PROSPECTUS
AUGUST 1, 1997
[USAA EAGLE LOGO]
USAA
SCIENCE &
TECHNOLOGY FUND
Shares of this fund are not deposits or other obligations of, or guaranteed by,
the USAA Federal Savings Bank, are not insured by the FDIC or any other
Government Agency, are subject to investment risks, and may lose value.
AS WITH OTHER MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR
DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION (SEC) NOR HAS THE SEC
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
THE FUND IS A NO-LOAD MUTUAL FUND OFFERED BY USAA INVESTMENT MANAGEMENT COMPANY.
USAA WILL SEEK LONG-TERM CAPITAL APPRECIATION BY INVESTING THE FUND'S ASSETS IN
EQUITY SECURITIES OF COMPANIES EXPECTED TO BENEFIT FROM THE DEVELOPMENT AND USE
OF SCIENTIFIC AND TECHNOLOGICAL ADVANCES AND IMPROVEMENTS.
TABLE OF CONTENTS
Who Manages the Fund?............................................ 2
What is the Investment Objective?................................ 2
Will the Value of Your Investment Fluctuate?..................... 2
Is This Fund for You?............................................ 2
How Do You Buy?.................................................. 2
Fees and Expenses................................................ 3
Performance Information.......................................... 4
A Word About Risk................................................ 4
Fund Investments................................................. 4
Fund Management.................................................. 6
Using Mutual Funds in an Investment Program...................... 7
How to Invest ................................................... 8
Important Information About Purchases and Redemptions............ 10
Exchanges........................................................ 11
Shareholder Information.......................................... 12
Description of Shares............................................ 13
Appendix A....................................................... 14
USAA Family of No-Load Mutual Funds.............................. 15
1
<PAGE>
THis prospectus provides you with information you should know before you invest
in the fund. Please read it and keep it for future reference.
WHO MANAGES THE FUND?
USAA Investment Management Company manages the Fund. For easier reading,
USAA Investment Management Company will be referred to as "we" throughout
the Prospectus.
WHAT IS THE INVESTMENT OBJECTIVE?
The Fund's investment objective is long-term capital appreciation. See FUND
INVESTMENTS on page 4 for more information.
WILL THE VALUE OF YOUR INVESTMENT FLUCTUATE?
Yes, it will. The value of your investment will increase or decrease. The
Fund's portfolio consists of companies whose value is highly dependent on
scientific and technological developments. Many of the products and
services of these companies are subject to short life cycles and
competitive pressures. Therefore, the market value of the Fund's portfolio
and the Fund's price per share are likely to fluctuate significantly.
IS THIS FUND FOR YOU?
This fund might be appropriate as part of your investment portfolio if. . .
X You are looking for significant growth.
X You are willing to accept very high risk.
X You are looking for a long-term investment.
This fund may NOT be appropriate as part of your investment portfolio
if . . .
X You need a steady income.
X You are unwilling to take a greater risk for long-term goals.
X You may need your money back within seven years.
X You need an investment that provides tax-free income.
If you feel this fund is not the one for you, refer to page 15 for a
complete list of the USAA Family of No-Load Mutual Funds.
HOW DO YOU BUY?
You may make your initial investment directly by mail, in person or, in
certain instances, by telephone. The minimum initial investment is $3,000
[$500 for Uniform Gifts/Transfers to Minors Act (UGMA/UTMA) accounts and
$250 for IRAs] and can be made by check or by wire. There is more
information about how to purchase Fund shares on page 8.
2
<PAGE>
FEES AND EXPENSES
This summary provides information to assist you in understanding the
expenses you will pay directly or indirectly to invest in the Fund.
Shareholder Transaction Expenses -- Fees You Pay Directly
There are no fees charged to your account when you buy, sell, or hold Fund
shares. However, if you sell shares and request your money by wire
transfer, you will pay a $10 fee. (Your bank may also charge a fee for
receiving wires.)
Annual Fund Operating Expenses -- Fees You Pay Indirectly
Unlike shareholder transaction charges, the Fund's expenses are not charged
directly to your account, but instead are paid out of the Fund's assets and
are reflected in the Fund's share price and dividends. "Other Expenses"
such as custodian and transfer agent fees have been estimated for the
Fund's first year of operation. The figures below are calculated as a
percentage of average net assets.
Management Fees .75%
12b-1 Fees None
Other Expenses (estimated) .72%
---
Total Fund Operating Expenses 1.47%
====
* 12B-1 FEES -- SOME MUTUAL FUNDS CHARGE THESE FEES TO PAY FOR THE COSTS
OF SELLING FUND SHARES.
Example of Effect of Fund Operating Expenses
You would pay the following expenses on a $1,000 investment in the Fund,
assuming (1) 5% annual return and (2) redemption at the end of the periods
shown.
1 year..................... $ 15
3 years.................... 47
THIS EXAMPLE IS NOT A REPRESENTATION OF PAST OR FUTURE EXPENSES AND ACTUAL
EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
3
<PAGE>
PERFORMANCE INFORMATION
(Tel)
TouchLINE(R)
1-800-531-8777
PRESS
(1)
THEN
(1)
THEN
(3) (1) (#)
Please consider performance information in light of the Fund's investment
objective and policies and market conditions during the reported time periods.
Remember, historical performance may not be repeated in the future. The value of
your shares may go up or down. For the most current price and return information
for this Fund, you may call TouchLINE(R) at 1-800-531-8777. Press 1 for the
Mutual Fund Menu, press 1 again for prices and returns. Then, press 31 followed
by the pound sign when asked for a Fund Code.
You may see the Fund's total return quoted in advertisements and reports. All
mutual funds must use the same formula to calculate total return. Total return
measures the price change in a share assuming the reinvestment of all dividends
and distributions of capital gains. You may also see a comparison of the Fund's
performance to that of other mutual funds with similar investment objectives and
to stock or relevant indexes.
A WORD ABOUT RISK
Portions of this Prospectus describe the risks you will face as an investor
in the Fund. Keep in mind that generally investments with a higher
potential reward are accompanied by a higher risk of losing money. The
reverse is also generally true: the lower the potential reward, the lower
the risk. However, as you consider an investment in the Fund, you should
also take into account your tolerance for the daily fluctuations of the
stock market and whether you can afford to leave your money in this
investment for long periods of time to ride out down periods.
[CAUTION LIGHT]
Look for this symbol throughout the Prospectus. We use it to mark detailed
information about the main risks that you will face as a shareholder of the
Fund.
FUND INVESTMENTS
Investment Policies and Risks
Q What is the Fund's investment policy?
A Under normal conditions, we will invest at least 80% of the Fund's
assets in equity securities that we expect will benefit from the
development and use of scientific and technological advances and
improvements. Most of these assets will be invested in U.S.
securities; however, we may also invest the Fund's assets in foreign
securities when they are in line with the Fund's investment
objective. For convenience, this Prospectus refers to common stocks,
preferred stocks, convertible securities, and securities which carry
the right to buy common stocks collectively as "equity securities."
4
<PAGE>
As a temporary defensive measure, we may invest up to 100% of the
Fund's assets in high-quality, short-term debt instruments.
Q In what industries will we invest the Fund's assets?
A We will invest at least 80% of the Fund's assets in industries such
as, but not limited to, biotechnology, computer hardware, software
and services, communication and telecommunication equipment and
services, electronics, health care, drugs, medical products and
supplies, specialized health care services, aerospace and defense,
and other industries that we believe may benefit indirectly from
research and development in the science and technology fields. We
may invest the Fund's remaining assets in any other industry.
Q What are the Fund's potential risks?
A Some of the potential risks of investing in this Fund include:
[CAUTION LIGHT]
INDUSTRY RISK. A mutual fund portfolio consisting of investments related to
the fields of science and technology is likely to be more volatile than a
portfolio that is more widely diversified in other economic sectors. Because
of the competitiveness and rapid changes in the fields of science and
technology, many of the companies in the Fund's portfolio are subject to
distinctive risks. The products and services of these companies may not be
economically successful or may quickly become outdated. In addition, many of
these companies must comply with significant governmental regulations and
may need governmental approval of their products and services.
[CAUTION LIGHT]
MARKET RISK. Because this Fund invests in equity securities, it is subject
to market risk. Stock prices in general may decline over short or even
extended periods, regardless of the success or failure of individual
companies' operations. The stock market tends to run in cycles, with periods
when stock prices generally go up and periods when stock prices generally go
down. Equity securities tend to go up and down more than bonds.
[CAUTION LIGHT]
FOREIGN INVESTING. Investing in foreign securities poses unique risks:
currency exchange rate fluctuations, foreign market illiquidity, increased
price volatility, exchange control regulations, foreign ownership limits,
different accounting, reporting and disclosure requirements, and
difficulties in obtaining legal judgments. In the past, equity and debt
instruments of foreign markets have been more volatile than equity and debt
instruments of U.S. securities markets.
We will not generally trade the Fund's assets in securities for short-term
profits; however, if circumstances warrant, we may purchase and sell
securities without regard to the length of time held. The Fund's portfolio
turnover rate will vary from year to year depending on market conditions,
and is not expected to exceed 150%. A high turnover rate increases
transaction costs and may increase taxable capital gains; therefore, we
will carefully weigh the anticipated benefits of trading.
For additional information about other investments in which we may invest
the Fund's assets, see Appendix A on page 14.
5
<PAGE>
Investment Restrictions
The following restrictions may only be changed with shareholder approval:
* The Fund may not invest 25% or more of its total assets in one
industry.
* The Fund may not invest more than 5% of its total assets in any one
issuer or own more than 10% of the outstanding voting securities of any
one issuer. This limitation does not apply to U.S. Government
securities, and only applies to 75% of the Fund's total assets.
* The Fund may borrow only for temporary or emergency purposes in an
amount not exceeding 33 1/3% of its total assets.
You will find a complete listing of the precise investment restrictions in
the Fund's Statement of Additional Information (SAI).
FUND MANAGEMENT
The Board of Directors of USAA Mutual Fund, Inc. (Company), of which the
Fund is a series, supervises the business affairs of the Company. The
Company has retained us, USAA Investment Management Company, to serve as
the manager and distributor of the Company.
We are an affiliate of United Services Automobile Association (USAA), a
large, diversified financial services institution. As of the date of this
Prospectus, we had approximately $35 billion in total assets under
management. Our mailing address is 9800 Fredericksburg Rd., San Antonio, TX
78288.
We provide management services to the Fund. We are responsible for managing
the Fund's portfolio (including placement of brokerage orders) and its
business affairs, subject to the authority of and supervision by the Board
of Directors. For our services, the Fund pays us an annual fee. The fee,
three-fourths of one percent (.75%) of average net assets, is accrued daily
and paid monthly.
In addition to the fees paid pursuant to the Advisory Agreement, the Fund's
operating expenses generally consist of expenses for issuing and redeeming
Fund shares, transfer agent and custodian charges, auditing and legal
expenses, certain expenses of registering and qualifying shares for sale,
fees of Directors who are not affiliated with us, and costs of typesetting,
printing, and mailing the Prospectus, SAI, and periodic reports to existing
shareholders.
We also provide distribution services to the Fund and receive no
compensation for those services.
Although our officers and employees, as well as those of the Company, may
engage in personal securities transactions, they are restricted by the
procedures in a Joint Code of Ethics adopted by the Company and us.
6
<PAGE>
Portfolio Transactions
USAA Brokerage Services, our discount brokerage service, may execute
purchases and sales of equity securities for the Fund's portfolio. The
Board of Directors has adopted procedures to ensure that any commissions
paid to USAA Brokerage Services are reasonable and fair.
Portfolio Manager
The following individual is primarily responsible for managing the Fund.
Curt Rohrman, Assistant Vice President of Equity Investments since
September 1996, is the portfolio manager. He has ten years investment
management experience and has worked for us for two years. Prior to joining
us, Mr. Rohrman worked for CS First Boston Corporation from June 1988 to
March 1995. He earned the Chartered Financial Analyst (CFA) designation in
1991 and is a member of the Association for Investment Management and
Research (AIMR) and the San Antonio Financial Analysts Society, Inc.
(SAFAS). He holds an MBA from the University of Texas at Austin and a BBA
from Texas Christian University.
[PICTURE]
Curt Rohrman
USING MUTUAL FUNDS IN AN INVESTMENT PROGRAM
I. The Idea Behind Mutual Funds
Mutual funds provide small investors some of the advantages enjoyed by
wealthy investors. A relatively small investment can buy part of a
diversified portfolio. That portfolio is managed by investment
professionals, relieving you of the need to make individual stock or bond
selections. You also enjoy 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, you own 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, you are giving up some
investment decisions, but must still make others. The decisions you don't
have to make are those involved with choosing individual securities. We
will perform that function. In addition, we will arrange for the
safekeeping of securities, auditing the annual financial statements, and
daily valuation of the Fund, as well as other functions.
You, however, retain at least part of the responsibility for an equally
important decision. This decision involves determining a portfolio of
mutual funds that balances your investment goals with your tolerance for
risk. It is likely that this decision may include the use of more than one
fund of the USAA Family of Funds.
7
<PAGE>
For example, assume you wish to invest in a widely-diversified, common
stock portfolio. You could combine an investment in the Science &
Technology Fund with investments in other mutual funds that invest in
stocks of large and small companies and high-dividend stocks. This is just
one way you could combine funds that fit your own risk and reward goals.
III. USAA's Family of Funds
We offer you another alternative for asset allocation with our asset
strategy funds listed on page 15. These unique mutual funds provide a
professionally managed diversified investment portfolio within a mutual
fund. They are designed for the individual who prefers to delegate the
asset allocation process to an investment manager and are structured to
achieve diversification across a number of investment categories.
Whether you prefer to create your own mix of mutual funds or use a USAA
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 assist you with your choices and to help you
craft a portfolio which meets your needs.
HOW TO INVEST
Purchase of Shares
OPENING AN ACCOUNT
You may open an account and make an investment as described below by mail,
bank wire, electronic funds transfer (EFT), phone, or in person. A
complete, signed application is required for each new account.
TAX ID NUMBER
Each shareholder named on the account must provide a social security number
or tax identification number to avoid possible withholding requirements.
EFFECTIVE DATE
When you make a purchase, your purchase price will be the net asset value
(NAV) per share next determined after we receive your request in proper
form as described below. The Fund's NAV is determined at the close of the
regular trading session (generally 4:00 p.m. Eastern Time) of the New York
Stock Exchange (NYSE) each day the Exchange is open. If we receive your
request prior to that time, your purchase price will be the NAV per share
determined for that day. If we receive your request after the NAV per share
is calculated, the purchase will be effective on the next business day. If
you plan to purchase Fund shares with a foreign check, we suggest you
convert your foreign check to U.S. dollars prior to investment in the Fund
to avoid a potential delay in the effectiveness of your purchase of up to
four to six weeks. Furthermore, a bank charge may be assessed in the
clearing process, which will be deducted from the amount of the purchase.
8
<PAGE>
MINIMUM INVESTMENTS
INITIAL PURCHASE $3,000 [$500 Uniform Gifts/Transfers to Minors Act
(UGMA/UTMA) accounts and $250 for IRAs] or if you
elect to have monthly electronic investments of at
least $50 each, only $100 is required to open an
account. Employees of USAA, its affiliates, or
subsidiaries may open an account through payroll
deduction for as little as $25 per pay period with no
initial investment.
ADDITIONAL PURCHASES $50
HOW TO PURCHASE
MAIL * To open an account, send your application and check to:
USAA Investment Management Company
9800 Fredericksburg Rd., San Antonio, TX 78288
* To add to your account, send your check and the "Invest
by Mail" stub that accompanies your Fund's transaction
confirmation to the Transfer Agent:
USAA Shareholder Account Services
9800 Fredericksburg Rd., San Antonio, TX 78288
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
BANK WIRE * 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 Science & Technology Fund
USAA AC-69384998
Shareholder(s) Name(s)_________________
Shareholder(s) Account Number___________________
ELECTRONIC * Additional purchases on a regular basis can be deducted
FUNDS from a bank account, paycheck, income-producing
TRANSFER investment or from a USAA money market fund account.
Sign up for these services when opening an account or
call 1-800-531-8448 to add these services.
PHONE * If you have an existing USAA account and would like to
1-800-531-8448 open a new account or if you would like to exchange to
another USAA fund, call for instructions. To open an
account by phone, the new account must have the same
registration as your existing account.
9
<PAGE>
Redemption of Shares
You may redeem Fund shares by any of the methods described below on any day
the NAV per share is calculated. Redemptions will be effective on the day
instructions are received in a manner as described below. However, if
instructions are received after the NAV per share calculation (generally
4:00 p.m. Eastern Time), redemption will be effective on the next business
day.
Within seven days after the effective date of redemption, we will send you
your money. Payment for redemption of shares purchased by EFT or check will
not be disbursed until the EFT or check 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 in limited circumstances.
HOW TO REDEEM
WRITTEN, FAX * Send your written instructions to:
TELEGRAPH, OR USAA Shareholder Account Services
TELEPHONE 9800 Fredericksburg Rd., San Antonio, TX 78288
* Send a signed fax to 1-800-292-8177, or send a telegraph
to USAA Shareholder Account Services.
* Call toll free 1-800-531-8448, in San Antonio, 456-7202.
Telephone redemption is automatically established when you complete your
application. The Fund will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine, and if it does not, it
may be liable for any losses due to unauthorized or fraudulent
instructions. Before any discussion regarding your account, we obtain the
following information: (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, we record
all telephone communications with you and send confirmations of account
transactions to the address of record. Redemption by telephone, fax, or
telegraph is not available for shares represented by stock certificates.
IMPORTANT INFORMATION ABOUT PURCHASES AND REDEMPTIONS
Investor's Guide to USAA Mutual Fund Services
Upon your initial investment with us, you will receive the INVESTOR'S GUIDE
to help you get the most out of your USAA mutual fund account and to help
you in your role as an investor. In the INVESTOR'S GUIDE, you will find
additional purchase information as well as more information on redemption
of shares and methods of payment. You will also find in-depth information
on automatic investment plans, shareholder statements and reports, and
other useful information.
Account Balance
Beginning in September 1998, and occurring each September thereafter, USAA
Shareholder Account Services (SAS), the Fund's transfer agent, will assess
a small balance account fee of $12
10
<PAGE>
to each shareholder account with a balance, at the time of assessment, of
less than $2,000. The fee will reduce total transfer agency fees paid by
the Fund to SAS. Accounts exempt from the fee include: (1) any account
regularly purchasing additional shares each month through an automatic
investment plan; (2) any account registered under the Uniform
Gifts/Transfers to Minors Act (UGMA/UTMA); (3) all (non IRA) money market
fund accounts; (4) any account whose registered owner has an aggregate
balance of $50,000 or more invested in USAA mutual funds; and (5) all IRA
accounts (for the first year the account is open).
Company Rights
The Company reserves the right to:
* reject purchase or exchange orders when in the best interest of the
Company;
* limit or discontinue the offering of shares of any portfolio of the
Company without notice to the shareholders;
* impose a redemption charge of up to 1% of the net asset value of shares
redeemed if circumstances indicate a charge is necessary for the
protection of remaining investors (for example, if excessive
market-timing share activity unfairly burdens long-term investors);
provided, however, this 1% charge will not be imposed upon shareholders
unless authorized by the Board of Directors and the required notice has
been given to shareholders;
* 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 SAI contains information on
acceptable guarantors;
* redeem an account with less than 10 shares, with certain limitations.
EXCHANGES
Exchange Privilege
The exchange privilege is automatic 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. The Fund's transfer
agent will simultaneously process exchange redemptions and purchases 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,
and as such, you may realize a capital gain or loss.
The Fund has undertaken certain procedures regarding telephone transactions
as described on page 10.
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. The limit
on exchanges out of any Fund in the USAA Family of Funds for each account
is six per calendar year (except that there is no limitation on exchanges
out of the Tax Exempt Short-Term Fund, Short-Term Bond Fund, or any of the
money market funds in the USAA Family of Funds).
11
<PAGE>
SHAREHOLDER INFORMATION
Share Price Calculation
The price at which shareholders purchase and redeem fund shares is equal to
the net asset value (NAV) per share determined on the effective date of the
purchase or redemption.
When
The Fund's NAV per share is calculated at the close of the regular trading
session of the NYSE, which is usually 4:00 p.m. Eastern Time. You may buy
and sell Fund shares at the NAV per share without a sales charge.
How
The NAV per share is calculated by adding the value of all securities and
other assets in the Fund, deducting liabilities, and dividing by the number
of shares outstanding.
Dividends and Distributions
The Fund pays net investment income dividends yearly. Any net capital gains
distribution usually occurs within 45 days of the July 31 fiscal year end
which would be somewhere around the middle of September. The Fund will make
additional payments to shareholders, if necessary, to avoid the imposition
of any federal income or excise tax.
All income dividends and capital gain distributions are automatically
reinvested, unless we receive different instructions from you. The share
price will be the NAV of the Fund shares computed on the ex-dividend date.
Any income dividends or capital gain distributions paid by the Fund will
reduce the NAV per share by the amount of the dividend or distribution.
These dividends and distributions are subject to taxes.
We will invest any dividend or distribution payment returned to us in your
account at the then-current NAV per share. Dividend and distribution checks
become void six months from the date on the check. The amount of the voided
check will be invested in your account at the then-current NAV per share.
Federal Taxes
This tax information is quite general and refers to the federal income tax
provisions in effect as of the date of this Prospectus. We urge you to
consult your own tax adviser about the status of distributions from the
Fund in your own state and locality.
FUND - The Fund intends to qualify as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended, referred to
as the Code. In compliance with the Code, the Fund will not be subject to
federal income tax on its net investment income and net capital gains
distributed to shareholders. Net capital gains are those gains in excess of
capital losses.
12
<PAGE>
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.
Regardless of the length of time you have held the Fund shares,
distributions of net long-term capital gains are taxable as long-term
capital gains whether received in cash or reinvested in additional shares.
Redemptions, including exchanges, are subject to income tax, based on the
difference between the cost of shares when purchased and the price received
upon redemption or exchange.
WITHHOLDING - Federal law requires the Fund 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,
* underreports dividend or interest income,
* 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 Fund's transfer
agent, that your tax identification number is correct and that you are not
currently subject to backup withholding.
REPORTING - The Fund will report annually to you information concerning the
tax status of dividends and distributions for federal income tax purposes.
DESCRIPTION OF SHARES
The Fund is a series of USAA Mutual Fund, Inc. (Company) and is
diversified. The Company is an open-end management investment company
incorporated under the laws of the State of Maryland. The Company is
authorized to issue shares of common stock of separate series, each of
which is commonly referred to as a mutual fund. There are ten mutual funds
in the Company, including the Fund.
The Company does not hold annual or regular meetings of shareholders and
holds special meetings only as required by the Investment Company Act of
1940. The Directors may fill vacancies on the Board or appoint new
Directors if the result is that at least two-thirds of the Directors have
still been elected by shareholders. Shareholders have one vote per share
(with proportionate voting for fractional shares) regardless of the
relative net asset value of the shares. If a matter affects an individual
fund in the Company, there will be a separate vote of the shareholders of
that specific fund. Shareholders collectively holding at least 10% of the
outstanding shares of the Company may request a shareholder meeting at any
time for the purpose of voting to remove one or more of the Directors. The
Company will assist communicating to other shareholders about the meeting.
13
<PAGE>
APPENDIX A
The following are descriptions of certain types of securities in which we may
invest the Fund's assets:
CONVERTIBLE SECURITIES
We may invest in convertible securities which are bonds, preferred stocks, and
other securities that pay interest or dividends and offer the buyer the option
of converting the security into common stock. The value of convertible
securities depends partially on interest rate changes and the credit quality of
the issuer. Because a convertible security affords an investor the opportunity,
through its conversion feature, to participate in the capital appreciation of
the underlying common stock, the value of convertible securities may also change
based on the price of the common stock.
MONEY MARKET INSTRUMENTS
We may hold a certain portion of the Fund's assets in high-quality, U.S.
dollar-denominated debt securities that have remaining maturities of one year or
less. Such securities may include U.S. Government obligations, commercial paper
and other short-term corporate obligations, repurchase agreements collateralized
with U.S. Government securities, and certificates of deposit, bankers'
acceptances, bank deposits, and other financial institution obligations. These
securities may carry fixed or variable interest rates.
ILLIQUID SECURITIES
We may not invest more than 15% of the market value of the Fund's net assets in
securities which are illiquid. Illiquid securities are those securities that
cannot be disposed of in the ordinary course of business in seven days or less
at approximately the value at which the Fund has valued the securities.
FORWARD CURRENCY CONTRACTS
We may hold securities denominated in foreign currencies. As a result, the value
of the securities will be affected by changes in the exchange rate between the
dollar and foreign currencies. In managing currency exposure, we may enter into
forward currency contracts. A forward currency contract involves an agreement to
purchase or sell a specified currency at a specified future date or over a
specified time period at a price set at the time of the contract.
14
<PAGE>
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 you with the opportunity to formulate your 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
other Funds in the USAA Family of Funds, including charges and expenses,
call us for a Prospectus. Read it carefully before you invest or send
money.
FUND
TYPE/NAME VOLATILITY
---------------------------------------------------------------
CAPITAL APPRECIATION
Aggressive Growth Very high
Emerging Markets (5) Very high
First Start Growth Moderate to high
Gold (5) Very high
Growth Moderate to high
Growth & Income Moderate
International (5) Moderate to high
S&P 500 Index (1) Moderate
Science & Technology Very high
World Growth (5) Moderate to high
ASSET ALLOCATION
Balanced Strategy Moderate
Cornerstone Strategy (5) Moderate
Growth and Tax Strategy (2) Moderate
Growth Strategy (5) Moderate to high
Income Strategy Low to moderate
INCOME -- TAXABLE
GNMA Low to moderate
Income Moderate
Income Stock Moderate
Short-Term Bond Low
INCOME -- TAX EXEMPT
Long-Term (2) Moderate
Intermediate-Term (2) Low to moderate
Short-Term (2) Low
State Bond/Income (2, 3) Moderate
MONEY MARKET
Money Market (4) Very low
Tax Exempt Money Market (2, 4) Very low
Treasury Money Market Trust (4) Very low
State Money Market (2, 3, 4) Very low
(1) S&P(R)IS A TRADEMARK OF THE MCGRAW-HILL COMPANIES, INC., AND HAS BEEN
LICENSED FOR USE. THE PRODUCT IS NOT SPONSORED, SOLD OR PROMOTED BY STANDARD
& POOR'S, AND STANDARD & POOR'S MAKES NO REPRESENTATION REGARDING THE
ADVISABILITY OF INVESTING IN THE PRODUCT.
(2) SOME INCOME MAY BE SUBJECT TO STATE OR LOCAL TAXES.
(3) CALIFORNIA, FLORIDA, NEW YORK, TEXAS, AND VIRGINIA FUNDS ARE OFFERED ONLY TO
RESIDENTS OF THOSE STATES.
(4) AN INVESTMENT IN A MONEY MARKET FUND IS NEITHER INSURED NOR GUARANTEED BY
THE U.S. GOVERNMENT AND THERE IS NO ASSURANCE THAT ANY OF THE FUNDS WILL BE
ABLE TO MAINTAIN A STABLE NET ASSET VALUE OF $1 PER SHARE.
(5) FOREIGN INVESTING IS SUBJECT TO ADDITIONAL RISKS, SUCH AS CURRENCY
FLUCTUATIONS, MARKET ILLIQUIDITY, AND POLITICAL INSTABILITY.
15
<PAGE>
If you would like more information about the Fund, you may call
1-800-531-8181 to request a free copy of the most recent financial report and/or
the Fund's Statement of Additional Information (SAI), dated August 1, 1997. The
SAI has been filed with the SEC and is incorporated by reference into this
Prospectus (meaning it is legally a part of the Prospectus).
Investment Adviser, Underwriter and Distributor
USAA Investment Management Company
9800 Fredericksburg Road
San Antonio, Texas 78288
-----------------------------
Transfer Agent
USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, Texas 78288
-----------------------------
Custodian
State Street Bank and Trust Company
P.O. Box 1713
Boston, Massachusetts 02105
--------------------------
Telephone Assistance
Call toll free - Central Time
Monday - Friday 8:00 a.m. to 8:00 p.m.
Saturdays 8:30 a.m. to 5:00 p.m.
For Additional Information on Mutual Funds
1-800-531-8181, (in San Antonio) 456-7211
For account servicing, exchanges or redemptions
1-800-531-8448, (in San Antonio) 456-7202
Recorded Mutual Fund Price Quotes
24-Hour Service (from any phone)
1-800-531-8066, (in San Antonio) 498-8066
Mutual Fund TouchLINE(R)
(from Touchtone phones only)
For account balance, last transaction or fund prices:
1-800-531-8777, (in San Antonio) 498-8777
[USAA EAGLE LOGO}
USAA INVESTMENT MANAGEMENT COMPANY
9800 FREDERICKSBURG ROAD
SAN ANTONIO, TEXAS
78288
(recycled)
30227-0897 (C) 1997, USAA. All rights reserved. RECYCLED PAPER
16
<PAGE>
PROSPECTUS
AUGUST 1, 1997
[USAA EAGLE LOGO]
USAA
FIRST START
GROWTH FUND
Shares of this fund are not deposits or other obligations of, or guaranteed by,
the USAA Federal Savings Bank, are not insured by the FDIC or any other
government agency, are subject to investment risks, and may lose value.
AS WITH OTHER MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR
DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION (SEC) NOR HAS THE SEC
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
THE FUND IS A NO-LOAD MUTUAL FUND OFFERED BY USAA INVESTMENT MANAGEMENT COMPANY.
USAA WILL SEEK LONG-TERM CAPITAL APPRECIATION BY INVESTING THE FUND'S ASSETS IN
THE STOCKS OF COMPANIES THAT PROVIDE GOODS OR SERVICES THAT WE BELIEVE ARE
FAMILIAR TO YOUNG PEOPLE. USAA DESIGNED THE FUND AS PART OF A PROGRAM TO
STIMULATE INTEREST IN LONG-TERM INVESTING BY YOUNG PEOPLE.
THE USAA FIRST START GROWTH FUND IS PART OF USAA FIRST START, A MONEY MANAGEMENT
PLAN FOR YOUNG PEOPLE.
TABLE OF CONTENTS
Who Manages the Fund?............................................ 2
What is the Investment Objective?................................ 2
Will the Value of Your Investment Fluctuate?..................... 2
Is This Fund for You?............................................ 2
How Do You Buy?.................................................. 2
Fees and Expenses................................................ 3
Performance Information.......................................... 4
A Word About Risk................................................ 4
Fund Investments................................................. 4
Fund Management.................................................. 6
Using Mutual Funds in an Investment Program...................... 7
How to Invest.................................................... 8
Important Information About Purchases and Redemptions............ 10
Exchanges........................................................ 11
Shareholder Information.......................................... 12
Description of Shares............................................ 13
Appendix A....................................................... 14
USAA Family of No-Load Mutual Funds.............................. 15
1
<PAGE>
This Prospectus provides you with information you should know before you invest
in the Fund. Please read it and keep it for future reference.
WHO MANAGES THE FUND?
USAA Investment Management Company manages the Fund. For easier reading,
USAA Investment Management Company will be referred to as "we" throughout
the Prospectus.
WHAT IS THE INVESTMENT OBJECTIVE?
The Fund's investment objective is long-term capital appreciation. See FUND
INVESTMENTS on page 4 for more information.
WILL THE VALUE OF YOUR INVESTMENT FLUCTUATE?
Yes, it will. The value of your investment will fluctuate with the changing
market value of the Fund's portfolio. You may have a gain or loss when you
sell your shares.
IS THIS FUND FOR YOU?
This fund might be appropriate as part of your investment portfolio if. . .
X You are interested in learning about investments.
X You are willing to accept moderate to high risk.
X You are looking for a long-term investment.
This fund may NOT be appropriate as part of your investment portfolio
if . . .
X You need steady income.
X You are unwilling to take greater risk for long-term goals.
X You may need your money back within five years.
X You need an investment that provides tax-free income.
If you feel this fund is not the one for you, refer to page 15 for a
complete list of the USAA Family of No-Load Mutual Funds.
HOW DO YOU BUY?
You may make your initial investment directly by mail, in person or, in
certain instances, by telephone. The minimum initial investment is $3,000
[$250 for IRAs] and can be made by check or by wire. To suit the needs of
young people, Uniform Gifts/Transfers to Minors Act (UGMA/UTMA) accounts
may be opened for as little as $250, or if you elect to have monthly
electronic investments of at least $20 each, there is no minimum required
to open an account. There is more information about how to purchase Fund
shares on page 8.
2
<PAGE>
FEES AND EXPENSES
This summary provides information to assist you in understanding the
expenses you will pay directly or indirectly to invest in the Fund.
Shareholder Transaction Expenses -- Fees You Pay Directly
There are no fees charged to your account when you buy, sell, or hold Fund
shares. However, if you sell shares and request your money by wire
transfer, you will pay a $10 fee. (Your bank may also charge a fee for
receiving wires.)
Annual Fund Operating Expenses -- Fees You Pay Indirectly
Unlike shareholder transaction charges, the Fund's expenses are not charged
directly to your account, but instead are paid out of the Fund's assets and
are reflected in the Fund's share price and dividends. "Other Expenses"
such as custodian and transfer agent fees have been estimated for the
Fund's first year of operation. The figures below are calculated as a
percentage of average net assets.
Management Fees .75%
12b-1 Fees None
Other Expenses (estimated) .67%
----
Total Fund Operating Expenses 1.42%
====
* 12B-1 FEES -- SOME MUTUAL FUNDS CHARGE THESE FEES TO PAY FOR THE COSTS
OF SELLING FUND SHARES.
Example of Effect of Fund Operating Expenses
You would pay the following expenses on a $1,000 investment in the Fund,
assuming (1) 5% annual return and (2) redemption at the end of the periods
shown.
1 year........................ $ 14
3 years....................... 45
THIS EXAMPLE IS NOT A REPRESENTATION OF PAST OR FUTURE EXPENSES AND ACTUAL
EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
3
<PAGE>
PERFORMANCE INFORMATION
(Tel)
TouchLINE(R)
1-800-531-8777
PRESS
(1)
THEN
(1)
THEN
(3)(2)(#)
Please consider performance information in light of the Fund's investment
objective and policies and market conditions during the reported time periods.
Remember, historical performance may not be repeated in the future. The value of
your shares may go up or down. For the most current price and return information
for this Fund, you may call TouchLINE(R) at 1-800-531-8777. Press 1 for the
Mutual Fund Menu, press 1 again for prices and returns. Then, press 32 followed
by the pound sign when asked for a Fund Code.
You may see the Fund's total return quoted in advertisements and reports. All
mutual funds must use the same formula to calculate total return. Total return
measures the price change in a share assuming the reinvestment of all dividends
and distributions of capital gains. You may also see a comparison of the Fund's
performance to that of other mutual funds with similar investment objectives and
to stock or relevant indexes. A WORD ABOUT RISK
Portions of this Prospectus describe the risks you will face as an investor
in the Fund. Keep in mind that generally investments with a higher
potential reward are accompanied by a higher risk of losing money. The
reverse is also generally true: the lower the potential reward, the lower
the risk. However, as you consider an investment in the Fund, you should
also take into account your tolerance for the daily fluctuations of the
stock market and whether you can afford to leave your money in this
investment for long periods of time to ride out down periods.
[CAUTION LIGHT]
Look for this symbol throughout the Prospectus. We use it to mark detailed
information about the main risks that you will face as a shareholder of the
Fund.
FUND INVESTMENTS
Investment Policies and Risks
Q What is the Fund's investment policy?
A We will invest the Fund's assets in equity securities of companies
that provide goods or services that we believe are familiar to young
people. For convenience, this Prospectus refers to common stocks,
preferred stocks, convertible securities, and securities which carry
the right to buy common stocks collectively as "equity securities."
Most of the Fund's assets will be invested in U.S. securities;
however, we may also invest the Fund's assets in foreign securities
when they are in line with the Fund's investment objective.
4
<PAGE>
We designed the Fund as part of a program to stimulate interest in
long-term investing by young people. Shareholders of the Fund may give
us their suggestions about the types of companies that they would like
us to consider for investment by the Fund. We invite shareholders to
tell us the investment topics or the names of stocks that they would
like us to feature in the Fund's communications to shareholders.
As a temporary defensive measure, we may invest up to 100% of the
Fund's assets in high-quality, short-term debt instruments.
Q In what industries will we invest the Fund's assets?
A We will invest the Fund's assets in many different industries. The
Fund is not a "sector" fund that focuses its investments in a
specific industry or sector of the economy. We believe that goods or
services that are likely to be familiar to young investors are
provided by companies engaged in many different types of industries.
Such companies may include computer hardware and software
manufacturers, internet service providers, and companies in the
apparel, automobile, communications, entertainment, financial
services, health services, and travel industries, among others. We
believe that the flexibility to select equity securities of companies
across a broad universe of industries maximizes our opportunity to
find attractive investments as we pursue the Fund's objective of
long-term capital appreciation.
Q Are we prohibited from investing the Fund's assets in any specific
industries?
A Yes. We will not invest the Fund's assets in companies whose primary
line of business is the production of tobacco products or alcoholic
beverages. Investments in firms primarily focused on gaming
activities are also prohibited.
Q What special services are provided to shareholders in this Fund?
A In addition to providing an investment opportunity for long-term
capital appreciation, shareholders will receive educational
information targeted to young people about the basic concepts of
saving and investing.
Q What are the Fund's potential risks?
A Two potential risks of investing in this Fund include:
[CAUTION LIGHT]
Market Risk. Because this Fund invests in equity securities, it is subject
to market risk. Stock prices in general may decline over short or even
extended periods, regardless of the success or failure of individual
companies' operations. The stock market tends to run in cycles, with periods
when stock prices generally go up and periods when stock prices generally go
down. Equity securities tend to go up and down more than bonds.
5
<PAGE>
[CAUTION LIGHT]
Foreign Investing. Investing in foreign securities poses unique risks:
currency exchange rate fluctuations, foreign market illiquidity, increased
price volatility, exchange control regulations, foreign ownership limits,
different accounting, reporting and disclosure requirements, and
difficulties in obtaining legal judgments. In the past, equity and debt
instruments of foreign markets have been more volatile than equity and debt
instruments of U.S. securities markets.
For additional information about other investments in which we may invest
the Fund's assets, see Appendix A on page 14.
Investment Restrictions
The following restrictions may only be changed with shareholder approval:
* The Fund may not invest 25% or more of its total assets in one industry.
* The Fund may not invest more than 5% of its total assets in any one
issuer or own more than 10% of the outstanding voting securities of any
one issuer. This limitation does not apply to U.S. Government
securities, and only applies to 75% of the Fund's total assets.
* The Fund may borrow only for temporary or emergency purposes in an
amount not exceeding 33 1/3% of its total assets.
You will find a complete listing of the precise investment restrictions in
the Fund's Statement of Additional Information (SAI).
FUND MANAGEMENT
The Board of Directors of USAA Mutual Fund, Inc. (Company), of which the
Fund is a series, supervises the business affairs of the Company. The
Company has retained us, USAA Investment Management Company, to serve as
the manager and distributor of the Company.
We are an affiliate of United Services Automobile Association (USAA), a
large, diversified financial services institution. As of the date of this
Prospectus, we had approximately $35 billion in total assets under
management. Our mailing address is 9800 Fredericksburg Rd., San Antonio, TX
78288.
We provide management services to the Fund. We are responsible for managing
the Fund's portfolio (including placement of brokerage orders) and its
business affairs, subject to the authority of and supervision by the Board
of Directors. For our services, the Fund pays us an annual fee. The fee,
three-fourths of one percent (.75%) of average net assets, is accrued daily
and paid monthly.
In addition to the fees paid pursuant to the Advisory Agreement, the Fund's
operating expenses generally consist of expenses for the issuing and
redeeming of Fund shares, transfer agent and custodian charges, auditing
and legal expenses, certain expenses of registering and qualifying shares
for sale, fees of Directors who are not affiliated with us, and costs of
typesetting, printing, and mailing the Prospectus, SAI, and periodic
reports to existing shareholders.
6
<PAGE>
We also provide distribution services to the Fund and receive no
compensation for those services.
Although our officers and employees, as well as those of the Company, may
engage in personal securities transactions, they are restricted by the
procedures in a Joint Code of Ethics adopted by the Company and us.
Portfolio Transactions
USAA Brokerage Services, our discount brokerage service, may execute
purchases and sales of equity securities for the Fund's portfolio. The
Board of Directors has adopted procedures to ensure that any commissions
paid to USAA Brokerage Services are reasonable and fair.
Portfolio Manager
The following individual is primarily responsible for managing the Fund.
Curt Rohrman, Assistant Vice President of Equity Investments since
September 1996, is the portfolio manager. He has ten years investment
management experience and has worked for us for two years. Prior to joining
us, Mr. Rohrman worked for CS First Boston Corporation from June 1988 to
March 1995. He earned the Chartered Financial Analyst (CFA) designation in
1991 and is a member of the Association for Investment Management and
Research (AIMR) and the San Antonio Financial Analysts Society, Inc.
(SAFAS). He holds an MBA from the University of Texas at Austin and a BBA
from Texas Christian University.
[PICTURE]
Curt Rohrman
USING MUTUAL FUNDS IN AN INVESTMENT PROGRAM
I. The Idea Behind Mutual Funds
Mutual funds provide small investors some of the advantages enjoyed by
wealthy investors. A relatively small investment can buy part of a
diversified portfolio. That portfolio is managed by investment
professionals, relieving you of the need to make individual stock or bond
selections. You also enjoy 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, you own 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, you are giving up some
investment decisions, but must still make others. The decisions you don't
have to make are those involved with choosing individual securities. We
will perform that function. In addition, we will arrange for the
safekeeping of securities, auditing the annual financial statements, and
daily valuation of the Fund, as well as other functions.
7
<PAGE>
You, however, retain at least part of the responsibility for an equally
important decision. This decision involves determining a portfolio of
mutual funds that balances your investment goals with your tolerance for
risk. It is likely that this decision may include the use of more than one
fund of the USAA Family of Funds.
For example, assume you wish to invest in a widely-diversified, common
stock portfolio. You could combine an investment in the First Start Growth
Fund with investments in other mutual funds that invest in stocks of large
and small companies and high-dividend stocks. This is just one way you
could combine funds that fit your own risk and reward goals.
III. USAA's Family of Funds
We offer you another alternative for asset allocation with our asset
strategy funds listed on page 15. These unique mutual funds provide a
professionally managed diversified investment portfolio within a mutual
fund. They are designed for the individual who prefers to delegate the
asset allocation process to an investment manager and are structured to
achieve diversification across a number of investment categories.
Whether you prefer to create your own mix of mutual funds or use a USAA
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 assist you with your choices and to help you
craft a portfolio which meets your needs.
HOW TO INVEST
Purchase of Shares
OPENING AN ACCOUNT
You may open an account and make an investment as described below by mail,
bank wire, electronic funds transfer (EFT), phone, or in person. A
complete, signed application is required for each new account.
TAX ID NUMBER
Each shareholder named on the account must provide a social security number
or tax identification number to avoid possible withholding requirements.
EFFECTIVE DATE
When you make a purchase, your purchase price will be the net asset value
(NAV) per share next determined after we receive your request in proper
form as described below. The Fund's NAV is determined at the close of the
regular trading session (generally 4:00 p.m. Eastern Time) of the New York
Stock Exchange (NYSE) each day the Exchange is open. If we receive your
request prior to that time, your purchase price will be the NAV per share
determined for that day. If we receive your request after the NAV per share
is calculated, the purchase will be effective on the next business day. If
you plan to purchase Fund shares with a foreign check, we suggest you
convert your foreign check to U.S. dollars prior to investment in the Fund
to avoid a potential delay in the effectiveness of your purchase of up to
four to six weeks. Furthermore, a bank charge may be assessed in the
clearing process, which will be deducted from the amount of the purchase.
8
<PAGE>
MINIMUM INVESTMENTS
INITIAL PURCHASE $3,000 [$250 Uniform Gifts/Transfers to Minors Act
(UGMA/ UTMA) accounts and $250 for IRAs] or if you
elect to have monthly electronic investments of at
least $20 each, there is no minimum required to open
an account. Employees of USAA, its affiliates, or
subsidiaries may open an account through payroll
deduction for as little as $25 per pay period with no
initial investment.
ADDITIONAL PURCHASES $20
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
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
BANK WIRE * 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 First Start Growth Fund
USAA AC-69384998
Shareholder(s) Name(s)_________________
Shareholder(s) Account Number___________________
ELECTRONIC * Additional purchases on a regular basis can be deducted
FUNDS from a bank account, paycheck, income-producing
TRANSFER investment or from a USAA money market fund account.
Sign up for these services when opening an account or
call 1-800-531-8448 to add these services.
PHONE * If you have an existing USAA account and would like to
1-800-531-8448 open a new account or if you would like to exchange to
another USAA fund, call for instructions. To open an
account by phone, the new account must have the same
registration as your existing account.
9
<PAGE>
Redemption of Shares
You may redeem Fund shares by any of the methods described below on any day
the NAV per share is calculated. Redemptions will be effective on the day
instructions are received in a manner as described below. However, if
instructions are received after the NAV per share calculation (generally
4:00 p.m. Eastern Time), redemption will be effective on the next business
day.
Within seven days after the effective date of redemption, we will send you
your money. Payment for redemption of shares purchased by EFT or check will
not be disbursed until the EFT or check 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 in limited circumstances.
HOW TO REDEEM
WRITTEN, FAX * Send your written instructions to:
TELEGRAPH, OR USAA Shareholder Account Services
TELEPHONE 9800 Fredericksburg Rd., San Antonio, TX 78288
* Send a signed fax to 1-800-292-8177, or send a telegraph
to USAA Shareholder Account Services.
* Call toll free 1-800-531-8448, in San Antonio, 456-7202.
Telephone redemption is automatically established when you complete your
application. The Fund will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine, and if it does not, it
may be liable for any losses due to unauthorized or fraudulent
instructions. Before any discussion regarding your account, we obtain the
following information: (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, we record
all telephone communications with you and send confirmations of account
transactions to the address of record. Redemption by telephone, fax, or
telegraph is not available for shares represented by stock certificates.
IMPORTANT INFORMATION ABOUT PURCHASES AND REDEMPTIONS
Investor's Guide to USAA Mutual Fund Services
Upon your initial investment with us, you will receive the INVESTOR'S GUIDE
to help you get the most out of your USAA mutual fund account and to help
you in your role as an investor. In the INVESTOR'S GUIDE, you will find
additional purchase information as well as more information on redemption
of shares and methods of payment. You will also find in-depth information
on automatic investment plans, shareholder statements and reports, and
other useful information.
Account Balance
Beginning in September 1998, and occurring each September thereafter, USAA
Shareholder Account Services (SAS), the Fund's transfer agent, will assess
a small balance account fee of $12 to each shareholder account with a
balance, at the time of assessment, of less than $2,000. The fee
10
<PAGE>
will reduce total transfer agency fees paid by the Fund to SAS. Accounts
exempt from the fee include: (1) any account regularly purchasing
additional shares each month through an automatic investment plan; (2) any
account registered under the Uniform Gifts/Transfers to Minors Act
(UGMA/UTMA); (3) all (non IRA) money market fund accounts; (4) any account
whose registered owner has an aggregate balance of $50,000 or more invested
in USAA mutual funds; and (5) all IRA accounts (for the first year the
account is open).
Company Rights
The Company reserves the right to:
* reject purchase or exchange orders when in the best interest of the
Company;
* limit or discontinue the offering of shares of any portfolio of the
Company without notice to the shareholders;
* impose a redemption charge of up to 1% of the net asset value of shares
redeemed if circumstances indicate a charge is necessary for the
protection of remaining investors (for example, if excessive
market-timing share activity unfairly burdens long-term investors);
provided, however, this 1% charge will not be imposed upon shareholders
unless authorized by the Board of Directors and the required notice has
been given to shareholders;
* 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 SAI contains information on
acceptable guarantors;
* redeem an account with less than 10 shares, with certain limitations.
EXCHANGES
Exchange Privilege
The exchange privilege is automatic 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. The Fund's transfer
agent will simultaneously process exchange redemptions and purchases 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,
and as such, you may realize a capital gain or loss.
The Fund has undertaken certain procedures regarding telephone transactions
as described on page 10.
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. The limit
on exchanges out of any Fund in the USAA Family of Funds for each account
is six per calendar year (except that there is no limitation on exchanges
out of the Tax Exempt Short-Term Fund, Short-Term Bond Fund, or any of the
money market funds in the USAA Family of Funds).
11
<PAGE>
SHAREHOLDER INFORMATION
Share Price Calculation
The price at which shareholders purchase and redeem fund shares is equal to
the net asset value (NAV) per share determined on the effective date of the
purchase or redemption.
When
The Fund's NAV per share is calculated at the close of the regular trading
session of the NYSE, which is usually 4:00 p.m. Eastern Time. You may buy
and sell Fund shares at the NAV per share without a sales charge.
How
The NAV per share is calculated by adding the value of all securities and
other assets in the Fund, deducting liabilities, and dividing by the number
of shares outstanding.
Dividends and Distributions
The Fund pays net investment income dividends yearly. Any net capital gains
distribution usually occurs within 45 days of the July 31 fiscal year end
which would be somewhere around the middle of September. The Fund will make
additional payments to shareholders, if necessary, to avoid the imposition
of any federal income or excise tax.
All income dividends and capital gain distributions are automatically
reinvested, unless we receive different instructions from you. The share
price will be the NAV of the Fund shares computed on the ex-dividend date.
Any income dividends or capital gain distributions paid by the Fund will
reduce the NAV per share by the amount of the dividend or distribution.
These dividends and distributions are subject to taxes.
We will invest any dividend or distribution payment returned to us in your
account at the then-current NAV per share. Dividend and distribution checks
become void six months from the date on the check. The amount of the voided
check will be invested in your account at the then-current NAV per share.
Federal Taxes
This tax information is quite general and refers to the federal income tax
provisions in effect as of the date of this Prospectus. We urge you to
consult your own tax adviser about the status of distributions from the
Fund in your own state and locality.
FUND - The Fund intends to qualify as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended, referred to
as the Code. In compliance with the Code, the Fund will not be subject to
federal income tax on its net investment income and net capital gains
distributed to shareholders. Net capital gains are those gains in excess of
capital losses.
12
<PAGE>
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.
Regardless of the length of time you have held the Fund shares,
distributions of net long-term capital gains are taxable as long-term
capital gains whether received in cash or reinvested in additional shares.
Redemptions, including exchanges, are subject to income tax, based on the
difference between the cost of shares when purchased and the price received
upon redemption or exchange.
WITHHOLDING - Federal law requires the Fund 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,
* underreports dividend or interest income,
* 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 Fund's transfer
agent, that your tax identification number is correct and that you are not
currently subject to backup withholding.
REPORTING - The Fund will report annually to you information concerning the
tax status of dividends and distributions for federal income tax purposes.
DESCRIPTION OF SHARES
The Fund is a series of USAA Mutual Fund, Inc. (Company) and is
diversified. The Company is an open-end management investment company
incorporated under the laws of the State of Maryland. The Company is
authorized to issue shares of common stock of separate series, each of
which is commonly referred to as a mutual fund. There are ten mutual funds
in the Company, including the Fund.
The Company does not hold annual or regular meetings of shareholders and
holds special meetings only as required by the Investment Company Act of
1940. The Directors may fill vacancies on the Board or appoint new
Directors if the result is that at least two-thirds of the Directors have
still been elected by shareholders. Shareholders have one vote per share
(with proportionate voting for fractional shares) regardless of the
relative net asset value of the shares. If a matter affects an individual
fund in the Company, there will be a separate vote of the shareholders of
that specific fund. Shareholders collectively holding at least 10% of the
outstanding shares of the Company may request a shareholder meeting at any
time for the purpose of voting to remove one or more of the Directors. The
Company will assist communicating to other shareholders about the meeting.
13
<PAGE>
APPENDIX A
The following are descriptions of certain types of securities in which we may
invest the Fund's assets:
CONVERTIBLE SECURITIES
We may invest in convertible securities which are bonds, preferred stocks, and
other securities that pay interest or dividends and offer the buyer the option
of converting the security into common stock. The value of convertible
securities depends partially on interest rate changes and the credit quality of
the issuer. Because a convertible security affords an investor the opportunity,
through its conversion feature, to participate in the capital appreciation of
the underlying common stock, the value of convertible securities may also change
based on the price of the common stock.
MONEY MARKET INSTRUMENTS
We may hold a certain portion of the Fund's assets in high-quality, U.S.
dollar-denominated debt securities that have remaining maturities of one year or
less. Such securities may include U.S. Government obligations, commercial paper
and other short-term corporate obligations, repurchase agreements collateralized
with U.S. Government securities, and certificates of deposit, bankers'
acceptances, bank deposits, and other financial institution obligations. These
securities may carry fixed or variable interest rates.
ILLIQUID SECURITIES
We may not invest more than 15% of the market value of the Fund's net assets in
securities which are illiquid. Illiquid securities are those securities that
cannot be disposed of in the ordinary course of business in seven days or less
at approximately the value at which the Fund has valued the securities.
FORWARD CURRENCY CONTRACTS
We may hold securities denominated in foreign currencies. As a result, the value
of the securities will be affected by changes in the exchange rate between the
dollar and foreign currencies. In managing currency exposure, we may enter into
forward currency contracts. A forward currency contract involves an agreement to
purchase or sell a specified currency at a specified future date or over a
specified time period at a price set at the time of the contract.
14
<PAGE>
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 you with the opportunity to formulate your 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
other Funds in the USAA Family of Funds, including charges and expenses,
call us for a Prospectus. Read it carefully before you invest or send
money.
FUND
TYPE/NAME VOLATILITY
---------------------------------------------------------------
CAPITAL APPRECIATION
Aggressive Growth Very high
Emerging Markets (5) Very high
First Start Growth Moderate to high
Gold (5) Very high
Growth Moderate to high
Growth & Income Moderate
International (5) Moderate to high
S&P 500 Index (1) Moderate
Science & Technology Very high
World Growth (5) Moderate to high
ASSET ALLOCATION
Balanced Strategy Moderate
Cornerstone Strategy (5) Moderate
Growth and Tax Strategy (2) Moderate
Growth Strategy (5) Moderate to high
Income Strategy Low to moderate
INCOME -- TAXABLE
GNMA Low to moderate
Income Moderate
Income Stock Moderate
Short-Term Bond Low
INCOME -- TAX EXEMPT
Long-Term (2) Moderate
Intermediate-Term (2) Low to moderate
Short-Term (2) Low
State Bond/Income (2, 3) Moderate
MONEY MARKET
Money Market (4) Very low
Tax Exempt Money Market (2, 4) Very low
Treasury Money Market Trust (4) Very low
State Money Market (2, 3, 4) Very low
(1) S&P(R) IS A TRADEMARK OF THE MCGRAW-HILL COMPANIES, INC., AND HAS BEEN
LICENSED FOR USE. THE PRODUCT IS NOT SPONSORED, SOLD OR PROMOTED BY
STANDARD & POOR'S, AND STANDARD & POOR'S MAKES NO REPRESENTATION REGARDING
THE ADVISABILITY OF INVESTING IN THE PRODUCT.
(2) SOME INCOME MAY BE SUBJECT TO STATE OR LOCAL TAXES.
(3) CALIFORNIA, FLORIDA, NEW YORK, TEXAS, AND VIRGINIA FUNDS ARE OFFERED ONLY TO
RESIDENTS OF THOSE STATES.
(4) AN INVESTMENT IN A MONEY MARKET FUND IS NEITHER INSURED NOR GUARANTEED BY
THE U.S. GOVERNMENT AND THERE IS NO ASSURANCE THAT ANY OF THE FUNDS WILL BE
ABLE TO MAINTAIN A STABLE NET ASSET VALUE OF $1 PER SHARE.
(5) FOREIGN INVESTING IS SUBJECT TO ADDITIONAL RISKS, SUCH AS CURRENCY
FLUCTUATIONS, MARKET ILLIQUIDITY, AND POLITICAL INSTABILITY.
15
<PAGE>
If you would like more information about the Fund, you may call 1-800-531-8181
to request a free copy of the most recent financial report and/or the Fund's
Statement of Additional Information (SAI), dated August 1, 1997. The SAI has
been filed with the SEC and is incorporated by reference into this Prospectus
(meaning it is legally a part of the Prospectus).
Investment Adviser, Underwriter and Distributor
USAA Investment Management Company 9800
Fredericksburg Road San Antonio, Texas 78288
-----------------------------
Transfer Agent
USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, Texas 78288
-----------------------------
Custodian
State Street Bank and Trust Company
P.O. Box 1713
Boston, Massachusetts 02105
--------------------------
Telephone Assistance
Call toll free - Central Time
Monday - Friday 8:00 a.m. to 8:00 p.m.
Saturdays 8:30 a.m. to 5:00 p.m.
For Additional Information on Mutual Funds
1-800-531-8181, (in San Antonio) 456-7211
For account servicing, exchanges or redemptions
1-800-531-8448, (in San Antonio) 456-7202
Recorded Mutual Fund Price Quotes
24-Hour Service (from any phone)
1-800-531-8066, (in San Antonio) 498-8066
Mutual Fund TouchLINE(R)
(from Touchtone phones only)
For account balance, last transaction or fund prices:
1-800-531-8777, (in San Antonio) 498-8777
16
<PAGE>
[USAA EAGLE LOGO]
USAA STATEMENT OF
MUTUAL ADDITIONAL INFORMATION
FUND, INC. August 1, 1997
- --------------------------------------------------------------------------------
USAA MUTUAL FUND, INC.
USAA MUTUAL FUND, INC. (the Company) is a registered investment company offering
shares of ten no-load mutual funds, two of which are described in this Statement
of Additional Information (SAI): the Science & Technology Fund and the First
Start Growth Fund (collectively, the Funds). Each Fund is classified as a
diversified investment company and has its own investment objective designed to
meet different investment goals.
You may obtain a free copy of a Prospectus for either Fund dated August 1, 1997,
by writing to USAA Mutual Fund, Inc., 9800 Fredericksburg Rd., San Antonio, TX
78288, or by calling toll free 1-800-531-8181. The Prospectus provides the basic
information you should know before investing in each Fund. This SAI is not a
Prospectus and contains information in addition to and more detailed than that
set forth in each Fund's Prospectus. It is intended to provide you with
additional information regarding the activities and operations of the Company
and the Funds and should be read in conjunction with each Fund's Prospectus.
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
PAGE
2 Valuation of Securities
2 Conditions of Purchase and Redemption
3 Additional Information Regarding Redemption of Shares
3 Investment Plans
4 Investment Policies
6 Investment Restrictions
7 Portfolio Transactions
7 Further Description of Shares
8 Tax Considerations
8 Directors and Officers of the Company
11 The Company's Manager
12 General Information
12 Calculation of Performance Data
13 Appendix A - Long-Term and Short-Term Debt Ratings
16 Appendix B - Comparison of Portfolio Performance
19 Appendix C - Dollar-Cost Averaging
<PAGE>
VALUATION OF SECURITIES
Shares of each Fund are offered on a continuing best efforts basis through USAA
Investment Management Company (IMCO or the Manager). The offering price for
shares of each Fund is equal to the current net asset value (NAV) per share. The
NAV per share of each Fund is calculated by adding the value of all its
portfolio securities and other assets, deducting its liabilities, and dividing
by the number of shares outstanding.
Each 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, Martin Luther King Jr. Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving, and Christmas, and on the preceding Friday or subsequent Monday
when one of these holidays falls on a Saturday or Sunday, respectively.
The value of the securities of each Fund is determined by one or more of
the following methods:
(1) Portfolio securities, except as otherwise noted, traded primarily on a
domestic securities exchange are valued at the last sales price on that
exchange. Portfolio securities traded primarily on foreign securities
exchanges are generally valued at the closing values of such securities on
the exchange where primarily traded. If no sale is reported, the average
of the bid and asked prices is generally used depending upon local
custom or regulation.
(2) Over-the-counter securities are priced at the last sales price or, if not
available, at the average of the bid and asked prices at the time trading
closes on the NYSE.
(3) Debt securities purchased with maturities of 60 days or less are stated at
amortized cost which approximates market value. Repurchase agreements are
valued at cost.
(4) Other debt securities may be valued each business day by a pricing service
(the Service) approved by the Board of Directors. The Service uses the
mean between quoted bid and asked prices or the last sales price to price
securities when, in the Service's judgment, these prices are readily
available and are representative of the securities' market values. For
many securities, such prices are not readily available. The Service
generally prices those securities based on methods which include
consideration of yields or prices of securities of comparable quality,
coupon, maturity and type, indications as to values from dealers in
securities, and general market conditions.
(5) Securities which cannot be valued by the methods set forth above, and all
other assets, are valued in good faith at fair value using methods
determined by the Manager under the general supervision of the Board of
Directors.
Securities trading in foreign markets may not take place on all days on
which the NYSE is open. Further, trading takes place in various foreign markets
on days on which the NYSE is not open. The calculation of each Fund's NAV
therefore may not take place contemporaneously with the determination of the
prices of securities held by each Fund. Events affecting the values of portfolio
securities that occur between the time their prices are determined and the close
of normal trading on the NYSE on a day the Fund's NAV is calculated will not be
reflected in the Fund's NAV, unless the Manager determines that the particular
event would materially affect NAV. In such a case, the Fund's Manager, under the
supervision of the Board of Directors, will use all relevant available
information to determine a fair value for the affected portfolio securities.
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 USAA Shareholder Account Services (Transfer Agent). The account must be
clearly identified, and you must include the number of shares to be transferred,
the signatures of all registered owners, and all stock certificates, if any,
which are the subject of transfer. You also need to send written instructions
signed by all registered owners and supporting documents to change an account
registration due to events such as divorce, marriage, or death. If a new account
needs to be established, an application must be completed and returned to the
Transfer Agent.
2
<PAGE>
ADDITIONAL INFORMATION REGARDING REDEMPTION OF SHARES
The value of a shareholder's investment at the time of redemption may be more or
less than the cost at purchase, depending on the value of the securities held in
each Fund's portfolio. Requests for redemption which are subject to any special
conditions, or which specify an effective date other than as provided herein,
cannot be accepted. A gain or loss for tax purposes may be realized on the sale
of shares, depending upon the price when redeemed.
The Board of Directors may cause the redemption of an account with a
balance of less than 10 shares of each Fund provided (1) the value of the
account has been reduced, for reasons other than market action, below the
minimum initial investment in the Fund at the time of the establishment of the
account, (2) the account has remained below the minimum level for six months,
and (3) 60 days' prior written notice of the proposed redemption has been sent
to the shareholder. Shares will be redeemed at the NAV on the date fixed for
redemption by the Board of Directors. Prompt payment will be made by mail to the
last known address of the shareholder.
The Company reserves the right to suspend the right of redemption or
postpone the date of payment (1) for any periods during which the NYSE is
closed, (2) when trading in the markets the Company normally utilizes is
restricted, or an emergency exists as determined by the SEC so that disposal of
the Company's investments or determination of its net asset value is not
reasonably practicable, or (3) for such other periods as the SEC by order may
permit for protection of the Company's shareholders.
For the mutual protection of the investor and the Funds, the Company may
require a signature guarantee. 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 each 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.
AUTOMATIC PURCHASE OF SHARES
INVESTART(R) - A low initial investment purchase plan for the Science &
Technology Fund. With this plan the regular minimum initial investment amount is
waived if you make an initial investment as low as $100 with subsequent monthly
additions of at least $50 through electronic funds transfer from a checking or
savings account.
INVESTRONIC(R) - The regular purchase of additional shares through electronic
funds transfer from a checking or savings account. You may invest as little as
$50 per month.
DIRECT PURCHASE SERVICE - The periodic purchase of shares through electronic
funds transfer from an employer (including government allotments), an
income-producing investment, or an account with a participating financial
institution.
AUTOMATIC PURCHASE PLAN - The periodic transfer of funds from a USAA money
market fund to purchase shares in another non-money market USAA mutual fund.
There is a minimum investment required for this program of $5,000 in the money
market fund, with a monthly transaction minimum of $50.
BUY/SELL SERVICE - The intermittent purchase or redemption of shares through
electronic funds transfer to or from a checking or savings account.
Participation in these automatic purchase plans will permit a shareholder
to engage in dollar-cost averaging. For additional information concerning the
benefits of dollar-cost averaging, see APPENDIX C.
SYSTEMATIC WITHDRAWAL PLAN
If a shareholder in a single investment account (accounts in different Funds
cannot be aggregated for this purpose) owns shares having a NAV of $5,000 or
more, the shareholder may request that enough shares to produce a fixed amount
of money be liquidated from the account monthly or quarterly. The amount of each
withdrawal must be at least $50. Using the electronic funds transfer service,
shareholders may choose to have
3
<PAGE>
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. The Manager will bear
any additional expenses of administering the plan.
Withdrawals will be made by redeeming full and fractional shares on the
date selected by the shareholder at the time the plan is established. Withdrawal
payments made under this plan may exceed dividends and distributions and, to
this extent, will involve the use of principal and could reduce the dollar value
of a shareholder's investment and eventually exhaust the account. Reinvesting
dividends and distributions helps replenish the account. Because share values
and net investment income can fluctuate, shareholders should not expect
withdrawals to be offset by rising income or share value gains.
Each redemption of shares may result in a gain or loss, which must be
reported on the shareholder's income tax return. Therefore, a shareholder should
keep an accurate record of any gain or loss on each withdrawal.
TAX-DEFERRED RETIREMENT PLANS
Federal taxes on current income may be deferred if an investor qualifies for
certain types of retirement programs. For the convenience of the investor, the
following plans are made available by the Manager: IRA (including SEP/IRA) and
403(b)(7) accounts. The minimum initial investment in each of these plans is
$250 or minimum $100 with a minimum $50 monthly electronic investment in the
Science & Technology Fund or minimum $20 with a minimum $20 monthly electronic
investment in the First Start Growth Fund. Subsequent investments of $50 or more
in the Science & Technology Fund and $20 or more in the First Start Growth Fund
may be made at any time. Investments may be made in one or any combination of
the portfolios described in the Prospectus of each Fund of USAA Mutual Fund,
Inc. and USAA Investment Trust (not available in the Growth and Tax Strategy
Fund).
Retirement plan applications for the IRA and 403(b)(7) programs should be
sent directly to USAA Shareholder Account Services, 9800 Fredericksburg Rd., San
Antonio, TX 78288. USAA Federal Savings Bank serves as Custodian for these
tax-deferred retirement plans under the programs made available by the Manager.
Applications for these retirement plans received by the Manager will be
forwarded to the Custodian for acceptance.
An administrative fee of $20 is deducted from the proceeds of a
distribution closing an account. Exceptions to the fee are: partial
distributions, total transfer within USAA, and distributions due to disability
or death. This charge is subject to change as provided in the various
agreements. There may be additional charges, as mutually agreed upon between the
investor and the Custodian, for further services requested of the Custodian.
Each employer or individual establishing a tax-deferred retirement plan is
advised to consult with a tax adviser before establishing the plan. Detailed
information about the plans may be obtained from the Manager.
INVESTMENT POLICIES
The section captioned FUND INVESTMENTS in each Fund's Prospectus describes the
fundamental investment objective and the investment policies applicable to each
Fund and the following is provided as additional information.
SECTION 4(2) COMMERCIAL PAPER AND RULE 144A SECURITIES
Each Fund may invest in commercial paper issued in reliance on the "private
placement" exemption from registration afforded by Section 4(2) of the
Securities Act of 1933 (Section 4(2) Commercial Paper). Section 4(2) Commercial
Paper is restricted as to disposition under the federal securities laws;
therefore, any resale of Section 4(2) Commercial Paper must be effected in a
transaction exempt from registration under the Securities Act of 1933 (1933
Act). Section 4(2) Commercial Paper is normally resold to other investors
through or with the assistance of the issuer or investment dealers who make a
market in Section 4(2) Commercial Paper, thus providing liquidity.
Each Fund may also purchase restricted securities eligible for resale to
"qualified institutional buyers" pursuant to Rule 144A under the 1933 Act (Rule
144A Securities). Rule 144A provides a non-exclusive safe harbor from the
registration requirements of the 1933 Act for resales of certain securities to
institutional investors.
4
<PAGE>
LIQUIDITY DETERMINATIONS
The Board of Directors has established guidelines pursuant to which Section 4(2)
Commercial Paper, Rule 144A Securities, and certain restricted debt securities
that are subject to unconditional put or demand features exercisable within
seven days (Restricted Put Bonds) may be determined to be liquid for purposes of
complying with the Funds' investment restrictions applicable to investments in
illiquid securities. In determining the liquidity of Section 4(2) Commercial
Paper and Rule 144A Securities, the Manager will consider the following factors,
among others, established by the Board of Directors: (1) the frequency of trades
and quotes for the security, (2) the number of dealers willing to purchase or
sell the security and the number of other potential purchasers, (3) dealer
undertakings to make a market in the security, and (4) the nature of the
security and the nature of the marketplace trades, including the time needed to
dispose of the security, the method of soliciting offers, and the mechanics of
transfer. In determining the liquidity of Restricted Put Bonds, the Manager will
evaluate the credit quality of the party (the Put Provider) issuing (or
unconditionally guaranteeing performance on) the unconditional put or demand
feature of the Restricted Put Bond. In evaluating the credit quality of the Put
Provider, the Manager will consider all factors that it deems indicative of the
capacity of the Put Provider to meet its obligations under the Restricted Put
Bond based upon a review of the Put Provider's outstanding debt and financial
statements and general economic conditions.
Certain foreign securities (including Eurodollar obligations) may be
eligible for resale pursuant to Rule 144A in the United States and may also
trade without restriction in one or more foreign markets. Such securities may be
determined to be liquid based upon these foreign markets without regard to their
eligibility for resale pursuant to Rule 144A. In such cases, these securities
will not be treated as Rule 144A securities for purposes of the liquidity
guidelines established by the Board of Directors.
FORWARD CURRENCY CONTRACTS
Each Fund may enter into forward currency contracts in order to protect against
uncertainty in the level of future foreign exchange rates.
A forward contract involves an agreement to purchase or sell a specific
currency at a specified future date or over a specified time period at a price
set at the time of the contract. These contracts are usually traded directly
between currency traders (usually large commercial banks) and their customers. A
forward contract generally has no deposit requirements, and no commissions are
charged.
Each Fund may enter into forward currency contracts under two
circumstances. First, when the Fund enters into a contract for the purchase or
sale of a security denominated in a foreign currency, it may desire to "lock in"
the U.S. dollar price of the security. By entering into such a contract, the
Fund will be able to protect itself against a possible loss resulting from an
adverse change in the relationship between the U.S. dollar and the foreign
currency from the date the security is purchased or sold to the date on which
payment is made or received. Second, when management of the Fund believes that
the currency of a specific country may deteriorate relative to the U.S. dollar,
it may enter into a forward contract to sell that currency. The Fund may not
hedge with respect to a particular currency for an amount greater than the
aggregate market value (determined at the time of making any sale of forward
currency) of the securities held in its portfolio denominated or quoted in, or
bearing a substantial correlation to, such currency.
The use of forward contracts involves certain risks. The precise matching
of contract amounts and the value of securities involved generally will not be
possible since the future value of such securities in currencies more than
likely will change between the date the contract is entered into and the date it
matures. The projection of short-term currency market movements is extremely
difficult and successful execution of a short-term hedging strategy is
uncertain. Under normal circumstances, consideration of the prospect for
currency parities will be incorporated into the longer term investment
strategies. The Manager believes it is important, however, to have the
flexibility to enter into such contracts when it determines it is in the best
interest of a Fund to do so. It is impossible to forecast what the market value
of portfolio securities will be at the expiration of a contract. Accordingly, it
may be necessary for the Fund to purchase additional currency (and bear the
expense of such purchase) if the market value of the security is less than the
amount of currency a Fund is obligated to deliver, and if a decision is made to
sell the security and make delivery of the currency. Conversely, it may be
necessary to sell some of the foreign currency received on the sale of the
portfolio security if its market value exceeds the amount of currency the Fund
is obligated to deliver.
Each Fund is not required to enter into such transactions and will not do
so unless deemed appropriate by the Manager.
Although each Fund values its assets each business day in terms of U.S.
dollars, it does not intend to convert its foreign currencies into U.S. dollars
on a daily basis. It will do so from time to time, and shareholders should be
aware of currency conversion costs. Although foreign exchange dealers do not
charge a fee for conversion, they do realize a profit based on the difference
(spread) between the prices at which they are buying and selling various
currencies. Thus, a dealer may offer to sell a foreign currency to the Fund at
one rate, while offering a lesser rate of exchange should the Fund desire to
resell that currency to the dealer.
5
<PAGE>
CONVERTIBLE SECURITIES
Convertible securities are bonds, preferred stocks, and other securities that
pay interest or dividends and offer the buyer the option of converting the
security into common stock. The value of convertible securities depends
partially on interest rate changes and the credit quality of the issuer. Because
a convertible security affords an investor the opportunity, through its
conversion feature, to participate in the capital appreciation of the underlying
common stock, the value of convertible securities may also change based on the
price of the common stock.
The convertible securities in which each Fund will invest may be rated
below investment grade as determined by Moody's Investors Service, Inc.
(Moody's) or Standard & Poor's Ratings Group (S&P), or unrated but judged by the
Manager to be of comparable quality (commonly called junk bonds). For a more
complete description of debt ratings, see APPENDIX A. Such securities are deemed
to be speculative and involve greater risk of default due to changes in interest
rates, economic conditions, and the issuer's creditworthiness. As a result,
their market prices tend to fluctuate more than higher-quality securities.
During periods of general economic downturns or rising interest rates, issuers
of such securities may experience financial difficulties which could affect
their ability to make timely interest and principal payments. Each Fund's
ability to timely and accurately value and dispose of lower quality securities
may also be affected by the absence or periodic discontinuance of liquid trading
markets.
INVESTMENT RESTRICTIONS
The following investment restrictions have been adopted by the Company for and
are applicable to each Fund. These restrictions may not be changed for any given
Fund without approval by the lesser of (1) 67% or more of the voting securities
present at a meeting of the Fund if more than 50% of the outstanding voting
securities of the Fund are present or represented by proxy or (2) more than 50%
of the Fund's outstanding voting securities.
Each Fund may not:
(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) Invest 25% or more 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.
(7) Purchase or sell commodities, except that each Fund may invest in
financial futures contracts, options thereon, and similar instruments.
(8) Purchase or sell real estate unless acquired as a result of ownership of
securities or other instruments, except that each Fund may invest in
securities or other instruments backed by real estate or securities of
companies that deal in real estate or are engaged in the real estate
business.
With respect to each Fund's concentration policy as described above and in
its Prospectus, the Manager uses industry classifications for industries based
on categories established by Standard & Poor's Corporation (Standard & Poor's)
for the Standard & Poor's 500 Composite Index, with certain modifications.
Because the Manager has determined that certain categories within, or in
addition to, those set forth by Standard & Poor's have unique investment
characteristics, additional industries are included as industry classifications.
ADDITIONAL RESTRICTION
The following restriction is not considered to be a fundamental policy of each
Fund. This additional restriction may be changed by the Board of Directors of
the Company without notice to or approval by the shareholders.
Each Fund may not:
(1) Purchase any security while borrowings representing more than 5% of the
Fund's total assets are outstanding.
6
<PAGE>
PORTFOLIO TRANSACTIONS
The Manager, pursuant to the Advisory Agreement dated September 21, 1990, and
subject to the general control of the Company's Board of Directors, places all
orders for the purchase and sale of Fund securities. In executing portfolio
transactions and selecting brokers and dealers, it is the Company's policy to
seek the best overall terms available. The Manager shall consider such factors
as it deems relevant, including the breadth of the market in the security, the
financial condition and execution capability of the broker or dealer, and the
reasonableness of the commission, if any, for the specific transaction or on a
continuing basis. Securities purchased or sold in the over-the-counter market
will be executed through principal market makers, except when, in the opinion of
the Manager, better prices and execution are available elsewhere.
In the allocation of brokerage business, preference may be given to those
broker-dealers who provide research or other services to the Manager as long as
there is no sacrifice in obtaining the best overall terms available. Such
research and other services may include, for example: advice concerning the
value of securities, the advisability of investing in, purchasing, or selling
securities, and the availability of securities or the purchasers or sellers of
securities; analyses and reports concerning issuers, industries, securities,
economic factors and trends, portfolio strategy, and performance of accounts;
and various functions incidental to effecting securities transactions, such as
clearance and settlement. In return for such services, a Fund may pay to those
brokers a higher commission than may be charged by other brokers, provided that
the Manager determines in good faith that such commission is reasonable in terms
of either that particular transaction or of the overall responsibility of the
Manager to the Funds and its other clients. The receipt of research from
broker-dealers that execute transactions on behalf of the Company may be useful
to the Manager in rendering investment management services to other clients
(including affiliates of the Manager), and conversely, such research provided by
broker-dealers who have executed transaction orders on behalf of other clients
may be useful to the Manager in carrying out its obligations to the Company.
While such research is available to and may be used by the Manager in providing
investment advice to all its clients (including affiliates of the Manager), not
all of such research may be used by the Manager for the benefit of the Company.
Such research and services will be in addition to and not in lieu of research
and services provided by the Manager, and the expenses of the Manager will not
necessarily be reduced by the receipt of such supplemental research. See THE
COMPANY'S MANAGER.
Securities of the same issuer may be purchased, held, or sold at the same
time by the Company for any or all of its Funds, or other accounts or companies
for which the Manager acts as the investment adviser (including affiliates of
the Manager). On occasions when the Manager deems the purchase or sale of a
security to be in the best interest of the Company, as well as the Manager's
other clients, the Manager, to the extent permitted by applicable laws and
regulations, may aggregate such securities to be sold or purchased for the
Company with those to be sold or purchased for other customers in order to
obtain best execution and lower brokerage commissions, if any. In such event,
allocation of the securities so purchased or sold, as well as the expenses
incurred in the transaction, will be made by the Manager in the manner it
considers to be most equitable and consistent with its fiduciary obligations to
all such customers, including the Company. In some instances, this procedure may
impact the price and size of the position obtainable for the Company.
PORTFOLIO TURNOVER RATES
The rate of portfolio turnover will not be a limiting factor when the Manager
deems changes in each Fund's portfolio appropriate in view of each Fund's
investment objective. Although neither Fund will purchase or sell securities
solely to achieve short-term trading profits, each Fund may sell portfolio
securities without regard to the length of time held if consistent with each
Fund's investment objective. A higher degree of portfolio activity will increase
brokerage costs to a Fund.
The portfolio turnover rate is computed by dividing the dollar amount of
securities purchased or sold (whichever is smaller) by the average value of
securities owned during the year. Short-term investments such as commercial
paper and short-term U.S. Government securities are not considered when
computing the turnover rate.
FURTHER DESCRIPTION OF SHARES
The Company is authorized to issue shares in separate series or Funds. Ten Funds
have been established, two of which are described in this SAI. Under the
Articles of Incorporation, the Board of Directors is authorized to create new
Funds in addition to those already existing without shareholder approval.
The assets of each Fund and all income, earnings, profits, and proceeds
thereof, subject only to the rights of creditors, are specifically allocated to
such Fund. They constitute the underlying assets of each Fund, are required to
be segregated on the books of account, and are to be charged with the expenses
of such Fund. Any general expenses of the Company not readily identifiable as
belonging to a particular Fund are allocated on the basis of each Fund's
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
7
<PAGE>
that Fund with every other share and is entitled to such dividends and
distributions out of the net income and capital gains belonging to that Fund
when declared by the Board.
Under the provisions of the Bylaws of the Company, no annual meeting of
shareholders is required. Thus, there will ordinarily be no shareholder meeting
unless required by the 1940 Act. Under certain circumstances, however,
shareholders may apply for shareholder information in order to obtain signatures
to request a special shareholder meeting. Moreover, pursuant to the Bylaws of
the Company, any Director may be removed by the affirmative vote of a majority
of the outstanding Company shares; and holders of 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 net asset values of the Fund's shares. However, on matters
affecting an individual Fund, a separate vote of the shareholders of that Fund
is required. Shareholders of a Fund are not entitled to vote on any matter which
does not affect that Fund but which requires a separate vote of another Fund.
Shares do not have cumulative voting rights, which means that holders of more
than 50% of the shares voting for the election of Directors can elect 100% of
the Company's Board of Directors, and the holders of less than 50% of the shares
voting for the election of Directors will not be able to elect any person as a
Director.
Shareholders of a particular Fund might have the power to elect all of the
Directors of the Company because that Fund has a majority of the total
outstanding shares of the Company. When issued, each Fund's shares are fully
paid and nonassessable, have no pre-emptive or subscription rights, and are
fully transferable. There are no conversion rights.
TAX CONSIDERATIONS
Each Fund intends to qualify as a regulated investment company under Subchapter
M of the Internal Revenue Code of 1986, as amended (the Code). Accordingly, each
Fund will not be liable for federal income taxes on its taxable net investment
income and net capital gains (capital gains in excess of capital losses) that
are distributed to shareholders, provided that each Fund distributes at least
90% of its net investment income and net short-term capital gain for the taxable
year.
To qualify as a regulated investment company, each Fund must, among other
things, (1) derive in each taxable year at least 90% of its gross income from
dividends, interest, payments with respect to securities loans, gains from the
sale or other disposition of stock, securities or foreign currencies, or other
income derived with respect to its business of investing in such stock,
securities, or currencies (the 90% test), (2) derive in each taxable year less
than 30% of its gross income from the sale or other disposition of stock or
securities held less than three months (the 30% test), and (3) satisfy certain
diversification requirements at the close of each quarter of the Fund's taxable
year.
The Code imposes a nondeductible 4% excise tax on a regulated investment
company that fails to distribute during each calendar year an amount at least
equal to the sum of (1) 98% of its taxable net investment income for the
calendar year, (2) 98% of its capital gain net income for the twelve-month
period ending on October 31, and (3) any prior amounts not distributed. Each
Fund intends to make such distributions as are necessary to avoid imposition of
the excise tax.
Taxable distributions are generally included in a shareholder's gross
income for the taxable year in which they are received. Dividends declared in
October, November, or December and made payable to shareholders of record in
such a month will be deemed to have been received on December 31, if the Fund
pays the dividend during the following January. If a shareholder of a Fund
receives a distribution taxable as long-term capital gain with respect to shares
of a Fund and redeems or exchanges the shares before he has held them for more
than six months, any loss on the redemption or exchanges that is less than or
equal to the amount of the distribution will be treated as long-term capital
loss.
DIRECTORS AND OFFICERS OF THE COMPANY
The Board of Directors of the Company consists of seven Directors. Set forth
below are the Directors and officers of the Company, their respective offices
and principal occupations during the last five years. Unless otherwise
indicated, the business address of each is 9800 Fredericksburg Rd., San Antonio,
TX 78288.
Robert G. Davis 1, 2
Director and Chairman of the Board of Directors
Age: 50
President, Chief Executive Officer, Director and Vice Chairman of the Board of
Directors of USAA Capital Corporation and several of its subsidiaries and
affiliates (1/97-present); Director, Chairman, President, and Chief Executive
Officer, USAA Financial Planning Network, Inc. (1/97-present); Director, Vice
Chairman, Executive Vice President, and Chief Operating Officer, USAA Financial
Planning Network, Inc. (9/96-1/97); Special Assistant to Chairman, United
Services Automobile Association (USAA) (6/96-12/96); President and
8
<PAGE>
Chief Executive Officer, Banc One Credit Corporation (12/95-6/96); and President
and Chief Executive Officer, Banc One Columbus, (8/91-12/95). Mr. Davis also
serves as a Trustee and Chairman of the Board of Trustees of USAA Investment
Trust and USAA State Tax-Free Trust and as a Director and Chairman of the Boards
of Directors of USAA Investment Management Company (IMCO), USAA Tax Exempt Fund,
Inc., USAA Shareholder Account Services, USAA Federal Savings Bank and USAA Real
Estate Company.
Michael J.C. Roth 1, 2
Director, President and Vice Chairman of the Board of Directors
Age: 55
Chief Executive Officer, IMCO (10/93-present); President, Director and Vice
Chairman of the Board of Directors, IMCO (1/90-present). Mr. Roth 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: 62
Senior Vice President, Fixed Income Investments, IMCO (10/85-present). Mr.
Saunders 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.
Barbara B. Dreeben 3, 4, 5
200 Patterson #1008
San Antonio, TX 78209
Director
Age: 52
President, Postal Addvantage (7/92-present); Consultant, Nancy Harkins Stationer
(8/91-12/95). Mrs. Dreeben serves as a Trustee of USAA Investment Trust and USAA
State Tax-Free Trust and as a Director of USAA Tax Exempt Fund, Inc.
Howard L. Freeman, Jr. 2, 3, 4, 5
2710 Hopeton
San Antonio, TX 78230
Director
Age: 62
Retired. Assistant General Manager for Finance, San Antonio City Public Service
Board (1976-1996). Mr. Freeman serves as a Trustee of USAA Investment Trust and
USAA State Tax-Free Trust and as a Director of USAA Tax Exempt Fund, Inc.
Robert L. Mason, Ph.D. 3, 4, 5
12823 Queens Forest
San Antonio, TX 78230
Director
Age: 51
Manager, Statistical Analysis Section, Southwest Research Institute (8/75-
present). Dr. Mason 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: 54
Vice President, Beldon Roofing and Remodeling (1985-present). Mr. Zucker serves
as a Trustee of USAA Investment Trust and USAA State Tax-Free Trust and as a
Director of USAA Tax Exempt Fund, Inc.
9
<PAGE>
Michael D. Wagner 1
Secretary
Age: 49
Vice President, Corporate Counsel, USAA (1982-present). Mr. Wagner has held
various positions in the legal department of USAA since 1970 and 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: 47
Vice President, Compliance, IMCO (12/94-present); Vice President and Chief
Operating Officer, Commonwealth Shareholder Services (6/94-11/94); and Vice
President, Compliance, IMCO (12/91-5/94). Mr. Ciccone 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: 52
Vice President, Controller, IMCO (10/92-present); Vice President, Corporate
Financial Analysis, USAA (9/92- 10/92); Assistant Vice President, Financial
Plans and Support, USAA (8/91-9/92). Mrs. Kirk 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: 38
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 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 auditors' reports and undertakes certain studies and analyses
as directed by the Board. The Corporate Governance Committee of the Board of
Directors maintains oversight of the organization, performance, and
effectiveness of the Board and independent Directors.
In addition to the previously listed Directors and/or officers of the
Company who also serve as Directors and/or officers of the Manager, the
following individuals are Directors and/or executive officers of the Manager:
Harry W. Miller, Senior Vice President, Investments (Equity); Carl W. Shirley,
Senior Vice President, Insurance Company Portfolios; and John J. Dallahan,
Senior Vice President, Investment Services. There are no family relationships
among the Directors, officers, and managerial level employees of the Company or
its Manager.
10
<PAGE>
The following table sets forth information describing the compensation of
the current Directors of the Company for their services as Directors for the
fiscal year ended July 31, 1996.
Name Aggregate Total Compensation
of Compensation from the USAA
Director from the Company Family of Funds (c)
- -------- ------------------ ------------------
C. Dale Briscoe* $2,389 $ 9,700
George E. Brown *(a) 7,885 28,900
Barbara B. Dreeben 6,885 27,900
Howard L. Freeman, Jr. 7,885 28,900
M. Staser Holcomb** None (b) None (b)
Michael J.C. Roth None (b) None (b)
John W. Saunders, Jr. None (b) None (b)
Richard A. Zucker 7,885 28,900
- ----------------
* Effective January 1, 1996, C. Dale Briscoe retired from the Board of
Directors and effective December 31, 1996, George E. Brown retired from
the Board of Directors.
** Effective December 1, 1996, Robert G. Davis replaced M. Staser Holcomb as
Director and Chairman of the Board of Directors.
(a) The USAA Family of Funds has accrued deferred compensation for Mr. Brown
in an amount (plus earnings thereon) of $21,525. The compensation was
deferred by Mr. Brown pursuant to a non-qualified Deferred Compensation
Plan, under which deferred amounts accumulate interest quarterly based on
the annualized U.S. Treasury Bill rate in effect on the last day of the
quarter. Amounts deferred and accumulated earnings thereon are not funded
and are general unsecured liabilities of the USAA Funds until paid. The
Deferred Compensation Plan was terminated in 1988 and no compensation has
been deferred by any Director/Trustee of the USAA Family of Funds since
the Plan was terminated.
(b) M. Staser Holcomb, Michael J.C. Roth, and John W. Saunders, Jr. are
affiliated with the Company's investment adviser, IMCO, and, accordingly,
receive no remuneration from the Company or any other Fund of the USAA
Family of Funds.
(c) At July 31, 1996, the USAA Family of Funds consisted of four registered
investment companies offering 33 individual funds. Each Director presently
serves as a Director or Trustee of each investment company in the USAA
Family of Funds. In addition, Michael J.C. Roth presently serves as a
Trustee of USAA Life Investment Trust, a registered investment company
advised by IMCO, consisting of five funds offered to investors in a fixed
and variable annuity contract with USAA Life Insurance Company. Mr. Roth
receives no compensation as Trustee of USAA Life Investment Trust.
All of the above Directors are also Directors/Trustees of the other funds
for which IMCO serves as investment adviser. No compensation is paid by any fund
to any Director/Trustee who is a director, officer, or employee of IMCO or its
affiliates. No pension or retirement benefits are accrued as part of fund
expenses. The Company reimburses certain expenses of the Directors who are not
affiliated with the investment adviser.
THE COMPANY'S MANAGER
As described in each Fund's Prospectus, USAA Investment Management Company is
the Manager and investment adviser, providing services under the Advisory
Agreement. The Manager was organized in May 1970 and has served as investment
adviser and underwriter for USAA Mutual Fund, Inc. from its inception.
In addition to managing the Company's assets, the Manager advises and
manages the investments for USAA and its affiliated companies as well as those
of USAA Tax Exempt Fund, Inc., USAA Investment Trust, and USAA State Tax-Free
Trust, and USAA Life Investment Trust. As of the date of this SAI, total assets
under management by the Manager were approximately $35 billion, of which
approximately $20 billion were in mutual fund portfolios.
ADVISORY AGREEMENT
Under the Advisory Agreement, the Manager provides an investment program,
carries out the investment policy, and manages the portfolio assets for each
Fund. The Manager is authorized, subject to the control of the Board of
Directors of the Company, to determine the selection, amount, and time to buy or
sell securities for each Fund. In addition to providing investment services, the
Manager pays for office space, facilities, business equipment, and accounting
services (in addition to those provided by the Custodian) for the Company. The
Manager compensates all personnel, officers, and Directors of the Company if
such persons are also employees of the Manager or its affiliates. For these
services under the Advisory Agreement, the
11
<PAGE>
Company has agreed to pay the Manager a fee computed as described under FUND
MANAGEMENT in each Fund's Prospectus. Management fees are computed and accrued
daily and are payable monthly.
Except for the services and facilities provided by the Manager, each Fund
pays all other expenses incurred in its operation. Expenses for which each Fund
is responsible includes taxes (if any), brokerage commissions on portfolio
transactions (if any), expenses of issuance and redemption of shares, charges of
transfer agents, custodians and dividend disbursing agents, costs of preparing
and distributing proxy material, costs of printing and engraving stock
certificates, auditing and legal expenses, certain expenses of registering and
qualifying shares for sale, fees of Directors who are not interested persons
(not affiliated) of the Manager, costs of typesetting, printing and mailing the
Prospectus, SAI and periodic reports to existing shareholders, and any other
charges or fees not specifically enumerated. The Manager pays the cost of
printing and mailing copies of the Prospectus, the SAI, and reports to
prospective shareholders.
The Advisory Agreement will remain in effect until June 30, 1998, for each
Fund and will continue in effect from year to year thereafter for each such Fund
as long as it is approved at least annually by a vote of the outstanding voting
securities of such Fund (as defined by the 1940 Act) or by the Board of
Directors (on behalf of such Fund) including a majority of the Directors who are
not interested persons of the Manager or (otherwise than as Directors) of the
Company, at a meeting called for the purpose of voting on such approval. The
Advisory Agreement may be terminated at any time by either the Company or the
Manager on 60 days' written notice. It will automatically terminate in the event
of its assignment (as defined in the 1940 Act).
UNDERWRITER
The Company has an agreement with the Manager for exclusive underwriting and
distribution of each Fund's shares on a continuing best efforts basis. This
agreement provides that the Manager will receive no fee or other compensation
for such distribution services.
TRANSFER AGENT
The Transfer Agent performs transfer agent services for the Company under a
Transfer Agency Agreement. Services include maintenance of shareholder account
records, handling of communications with shareholders, distribution of Fund
dividends, and production of reports with respect to account activity for
shareholders and the Company. For its services under the Transfer Agency
Agreement, each Fund pays the Transfer Agent an annual fixed fee of $23.50 per
account. This fee is subject to change at any time.
The fee to the Transfer Agent includes processing of all transactions and
correspondence. Fees are billed on a monthly basis at the rate of one-twelfth of
the annual fee. In addition, each Fund pays all out-of-pocket expenses of the
Transfer Agent and other expenses which are incurred at the specific direction
of the Company.
GENERAL INFORMATION
CUSTODIAN
State Street Bank and Trust Company, P.O. Box 1713, Boston, MA 02105, is the
Company's Custodian. The Custodian is responsible for, among other things,
safeguarding and controlling the Company's cash and securities, handling the
receipt and delivery of securities, and collecting interest on the Company's
investments.
COUNSEL
Goodwin, Procter & Hoar LLP, Exchange Place, Boston, MA 02109, will review
certain legal matters for the Company in connection with the shares offered by
the Prospectus.
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP, 112 East Pecan, Suite 2400, San Antonio, TX 78205, is the
Company's independent auditor. In this capacity, the firm is responsible for
auditing the annual financial statements of each Fund and reporting thereon.
CALCULATION OF PERFORMANCE DATA
Information regarding total return of each Fund is provided under PERFORMANCE
INFORMATION in its Prospectus. See VALUATION OF SECURITIES herein for a
discussion of the manner in which the Funds' price per share is calculated.
TOTAL RETURN
Each 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:
12
<PAGE>
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 the 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.
APPENDIX A - LONG-TERM AND SHORT-TERM DEBT RATINGS
1. LONG-TERM DEBT RATINGS:
MOODY'S INVESTORS SERVICE, INC. (MOODY'S)
Aaa Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred
to as "gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong
position of such issues.
Aa Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high-grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities
or fluctuation of protective elements may be of greater amplitude or
there may be other elements present which make the long-term risks
appear somewhat larger than in Aaa securities.
A Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper-medium-grade obligations. Factors
giving security to principal and interest are considered adequate, but
elements may be present which suggest a susceptibility to impairment
sometime in the future.
Baa Bonds which are rated Baa are considered as medium-grade obligations
(i.e., they are neither highly protected nor poorly secured). Interest
payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics
as well.
Ba Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate, and thereby not
well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class.
B Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time
may be small.
Caa Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
Ca Bonds which are rated Ca represent obligations which are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.
C Bonds which are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
STANDARD & POOR'S RATINGS GROUP (S&P)
AAA Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small
degree.
A Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher
rated categories.
13
<PAGE>
BBB Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than in higher
rated categories.
BB Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which
could lead to inadequate capacity to meet timely interest and principal
payments. The BB rating category is also used for debt subordinated to
senior debt that is assigned an actual or implied BBB- rating.
B Debt rated B has a greater vulnerability to default but currently has
the capacity to meet interest payments and principal repayments.
Adverse business, financial, or economic conditions will likely impair
capacity or willingness to pay interest and repay principal. The B
rating category is also used for debt subordinated to senior debt that
is assigned an actual or implied BB or BB- rating.
CCC Debt rated CCC has a currently identifiable vulnerability to default,
and is dependent upon favorable business, financial, and economic
conditions to meet timely payment of interest and repayment of
principal. In the event of adverse business, financial, or economic
conditions, it is not likely to have the capacity to pay interest and
repay principal. The CCC rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied B or
B- rating.
CC The rating CC typically is applied to debt subordinated to senior debt
that is assigned an actual or implied CCC rating.
C The rating C typically is applied to debt subordinated to senior debt
which is assigned an actual or implied CCC- debt rating. The C rating
may be used to cover a situation where a bankruptcy petition has been
filed, but debt service payments are continued.
CI The rating CI is reserved for income bonds on which no interest is
being paid.
D Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due
even if the applicable grace period has not expired, unless S&P
believes that such payments will be made during such grace period. The
D rating also will be used upon the filing of a bankruptcy petition if
debt service payments are jeopardized.
PLUS (+) OR MINUS (-): THE RATINGS FROM AA TO CCC MAY BE MODIFIED BY THE
ADDITION OF A PLUS OR MINUS SIGN TO SHOW RELATIVE STANDING WITHIN THE MAJOR
RATING CATEGORIES.
FITCH INVESTORS SERVICE, INC. (FITCH)
AAA Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by
reasonably foreseeable events.
AA Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is
very strong, although not quite as strong as bonds rated AAA. Because
bonds rated in the AAA and AA categories are not significantly
vulnerable to foreseeable future developments, short-term debt of these
issuers is generally rated F-1+.
A Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to
be strong, but may be more vulnerable to adverse changes in economic
conditions and circumstances than bonds with higher ratings.
BBB Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have adverse impact on these
bonds, and therefore, impair timely payment. The likelihood that the
ratings of these bonds will fall below investment grade is higher than
for bonds with higher ratings.
PLUS (+) MINUS(-) PLUS AND MINUS SIGNS ARE USED WITH A RATING SYMBOL TO INDICATE
THE RELATIVE POSITION OF A CREDIT WITHIN THE RATING CATEGORY. PLUS AND MINUS
SIGNS, HOWEVER, ARE NOT USED IN THE AAA CATEGORY.
DUFF & PHELPS (D&P)
AAA Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA High credit quality. Protection factors are strong. Risk is modest but
may vary slightly from time to time because of economic conditions.
A Protection factors are average but adequate. However, risk factors are
more variable and greater in periods of economic stress.
14
<PAGE>
BBB Below-average protection factors but still considered sufficient for
prudent investment. Considerable variability in risk during economic
cycles.
2. SHORT-TERM DEBT RATINGS:
MOODY'S TAXABLE DEBT
Prime-1 Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1
repayment ability will often be evidenced by many of the following
characteristics:
o Leading market positions in well-established industries.
o High rates of return on funds employed.
o Conservative capitalization structure with moderate reliance on debt and
ample asset protection.
o Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
o Well-established access to a range of financial markets and assured
sources of alternate liquidity.
Prime-2 Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This
will normally be evidenced by many of the characteristics cited
above but to a lesser degree. Earnings trends and coverage ratios,
while sound, may be more subject to variation. Capitalization
characteristics, while still appropriate, may be more affected by
external conditions. Ample alternate liquidity is maintained.
Prime-3 Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayment of senior short-term obligations.
The effect of industry characteristics and market compositions may
be more pronounced. Variability in earnings and profitability may
result in changes in the level of debt protection measurements and
may require relatively high financial leverage. Adequate alternate
liquidity is maintained.
MOODY'S MUNICIPAL
MIG 1/VMIG 1 This designation denotes best quality. There is present
strong protection by established cash flows, superior
liquidity support or demonstrated broadbased access to
the market for refinancing.
MIG 2/VMIG 2 This designation denotes high quality. Margins of
protection are ample although not so large as in the
preceding group.
MIG 3/VMIG 3 This designation denotes favorable quality. All security
elements are accounted for but there is lacking the
undeniable strength of the preceding grades. Liquidity
and cash flow protection may be narrow and market access
for refinancing is likely to be less well established.
MIG 4/VMIG 4 This designation denotes adequate quality. Protection
commonly regarded as required of an investment security
is present and although not distinctly or predominantly
speculative, there is specific risk.
S&P COMMERCIAL PAPER
A-1 This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely
strong safety characteristics are denoted with a plus (+) sign
designation.
A-2 Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as
for issues designated A-1.
A-3 Issues carrying this designation have adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher
designations.
S&P NOTES
SP-1 Strong capacity to pay principal and interest. Issues determined to
possess very strong characteristics are given a plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest, with some
vulnerability to adverse financial and economic changes over the term
of the notes.
FITCH
F-1+ Exceptionally strong credit quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely
payment.
F-1 Very strong credit quality. Issues assigned this rating reflect an
assurance for timely payment only slightly less in degree than issues
rated F-1+.
15
<PAGE>
F-2 Good credit quality. Issues assigned this rating have a satisfactory
degree of assurance for timely payment, but the margin of safety is
not as great as for issues assigned F-1+ and F-1 ratings.
F-3 Fair credit quality. Issues assigned this rating have characteristics
suggesting that the degree of assurance for timely payment is
adequate; however, near-term adverse changes could cause these
securities to be rated below investment grade.
DUFF & PHELPS INC.
D-1+ Highest certainty of timely payment. Short-term liquidity, including
internal operating factors and/or access to alternative sources of
funds, is outstanding, and safety is just below risk-free U.S.
Treasury short-term obligations.
D-1 Very high certainty of timely payment. Liquidity factors are excellent
and supported by good fundamental protection factors. Risk factors are
minor.
D-1- High certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection factors. Risk factors are
very small.
D-2 Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge
total financing requirements, access to capital markets is good. Risk
factors are small.
D-3 Satisfactory liquidity and other protection factors qualify issues as
to investment grade. Risk factors are larger and subject to more
variation. Nevertheless, timely payment is expected.
THOMPSON BANKWATCH, INC.
TBW-1 The highest category; indicates a very high likelihood that principal
and interest will be paid on a timely basis.
TBW-2 The second highest category; while the degree of safety regarding
timely repayment of principal and interest is strong, the relative
degree of safety is not as high as for issues rated TBW-1.
TBW-3 The lowest investment grade category; indicates that while the
obligation is more susceptible to adverse developments (both internal
and external) than those with higher ratings, the capacity to service
principal and interest in a timely fashion is considered adequate.
IBCA INC.
A1 Obligations supported by the highest capacity for timely repayment.
Where issues possess a particularly strong credit feature, a rating of
A1+ is assigned.
A2 Obligations supported by a satisfactory capacity for timely repayment
although such capacity may be susceptible to adverse changes in
business, economic or financial conditions.
A3 Obligations supported by an adequate capacity for timely repayment.
Such capacity is more susceptible to adverse changes in business,
economic or financial conditions than for obligations in higher
categories.
B Obligations for which the capacity for timely repayment is susceptible
to adverse changes in business, economic, or financial conditions.
C Obligations for which there is a high risk of default or which are
currently in default.
APPENDIX B - COMPARISON OF PORTFOLIO PERFORMANCE
Occasionally, we may make comparisons in advertising and sales literature
between each 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 indexes of comparable
securities. Evaluations of Fund performance made by independent sources may also
be used in advertisements concerning the Fund, including reprints of, or
selections from, editorials or articles about the Fund. Each 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 each 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.
16
<PAGE>
Bank Rate Monitor, a service which publishes rates on various bank products such
as CDS, MMDAs and credit cards.
Barron's, a Dow Jones and Company, Inc. business and financial weekly that
periodically reviews mutual fund performance data.
Business Week, a national business weekly that periodically reports the
performance rankings and ratings of a variety of mutual funds.
Chicago Tribune, a newspaper which may cover financial news.
Consumer Reports, a monthly magazine which from time to time reports on
companies in the mutual fund industry.
Dallas Morning News, a newspaper which may cover financial news.
Denver Post, a newspaper which may quote financial news.
Financial Planning, a monthly magazine which may periodically review mutual fund
companies.
Financial Services Week, a weekly newspaper which covers financial news.
Financial World, a monthly magazine that periodically features companies in the
mutual fund industry.
Forbes, a national business publication that periodically reports the
performance of companies in the mutual fund industry.
Fortune, a national business publication that periodically rates the performance
of a variety of mutual funds.
Fund Action, a mutual fund news report.
Houston Chronicle, a newspaper which may cover financial news.
Houston Post, a newspaper which may cover financial news.
IBC/Donoghue's Moneyletter, a biweekly newsletter which covers financial news
and from time to time rates specific mutual funds.
IBC's Money Market Insight, a monthly money market industry analysis prepared by
IBC USA, Inc.
Income and Safety, a monthly newsletter that rates mutual funds.
InvesTech, a bimonthly investment newsletter.
Investment Advisor, a monthly publication directed primarily to the advisor
community; includes ranking of mutual funds using a proprietary methodology.
Investment Company Institute, the national association of the American
investment company industry.
Investor's Business Daily, a newspaper which covers financial news.
Kiplinger's Personal Finance Magazine, a monthly investment advisory publication
that periodically features the performance of a variety of securities.
Lipper Analytical Services, Inc.'s Fixed Income Fund Performance Analysis, a
monthly publication of industry-wide mutual fund performance averages by type of
fund.
Lipper Analytical Services, Inc.'s Mutual Fund Performance Analysis, a monthly
publication of industry-wide mutual fund averages by type of fund.
Los Angeles Times, a newspaper which may cover financial news.
Louis Rukeyser's Wall Street, a publication for investors.
Medical Economics, a monthly magazine providing information to the medical
profession.
Money, a monthly magazine that features the performance of both specific funds
and the mutual fund industry as a whole.
Money Fund Report, a weekly publication of the Donoghue Organization, Inc.,
reporting on the performance of the nation's money market funds, summarizing
money market fund activity, and including certain averages as performance
benchmarks, specifically "Donoghue's Taxable First Tier Fund Average."
Morningstar 5 Star Investor, a monthly newsletter which covers financial news
and rates mutual funds by Morningstar, Inc. (a data service which tracks
open-end mutual funds).
Mutual Fund Forecaster, a monthly newsletter that ranks mutual funds.
Mutual Fund Investing, a newsletter covering mutual funds.
Mutual Fund Performance Report, a monthly publication of mutual fund performance
and rankings, produced by Morningstar, Inc.
17
<PAGE>
Mutual Funds Magazine, a monthly publication reporting on mutual fund investing.
Mutual Fund Source Book, an annual publication produced by Morningstar, Inc.
which describes and rates mutual funds.
Mutual Fund Values, a biweekly guidebook to mutual funds produced by
Morningstar, Inc.
Newsweek, a national business weekly.
New York Times, a newspaper which may cover financial news.
No Load Fund Investor, a newsletter covering companies in the mutual fund
industry.
Personal Investor, a monthly magazine which from time to time features mutual
fund companies and the mutual fund industry.
San Antonio Business Journal, a weekly newspaper that periodically covers mutual
fund companies as well as financial news.
San Antonio Express-News, a newspaper which may cover financial news.
San Francisco Chronicle, a newspaper which may cover financial news.
Smart Money, a monthly magazine featuring news and articles on investing and
mutual funds.
USA Today, a newspaper which may cover financial news.
U.S. News and World Report, a national business weekly that periodically reports
mutual fund performance data.
Wall Street Journal, a Dow Jones and Company, Inc. newspaper which covers
financial news.
Washington Post, a newspaper which may cover financial news.
Weisenberger Mutual Funds Investment Report, a monthly newsletter that reports
on both specific mutual fund companies and the mutual fund industry as a whole.
Worth, a magazine which covers financial and investment subjects including
mutual funds.
Your Money, a monthly magazine directed toward the novice investor.
Among the organizations cited above, Lipper Analytical Services, Inc.'s
tracking results may be used. A Fund will be compared to Lipper's appropriate
fund category according to fund objective and portfolio holdings. The Science &
Technology Fund will be compared to funds in Lipper's science and technology
funds category. The First Start Growth Fund will be compared to funds in
Lipper's growth funds category. Footnotes in advertisements and other marketing
literature will include the time period applicable for any ranking used.
For comparative purposes, unmanaged indexes of comparable securities or
economic data may be cited.
Examples include the following:
- Ibbotson Associates, Inc., Stocks, Bonds, Bills, and Inflation Yearbook.
- NASDAQ Industrials, a composite index of approximately 3000 unmanaged
securities of industrial corporations traded over the counter.
- S&P 500 Index, a broadbased composite unmanaged index that represents the
average performance of a group of 500 widely held, publicly traded stocks.
Other sources for total return and other performance data which may be
used by a Fund or by those publications listed previously are Morningstar, Inc.,
Schabaker Investment Management, and Investment Company Data, Inc. These are
services that collect and compile data on mutual fund companies.
18
<PAGE>
APPENDIX C - DOLLAR-COST AVERAGING
Dollar-cost averaging is a systematic investing method which can be used by
investors as a disciplined technique for investing. A fixed amount of money is
invested in a security (such as a stock or mutual fund) on a regular basis over
a period of time, regardless of whether securities markets are moving up or
down.
This practice reduces average share costs to the investor who acquires more
shares in periods of lower securities prices and fewer shares in periods of
higher prices.
While dollar-cost averaging does not assure a profit or protect against
loss in declining markets, this investment strategy is an effective way to help
calm the effect of fluctuations in the financial markets. Systematic investing
involves continuous investment in securities regardless of fluctuating price
levels of such securities. Investors should consider their financial ability to
continue purchases through periods of low and high price levels.
As the following chart illustrates, dollar-cost averaging tends to keep the
overall cost of shares lower. This example is for illustration only, and
different trends would result in different average costs.
HOW DOLLAR-COST AVERAGING WORKS
$100 Invested Regularly for 5 Periods
Market Trend
-------------------------------------------------------------------------------
Down Up Mixed
-----------------------------------------------------------------
Share Shares Share Shares Share Shares
Investment Price Purchased Price Purchased Price Purchased
------------------- --------------------- ------------------
$100 10 10 6 16.67 10 10
100 9 11.1 7 14.29 9 11.1
100 8 12.5 7 14.29 8 12.5
100 8 12.5 9 11.1 9 11.1
100 6 16.67 10 10 10 10
---- -- ---- -- ---- --- ---
$500 ***41 62.77 ***39 66.35 ***46 54.7
*Avg. Cost: $7.97 *Avg. Cost: $7.54 *Avg. Cost: $9.14
----- ----- -----
**Avg. Price: $8.20 **Avg. Price:$7.80 **Avg Price: $9.20
----- ----- -----
* Average Cost is the total amount invested divided by number
of 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.
19
<PAGE>
30229-08297
