercised, the Portfolio will incur a loss which will be
reduced by the amount of the premium it receives. Depending on
the degree of correlation between changes in the value of its
portfolio securities and changes in the value of its futures
positions, the Portfolio's losses from existing options on
futures may to some extent be reduced or increased by changes in
the value of portfolio securities.
The purchase of a put option on a futures contract with
respect to the Index is similar in some respects to the purchase
of protective put options on the Index. For example, the
Portfolio may purchase a put option on an index futures contract
to hedge against the risk of lowering securities values.
The amount of risk the Portfolio assumes when it purchases
an option on a futures contract with respect to the Index is the
premium paid for the option plus related transaction costs. In
addition to the correlation risks discussed above, the purchase
of an option also entails the risk that changes in the value of
the underlying futures contract will not be fully reflected in
the value of the option purchased.
The Board of Trustees of the Portfolio has adopted the
requirement that index futures contracts and options on index
futures contracts be used only for cash management purposes for
cash management purposes as a hedge and not for speculation. The
Portfolio will not enter into any futures contracts or options on
futures contracts if immediately thereafter the amount of margin
deposits on all the futures contracts of the Portfolio and
premiums paid on outstanding options on futures contracts owned
by the Portfolio would exceed 5% of the market value of the total
assets of the Portfolio.
Options on Securities Indices. The Portfolio may write
(sell) covered call and put options to a limited extent on the
Index ("covered options") in an attempt to increase income. Such
options give the holder the right to receive a cash settlement
during the term of the option based upon the difference between
the exercise price and the value of the index. The Portfolio may
forego the benefits of appreciation on the Index or may pay more
than the market price of the Index pursuant to call and put
options written by the Portfolio.
By writing a covered call option, the Portfolio foregoes, in
exchange for the premium less the commission (net premium), the
opportunity to profit during the option period from an increase
in the market value of the Index above the exercise price. By
writing a covered put option, the Portfolio, in exchange for the
net premium received, accepts the risk of a decline in the market
value of the Index below the exercise price.
The Portfolio may terminate its obligation as the writer of
a call or put option by purchasing an option with the same
exercise price and expiration date as the option previously
written.
When the Portfolio writes an option, an amount equal to the
net premium received by the Portfolio is included in the
liability section of the Portfolio's Statement of Assets and
Liabilities as a deferred credit. The amount of the deferred
credit will be subsequently marked to market to reflect the
current market value of the option written. The current market
value of a traded option is the last sale price or, in the
absence of a sale, the mean between the closing bid and asked
price. If an option expires on its stipulated expiration date or
if the Portfolio enters into a closing purchase transaction, the
Portfolio will realize a gain (or loss if the cost of a closing
purchase transaction exceeds the premium received when the option
was sold), and the deferred credit related to such option will be
eliminated. If a call option is exercised, the Portfolio will
realize a gain or loss from the sale of the underlying security
and the proceeds of the sale will be increased by the premium
originally received. The writing of covered call options may be
deemed to involve the pledge of the securities against which the
option is being written. Securities against which call options
are written will be segregated on the books of the custodian for
the Portfolio.
The Portfolio may purchase call and put options on the
Index. The Portfolio would normally purchase a call option in
anticipation of an increase in the market value of the Index.
The purchase of a call option would entitle the Portfolio, in
exchange for the premium paid, to purchase the underlying
securities at a specified price during the option period. The
Portfolio would ordinarily have a gain if the value of the
securities increased above the exercise price sufficiently to
cover the premium and would have a loss if the value of the
securities remained at or below the exercise price during the
option period.
The Portfolio would normally purchase put options in
anticipation of a decline in the market value of the Index
(protective puts). The purchase of a put option would entitle
the Portfolio, in exchange for the premium paid, to sell the
underlying securities at a specified price during the option
period. The purchase of protective puts is designed merely to
offset or hedge against a decline in the market value of the
Index. The Portfolio would ordinarily recognize a gain if the
value of the Index decreased below the exercise price
sufficiently to cover the premium and would recognize a loss if
the value of the Index remained at or above the exercise price.
Gains and losses on the purchase of protective put options would
tend to be offset by countervailing changes in the value of the
Index.
The Portfolio has adopted certain other nonfundamental
policies concerning option transactions which are discussed
below. The Portfolio's activities in index options may also be
restricted by the requirements of the Internal Revenue Code of
1986, as amended (the Code), for qualification as a regulated
investment company.
The hours of trading for options on the Index may not
conform to the hours during which the underlying securities are
traded. To the extent that the option markets close before the
markets for the underlying securities, significant price and rate
movements can take place in the underlying securities markets
that cannot be reflected in the option markets. It is impossible
to predict the volume of trading that may exist in such options,
and there can be no assurance that viable exchange markets will
develop or continue.
Because options on securities indices require settlement in
cash, Bankers Trust may be forced to liquidate portfolio
securities to meet settlement obligations.
INVESTMENT RESTRICTIONS
Certain investment restrictions of the Fund and the Portfolio
have been adopted as fundamental policies of the Fund or
Portfolio, as the case may be. A fundamental policy may not be
changed without the approval of a majority of the outstanding
voting securities of the Fund or Portfolio, as the case may be.
Majority of the outstanding voting securities under the 1940 Act,
and as used in this SAI and the Prospectus, means, the lesser of
(i) 67% or more of the outstanding voting securities of the Fund or
Portfolio, as the case may be, present at a meeting, if the
holders of more than 50% of the outstanding voting securities of
the Fund or Portfolio, as the case may be, are present or
represented by proxy or (ii) more than 50% of the outstanding
voting securities of the Fund or Portfolio, as the case may be.
Whenever the Company is requested to vote on a fundamental policy
of the Portfolio, the Company will hold a meeting of the Fund's
shareholders and will cast its vote as instructed by the Fund's
shareholders. The percentage of the Company's votes representing
Fund shareholders not voting will be voted by the Directors of
the Company in the same proportion as the Fund shareholders who
do, in fact, vote.
As a matter of fundamental policy, the Fund may not (except
that no investment restriction of the Fund shall prevent the Fund
from investing all of its investable assets in an open-end
investment company with substantially the same investment
objective):
(1) With respect to 75% of its total assets, purchase the
securities of any issuer (except U.S. Government Securities,
as such term is defined in the 1940 Act) if, as a result, it would
own more than 10% of the outstanding voting securities of such
issuer or it would have more than 5% of the value of its
total assets invested in the securities of such issuer.
(2) 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).
(3) 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; provided, this limitation does not apply to
securities issued or guaranteed by the U.S. Government and
its agencies or instrumentalities.
(4) Issue senior securities, except as permitted under the 1940
Act.
(5) Underwrite securities of other issuers, except to the extent
that it may be deemed to act as a statutory underwriter in
the distribution of any restricted securities or not readily
marketable securities.
(6) 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.
As a matter of fundamental policy, the Portfolio may not:
(1) borrow money or mortgage or hypothecate assets of the
Portfolio, except that in an amount not to exceed 1/3 of the
current value of the Portfolio's assets, it may borrow money
as a temporary measure for extraordinary or emergency
purposes and enter into reverse repurchase agreements or
dollar roll transactions, and except that it may pledge,
mortgage or hypothecate not more than 1/3 of such assets to
secure such borrowings (it is intended that money would be
borrowed only from banks and only either to accommodate
requests for the withdrawal of beneficial interests
(redemption of shares) while effecting an orderly
liquidation of portfolio securities or to maintain liquidity
in the event of an unanticipated failure to complete a
portfolio security transaction or other similar situations)
or reverse repurchase agreements, provided that collateral
arrangements with respect to options and futures, including
deposits of initial deposit and variation margin, are not
considered a pledge of assets for purposes of this
restriction and except that assets may be pledged to secure
letters of credit solely for the purpose of participating in
a captive insurance company sponsored by the Investment
Company Institute; for additional related restrictions, see
clause (1) under the caption "State and Federal
Restrictions" below. (As an operating policy, the Portfolio
may not engage in dollar roll transactions);
(2) underwrite securities issued by other persons except insofar
as the Portfolio may technically be deemed an underwriter
under the 1933 Act in selling a portfolio security;
(3) make loans to other persons except: (a) through the lending
of the Portfolio's portfolio securities and provided that
any such loans not exceed 30% of the Portfolio's net assets
(taken at market value); (b) through the use of repurchase
agreements or the purchase of short-term obligations; or (c)
by purchasing a portion of an issue of debt securities of
types distributed publicly or privately (under current
regulations, the Portfolio's fundamental policy with respect
to 20% risk weighing for financial institutions prevent the
Portfolio from engaging in securities lending);
(4) purchase or sell real estate (including limited partnership
interests but excluding securities secured by real estate or
interests therein), interests in oil, gas or mineral leases,
commodities or commodity contracts (except futures and
option contracts) in the ordinary course of business (except
that the Portfolio may hold and sell, for the Portfolio's
portfolio, real estate acquired as a result of the
Portfolio's ownership of securities);
(5) concentrate its investments in any particular industry
(excluding U.S. Government securities), but if it is deemed
appropriate for the achievement of a Portfolio's investment
objective, up to 25% of its total assets may be invested in
any one industry; and
(6) issue any senior security (as that term is defined in the
1940 Act) if such issuance is specifically prohibited by the
1940 Act or the rules and regulations promulgated
thereunder, provided that collateral arrangements with
respect to options and futures, including deposits of
initial deposit and variation margin, are not considered to
be the issuance of a senior security for purposes of this
restriction.
State and Federal Restrictions. In order to comply with
certain state and Federal statutes and policies the Fund and the
Portfolio will not as a matter of operating policy (except that
no operating policy shall prevent the Fund from investing all of
its investable assets in an open-end investment company with
substantially the same investment objective):
(1) borrow money (including through dollar roll transactions)
for any purpose in excess of 10% of the Fund's (Portfolio's)
total assets (taken at cost), except that the Fund
(Portfolio) may borrow for temporary or emergency purposes
up to 1/3 of its total assets;
(2) pledge, mortgage or hypothecate for any purpose in excess of
10% of the Fund's (Portfolio's) total assets (taken at
market value), provided that collateral arrangements with
respect to options and futures, including deposits of
initial deposit and variation margin, and reverse repurchase
agreements are not considered a pledge of assets for
purposes of this restriction;
(3) purchase any security or evidence of interest therein on
margin, except that such short-term credit as may be
necessary for the clearance of purchases and sales of
securities may be obtained and except that deposits of
initial deposit and variation margin may be made in
connection with the purchase, ownership, holding or sale of
futures;
(4) sell any security which it does not own unless by virtue of
its ownership of other securities it has at the time of sale
a right to obtain securities, without payment of further
consideration, equivalent in kind and amount to the
securities sold and provided that if such right is
conditional the sale is made upon the same conditions;
(5) invest for the purpose of exercising control or management;
(6) purchase securities issued by any investment company except
by purchase in the open market where no commission or profit
to a sponsor or dealer results from such purchase other than
the customary broker's commission, or except when such
purchase, though not made in the open market, is part of a
plan of merger or consolidation; provided, however, that
securities of any investment company will not be purchased
for the Fund (Portfolio) if such purchase at the time
thereof would cause: (a) more than 10% of the Fund's
(Portfolio's) total assets (taken at the greater of cost or
market value) to be invested in the securities of such
issuers; (b) more than 5% of the Fund's (Portfolio's) total
assets (taken at the greater of cost or market value) to be
invested in any one investment company; or (c) more than 3%
of the outstanding voting securities of any such issuer to
be held for the Fund (Portfolio); and provided further that,
except in the case of merger or consolidation, the Fund
(Portfolio) shall not invest in any other open-end
investment company unless the Fund (Portfolio), (1) waives
the investment advisory fee with respect to assets invested
in other open-end investment companies and (2) incurs no
sales charge in connection with the investment (as an
operating policy, the Portfolio will not invest in another
open-end registered investment company);
(7) invest more than 15% of the Fund's (Portfolio's) net assets
(taken at the greater of cost or market value) in securities
that are illiquid or not readily marketable not including
(a) Rule 144A securities that have been determined to be
liquid by the Board of Directors/Trustees; and (b) commercial paper
that is sold under section 4(2) of the 1933 Act which: (i)
is not traded flat or in default as to interest or
principal; and (ii) is rated in one of the two highest
categories by at least two nationally recognized statistical
rating organizations (NRSROs) and the Fund's (Portfolio's) Board of
Directors/Trustees have determined the commercial paper to be liquid;
or (iii) is rated in one of the two highest categories by one NRSRO
and the Fund's (Portfolio's) Board of Directors/Trustees have determined
that the commercial paper is equivalent quality and is liquid;
(8) invest more than 10% of the Fund's (Portfolio's) total
assets (taken at the greater of cost or market value) in
securities that are restricted as to resale under the 1933
Act (other than Rule 144A securities deemed liquid by the
Fund's (Portfolio's) Board of Directors/Trustees);
(9) no more than 5% of the Fund's (Portfolio's) total assets are
invested in securities issued by issuers which (including
predecessors) have been in operation less than three years;
(10) with respect to 75% of the Fund's (Portfolio's) total
assets, purchase securities of any issuer if such purchase
at the time thereof would cause the Fund (Portfolio) to hold
more than 10% of any class of securities of such issuer, for
which purposes all indebtedness of an issuer shall be deemed
a single class and all preferred stock of an issuer shall be
deemed a single class, except that futures or option
contracts shall not be subject to this restriction;
(11) if the Fund (Portfolio) is a diversified fund with respect
to 75% of its assets, invest more than 5% of its total
assets in the securities (excluding U.S. Government
securities) of any one issuer;
(12) purchase or retain in the Fund's (Portfolio's) portfolio any
securities issued by an issuer any of whose officers,
directors, trustees or security holders is an officer or
Director of the Company (or Trustee of the Portfolio), or is
an officer or partner of the Manager (or Bankers Trust), if
after the purchase of the securities of such issuer for the
Fund (Portfolio) one or more of such persons owns
beneficially more than 1/2 of 1% of the shares or
securities, or both, all taken at market value, of such
issuer, and such persons owning more than 1/2 of 1% of such
shares or securities together own beneficially more than 5%
of such shares or securities, or both, all taken at market value;
(13) invest more than 5% of the Fund's (Portfolio's) net assets
in warrants (valued at the lower of cost or market), (other
than warrants acquired by the Fund (Portfolio) as part of a
unit or attached to securities at the time of purchase), but
not more than 2% of the Fund's (Portfolio's) net assets may
be invested in warrants not listed on the NYSE or the
American Stock Exchange;
(14) make short sales of securities or maintain a short position,
unless at all times when a short position is open it owns an
equal amount of such securities or securities convertible
into or exchangeable, without payment of any further
consideration, for securities of the same issue and equal in
amount to, the securities sold short, and unless not more
than 10% of the Fund's (Portfolio's) net assets (taken at
market value) is represented by such securities, or
securities convertible into or exchangeable for such
securities, at any one time (the Fund (Portfolio) has no
current intention to engage in short selling);
(15) write puts and calls on securities unless each of the
following conditions are met: (a) the security underlying
the put or call is within the investment policies of the
Fund (Portfolio) and the option is issued by the Options
Clearing Corporation, except for put and call options issued
by non-U.S. entities or listed on non-U.S. securities or
commodities exchanges; (b) the aggregate value of the
obligations underlying the puts determined as of the date
the options are sold shall not exceed 50% of the Fund's
(Portfolio's) net assets; (c) the securities subject to the
exercise of the call written by the Fund (Portfolio) must be
owned by the Fund (Portfolio) at the time the call is sold
and must continue to be owned by the Fund (Portfolio) until
the call has been exercised, has lapsed, or the Fund
(Portfolio) has purchased a closing call, and such purchase
has been confirmed, thereby extinguishing the Fund's
(Portfolio's) obligation to deliver securities pursuant to
the call it has sold; and (d) at the time a put is written,
the Fund (Portfolio) establishes a segregated account with
its custodian consisting of cash or short-term U.S.
Government securities equal in value to the amount the Fund
(Portfolio) will be obligated to pay upon exercise of the
put (this account must be maintained until the put is
exercised, has expired, or the Fund (Portfolio) has
purchased a closing put, which is a put of the same series
as the one previously written); and
(16) buy and sell puts and calls on securities, stock index
futures or options on stock index futures, or financial
futures or options on financial futures unless such options
are written by other persons and: (a) the options or futures
are offered through the facilities of a national securities
association or are listed on a national securities or
commodities exchange, except for put and call options issued
by non-U.S. entities or listed on non-U.S. securities or
commodities exchanges; (b) the aggregate premiums paid on
all such options which are held at any time do not exceed
20% of the Fund's (Portfolio's) total net assets; and (c)
the aggregate margin deposits required on all such futures
or options thereon held at any time do not exceed 5% of the
Fund's (Portfolio's) total assets.
The Fund will comply with the state securities laws and
regulations of all states in which it is registered. The
Portfolio will comply with the permitted investments and
investment limitations in the securities laws and regulations of
all states in which the Fund, or any other registered investment
company investing in the Portfolio, is registered.
PORTFOLIO TRANSACTIONS and BROKERAGE COMMISSIONS
Bankers Trust is responsible for decisions to buy and sell
securities, futures contracts and options on such securities and
futures for the Portfolio, the selection of brokers, dealers and
futures commission merchants to effect transactions and the
negotiation of brokerage commissions, if any. Broker-dealers may
receive brokerage commissions on portfolio transactions,
including options, futures and options on futures transactions
and the purchase and sale of underlying securities upon the
exercise of options. Orders may be directed to any broker-dealer
or futures commission merchant, including to the extent and in
the manner permitted by applicable law, Bankers Trust or its
subsidiaries or affiliates. Purchases and sales of certain
portfolio securities on behalf of the Portfolio are frequently
placed by Bankers Trust with the issuer or a primary or secondary
market-maker for these securities on a net basis, without any
brokerage commission being paid by the Portfolio. Trading does,
however, involve transaction costs. Transactions with dealers
serving as market-makers reflect the spread between the bid and
asked prices. Transaction costs may also include fees paid to
third parties for information as to potential purchasers or
sellers of securities. Purchases of underwritten issues may be
made which will include an underwriting fee paid to the underwriter.
Bankers Trust seeks to evaluate the overall reasonableness
of the brokerage commissions paid (to the extent applicable) in
placing orders for the purchase and sale of securities for the
Portfolio taking into account such factors as price, commission
(negotiable in the case of national securities exchange
transactions), if any, size of order, difficulty of execution and
skill required of the executing broker-dealer through familiarity
with commissions charged on comparable transactions, as well as
by comparing commissions paid by the Portfolio to reported
commissions paid by others. Bankers Trust reviews on a routine
basis commission rates, execution and settlement services
performed, making internal and external comparisons.
Bankers Trust is authorized, consistent with Section 28(e)
of the Securities Exchange Act of 1934, as amended, when placing
portfolio transactions for the Portfolio with a broker to pay a
brokerage commission (to the extent applicable) in excess of that
which another broker might have charged for effecting the same
transaction on account of the receipt of research, market or
statistical information. The term "research, market or
statistical information" includes advice as to the value of
securities; the advisability of investing in, purchasing or
selling securities; the availability of securities or purchasers
or sellers of securities; and furnishing analyses and reports
concerning issuers, industries, securities, economic factors and
trends, portfolio strategy and the performance of accounts.
Consistent with the policy stated above, the Rules of Fair
Practice of the National Association of Securities Dealers, Inc.
and such other policies as the Trustees of the Portfolio may
determine, Bankers Trust may consider sales of shares of any
investment company that invests in the Portfolio as a factor
in the selection of broker-dealers to execute portfolio
transactions. Bankers Trust will make such allocations if
commissions are comparable to those charged by nonaffiliated,
qualified broker-dealers for similar services.
Higher commissions may be paid to firms that provide
research services to the extent permitted by law. Bankers Trust
may use this research information in managing the Portfolio's
assets, as well as the assets of other clients.
Except for implementing the policies stated above, there is
no intention to place portfolio transactions with particular
brokers or dealers or groups thereof. In effecting transactions
in over-the-counter securities, orders are placed with the
principal market-makers for the security being traded unless,
after exercising care, it appears that more favorable results are
available otherwise.
Although certain research, market and statistical
information from brokers and dealers can be useful to the
Portfolio and to Bankers Trust, it is the opinion of the
management of the Portfolio that such information is only
supplementary to Bankers Trust's own research effort, since the
information must still be analyzed, weighed and reviewed by
Bankers Trust's staff. Such information may be useful to Bankers
Trust in providing services to clients other than the
Portfolios', and not all such information is used by Bankers
Trust in connection with the Portfolio. Conversely, such
information provided to Bankers Trust by brokers and dealers
through whom other clients of Bankers Trust effect securities
transactions may be useful to Bankers Trust in providing services
to the Portfolio.
In certain instances there may be securities which are
suitable for the Portfolio as well as for one or more of Bankers
Trust's other clients. Investment decisions for the Portfolio
and for Bankers Trust's other clients are made with a view to
achieving their respective investment objectives. It may develop
that a particular security is bought or sold for only one client
even though it might be held by, or bought or sold for, other
clients. Likewise, a particular security may be bought for one
or more clients when one or more clients are selling that same
security. Some simultaneous transactions are inevitable when
several clients receive investment advice from the same
investment adviser, particularly when the same security is
suitable for the investment objectives of more than one client.
When two or more clients are simultaneously engaged in the
purchase or sale of the same security, the securities are
allocated among clients in a manner believed to be equitable to
each. It is recognized that in some cases this system could have
a detrimental effect on the price or volume of the security as
far as the Portfolio in concerned. However, it is believed that
the ability of the Portfolio to participate in volume
transactions will produce better executions for the Portfolio.
For the years ended December 31, 1995, 1994, and 1993, the
Portfolio paid brokerage commissions in the amount of $172,924,
$97,069, and $63,408, respectively.
FURTHER DESCRIPTION OF SHARES
The Company is authorized to issue shares in separate classes, or
Funds. Eight such Funds have been established, one of which is
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 assets of the 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 the 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 of Directors.
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 10% 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 NAVs of
the Funds' shares. However, on matters affecting an individual
Fund, a separate vote of the shareholders of that Fund is
required. Shareholders of the 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
The Fund intends to qualify as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as
amended (the Code). Accordingly, the 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 the 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, the 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. The
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
the Fund receives a distribution taxable as long-term capital
gain with respect to shares of the 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.
The Portfolio is not subject to Federal income taxation.
Instead, the Fund and other investors investing in the Portfolio
must take into account, in computing their Federal income tax
liability, their share of the Portfolio's income, gains, losses,
deductions, credits and tax preference items, without regard to
whether they have received any cash distributions from the Portfolio.
Distributions received by the Fund from the Portfolio
generally will not result in the Fund recognizing any gain or
loss for Federal income tax purposes, except that: (i) gain will
be recognized to the extent that any cash distributed exceeds the
Fund's basis in its interest in the Portfolio prior to the
distribution; (ii) income or gain may be realized if the
distribution is made in liquidation of the Fund's entire interest
in the Portfolio and includes a disproportionate share of any
unrealized receivables held by the Portfolio; and (iii) loss may
be recognized if the distribution is made in liquidation of the
Fund's entire interest in the Portfolio and consists solely of
cash and/or unrealized receivables. The Fund's basis in its
interest in the Portfolio generally will equal the amount of cash
and the basis of any property which the Fund invests in the
Portfolio, increased by the Fund's share of income from the
Portfolio, and decreased by the amount of any cash distributions
and the basis of any property distributed from the Portfolio.
Any gain or loss realized by a shareholder upon the sale or
other disposition of shares of the Fund, or upon receipt of a
distribution in complete liquidation of the Fund, generally will
be a capital gain or loss which will be long-term or short-term,
generally depending upon the shareholder's holding period for the
shares. Any loss realized on a sale or exchange will be
disallowed to the extent the shares disposed of are replaced
(including shares acquired pursuant to a dividend reinvestment
plan) within a period of 61 days beginning 30 days before and
ending 30 days after disposition of the shares. In such a case,
the basis of the shares acquired will be adjusted to reflect the
disallowed loss. Any loss realized by a shareholder on a
disposition of shares held by the shareholder for six months or
less will be treated as a long term capital loss to the extent of
any distributions of net capital gains received by the
shareholder with respect to such shares.
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); 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);
and Executive Vice President, Property & Casualty Operations,
USAA (1/90-8/91). 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: 54
Chief Executive Officer, IMCO (10/93-present); President,
Director and Vice Chairman of the Board of Directors, IMCO (1/90-
present); Director, USAA Federal Savings Bank (12/83-8/91). Mr.
Roth currently serves as President, Trustee and Vice Chairman of
the Boards of Trustees of USAA Investment Trust and USAA State
Tax-Free Trust, as President, Director and Vice Chairman of the
Boards of Directors of USAA Tax Exempt Fund, Inc. and USAA
Shareholder Account Services, as Director of USAA Life Insurance
Company and as Trustee and Vice Chairman of USAA Life Investment
Trust.
John W. Saunders, Jr. 1, 2, 4
Director and Vice President
Age: 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: 77
Retired. Mr. Brown currently serves as a Trustee of USAA
Investment Trust and USAA State Tax-Free Trust and as a Director
of USAA Tax Exempt Fund, Inc.
Howard L. Freeman, Jr. 2, 3, 5
2710 Hopeton
San Antonio, TX 78230
Director
Age: 60
Assistant General Manager for Finance, San Antonio City Public
Service Board (1976-present). Mr. Freeman currently serves as a
Trustee of USAA Investment Trust and USAA State Tax-Free Trust
and as a Director of USAA Tax Exempt Fund, Inc.
Richard A. Zucker 3, 4, 5
407 Arch Bluff
San Antonio, TX 78216
Director
Age: 52
Vice President, Beldon Roofing and Remodeling (1985-present).
Mr. Zucker currently serves as a Trustee of USAA Investment Trust
and USAA State Tax-Free Trust and as a Director of USAA Tax
Exempt Fund, Inc.
Barbara B. Dreeben 3, 5
200 Patterson #1008
San Antonio, TX 78209
Director
Age: 51
President, Postal Addvantage (7/92-present); Consultant, Nancy
Harkins Stationer (8/91-12/95); Merchandise Manager, Nancy
Harkins Stationer (7/82-8/91). Mrs. Dreeben currently serves as
a Trustee of USAA Investment Trust and USAA State Tax-Free Trust
and as a Director of USAA Tax Exempt Fund, Inc.
Michael D. Wagner 1
Secretary
Age: 47
Vice President, Corporate Counsel, USAA (1982-present). Mr.
Wagner has held various positions in the legal department of USAA
since 1970 and currently serves as Vice President, Secretary and
Counsel, IMCO and USAA Shareholder Account Services, Secretary,
USAA Investment Trust, USAA State Tax-Free Trust, and USAA Tax
Exempt Fund, Inc. and as Vice President, Corporate Counsel for
various other USAA subsidiaries and affiliates.
Alex M. Ciccone 1
Assistant Secretary
Age: 46
Vice President, Compliance, IMCO (12/94-present); Vice President
and Chief Operating Officer, Commonwealth Shareholder Services
(6/94-11/94); Vice President, Compliance, IMCO (12/91-5/94); Vice
President, Compliance, Fund Management Co. (10/89-11/91); and
Vice President, Compliance, AIM Distributors, Inc. (4/82-11/91).
Mr. Ciccone currently serves as Assistant Secretary of USAA
Investment Trust, USAA State Tax-Free Trust, and USAA Tax Exempt
Fund, Inc.
Sherron A. Kirk 1
Treasurer
Age: 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);
Assistant Vice President, Real Estate Accounting, USAA Real
Estate Company (5/90-7/91). Mrs. Kirk currently serves as
Treasurer of USAA Investment Trust, USAA State Tax-Free Trust,
and USAA Tax Exempt Fund, Inc., and as Vice President, Controller
of USAA Shareholder Account Services.
Dean R. Pantzar 1
Assistant Treasurer
Age: 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: Mark H. Wright, President,
Chief Executive Officer, Director and Vice Chairman, USAA Federal
Savings Bank; Josue Robles, Jr., Senior Vice President, Chief Financial
Officer/Controller, USAA; Bradford W. Rich, Senior Vice President,
General Counsel and Secretary, USAA; Harry W. Miller, Senior Vice President,
Investments (Equity); and John J. Dallahan, Senior Vice
President, Investment Services. There are no family
relationships among the Directors, officers, and managerial level
employees of the Company or its Manager.
The following table sets forth information describing the
compensation of the current Directors of the Company for their
services as Directors for the fiscal year ended July 31, 1995.
Name Aggregate Total Compensation
of Compensation from the USAA
Director from the Company Family of Funds (c)
- -------- ---------------- -------------------
C. Dale Briscoe* $4,612 $18,500
George E. Brown (a) 4,612 18,500
Barbara B. Dreeben 4,612 18,500
Howard L. Freeman, Jr. 4,612 18,500
Hansford T. Johnson* None (b) None (b)
Michael J.C. Roth None (b) None (b)
John W. Saunders, Jr. None (b) None (b)
Richard A. Zucker 4,612 18,500
- ----------------
* 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
$20,481. The compensation was deferred by Mr. Brown
pursuant to a non-qualified Deferred Compensation Plan,
under which deferred amounts accumulate interest quarterly
based on the annualized U.S. Treasury Bill rate in effect on
the last day of the quarter. Amounts deferred and
accumulated earnings thereon are not funded and are general
unsecured liabilities of the USAA Funds until paid. The
Deferred Compensation Plan was terminated in 1988 and no
compensation has been deferred by any Director/Trustee of
the USAA Family of Funds since the Plan was terminated.
(b) Hansford T. Johnson, Michael J.C. Roth, and John W.
Saunders, Jr. are affiliated with the Company's investment
adviser, IMCO, and, accordingly, receive no remuneration
from the Company or any other Fund of the USAA Family of Funds.
(c) At July 31, 1995, the USAA Family of Funds consisted of 4
registered investment companies offering 29 individual
funds. Each Director presently serves as a Director or
Trustee of each investment company in the USAA Family of
Funds. In addition, Michael J.C. Roth presently serves as a
Trustee of USAA Life Investment Trust, a registered
investment company advised by IMCO, consisting of five funds
offered to investors in a fixed and variable annuity
contract with USAA Life Insurance Company. Mr. Roth receives
no compensation as Trustee of USAA Life Investment Trust.
All of the above Directors are also Directors/Trustees of
the other funds for which IMCO serves as investment adviser. No
compensation is paid by any fund to any Director/Trustee who is a
director, officer, or employee of IMCO or its affiliates. No
pension or retirement benefits are accrued as part of fund
expenses. The Company reimburses certain expenses of the
Directors who are not affiliated with the investment adviser. As
of March 31, 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.
TRUSTEES AND OFFICERS OF THE PORTFOLIO
The Trustees and officers of the Portfolio and their principal
occupations during the past five years are set forth below.
Their titles may have varied during that period. Unless
otherwise indicated, the address of each Trustee and officer is 6
St. James Avenue, Boston, Massachusetts.
CHARLES P. BIGGAR (Age 65) - Trustee; Retired; Director of
Chase/NBW Bank Advisory Board; Director, Batemen, Eichler, Hill
Richards Inc.; formerly Vice President of International Business
Machines and President of the National Services and the Field
Engineering Divisions of IBM. His address is 12 Hitching Post
Lane, Chappaqua, New York 10514.
PHILIP W. COOLIDGE (Age 44) - Trustee and President; Chairman,
Chief Executive Officer and President, Signature Financial Group (SFG)
(since December, 1988) and Signature (since April, 1989).
S. LELAND DILL (Age 65) - Trustee; Retired; Director, Coutts
& Company Group and Coutts & Co. (U.S.A.) International; Director,
Zweig Series Trust; formerly, Partner of KPMG Peat Marwick; Director,
Vinters International Company, Inc.; General Partner of Pemco (an
investment company registered under the 1940 Act). His address is
5070 North Ocean Drive, Singer Island, Florida 33404.
PHILIP SAUNDERS, JR. (Age 60) - Trustee; Principal, Philip
Saunders Associates (Consulting); former Director of Financial
Industry Consulting, Wolf & Company; President, John Hancock Home
Mortgage Corporation; and Senior Vice President of Treasury and
Financial Services, John Hancock Mutual Life Insurance Company,
Inc. His address is 445 Glen Road, Weston, Massachusetts 02193.
JOHN R. ELDER (Age 47) - Treasurer; Vice President, SFG (since
April, 1995); Treasurer, Phoenix Family of Mutual Funds (prior to
April, 1995).
DAVID G. DANIELSON (Age 30) - Assistant Treasurer; Assistant
Manager, SFG (since May, 1991); Graduate Student, Northeastern
University (from April, 1990 to March, 1991); Tax Accountant &
Systems Analyst, Putnam Companies (prior to March, 1990).
BARBARA M. O'DETTE (Age 36) - Assistant Treasurer; Assistant
Treasurer, SFG (since December, 1988); Assistant Treasurer,
Signature (since April, 1989).
DANIEL E. SHEA (Age 33) - Assistant Treasurer; Assistant
Manager, SFG (since November 1993); Supervisor and Senior
Technical Advisor, Putnam Investments (prior to November 1993).
THOMAS M. LENZ (Age 37) - Secretary; Senior Vice President
and Associate General Counsel, SFG (since November, 1989);
Assistant Secretary, Signature (since February, 1991); Attorney,
Ropes & Gray (prior to November, 1989).
LINDA T. GIBSON (Age 30) - Assistant Secretary; Vice
President, Global Product Management and Assistant Secretary, SFG
(since May, 1992); Assistant Secretary, Signature (since October,
1992); student, Boston University School of Law (September, 1989
to May, 1992).
MOLLY S. MUGLER (Age 44) - Assistant Secretary; Legal
Counsel and Assistant Secretary, SFG (since December, 1988);
Assistant Secretary, Signature (since April, 1989).
ANDRES E. SALDANA (Age 33) - Assistant Secretary; Legal
Counsel, SFG (since November, 1992); Assistant Secretary,
Signature (since September, 1993); Attorney, Ropes & Gray
(September, 1990 to November, 1992).
No person who is an officer or director of Bankers Trust is
an officer or Trustee of the Portfolio. No director, officer or
employee of SFG or any of its affiliates will receive any
compensation from the Portfolio for serving as an officer or
Trustee of the Portfolio. The Portfolio and certain other
investment companies advised by Bankers Trust (the Fund Complex)
collectively pay each Trustee who is not a director, officer or
employee of Bankers Trust, SFG, or any of their affiliates an
annual fee of $10,000, respectively, per annum plus $1,250,
respectively, per meeting attended and reimburses them for travel
and out-of-pocket expenses.
For the year ended December 31, 1995, the Portfolio incurred
Trustees fees equal to $1,868.
The following table reflects fees paid to the Trustees of
the Portfolio for the year ended December 31, 1995.
TRUSTEE COMPENSATION TABLE
Aggregate Total Compensation
Name of Person, Compensation from Fund Complex
Position from Portfolio Paid to Trustees
- -------------- -------------- -----------------
Philip W. Coolidge none none
Trustee
Charles P. Biggar $706 $12,500
Trustee
S. Leland Dill $706 $12,500
Trustee
Philip Saunders, Jr. none $12,500
Trustee
Bankers Trust reimbursed the Portfolio for a portion of their Trustees
fees for the period above. See INVESTMENT ADVISER and ADMINISTRATOR below.
INVESTMENT ADVISER
As described in the Fund's Prospectus, USAA Investment Management
Company is the Manager and investment adviser, providing the
services under the Management Agreement. The Manager, organized
in May 1970, has served as investment adviser and underwriter for
USAA Mutual Fund, Inc. from its inception.
In addition to the services it provides under the Management
Agreement, the Manager advises and manages the investments for
USAA and its affiliated companies as well as those of USAA
Investment Trust, USAA Tax Exempt Fund, Inc., USAA State Tax-Free
Trust, and USAA Life Investment Trust. As of the date of this
SAI, total assets under management by the Manager were
approximately $29 billion, of which approximately $17 billion
were in mutual fund portfolios.
Under the Management Agreement, the Manager presently
monitors the services provided by Bankers Trust to the Portfolio.
The Manager receives no fee for providing these monitoring
services. In the event the Fund's Board of Directors determines
it is in the best interests of the Fund's shareholders to
withdraw its investment in the Portfolio, the Manager would
become responsible for directly managing the assets of the Fund.
In such event, the Fund would pay the Manager an annual fee of
.10% of the Fund's ANA, accrued daily and paid monthly.
The Management Agreement will remain in effect until April
30, 1998 for the Fund and will continue in effect from year to
year thereafter for the Fund as long as it is approved at least
annually by a vote of the outstanding voting securities of the
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 Management 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 by the 1940 Act).
Under the terms of the Management Agreement, the Manager is
required to reimburse the Fund in the event that the total annual
expenses, inclusive of the management fees, but exclusive of the
interest, taxes, brokerage fees and extraordinary items, incurred
by the 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 the Fund. The Manager has
voluntarily agreed to limit the annual expenses of the Fund to
.18% of the Fund's ANA until May 1, 1997 and will reimburse the
Fund for all expenses in excess of such limitation. After May 1,
1997, any such waiver or reimbursement may be terminated by the
Manager at any time without prior notice to the shareholders.
Under the terms of the Portfolio's investment advisory
agreement with Bankers Trust (the Advisory Agreement), Bankers
Trust manages the Portfolio subject to the supervision and
direction of the Board of Trustees of the Portfolio. Bankers
Trust will: (i) act in strict conformity with the Portfolio's
Declaration of Trust, the 1940 Act and the Investment Advisers
Act of 1940, as the same may from time to time be
amended; (ii) manage the Portfolio in accordance with the
Portfolio's investment objective, restrictions and policies;
(iii) make investment decisions for the Portfolio; and (iv) place
purchase and sale orders for securities and other financial
instruments on behalf of the Portfolio.
Bankers Trust bears all expenses in connection with the
performance of services under the Advisory Agreement. The Fund
and the Portfolio each bear certain other expenses incurred in
its operation, including: taxes, interest, brokerage fees and
commissions, if any; fees of Trustees of the Portfolio or
Directors of the Company who are not officers, directors or
employees of Bankers Trust, SFG, the Manager or any of their
affiliates; SEC fees and state Blue Sky qualification fees;
charges of custodians and transfer and dividend disbursing
agents; certain insurance premiums; outside auditing and legal
expenses; costs of maintenance of corporate existence; costs
attributable to investor services, including, without limitation,
telephone and personnel expenses; costs of preparing and printing
prospectuses and statements of additional information for
regulatory purposes and for distribution to existing
shareholders; costs of shareholders' reports and meetings of
shareholders, officers and Trustees of the Portfolio or Directors
of the Company; and any extraordinary expenses.
For the years ended December 31, 1995, 1994 and 1993,
Bankers Trust earned $770,530, $428,346 and $74,893,
respectively, as compensation for investment advisory services
provided to the Portfolio. During the same periods, Bankers
Trust reimbursed $418,814, $249,230 and $72,112, respectively, to
the Portfolio to cover expenses.
Bankers Trust may have deposit, loan and other commercial
banking relationships with the issuers of obligations which may
be purchased on behalf of the Portfolio, including outstanding
loans to such issuers which could be repaid in whole or in part
with the proceeds of securities so purchased. Such affiliates
deal, trade and invest for their own accounts in such obligations
and are among the leading dealers of various types of such
obligations. Bankers Trust has informed the Portfolio that, in
making its investment decisions, it does not obtain or use
material inside information in its possession or in the
possession of any of its affiliates. In making investment
recommendations for the Portfolio, Bankers Trust will not inquire
or take into consideration whether an issuer of securities
proposed for purchase or sale by the Portfolio is a customer of
Bankers Trust, its parent or its subsidiaries or affiliates and,
in dealing with its customers, Bankers Trust, its parent,
subsidiaries and affiliates will not inquire or take into
consideration whether securities of such customers are held by
any fund managed by Bankers Trust or and such affiliate.
The Fund's prospectus contains disclosure as to the amount
of Bankers Trust's investment advisory and services fees,
including waivers thereof. Bankers Trust may not recoup any of
its waived investment advisory and services fees. Such waivers
by Bankers Trust shall stay in effect for at least 12 months.
ADMINISTRATOR
Under the terms of the Fund's administration agreement with the
Manager, the Manager is obligated on a continuous basis to
provide such administrative services as the Board of Directors of
the Company reasonably deems necessary for the proper
administration of the Fund. The Manager will generally assist in
all aspects of the Fund's operations; supply and maintain office
facilities, statistical and research data, data processing
services, clerical, accounting, bookkeeping and recordkeeping
services (including without limitation the maintenance of such
books and records as are required under the 1940 Act and the
rules thereunder, except as maintained by other agents), internal
auditing, executive and administrative services, and stationery
and office supplies; prepare reports to shareholders; prepare and
file tax returns; supply financial information and supporting
data for reports to and filings with the SEC and various state
Blue Sky authorities; supply supporting documentation for
meetings of the Board of Directors; provide monitoring reports
and assistance regarding compliance with its Articles of
Incorporation, by-laws, investment objectives and policies and
with Federal and state securities laws; arrange for appropriate
insurance coverage; calculate net asset values, net income and
realized capital gains or losses; and negotiate arrangements
with, and supervise and coordinate the activities of, agents and
others to supply services.
Pursuant to a sub-administration agreement between the
Manager and Investors Fiduciary Trust Company (IFTC) (the
Sub-Administration Agreement), IFTC performs such sub-administration
duties for the Fund as from time to time may be agreed upon by the
Manager and IFTC. The Sub-Administration Agreement provides that
IFTC will receive such compensation from Bankers Trust as from time
to time may be agreed upon by the Manager, Bankers Trust and IFTC.
Under the administration and services agreement between the
Portfolio and Bankers Trust, Bankers Trust is obligated on a
continuous basis to provide such administrative services as the
Board of Trustees of the Portfolio reasonably deems necessary for
the proper administration of the Portfolio. Bankers Trust will
generally assist in all aspects of the Portfolio's operations;
supply and maintain office facilities (which may be in Bankers
Trust's own offices), statistical and research data, data
processing services, clerical, accounting, bookkeeping and
recordkeeping services (including without limitation the
maintenance of such books and records as are required under the
1940 Act and the rules thereunder, except as maintained by other
agents), internal auditing, executive and administrative
services, and stationery and office supplies; prepare reports to
investors; prepare and file tax returns; supply financial
information and supporting data for reports to and filings with
the SEC and various state Blue Sky authorities; supply supporting
documentation for meetings of the Board of Trustees; provide
monitoring reports and assistance regarding compliance with its
Declaration of Trust, by-laws, investment objectives and policies
and with Federal and state securities laws; arrange for
appropriate insurance coverage; calculate net asset values, net
income and realized capital gains or losses; and negotiate
arrangements with, and supervise and coordinate the activities
of, agents and others to supply services.
Pursuant to a sub-administration agreement between Bankers
Trust and SFG (the Sub-Administration Contract), SFG performs
such sub-administration duties for the Portfolio as from time to
time may be agreed upon by Bankers Trust and SFG. The Sub-Administration
Contract provides that Signature will receive such compensation as
from time to time may be agreed upon by SFG and Bankers Trust. All
such compensation will be paid by Bankers Trust.
For the years ended December 31, 1995, 1994 and 1993, Bankers Trust
received $385,265, $214,173 and $37,446, respectively, in compensation
for administrative and other services provided to the Portfolio.
The Manager has agreed that if in any year the aggregate
expenses of the Fund (including fees pursuant to the investment
advisory agreement, but excluding interest, taxes, brokerage and,
if permitted by the relevant state securities commissions,
extraordinary expenses) exceed the expense limitation of any
state having jurisdiction over the Fund, the Manager will
reimburse the Fund for the excess expense to the extent required
by state law. As of the date of this SAI, the most restrictive
annual expense limitation applicable to the Fund is 2.5% of the
Fund's first $30 million of average annual net assets, 2.0% of
the next $70 million of average annual net assets and 1.5% of the
remaining average annual net assets.
GENERAL INFORMATION
Underwriter
The Company has an agreement with the Manager for exclusive
underwriting and distribution of the Funds' shares on a
continuing best efforts basis. This agreement provides that the
Manager will receive no fee or other compensation for such
distribution services.
Transfer Agent
USAA Shareholder Account Services performs transfer agent
services for the Company under a Transfer Agency Agreement.
Services include maintenance of shareholder account records,
handling of communications with shareholders, distribution of
Fund dividends, and production of reports with respect to account
activity for shareholders and the Company.
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 investment in the Portfolio. Bankers
Trust serves as custodian for both the Fund and the Portfolio.
As custodian, it holds both the Fund's and the Portfolio's
assets. Bankers Trust will comply with the self-custodian
provisions of Rule 17f-2 under the 1940 Act.
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. Willkie Farr &
Gallagher, One Citicorp Center, 153 East 53rd Street, New York,
New York 10022-4669, serves as counsel to the Portfolio.
Independent Accountant
Coopers & Lybrand L.L.P., 1100 Main Street, Suite 900, Kansas
City, Missouri 64105, has been selected as the Independent
Accountants for the Fund and the Portfolio.
Financial Statements
The Fund's commencement of operations is May 1, 1996, therefore,
this SAI does not include any financial statements of the Fund.
Audited Financial Statements as of December 31, 1995 of the Portfolio
are included on page 24 of the SAI.
CALCULATION OF PERFORMANCE DATA
Information regarding the total return of the Fund is provided
under Performance Information in its Prospectus. See Valuation
of Securities herein for a discussion of the manner in which the
Fund's price per share is calculated.
Total Return
The Fund may advertise performance in terms of average annual
total return for 1, 5 and 10 year periods, or for such lesser
periods as the Fund has 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, such
as the $10 annual account maintenance fee.
APPENDIX A - COMPARISON OF FUND PERFORMANCE
Occasionally, we may make comparisons in advertising and sales
literature between the Fund 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 indices 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 produced 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.
In addition to the sources above, performance of the Fund
may also be tracked by Lipper Analytical Services, Inc. The Fund
will be compared to Lipper's appropriate fund category according
to fund objective and portfolio holdings. The S&P 500 Index Fund
will be compared to funds in Lipper's S&P 500 Index Objective
category. Footnotes in advertisements and other marketing
literature will include the time period applicable for any
ranking used.
Other sources for total return and other performance data
which may be used by the 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 B - 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.
EQUITY 500 INDEX PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1995
Assets
Investments, at Value (Cost $882,615,151) $1,094,348,578
Cash 123,298
Dividends and Interest Receivable 1,956,933
Variation Margin Receivable 20,521
Prepaid Expenses and Other 6,237
--------------
Total Assets 1,096,455,567
--------------
Liabilities
Due to Bankers Trust 88,584
Payable for Securities Purchased 15,605,707
Accrued Expenses and Other 25,250
--------------
Total Liabilities 15,719,541
--------------
Net Assets $1,080,736,026
==============
Composition of Net Assets
Paid-in Capital $ 869,029,224
Net Unrealized Appreciation on Securities
and Futures Contracts 211,706,802
--------------
Net Assets, December 31, 1995 $1,080,736,026
==============
See Notes to Financial Statements
EQUITY 500 INDEX PORTFOLIO
STATEMENT OF OPERATIONS
For the year ended December 31, 1995
Investment Income
Dividends (net of foreign withholding
taxes of $126,152) $ 18,799,153
Interest 1,396,877
------------
Total Investment Income $ 20,196,030
------------
Expenses
Advisory 770,530
Administration and Services 385,265
Professional 26,713
Trustees 1,868
Miscellaneous 4,968
------------
Total Expenses 1,189,344
Less: Expenses Absorbed by Bankers Trust (418,814) 770,530
------------ ------------
Net Investment Income 19,425,500
------------
Net Realized and Unrealized Gain (Loss) on Securities and Futures
Net Realized Loss from Securities Transactions (275,120)
Net Realized Gain from Futures Transactions 4,963,019
Net Unrealized Appreciation on Securities 212,730,076
Net Unrealized Depreciation on Futures Contracts (4,393)
------------
Net Realized and Unrealized Gain on Securities and Futures 217,413,582
------------
Net Increase in Net Assets from Operations $236,839,082
============
See Notes to Financial Statements
EQUITY 500 INDEX PORTFOLIO
STATEMENTS OF CHANGES IN NET ASSETS
- ------------------------------------------------------------------------------
For the years ended December 31
1995 1994
-------------- --------------
Increase (Decrease) in Net Assets From:
Operations
Net Investment Income $ 19,425,500 $ 12,177,697
Net Realized Gain (Loss) from Securities
and Futures Transactions 4,687,899 (483,667)
Net Unrealized Appreciation (Depreciation)
on Securities and Futures Contracts 212,725,683 (4,936,075)
-------------- --------------
Net Increase in Net Assets from Operations 236,839,082 6,757,955
-------------- --------------
Capital Transactions
Proceeds from Capital Invested 474,637,337 529,295,851
Value of Capital Withdrawn (190,511,921) (128,087,609)
-------------- --------------
Net Increase in Net Assets from
Capital Transactions 284,125,416 401,208,242
-------------- --------------
Total Increase in Net Assets 520,964,498 407,966,197
Net Assets
Beginning of Year 559,771,528 151,805,331
-------------- --------------
End of Year $1,080,736,026 $ 559,771,528
============== ==============
FINANCIAL HIGHLIGHTS
Contained below are selected ratios and supplemental data for
each of the periods presented for the Equity 500 Index Portfolio.
December 31, 1992
For the year ended December 31, (Commencement
1995 1994 1993 of Operations)
---- ---- ---- --------------
Ratios and Supplemental Data
Ratio of Net Investment Income
to Average Net Assets 2.52% 2.84% 2.67% --
Ratio of Expenses to Average
Net Assets 0.10% 0.10% 0.10% --
Decrease Reflected in Above Ratio
of Expenses to Average Net
Assets Due to Absorption of
Expenses by Bankers Trust 0.05% 0.06% 0.10% --
Portfolio Turnover Rate 6% 21% 31% --
Net Assets, End of Period
(000s omitted) $1,080,736 $559,772 $151,805 $9,435
See Notes to Financial Statements
EQUITY 500 INDEX PORTFOLIO
Schedule of Portfolio Investments
December 31, 1995
Shares Description Value
- ------ ----------- -----
COMMON STOCKS - 98.43%
----------------------
Aerospace - 2.13%
81,042 Boeing $ 6,351,667
11,222 General Dynamics 663,501
47,610 Lockheed Martin 3,761,190
32,272 Loral 1,141,622
27,588 McDonnell Douglas 2,538,096
8,479 Northrop Grumman 542,656
54,914 Raytheon 2,594,686
49,424 Rockwell International 2,613,294
29,706 United Technologies 2,818,357
-----------
23,025,069
-----------
Airlines - 0.30%
19,202 AMR (a) 1,425,749
13,349 Delta Air Lines 986,157
31,900 Southwest Airlines 741,675
9,015 USAir Group (a) 119,449
-----------
3,273,030
-----------
Apparel, Textiles - 0.61%
1,493 Brown Group 21,275
18,003 Charming Shoppes 51,759
56,714 Coming 1,814,848
10,300 Fruit of the Loom (a) 251,063
17,603 Liz Clairborne 488,483
20,919 Melville 643,259
22,724 Nike, Cl. B 1,582,159
18,229 Reebok International Ltd. 514,969
4,611 Russell 127,955
8,204 Spring Industries, Cl. A 339,441
6,749 Stride Rite 50,617
14,515 V F 765,666
-----------
6,651,494
-----------
Auto Related - 2.45%
90,751 Chrysler 5,025,337
13,734 Cummins Engine 508,158
16,874 Dana 493,565
20,082 Eaton 1,076,897
9,844 Echlin 359,306
253,064 Ford Motor 7,338,856
176,084 General Motors 9,310,441
23,284 Genuine Parts 954,644
12,690 PACCAR 534,566
12,343 Parker-Hannifin 422,748
11,448 Timken 437,886
-----------
26,462,404
-----------
Banks - 5.89%
24,034 Ahmanson (H.F.) & Company 636,901
94,559 Banc One 3,569,602
26,567 Bank of Boston 1,228,724
49,900 Bank of New York 2,432,625
88,536 BankAmerica 5,732,706
19,397 Barnett Banks 1,144,423
30,754 Boatmen's Bancshares 1,257,070
44,294 Chase Manhattan 2,685,324
60,855 Chemical Banking 3,575,231
101,166 Citicorp 6,803,414
25,400 Comerica 1,019,175
27,064 Corestates Financial 1,025,049
76,036 First Chicago NBD 3,003,422
13,354 First Fidelity Bancorp 1,006,558
18,772 First Interstate Bancorp 2,562,378
30,923 First Union 1,720,092
10,817 Golden West Financial 597,639
31,984 Great Western Financial 815,592
58,200 KeyCorp 2,109,750
35,262 Mellon Bank 1,895,332
45,660 Morgan (J. P.) 3,664,215
31,200 National City 1,033,500
65,326 NationsBank 4,548,323
86,908 Norwest 2,867,964
25,080 Suntrust Banks 1,717,980
21,388 U.S. Bancorp 719,171
37,500 Wachovia 1,715,625
11,922 Wells Fargo 2,575,152
-----------
63,662,937
-----------
Beverages - 3.66%
60,640 Anheuser-Busch 4,055,300
8,219 Brown Forman, Cl. B 299,993
292,611 Coca-Cola 21,726,367
6,168 Coors (Adolph), Cl. B 136,467
184,847 PepsiCo 10,328,326
86,037 Seagram, ADR 2,979,031
-----------
39,525,484
-----------
Building & Construction - 0.76%
8,483 Armstrong World Industries 525,946
5,990 Centex 208,152
3,311 Crane 122,093
6,906 Fleetwood Enterprises 177,829
112,951 Home Depot 5,407,529
32,311 Masco 1,013,758
8,650 Owens-Corning Fiberglas (a) 388,169
6,565 Stanley Works 338,098
-----------
8,181,574
-----------
Building, Forest Products - 0.59%
8,203 Boise Cascade 284,029
25,028 Champion International 1,051,176
23,001 Georgia-Pacific 1,578,444
EQUITY 500 INDEX PORTFOLIO
Schedule of Portfolio Investments - continued
December 31, 1995
Shares Description Value
- ------ ----------- -----
8,977 Johnson Controls $ 617,169
2,045 Kaufman & Broad Home 30,419
19,858 Louisiana Pacific 481,556
4,901 Potlatch 196,040
49,294 Weyerhaeuser 2,131,966
-----------
6,370,799
-----------
Chemicals & Toxic Waste - 3.31%
24,304 Air Products & Chemical 1,282,036
63,540 Amgen (a) 3,772,687
62,276 Dow Chemical 4,382,673
130,396 Du Pont (E.I.) de Nemours 9,111,420
20,581 Eastman Chemical 1,288,885
6,050 FMC (a) 409,131
24,349 Grace (W. R.) 1,439,635
12,296 Great Lakes Chemical 885,312
26,314 Hercules 1,483,452
18,506 Mallinckrodt Group 600,260
27,844 Monsanto 3,410,890
32,006 Morton International 1,148,215
12,325 Nalco Chemical 371,291
49,442 PPG Industries 2,261,971
29,315 Praxair 985,717
8,438 Raychem 479,911
12,159 Rohm & Haas 782,736
7,500 Sigma-Aldrich 371,250
35,317 Union Carbide 1,324,388
-----------
35,791,860
-----------
Computer Services - 0.84%
40,100 3Com (a) 1,869,662
34,856 Automatic Data Processing 2,588,058
18,000 Cabletron Systems (a) 1,458,000
12,602 Ceridian (a) 519,832
45,600 CUC International (a) 1,556,100
41,300 Silicon Graphics (a) 1,135,750
-----------
9,127,402
-----------
Computer Software - 2.29%
64,900 Cisco Systems (a) 4,843,162
58,567 Computer Associates
International 3,330,998
138,700 Microsoft (a) 12,170,925
103,436 Oracle Systems (a) 4,383,101
-----------
24,728,186
-----------
Containers - 0.22%
11,015 Avery Dennison 552,127
3,054 Ball 83,985
23,850 Crown Cork & Seal (a) 995,738
21,649 Stone Container 311,204
11,022 Temple-Inland 486,346
-----------
2,429,400
-----------
Cosmetics & Toiletries - 0.73%
1,599 Alberto-Culver, Cl. B 54,965
17,314 Avon Products 1,305,043
105,008 Gillette 5,473,542
20,987 International Flavors
& Fragrance 1,007,376
-----------
7,840,926
-----------
Diversified - 1.06%
25,400 Loews 1,990,725
99,078 Minnesota Mining &
Manufacturing 6,563,917
4,781 NAACO Industries, Cl. A 265,345
19,064 Pall 512,345
13,420 Supervalu 422,730
8,857 Teledyne 226,961
22,003 Textron 1,485,203
-----------
11,467,226
-----------
Drugs - 6.79%
186,122 Abbott Laboratories 7,770,594
73,683 American Home Products 7,147,251
118,989 Bristol-Myers Squibb 10,218,180
129,970 Lilly (Eli) 7,310,813
287,497 Merck & Co. 18,902,928
149,404 Pfizer 9,412,452
119,632 Pharmacia & Upjohn 4,635,740
87,258 Schering-Plough 4,777,375
32,543 Warner-Lambert 3,160,739
-----------
73,336,072
-----------
Electrical Equipment - 4.22%
389,222 General Electric 28,023,984
8,272 General Signal 267,806
10,765 Grainger (W.W.) 713,181
120,070 Hewlett-Packard 10,055,863
29,123 ITT (a) 1,543,519
30,523 ITT Hartford Group (a) 1,476,550
27,823 ITT Industries 667,752
33,832 Tyco International 1,205,265
102,910 Westinghouse Electric 1,698,015
-----------
45,651,935
-----------
Electronics - 3.64%
29,841 Advanced Micro Devices 492,377
53,373 AMP 2,048,189
43,900 Applied Materials (a) 1,728,562
26,690 DSC Communications (a) 1,094,819
53,400 Emerson Electric 4,365,450
7,771 Harris 424,491
192,514 Intel 10,925,169
33,100 LSI Logic (a) 1,084,025
50,500 Micron Technology 2,001,062
EQUITY 500 INDEX PORTFOLIO
Schedule of Portfolio Investments - continued
December 31, 1995
Shares Description Value
- ------ ----------- -----
139,042 Motorola $ 7,925,394
33,226 National Semiconductor (a) 739,279
61,501 Northern Telecom 2,644,543
6,125 Perkin-Elmer 231,219
11,938 Scientific-Atlanta 179,070
3,738 Tektronix 183,629
45,828 Texas Instruments 2,371,599
3,500 Thomas & Betts 258,125
6,027 Trinova 172,523
8,459 Western Atlas (a) 427,180
-----------
39,296,705
-----------
Environmental Control - 0.52%
53,035 Browning-Ferris Industries 1,564,532
41,100 Laidlaw, Cl. B 421,275
7,326 Safety-Kleen 114,469
116,658 WMX Technologies 3,485,158
-----------
5,585,434
-----------
Financial Services - 3.84%
114,966 American Express 4,756,718
9,652 Beneficial 450,024
41,374 Dean Witter, Discover 1,944,578
43,256 Federal Home Loan Mortgage 3,611,876
64,141 Federal National Mortgage 7,961,502
31,900 First Bank System 1,583,037
53,400 First Data 3,571,125
63,544 Fleet Financial Group 2,589,447
24,558 Household International 1,451,992
36,030 MBNA 1,328,606
42,838 Merrill Lynch 2,184,738
19,400 Morgan Stanley Group 1,564,125
78,033 PNC Banc Corp 2,516,564
9,300 Republic New York 577,763
19,033 Salomon 675,672
75,073 Travelers Group 4,720,215
-----------
41,487,982
-----------
Food Service, Lodging - 0.94%
29,419 Darden Restaurants 349,351
11,912 Hilton Hotels 732,588
6,851 Luby's Cafeterias 152,435
26,590 Marriott International 1,017,068
163,914 McDonald's 7,396,619
21,182 Ryan's Family Steak
House (a) 148,274
4,809 Shoney's (a) 49,292
16,162 Wendy's International 343,442
-----------
10,189,069
-----------
Foods - 3.42%
129,055 Archer-Daniels-Midland 2,322,990
56,169 Campbell Soup 3,370,140
54,716 ConAgra 2,257,035
33,430 CPC International 2,294,134
38,719 General Mills 2,236,022
89,075 Heinz (H.J.) 2,950,609
14,197 Hershey Foods 922,805
49,707 Kellogg 3,839,866
21,800 Pioneer Hi-Bred
International 1,212,625
17,396 Premark International 880,672
34,384 Quaker Oats 1,186,248
23,005 Ralston Purina Group 1,434,937
115,687 Sara Lee 3,687,523
40,410 Sysco 1,313,325
37,917 Unilever N.V., ADR 5,336,818
18,127 Whitman 421,453
24,192 Wrigley (Wm) Jr. 1,270,080
-----------
36,937,282
-----------
Forest Products & Paper - 1.11%
5,731 Bemis 146,857
13,133 Federal Paper Board 681,275
61,928 International Paper 2,345,523
13,835 James River 333,769
65,965 Kimberly-Clark 5,458,640
13,751 Mead 718,490
17,703 Union Camp 843,106
23,560 Westvaco 653,790
13,700 Willamette Industries 770,625
-----------
11,952,075
-----------
Hospital Supplies & Healthcare - 3.30%
9,501 Allergan 308,783
14,634 Alza, Cl. A (a) 362,192
9,477 Bard (C.R.) 305,633
11,023 Bausch & Lomb 436,786
65,963 Baxter International 2,762,200
14,866 Becton, Dickinson 1,114,950
22,582 Beverly Enterprises (a) 239,934
17,050 Blomet (a) 304,769
34,900 Boston Scientific (a) 1,710,100
105,515 Columbia/HCA Healthcare 5,354,886
6,417 Community Psychiatric
Centers 78,608
41,600 Humana (a) 1,138,800
151,548 Johnson & Johnson 12,976,297
9,160 Manor Care 320,600
55,852 Medtronic 3,120,731
7,374 Shared Medical Systems 400,961
18,919 St. Jude Medical (a) 813,517
42,510 Tenet Healthcare (a) 882,083
42,200 United Healthcare 2,764,100
10,248 U.S. Surgical 219,051
-----------
35,614,981
-----------
EQUITY 500 INDEX PORTFOLIO
Schedule of Portfolio Investments - continued
December 31, 1995
Shares Description Value
- ------ ----------- -----
Household Furnishings - 0.18%
17,512 Maytag $ 354,618
28,958 Newell 749,288
16,439 Whirlpool 875,377
-----------
1,979,283
-----------
Household Products - 0.08%
35,502 Rubbermaid 905,301
-----------
Insurance - 3.25%
28,013 Aetna Life & Casualty 1,939,900
7,509 Alexander & Alexander
Services 142,671
107,250 Allstate 4,410,656
45,554 American General 1,588,696
111,167 American International
Group 10,282,947
21,336 Chubb 2,064,258
18,633 CIGNA 1,923,857
19,678 General Re 3,050,090
15,577 Jefferson-Pilot 724,354
22,110 Lincoln National 1,188,413
14,262 Marsh & McLennan 1,265,753
19,298 Providian 786,394
34,202 SAFECO 1,179,969
16,530 St. Paul 919,481
12,134 Torchmark 549,064
13,500 UNUM 742,500
13,917 USF & G 234,849
13,030 USLIFE 389,271
38,000 U.S. HealthCare 1,767,000
-----------
35,150,123
-----------
Leisure Related - 1.11%
20,114 American Greetings 555,649
4,093 Bally Entertainment (a) 57,302
21,442 Brunswick 514,608
123,173 Disney (Walt) 7,267,207
15,839 Handleman 91,074
13,239 Harcourt General 554,383
25,815 Harrah's Entertainment (a) 626,014
17,825 Hasbro 552,575
1,239 Jostens 30,046
55,052 Mattel 1,692,849
3,618 Outboard Marine 73,717
-----------
12,015,424
-----------
Machinery - 1.63%
67,906 AlliedSignal 3,225,535
16,271 Black & Decker 573,553
11,182 Briggs & Stratton 485,019
48,282 Caterpillar 2,836,568
3,647 Cincinnati Milacron 95,734
23,148 Cooper Industries 850,689
64,323 Deere 2,267,386
22,404 Dover 826,147
46,882 Dresser Industries 1,142,749
20,230 Echo Bay Mines Ltd. 209,886
16,847 Giddings & Lewis 277,975
5,522 Harnischfeger Industries 183,606
25,596 Illinois Tool Works 1,510,164
23,431 Ingersoll-Rand 823,014
6,992 Millipore 287,546
11,958 Navistar International (a) 125,559
7,196 Snap-On 325,619
17,586 TRW 1,362,915
7,262 Varity (a) 269,602
-----------
17,679,266
-----------
Metals - 1.58%
52,336 Alcan Aluminium 1,628,958
43,300 Aluminum Company
of America 2,289,488
15,835 Armco (a) 93,031
8,049 ASARCO 257,568
86,100 Barrick Gold 2,270,887
19,749 Bethlehem Steel (a) 276,486
20,994 Cyprus Amax Minerals 548,468
24,108 Engelhard 524,349
34,600 Freeport-McMoran
Copper & Gold 973,125
24,843 Homestake Mining 388,172
26,166 Inco Ltd. 870,019
6,103 Inland Steel Industries 153,338
22,334 Newmont Mining 1,010,613
22,194 Nucor 1,267,832
5,831 Ogden 124,638
17,808 Phelps Dodge 1,108,548
59,804 Placer Dome 1,442,772
12,749 Reynolds Metals 721,912
21,408 Santa Fe Pacific Gold 259,572
18,977 USX-U.S. Steel Group 583,543
13,179 Worthington Industries 274,288
-----------
17,067,607
-----------
Office Equipment & Computers - 2.94%
23,262 Alco Standard 1,061,329
37,057 Amdahl (a) 314,984
31,742 Apple Computer 1,011,776
14,114 Autodesk 483,404
63,913 Compaq Computer (a) 3,067,824
9,286 Computer Sciences (a) 652,341
5,068 Cray Research (a) 125,433
6,045 Data General (a) 83,119
EQUITY 500 INDEX PORTFOLIO
Schedule of Portfolio Investments - continued
December 31, 1995
Shares Description Value
- ------ ----------- -----
36,632 Digital Equipment (a) $ 2,349,027
25,019 Honeywell 1,216,549
9,046 Intergraph (a) 142,475
131,441 International Business
Machines 12,059,712
13,879 Moore 258,496
93,292 Novell (a) 1,329,411
32,898 Pitney Bowes 1,546,206
46,328 Sun Microsystems (a) 2,113,715
21,460 Tandem Computers (a) 228,013
30,099 Unisys (a) 169,307
25,745 Xerox 3,527,065
-----------
31,740,186
-----------
Oil Related - 9.33%
21,993 Amerada Hess 1,165,629
116,802 Amoco 8,395,144
11,687 Ashland 410,506
38,225 Atlantic Richfield 4,233,419
37,144 Baker Hughes 905,385
32,000 Burlington Resources 1,256,000
153,466 Chevron 8,056,965
19,466 Coastal 725,108
289,557 Exxon 23,200,755
19,081 Fluor 1,259,346
4,738 Foster Wheeler 201,365
28,890 Halliburton 1,462,556
2,808 Helmerich & Payne 83,538
9,532 Kerr-McGee 605,282
8,062 Louisiana Land & Exploration 345,658
9,187 McDermott International 202,114
92,771 Mobil 10,390,352
16,728 Noram Energy 148,461
78,914 Occidental Petroleum 1,686,787
16,579 Oryx Energy (a) 221,744
7,654 Pennzoil 323,381
63,906 Phillips Petroleum 2,180,792
16,500 Rowan (a) 162,938
125,201 Royal Dutch Petroleum 17,668,991
8,269 Santa Fe Energy
Resources (a) 79,589
57,681 Schlumberger 3,994,409
18,745 Sun 513,144
44,234 Tenneco 2,195,112
62,661 Texaco 4,918,889
61,137 Unocal 1,780,615
56,064 USX-Marathon Group 1,093,248
22,012 Williams 965,777
-----------
100,832,999
-----------
Photography & Optical - 0.54%
81,026 Eastman Kodak 5,428,742
9,282 Polaroid 439,735
-----------
5,868,477
-----------
Printing & Publishing - 1.41%
13,991 Deluxe 405,739
17,572 Dow Jones 700,684
41,179 Dun & Bradstreet 2,666,340
34,296 Gannett 2,104,917
3,804 Harland (John H.) 79,409
13,863 Knight-Ridder 866,438
13,115 McGraw-Hill 1,142,645
4,736 Meredith 198,320
17,684 New York Times, Cl. A 523,888
33,252 RR Donnelley & Sons 1,309,297
92,715 Time Warner 3,511,581
28,829 Times Mirror, Cl. A 976,582
12,898 Tribune 788,390
-----------
15,274,230
-----------
Professional Services - 0.47%
14,736 Dial 436,554
7,800 Ecolab 234,000
8,825 EG&G 214,007
26,835 H & R Block 1,086,818
14,707 Interpublic Group 637,916
7,526 National Service Industries 243,654
26,596 Service Corp International 1,170,224
13,743 Transamerica 1,001,521
-----------
5,024,694
-----------
Railroads - 1.08%
34,262 Burlington Northern 2,672,436
20,672 Conrail 1,447,040
44,432 CSX 2,027,210
28,051 Norfolk Southern 2,226,548
49,347 Union Pacific 3,256,902
-----------
11,630,136
-----------
Real Estate - 0.04%
11,666 Pulte 392,269
-----------
Retail - 4.03%
61,902 Albertson's 2,035,028
40,118 American Stores 1,073,156
23,646 Circuit City Stores 653,221
16,936 Dayton Hudson 1,270,200
26,597 Dillard Department
Stores, Cl. A 758,014
EQUITY 500 INDEX PORTFOLIO
Schedule of Portfolio Investments - continued
December 31, 1995
Shares Description Value
- ------ ----------- -----
51,000 Federated Department
Stores (a) $ 1,402,500
6,279 Fleming 129,504
35,907 Gap 1,508,094
19,193 Giant Food, Cl. A 604,579
5,125 Great Atlantic & Pacific 117,875
54,150 J.C. Penney 2,578,894
123,003 Kmart 891,772
22,260 Kroger (a) 834,750
89,712 Limited 1,558,746
6,113 Longs Drug Stores 292,660
37,994 Lowe's 1,272,799
57,198 May Department Stores 2,416,615
5,830 Mercantile Stores 269,637
18,729 Nordstrom 758,525
8,612 Pep Boys-Manny,
Moe & Jack 220,683
44,199 Price/Costco (a) 674,035
18,501 Rite Aid 633,659
93,209 Sears, Roebuck 3,635,151
16,037 Sherwin-Williams 653,508
11,483 Tandy 476,545
12,554 TJX 236,957
68,318 Toys 'R' Us (a) 1,485,917
53,734 Walgreen 1,605,303
537,648 Wal-Mart Stores 12,029,874
31,880 Winn-Dixie Stores 1,175,575
25,222 Woolworth 327,886
-----------
43,581,662
-----------
Soaps & Toiletries - 1.53%
9,952 Clorox 712,812
35,251 Colgate-Palmolive 2,476,383
160,570 Procter & Gamble 13,327,310
-----------
16,516,505
-----------
Telecommunications - 9.99%
118,835 Airtouch Communications (a) 3,357,089
40,500 Alltel 1,194,750
130,452 Ameritech 7,696,668
9,123 Andrew (a) 348,955
371,206 AT&T 24,035,588
103,139 Bell Atlantic 6,897,420
233,032 BellSouth 10,136,892
36,580 Capital Cities/ABC 4,513,057
50,362 Comcast, Cl. A 915,959
227,336 GTE 10,002,784
10,106 King World Productions (a) 392,871
161,420 MCI Communications 4,217,097
101,900 NYNEX 5,502,600
102,635 Pacific Telesis Group 3,451,102
143,262 SBC Communications 8,237,565
80,582 Sprint 3,213,207
138,116 Tele-Communications,
Cl. A (a) 2,745,055
23,400 Tellabs (a) 865,800
114,928 U S West 2,183,632
112,328 U S West Communications
Group 4,015,726
85,149 Viacom, Cl. B (a) 4,033,934
-----------
107,957,751
-----------
Tire & Rubber - 0.22%
3,926 B.F. Goodrich 267,459
14,951 Cooper Tire & Rubber 368,168
38,036 Goodyear Tire & Rubber 1,725,884
-----------
2,361,511
-----------
Tobacco - 1.95%
45,674 American Brands 2,038,203
194,966 Philip Morris 17,644,423
42,107 UST 1,405,321
-----------
21,087,947
-----------
Trucking, Shipping - 0.24%
14,392 Consolidated Freightways 381,388
12,275 Federal Express (a) 906,815
7,338 Pittston Services Group 230,230
7,382 Roadway Services 360,796
25,217 Ryder System 624,121
6,040 Yellow 74,745
-----------
2,578,095
-----------
Utilities - 4.21%
41,310 American Electric Power 1,673,055
30,625 Baltimore Gas & Electric 872,812
33,228 Carolina Power & Light 1,146,366
36,430 Central & South West 1,015,487
33,122 CINergy 1,014,361
9,135 Columbia Gas System (a) 400,798
51,536 Consolidated Edison 1,649,152
17,005 Consolidated Natural Gas 771,602
28,276 Detroit Edison 975,522
37,906 Dominion Resources 1,563,622
42,787 Duke Power 2,027,034
4,142 Eastern Enterprises 146,005
62,266 Enron 2,373,891
11,424 ENSERCH 185,640
56,607 Entergy 1,655,755
45,594 FPL Group 2,114,422
23,900 General Public Utilities 812,600
65,556 Houston Industries 1,589,733
43,142 Niagara Mohawk Power 415,242
8,469 NICOR 232,898
EQUITY 500 INDEX PORTFOLIO
Schedule of Portfolio Investments - continued
December 31, 1995
Shares Description Value
- ------ ----------- -----
13,644 Northern States Power $ 670,262
25,584 Ohio Edison 601,224
13,591 ONEOK 310,894
31,900 P P & L Resources 797,500
12,268 Pacific Enterprises 346,571
101,005 Pacific Gas & Electric 2,866,017
61,689 PacifiCorp 1,310,891
36,958 Panhandle Eastern 1,030,204
46,484 PECO Energy 1,400,330
5,755 People's Energy 182,721
60,394 Public Service
Enterprise Group 1,849,566
109,570 SCEcorp 1,944,867
19,710 Sonat 702,169
158,958 Southern 3,914,341
55,465 Texas Utilities 2,280,998
53,225 Unicom 1,743,119
21,220 Union Electric 885,935
-----------
45,473,606
-----------
Total Common Stocks
(Cost $852,011,555) $1,063,706,398
-------------
PREFERRED STOCK
NON-CONVERTIBLE - 0.00%
Diversified - 0.00%
88 Teledyne (Cost $1,320) $ 1,265
------------
Principal
Amount Description Value
- --------- ----------- -----
BOND - 0.00%
$ 33,000 Viacom International 8.00%,
7/7/06 (Cost $28,638) $ 33,722
-----------
U.S. TREASURY BILLS - 2.83%
$ 1,590,000 5.310%, 1/11/96 (b) $ 1,587,665
3,875,000 5.465%, 2/22/96 3,845,161
2,110,000 5.340%, 2/29/96 2,094,295
12,997,000 5.310%, 3/07/96 12,887,231
8,303,000 5.200%, 5/16/96 8,152,505
2,078,000 5.330%, 5/16/96 2,040,336
-----------
Total U.S. Treasury Bills
(Cost $30,573,638) $ 30,607,193
------------
Total Investments
(Cost $882,615,151) 101.26% $1,094,348,578
Liabilities in Excess of
Other Assets (1.26%) (13,612,552)
--------------
Net Assets 100.00% $1,080,736,026
==============
- ------------
(a) Non-income producing security
(b) Held as collateral for futures contracts
EQUITY 500 INDEX PORTFOLIO
Notes To Financial Statements
- --------------------------------------------------------------------------
December 31, 1995
Note 1 - Organization and Significant Accounting Policies
A. Organization
The Equity 500 Index Portfolio (the Portfolio) is registered
under the Investment Company Act of 1940, as amended, as
an open-end management investment company. The Portfolio was
organized on December 11, 1991 as an unincorporated trust under
the laws of New York and commenced operations on December 31,
1992. The Declaration of Trust permits the Board of Trustees (the
Trustees) to issue beneficial interests in the Portfolio.
B. Security Valuation
The Portfolio's investments are valued each business day by an
independent pricing service (the Service) approved by the
Trustees. Securities traded on national exchanges or traded in
the NASDAQ National Market System are valued at the last sales
prices reported at the close of business each day.
Over-the-counter securities not included in the NASDAQ National
Market System and listed securities for which no sale was
reported are valued at the mean of the bid and asked prices.
Short-term obligations with remaining maturities of 60 days or
less are valued at amortized cost which with accrued interest
approximates value. Securities for which quotations are not
available are stated at fair value as determined by the Trustees.
C. Security Transactions and Investment Income
Security transactions are accounted for on a trade date basis
(date the order to buy or sell is executed). Dividend income is
recorded on the ex-dividend date. Interest income is recorded on
the accrual basis and includes amortization of premium and
discount on investments. Realized gains and losses from
securities transactions are recorded on the identified cost
basis.
All of the net investment income and realized and unrealized
gains and losses from the security transactions of the Portfolio
are allocated pro rata among the investors in the Portfolio at
the time of such determination.
D. The portfolio may enter into financial futures contracts which
are contracts to buy a standard quantity of securities at a
specified price on a future date. The Portfolio is required to
deposit either in cash or securities an amount equal to a certain
percentage of the contract amount. Subsequent payments are made
or received by the portfolio each day, dependent on the daily
fluctuations in the value of the underlying security, and are
recorded for financial statement purposes as unrealized gains or
losses by the portfolio. The Portfolio's investment in the
financial futures contracts is designed to hedge against
anticipated future changes in general market prices which
otherwise might either adversely affect the value of securities
held by the Portfolio, the prices of securities which are
intended to be purchased at a later date for the Portfolio or to
closely replicate the benchmark index used by the portfolio.
Should the portfolio prices move unexpectedly, the portfolio may
not achieve the anticipated benefits of the financial futures
contracts and may realize a loss.
Futures contracts are valued at the settlement price established
each day by the board of trade or exchange on which they are
traded.
E. Federal Income Taxes
It is the Portfolio's policy to comply with the requirements of
the Internal Revenue Code. Therefore, no federal income tax
provision is required.
F. Other
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that may affect the reported
amounts in the financial statements.
Note 2 - Fees and Transactions with Affiliates
The Portfolio has entered into an Administration and Services
Agreement with Bankers Trust Company (Bankers Trust). Under
this Administration and Services Agreement, Bankers Trust
provides administrative, custody, transfer agency and shareholder
services to the Portfolio in return for a fee computed daily and
paid monthly at an annual rate of 0.05 of 1% of the Portfolio's
average daily net assets. For the year ended December 31, 1995,
this fee aggregated $385,265.
Equity 500 Index Portfolio
Notes To Financial Statements
- -------------------------------------------------------------------------
December 31, 1995
The Portfolio has entered into an Advisory Agreement with Bankers
Trust. Under this Advisory Agreement, the Portfolio pays Bankers
Trust an advisory fee computed daily and paid monthly at an
annual rate of 0.10 of 1% of the Portfolio's average daily net
assets. For the year ended December 31, 1995, this fee aggregated $770,530.
Bankers Trust has voluntarily undertaken to waive and reimburse
expenses of the Portfolio, to the extent necessary, to limit all
expenses to 0.10 of 1% of the average daily net assets of the
Portfolio. For the year ended December 31, 1995, expenses of the
Portfolio have been reduced by $418,814.
Certain trustees and officers of the Portfolio are also
directors, officers and/or employees of Signature. None of the
trustees so affiliated received compensation for services as
trustee of the Portfolio. Similarly, none of the Portfolio's
officers received compensation from the Portfolio.
Note 3 - Purchases and Sales of Investment Securities
The aggregate cost of purchases and proceeds from sales of
investments, other than short-term obligations, for the year
ended December 31, 1995 were $361,509,575 and $46,402,840,
respectively. The cost of investments for federal income tax
purposes was $888,890,700. The aggregate gross unrealized
appreciation for all investments was $217,720,061 and the aggregate
gross unrealized depreciation for all investments was $12,262,183.
Note 4 - Futures Contracts
A summary of obligations under these financial instruments at
December 31, 1995 is as follows:
Type of Unrealized
Future Expiration Contracts Position Depreciation
- ------- ---------- --------- -------- ------------
S&P 500 March 1996 43 Long $(26,625)
Futures
Index
At December 31, 1995, the Portfolio has segregated sufficient
securities to cover margin requirements on open futures contracts.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees and Holders of Beneficial
Interest of the Equity 500 Index Portfolio
We have audited the accompanying statement of assets and
liabilities of the Equity 500 Index Portfolio, including the
schedule of portfolio investments, as of December 31, 1995, and
the related statement of operations for the year then ended, the
statements of changes in net assets for each of the two years in
the period then ended, and the financial highlights for each of
the three years in the period then ended and for the period
December 31, 1992 (commencement of operations). These financial
statements and financial highlights are the responsibility of the
Portfolio's management. Our responsibility is to express an
opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements and financial highlights are free of
material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the
financial statements. Our procedures included confirmation of
securities owned as of December 31, 1995 by correspondence with
the custodian and brokers. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements and financial highlights
referred to above present fairly, in all material respects, the
financial position of the Equity 500 Index Portfolio as of
December 31, 1995, the results of its operations, the changes in
its net assets, and the financial highlights for the periods
referred to above, in conformity with generally accepted
accounting principles.
Coopers & Lybrand L.L.P.
Kansas City, Missouri
February 13, 1996
28083-0596
