As filed with the Securities and Exchange Commission on September 30, 1997.
1933 Act File No. 2-49560
1940 Act File No. 811-2429
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 X
Pre-Effective Amendment No. ___
Post-Effective Amendment No. 46
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 X
Amendment No. 34
USAA MUTUAL FUND, INC.
-------------------------------------------------
(Exact Name of Registrant as Specified in Charter)
9800 Fredericksburg Rd., San Antonio, TX 78288
------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code (210) 498-0600
Michael D. Wagner, Secretary
USAA MUTUAL FUND, INC.
9800 Fredericksburg Rd.
San Antonio, TX 78288-0227
---------------------------------------
(Name and Address of Agent for Service)
Approximate Date of Proposed Public Offering: As soon as practicable after the
effective date of this Registration Statement.
It is proposed that this filing will become effective under Rule 485
___ immediately upon filing pursuant to paragraph (b)
___ on (date) pursuant to paragraph (b)
___ 60 days after filing pursuant to paragraph (a)(1)
_X_ on (December 1, 1997) pursuant to paragraph (a)(1)
___ 75 days after filing pursuant to paragraph (a)(2)
___ on (date) pursuant to paragraph (a)(2)
If appropriate, check the following box:
___ This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
DECLARATION PURSUANT TO RULE 24f-2
The Registrant has heretofore registered an indefinite number of shares of the
Aggressive Growth Fund, Growth Fund, Growth & Income Fund, Income Stock Fund,
Income Fund, Short-Term Bond Fund, Money Market Fund, Science & Technology
Fund, and First Start Growth Fund pursuant to Rule 24f-2 under the Investment
Company Act of 1940 (the 1940 Act). The Registrant filed its Rule 24f-2 notice
for the fiscal year ended July 31, 1997 on September 25, 1997 for the
Aggressive Growth Fund, Growth Fund, Growth & Income Fund, Income Stock Fund,
Income Fund, Short-Term Bond Fund, and Money Market Fund. With respect to the
Science & Technology Fund and First Start Growth Fund, the Registrant intends
to file its 24f-2 notice for the fiscal year ended July 31, 1998 on or prior to
September 30, 1998. The Registrant has heretofore registered an indefinite
number of shares of the S&P 500 Index Fund pursuant to Rule 24f-2 under the
1940 Act. With respect to the S&P 500 Index Fund, the Registrant intends to
file its Rule 24f-2 notice for the fiscal year ended December 31, 1997 on or
prior to February 28, 1998. The S&P 500 Index Fund is a "feeder fund" within a
"master-feeder structure."
Exhibit Index on Pages 184 - 187
Page 1 of 275
<PAGE>
USAA MUTUAL FUND, INC.
CROSS REFERENCE SHEET
PART A
FORM N-1A ITEM NO. SECTION IN PROSPECTUS
1. Cover Page.......................... Same
2. Synopsis............................ Fees and Expenses
3. Condensed Financial
Information...................... Financial Highlights
Performance Information
4. General Description
of Registrant.................... Fund Investments
Description of Shares
Appendix A
5. Management of the Fund.............. Fund Management
Back Cover Page
6. Capital Stock and Other
Securities....................... Shareholder Information
Description of Shares
7. Purchase of Securities
Being Offered.................... How to Invest
Important Information About Purchases
and Redemptions
Exchanges
Shareholder Information
8. Redemption or Repurchase............ How to Invest
Important Information About Purchases
and Redemptions
Exchanges
9. Legal Proceedings................... Not Applicable
<PAGE>
USAA MUTUAL FUND, INC.
CROSS REFERENCE SHEET
PART B
FORM N-1A ITEM NO. SECTION IN STATEMENT OF ADDITIONAL
INFORMATION
10. Cover Page......................... Same
11. Table of Contents.................. Same
12. General Information and
History......................... Not Applicable
13. Investment Objectives
and Policies.................... Investment Policies
Investment Restrictions
Portfolio Transactions
14. Management of the
Registrant...................... Directors and Officers of the Company
15. Control Persons and
Principal Holders
of Securities................... Directors and Officers of the Company
16. Investment Advisory and
Other Services.................. Directors and Officers of the Company
The Company's Manager
General Information
17. Brokerage Allocation and
Other Practices................. Portfolio Transactions
18. Capital Stock and Other
Securities...................... Further Description of Shares
19. Purchase, Redemption and
Pricing of Securities
Being Offered................... Valuation of Securities
Conditions of Purchase and Redemption
Additional Information Regarding
Redemption of Shares
Investment Plans
20. Tax Status......................... Tax Considerations
21. Underwriters....................... General Information
22. Calculation of Performance
Data............................ Calculation of Performance Data
23. Financial Statements............... Not Applicable
<PAGE>
Part A
Prospectuses for
Aggressive Growth Fund, Growth Fund, Growth & Income Fund,
Income Stock Fund, Income Fund, Short-Term Bond Fund,
and Money Market Fund
are included herein
Not included in this Post-Effective Amendment
are the Prospectuses for the Science & Technology Fund,
First Start Growth Fund, and S&P 500 Index Fund.
<PAGE>
Part A
Prospectus for the
Aggressive Growth Fund
is included herein
<PAGE>
USAA AGGRESSIVE GROWTH FUND
DECEMBER 1, 1997 PROSPECTUS
The Fund is a no-load mutual fund offered by USAA Investment Management
Company. USAA will seek capital appreciation by investing primarily in
common stocks of companies that have the prospect of rapidly growing
earnings.
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.
TABLE OF CONTENTS
Who Manages the Fund?................................................. 2
What is the Investment Objective?..................................... 2
Is This Fund for You?................................................. 2
How Do You Buy?....................................................... 2
Fees and Expenses..................................................... 3
Financial Highlights.................................................. 3
Performance Information............................................... 4
Will the Value of Your Investment Fluctuate?.......................... 4
A Word About Risk..................................................... 5
Fund Investments...................................................... 6
Fund Management....................................................... 7
Using Mutual Funds in an Investment Program........................... 9
How to Invest......................................................... 10
Important Information About Purchases and Redemptions................. 12
Exchanges............................................................. 13
Shareholder Information............................................... 13
Description of Shares................................................. 15
Appendix A............................................................ 16
USAA Family of No-Load Mutual Funds................................... 17
<PAGE>
This Prospectus contains 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 capital appreciation. See FUND
INVESTMENTS on page 6 for more information.
IS THIS FUND FOR YOU?
This fund might be appropriate as part of your investment portfolio if ...
X You are willing to accept very high risk.
X You are looking for a long-term investment.
X You are willing to give up current income for long-term growth.
This fund MAY NOT be appropriate as part of your investment portfolio
if. . .
X You are unwilling to take greater risk for long-term goals.
X You are unable or reluctant to invest for a period of seven years or
more.
X You need an investment that provides steady income.
X You need an investment that provides tax-free income.
If you feel this fund is not the one for you, refer to page 17 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. Generally, 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. If you
participate in one of our automatic investment plans, your minimum initial
investment may be less. There is more information about how to purchase
Fund shares on page 10.
2
<PAGE>
FEES AND EXPENSES
This summary shows what it will cost you 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
Fund expenses come out of the Fund's assets and are reflected in the
Fund's share price and dividends. "Other Expenses" include expenses such
as custodian and transfer agent fees. The figures below show actual
expenditures during the past fiscal year ended July 31, 1997, and are
calculated as a percentage of average net assets.
Management Fees .39%
12b-1 Fees None
Other Expenses .35%
---
Total Fund Operating Expenses .74%
===
o 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............................................ $ 8
3 years........................................... 24
5 years........................................... 41
10 years.......................................... 92
THIS EXAMPLE IS NOT A REPRESENTATION OF PAST OR FUTURE EXPENSES AND ACTUAL
EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
FINANCIAL HIGHLIGHTS
Please read the Fund's Annual Report furnished with this Prospectus. The
Annual Report includes the Fund's financial statements and financial
highlights audited by KPMG Peat Marwick LLP, which are legally a part of
this Prospectus. The Annual Report includes messages from the President
and the Fund's portfolio managers, a listing of the Fund's investments,
and additional performance information that you may wish to review.
3
<PAGE>
PERFORMANCE INFORMATION
(Tel)
TouchLINE(R)
1-800-531-8777
PRESS
(1)
THEN
(1)
THEN
(3) (8) (#)
Newspaper Symbol:
AgvGt
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 38 followed by the pound sign when asked for a
Fund Code.
You also can find the most current price of your shares in the business
section of your newspaper in the mutual fund section under the heading
"USAA Group" and the symbol "AgvGt."
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 dividend income and capital gain distributions. 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. For the following periods ended September 30, 1997, the Fund's
average annual total returns have been:
1 year............................................ ___%
5 years........................................... ___%
10 years.......................................... ___%
Figures on page 5 are different because they are for periods which ended
December 31, 1996.
WILL THE VALUE OF YOUR INVESTMENT FLUCTUATE?
Yes, it will. The value of your investment could increase or decrease.
While the portfolio will be broadly diversified, the Fund is expected to
be significantly more volatile than the average equity mutual fund.
Investing in smaller less well-known companies, especially those that have
a narrow product line or are traded infrequently, often involves greater
risk than investing in established companies with proven track records.
The bar chart and table shown below illustrate the Fund's risks and
performance from year to year over the past ten years and shows how the
Fund's average annual returns for the one-, five-, and ten-year periods
compare to those of a broad-based securities market index. Remember that
this historical information may not be repeated in the future.
4
<PAGE>
[BAR CHART]
CALENDAR TOTAL RETURN
YEAR PERCENTAGE
1987 -0.90
1988 14.25
1989 16.59
1890 -11.92
1991 71.69
1992 -8.51
1993 8.14
1994 -0.81
1995 50.42
1996 16.47
o TOTAL RETURN MEASURES THE PRICE CHANGE IN A SHARE ASSUMING THE
REINVESTMENT OF ALL DIVIDEND INCOME AND CAPITAL GAIN DISTRIBUTIONS.
===============================================================================
Average Annual Total
Returns
(for the periods ending Past 1 Past 5 Past 10
December 31, 1996) Year Years Years
- -------------------------------------------------------------------------------
Aggressive Growth Fund 16.47% 11.45% 13.12%
- -------------------------------------------------------------------------------
Russell 2000 Index 16.50% 15.64% 12.42%
===============================================================================
The Russell 2000 Index is an index which consists of the 2,000 smallest
companies in the Russell 3000(R) Index, a widely recognized small cap
index.
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 also have a higher risk of losing money. The
reverse is also generally true: the lower the risk, the lower the
potential reward. However, as you consider an investment in the Fund, you
should also take into account your tolerance for the daily fluctuations of
the financial markets and whether you can afford to leave your money in
this investment for long periods of time to ride out down periods.
[CAUTION SYMBOL]
Look for this symbol throughout the Prospectus. We use it to mark detailed
information about the main risks that you will face as a Fund shareholder.
5
<PAGE>
FUND INVESTMENTS
Investment Policies and Risks
Q What is the Fund's investment policy?
A We will invest the Fund's assets primarily in equity securities of
companies that have the prospect of rapidly growing earnings. These
investments will tend to be made in smaller, less recognized
companies, but may include larger, more widely recognized companies
as well. We use the term "equity securities" to include common
stocks, preferred stocks, securities convertible into common stocks,
and securities which carry the right to buy common stocks. We may
also invest up to 10% of the Fund's assets in shares of real estate
investment trusts (REITs).
[CAUTION SYMBOL]
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 an individual
company's 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 SYMBOL]
REITs. Investing in REITs may subject the Fund to many of the same risks
associated with the direct ownership of real estate. REITs are dependent
upon the capabilities of the REIT manager(s) and have limited
diversification.
Q May the Fund's assets be invested in foreign securities?
A Yes. While most of the Fund's assets will be invested in U.S.
securities, we may also invest up to 30% of the Fund's total assets
in foreign securities, including American Depositary Receipts (ADRs)
and Global Depositary Receipts (GDRs). These foreign holdings may
include securities issued in emerging markets as well as securities
issued in established markets.
[CAUTION SYMBOL]
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.
[CAUTION SYMBOL]
EMERGING MARKETS RISK. A country that is in the initial stages of its
industrial cycle is considered to be an emerging markets country.
Investments in developing countries involve exposure to economic
structures that are generally less diverse and mature than in the United
States and to political systems which may be less stable. In the past,
markets of developing countries have been more volatile than the markets
of developed countries.
6
<PAGE>
[CAUTION SYMBOL]
POLITICAL RISK. Political risk includes a greater potential for coup
d'etats, revolts, and expropriation by governmental organizations. For
example, we may invest the Fund's assets in Eastern Europe and former
states of the Soviet Union (also known as the Commonwealth of Independent
States or CIS). These countries were under communist systems which had
nationalized private industry. There is no guarantee that nationalization
may not occur again in this region or others in which we may invest the
Fund's assets, in which case, we may lose all or part of the Fund's
investment in that country's issuers.
As a temporary defensive measure, we may invest up to 100% of the Fund's
assets in high-quality, short-term debt instruments.
We will not generally trade the Fund's securities for short-term profits;
however, if circumstances warrant, we may purchase and sell Fund
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 it may exceed 100%. Because a high turnover rate increases transaction
costs and may increase taxable capital gains, 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 16.
Investment Restrictions
The following restrictions may only be changed with shareholder approval:
* The Fund may not invest more than 25% 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.
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 $__ billion in total assets under
management. Our mailing address is 9800 Fredericksburg Road, San Antonio,
TX 78288.
7
<PAGE>
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. This fee, which is accrued daily and paid monthly, is
computed as a percentage of average net assets. The fee is computed at
one-half of one percent (.50%) of the first $200 million of average net
assets, two-fifths of one percent (.40%) for that portion of average net
assets in excess of $200 million but not over $300 million, and one-third
of one percent (.33%) for that portion of average net assets in excess of
$300 million. The fees we received for the fiscal year ended July 31,
1997, were equal to .39% of average net assets.
We also provide services related to selling the Fund's shares 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 Managers
The following individuals are primarily responsible for managing the Fund.
Eric M. Efron and John K. Cabell, Jr., Assistant Vice Presidents of Equity
Investments since September 1996, have managed the Fund since March 1995.
Mr. Efron has 22 years investment management experience and has worked for
us for five years. He earned the Chartered Financial Analyst (CFA)
designation in 1983 and is also 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 New York University, an MA
from the University of Michigan, and a BA from Oberlin College, Ohio.
[PHOTOGRAPH OF
PORTFOLIO MANAGER]
Eric M. Efron
Mr. Cabell has 19 years investment management experience and has worked
for us for eight years. He served as Chief Economist for Retirement
Systems of Alabama from March 1991 to March 1994. He earned the CFA
designation in 1982 and is a member of AIMR and SAFAS. He holds an MA and
a BS from the University of Alabama.
[PHOTOGRAPH OF
PORTFOLIO MANAGER]
John K. Cabell, Jr.
8
<PAGE>
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.
For example, assume you wish to invest in a widely-diversified, common
stock portfolio. You could combine an investment in the Aggressive 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 17. 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.
9
<PAGE>
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 NYSE 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 effective date 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.
MINIMUM INVESTMENTS
INITIAL PURCHASE * $3,000 [$500 Uniform Gifts/Transfers to Minor Act
[MONEY] (UGMA/UTMA) Accounts and $250 for IRAs] or no initial
investment if you elect to have monthly electronic
investments of at least $50 each. We may periodically
offer programs that reduce the minimum amounts for
monthly electronic investments. Employees of USAA
and its affiliated companies may open an account
payroll deduction for as little as $25 per pay period
with no initial investment.
ADDITIONAL
PURCHASES * $50
10
<PAGE>
HOW TO PURCHASE
MAIL * To open an account, send your application and
[ENVELOPE] check to:
USAA Investment Management Company
9800 Fredericksburg Road, 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 Road, San Antonio, TX 78288
IN PERSON * To open an account, bring your application and
[MAN AND WOMAN] 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
[ELECTRONIC service) to wire the specified amount to the Fund as
ENVELOPE] follows:
State Street Bank and Trust Company, Boston,
MA 02101
ABA#011000028
Attn: USAA Aggressive Growth Fund
USAA AC-69384998
Shareholder(s) Name(s)_________________
Shareholder(s) Account Number___________________
ELECTRONIC * Addtional purchases on a regular basis can be deducted
FUNDS from a bank account, paycheck, income-producing
TRANSFER investment, or USAA money market fund account. Sign
[CALENDAR] up for these services when opening an account or call
1-800-531-8448 to add these services.
PHONE
1-800-531-8448 * If you have an existing USAA account and would like to
[PHONE] open a new account or 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.
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 are 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 is
sent after 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.
11
<PAGE>
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 Road, San Antonio, TX 78288
[FAX MACHINE] * 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 privileges are 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 information on purchases, redemptions, 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 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;
12
<PAGE>
* 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);
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 Statement of Additional
Information 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 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 12.
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).
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. You may buy and sell Fund shares at the NAV
per share without a sales charge.
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.
13
<PAGE>
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. Note that the
recently enacted Taxpayer Relief Act of 1997 and regulations that will
likely be created to implement the Act may affect the status and treatment
of certain distributions shareholders receive from the Fund. 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 (RIC)
under Subchapter M of the Internal Revenue Code of 1986, as amended. As a
RIC, 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.
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 and 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.
14
<PAGE>
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, or
* fails to certify that he or she 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 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 this 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.
15
<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.
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. We only enter into forward currency contracts when the Fund enters
into a contract for the purchase or sale of a security denominated in foreign
currency and desires to "lock in" the U.S. dollar price of that security.
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.
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.
16
<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 EPRESENTATION 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.
17
<PAGE>
NOTES
18
<PAGE>
If you would like more information about the Fund, you may call
1-800-531-8181 to request a free copy of the Fund's Statement of
Additional Information (SAI), dated December 1, 1997, or the Fund's Annual
Report for the year ended July 31, 1997. The SAI and the financial
statements contained with the Fund's Annual Report have been filed with
the SEC and are legally a part of this 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)
23451-1297 (C) 1997, USAA. All rights reserved. RECYCLED PAPER
<PAGE>
Part A
Prospectus for the
Growth Fund
is included herein
<PAGE>
USAA GROWTH FUND
DECEMBER 1, 1997 PROSPECTUS
The Fund is a no-load mutual fund offered by USAA Investment Management
Company. USAA will seek the Fund's primary objective of long-term growth
of capital and secondary objectives of regular income and conservation of
principal by investing primarily in common stocks.
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.
TABLE OF CONTENTS
Who Manages the Fund?.................................................. 2
What is the Investment Objective?...................................... 2
Is This Fund for You?.................................................. 2
How Do You Buy?........................................................ 2
Fees and Expenses...................................................... 3
Financial Highlights................................................... 3
Performance Information................................................ 4
Will the Value of Your Investment Fluctuate?........................... 4
A Word About Risk...................................................... 5
Fund Investments....................................................... 6
Fund Management........................................................ 7
Using Mutual Funds in an Investment Program............................ 8
How to Invest.......................................................... 9
Important Information About Purchases and Redemptions.................. 11
Exchanges.............................................................. 12
Shareholder Information................................................ 12
Description of Shares.................................................. 14
Appendix A............................................................. 15
USAA Family of No-Load Mutual Funds.................................... 16
<PAGE>
This Prospectus contains 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 primary investment objective is long-term growth of capital
with secondary objectives of regular income and conservation of principal.
See FUND INVESTMENTS on page 6 for more information.
IS THIS FUND FOR YOU?
This fund might be appropriate as part of your investment portfolio if ..
X You are looking for long-term growth.
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 are unwilling to take greater risk for long-term goals.
X You are unable or reluctant to invest for a period of five years
or more.
X You need an investment that provides regular income or tax-free income.
If you feel this fund is not the one for you, refer to page 16 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. Generally, 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. If you
participate in one of our automatic investment plans, your minimum initial
investment may be less. There is more information about how to purchase
Fund shares on page 9.
2
<PAGE>
FEES AND EXPENSES
This summary shows what it will cost you 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
Fund expenses come out of the Fund's assets and are reflected in the
Fund's share price and dividends. "Other Expenses" include expenses such
as custodian and transfer agent fees. The figures below show actual
expenditures during the past fiscal year ended July 31, 1997, and are
calculated as a percentage of average net assets.
Management Fees .75%
12b-1 Fees None
Other Expenses .22%
---
Total Fund Operating Expenses .97%
===
o 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............................................ $ 10
3 years........................................... 31
5 years........................................... 54
10 years.......................................... 119
THIS EXAMPLE IS NOT A REPRESENTATION OF PAST OR FUTURE EXPENSES AND ACTUAL
EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
FINANCIAL HIGHLIGHTS
Please read the Fund's Annual Report furnished with this Prospectus. The
Annual Report includes the Fund's financial statements and financial
highlights audited by KPMG Peat Marwick LLP, which are legally a part of
this Prospectus. The Annual Report includes messages from the President
and the Fund's portfolio manager, a listing of the Fund's investments, and
additional performance information that you may wish to review.
3
<PAGE>
PERFORMANCE INFORMATION
(Tel)
TouchLINE(R)
1-800-531-8777
PRESS
(1)
THEN
(1)
THEN
(4)(1)(#)
Newspaper Symbol:
Grwth
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 41 followed by the pound sign when asked for a
Fund Code.
You also can find the most current price of your shares in the business
section of your newspaper in the mutual fund section under the heading
"USAA Group" and the symbol "Grwth."
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 dividend income and capital gain distributions. 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. For the following periods ended September 30, 1997, the Fund's
average annual total returns have been:
1 year............................................ ___%
5 years........................................... ___%
10 years.......................................... ___%
Figures on page 5 are different because they are for periods which ended
December 31, 1996.
WILL THE VALUE OF YOUR INVESTMENT FLUCTUATE?
Yes, it will. The value of your investment could increase or decrease. The
bar chart and table shown below illustrate the Fund's risks and
performance from year to year over the past ten years and shows how the
Fund's average annual returns for the one-, five-, and ten-year periods
compare to those of a broad-based securities market index. Remember that
this historical information may not be repeated in the future.
4
<PAGE>
[BAR CHART]
CALENDAR TOTAL RETURN
YEAR PERCENTAGE
1987 5.34
1988 6.57
1989 27.33
1890 -0.05
1991 27.81
1992 9.95
1993 7.45
1994 3.35
1995 32.06
1996 17.80
o TOTAL RETURN MEASURES THE PRICE CHANGE IN A SHARE ASSUMING THE
REINVESTMENT OF ALL DIVIDEND INCOME AND CAPITAL GAIN DISTRIBUTIONS.
===============================================================================
Average Annual Total
Returns
(for the periods ending Past One Past 5 Past 10
December 31, 1996) Year Years Years
- -------------------------------------------------------------------------------
Growth Fund 17.80% 13.69% 13.24%
- -------------------------------------------------------------------------------
S&P 500 Index 22.95% 15.20% 15.26%
===============================================================================
The S&P 500 Index is a broad-based composite unmanaged index that
represents the average performance of a group of 500 widely-held,
publicly-traded stocks.
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 also have a higher risk of losing money. The
reverse is also generally true: the lower the risk, the lower the
potential reward. However, as you consider an investment in the Fund, you
should also take into account your tolerance for the daily fluctuations of
the financial markets and whether you can afford to leave your money in
this investment for long periods of time to ride out down periods.
[CAUTION SYMBOL]
Look for this symbol throughout the Prospectus. We use it to mark detailed
information about the main risks that you will face as a Fund shareholder.
5
<PAGE>
FUND INVESTMENTS
Investment Policies and Risks
Q What is the Fund's investment policy?
A We will invest the Fund's assets primarily in common stocks or in
securities that are convertible into common stocks. However, we will
limit the Fund's investment in convertible securities to 5% of the
value of the Fund's net assets at the time these securities are
purchased. We may also invest the Fund's assets in warrants, rights,
real estate investment trusts, and in nonconvertible debt securities
when we believe these securities will offer a good prospect for
appreciation.
[CAUTION SYMBOL]
MARKET RISK. Because this Fund invests in common stocks, 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 an individual
company's 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. Stocks tend to go up and down more than bonds.
Q How will particular securities be selected?
A Generally, we will invest the Fund's assets in stocks that are deemed
to be out of favor or undervalued. These investments will have at
least one of the following characteristics:
* a recent significant market price decline;
* sustained poor performance relative to the market or their
industry;
* extremely pessimistic appraisal by most investors; or
* a market price that is low relative to earnings, cash flow, assets,
or book value.
We will not trade the Fund's securities to realize short-term profits; but
rather, we intend to purchase securities for long-term capital
appreciation.
Q May the Fund's assets be invested in securities of foreign issuers?
A Yes. We may invest up to 30% of the Fund's total assets in American
Depositary receipts (ADRs) or similar forms of ownership interest in
securities of foreign issuers deposited with a depositary, and
securities of foreign issuers that are traded on U.S. securities
exchanges or in U.S. over-the-counter markets.
[CAUTION SYMBOL]
FOREIGN INVESTING. Investing in securities of foreign issuers poses unique
risks: currency exchange rate fluctuations; increased price volatility;
different accounting, reporting, and disclosure requirements; and
political or social instability. In the past, equity and debt instruments
of foreign issuers have been more volatile than equity and debt
instruments of U.S. issuers.
6
<PAGE>
As a temporary defensive measure, we may invest up to 100% of the Fund's
assets in high-quality, short-term debt instruments.
For additional information about other investments in which we may invest
the Fund's assets, see APPENDIX A on page 15.
Investment Restrictions
The following restrictions may only be changed with shareholder approval:
* The Fund may not invest more than 25% 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.
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 $__ billion in total assets under
management. Our mailing address is 9800 Fredericksburg Road, San Antonio,
TX 78288.
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. This fee was computed and paid at three-fourths of one
percent (.75%) of average net assets for the fiscal year ended July 31,
1997.
We also provide services related to selling the Fund's shares 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.
7
<PAGE>
Portfolio Manager
The following individual is primarily responsible for managing the Fund:
David G. Parsons, Assistant Vice President of Equity Investments since
March 1995, has managed the Fund since January 1994. Mr. Parsons has 14
years investment management experience working for us. He earned the
Chartered Financial Analyst designation in 1986 and is a member of the
Association for Investment Management and Research and the San Antonio
Financial Analysts Society, Inc. He holds an MBA from the University of
Texas, an MA from Southern Illinois University, and a BA from Austin
College, Texas.
[PHOTOGRAPH OF
PORTFOLIO MANAGER]
David G. Parsons
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.
For example, assume you wish to invest in a widely-diversified, common
stock portfolio. You could combine an investment in the 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 16. These unique mutual funds provide a
professionally managed diversified investment
8
<PAGE>
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 NYSE 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 effective date 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.
MINIMUM INVESTMENTS
INITIAL PURCHASE * $3,000 [$500 Uniform Gifts/Transfers to Minor Act
[MONEY] (UGMA/UTMA) Accounts and $250 for IRAs] or no initial
investment if you elect to have monthly electronic
investments of at least $50 each. We may periodically
offer programs that reduce the minimum amounts for
monthly electronic investments. Employees of USAA
and its affiliated companies may open an account
payroll deduction for as little as $25 per pay period
with no initial investment.
ADDITIONAL
PURCHASES * $50
9
<PAGE>
HOW TO PURCHASE
MAIL * To open an account, send your application and
[ENVELOPE] check to:
USAA Investment Management Company
9800 Fredericksburg Road, 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 Road, San Antonio, TX 78288
IN PERSON * To open an account, bring your application and
[MAN AND WOMAN] 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
[ELECTRONIC service) to wire the specified amount to the Fund as
ENVELOPE] follows:
State Street Bank and Trust Company, Boston,
MA 02101
ABA#011000028
Attn: USAA Growth Fund
USAA AC-69384998
Shareholder(s) Name(s)_________________
Shareholder(s) Account Number___________________
ELECTRONIC * Addtional purchases on a regular basis can be deducted
FUNDS from a bank account, paycheck, income-producing
TRANSFER investment, or USAA money market fund account. Sign
[CALENDAR] up for these services when opening an account or call
1-800-531-8448 to add these services.
PHONE
1-800-531-8448 * If you have an existing USAA account and would like to
[PHONE] open a new account or 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.
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 are 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 is
sent after 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.
10
<PAGE>
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 Road, San Antonio, TX 78288
[FAX MACHINE] * 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 privileges are 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 information on purchases, redemptions, 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 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).
11
<PAGE>
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);
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 Statement of Additional
Information 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 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 11.
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).
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. You may buy and sell Fund shares at the NAV
per share without a sales charge.
12
<PAGE>
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.
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. Note that the
recently enacted Taxpayer Relief Act of 1997 and regulations that will
likely be created to implement the Act may affect the status and treatment
of certain distributions shareholders receive from the Fund. 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 (RIC)
under Subchapter M of the Internal Revenue Code of 1986, as amended. As a
RIC, 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.
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.
13
<PAGE>
Redemptions and 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, or
* fails to certify that he or she 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 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 this 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.
14
<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.
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.
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.
15
<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.
16
<PAGE>
If you would like more information about the Fund, you may call
1-800-531-8181 to request a free copy of the Fund's Statement of
Additional Information (SAI), dated December 1, 1997, or the Fund's Annual
Report for the year ended July 31, 1997. The SAI and the financial
statements contained with the Fund's Annual Report have been filed with
the SEC and are legally a part of this 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)
23452-1297 (C) 1997, USAA. All rights reserved. RECYCLED PAPER
<PAGE>
Part A
Prospectus for the
Growth & Income Fund
is included herein
<PAGE>
USAA GROWTH & INCOME FUND
DECEMBER 1, 1997 PROSPECTUS
The Fund is a no-load mutual fund offered by USAA Investment Management
Company. USAA will seek capital growth and current income by investing
primarily in dividend paying common stocks.
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.
TABLE OF CONTENTS
Who Manages the Fund?.................................................. 2
What is the Investment Objective?...................................... 2
Is This Fund for You?.................................................. 2
How Do You Buy?........................................................ 2
Fees and Expenses...................................................... 3
Financial Highlights................................................... 3
Performance Information................................................ 4
Will the Value of Your Investment Fluctuate?........................... 4
A Word About Risk...................................................... 5
Fund Investments....................................................... 6
Fund Management........................................................ 7
Using Mutual Funds in an Investment Program............................ 8
How to Invest.......................................................... 9
Important Information About Purchases and Redemptions.................. 11
Exchanges.............................................................. 12
Shareholder Information................................................ 13
Description of Shares.................................................. 14
Appendix A............................................................. 15
USAA Family of No-Load Mutual Funds.................................... 16
<PAGE>
This Prospectus contains 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 objectives are capital growth and current income.
See FUND INVESTMENTS on page 6 for more information.
IS THIS FUND FOR YOU?
This fund might be appropriate as part of your investment portfolio if ...
X You are looking for current income.
X You are willing to accept moderate 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 are unable or reluctant to invest for a period of five years
or more.
X You need an investment that provides tax-free income.
If you feel this fund is not the one for you, refer to page 16 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. Generally, 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. If you
participate in one of our automatic investment plans, your minimum initial
investment may be less. There is more information about how to purchase
Fund shares on page 9.
2
<PAGE>
FEES AND EXPENSES
This summary shows what it will cost you 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
Fund expenses come out of the Fund's assets and are reflected in the
Fund's share price and dividends. "Other Expenses" include expenses such
as custodian and transfer agent fees. The figures below show actual
expenditures during the past fiscal year ended July 31, 1997, and are
calculated as a percentage of average net assets.
Management Fees .60%
12b-1 Fees None
Other Expenses .29%
---
Total Fund Operating Expenses .89%
===
o 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............................................ $ 9
3 years........................................... 28
5 years........................................... 49
10 years.......................................... 110
THIS EXAMPLE IS NOT A REPRESENTATION OF PAST OR FUTURE EXPENSES AND ACTUAL
EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
FINANCIAL HIGHLIGHTS
Please read the Fund's Annual Report furnished with this Prospectus. The
Annual Report includes the Fund's financial statements and financial
highlights audited by KPMG Peat Marwick LLP, which are legally a part of
this Prospectus. The Annual Report includes messages from the President
and the Fund's portfolio manager, a listing of the Fund's investments, and
additional performance information that you may wish to review.
3
<PAGE>
PERFORMANCE INFORMATION
(Tel)
TouchLINE(R)
1-800-531-8777
PRESS
(1)
THEN
(1)
THEN
(3)(7)(3)
Newspaper Symbol:
Gr&Inc
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 37 followed by the pound sign when asked for a
Fund Code.
You also can find the most current price of your shares in the business
section of your newspaper in the mutual fund section under the heading
"USAA Group" and the symbol "Gr&Inc."
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 dividend income and capital gain distributions. 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. For the following periods ended September 30, 1997, the Fund's
average annual total returns have been:
1 year............................................ ___%
Since Inception on June 1, 1993................... ___%
Figures on page 5 are different because they are for periods which ended
December 31, 1996.
WILL THE VALUE OF YOUR INVESTMENT FLUCTUATE?
Yes, it will. The value of your investment could increase or decrease. The
bar chart and table shown below illustrate the Fund's risks and
performance from year to year over the life of the Fund and shows how the
Fund's average annual returns for one year and the life of the Fund
compare to those of a broad-based securities market index. Remember that
this historical information may not be repeated in the future.
4
<PAGE>
[BAR CHART]
CALENDAR TOTAL RETURN
YEAR PERCENTAGE
1993* 4.81
1994 1.29
1995 31.57
1996 23.04
* Fund commenced operations on June 1, 1993.
o TOTAL RETURN MEASURES THE PRICE CHANGE IN A SHARE ASSUMING THE
REINVESTMENT OF ALL DIVIDEND INCOME AND CAPITAL GAIN DISTRIBUTIONS.
===============================================================================
Average Annual Total
Returns Since Inception
(for the periods ending Past One on
December 31, 1996) Year June 1, 1993
- -------------------------------------------------------------------------------
Growth & Income Fund 23.04% 16.24%
- -------------------------------------------------------------------------------
S&P 500 Index 22.95% 17.88%
===============================================================================
The S&P 500 Index is a broad-based composite unmanaged index that
represents the average performance of a group of 500 widely-held,
publicly-traded stocks.
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 also have by a higher risk of losing money. The
reverse is also generally true: the lower the risk, the lower the
potential reward. However, as you consider an investment in the Fund, you
should also take into account your tolerance for the daily fluctuations of
the financial markets and whether you can afford to leave your money in
this investment for long periods of time to ride out down periods.
[CAUTION SYMBOL]
Look for this symbol throughout the Prospectus. We use it to mark detailed
information about the main risks that you will face as a Fund shareholder.
5
<PAGE>
FUND INVESTMENTS
Investment Policies and Risks
Q What is the Fund's investment policy?
A We will invest the Fund's assets primarily in dividend paying equity
securities. We use use the term "equity securities" to include common
stocks, securities convertible into common stocks, securities which
carry the right to buy common stocks, and real estate investment
trusts (REITs). We will limit the Fund's investment in convertible
securities to 5% of the value of the Fund's net assets at the time
these securities are purchased. We may also invest in nonconvertible
debt securities and nonconvertible preferred stock.
[CAUTION SYMBOL]
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 an individual
company's 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 SYMBOL]
REITs. Investing in REITs may subject the Fund to many of the same risks
associated with the direct ownership of real estate. REITs are dependent
upon the capabilities of the REIT manager(s) and have limited
diversification.
As a temporary defensive measure, we may invest up to 100% of the Fund's
assets in high-quality, short-term debt instruments.
Q May the Fund's assets be invested in securities of foreign issuers?
A Yes. We may invest up to 30% of the Fund's total assets in American
Depositary Receipts (ADRs) or similar forms of ownership interest in
securities of foreign issuers deposited with a depositary, and
securities of foreign issuers that are traded on U.S. securities
exchanges or in U.S. over-the-counter markets.
[CAUTION SYMBOL]
FOREIGN INVESTING. Investing in securities of foreign issuers poses unique
risks: currency exchange rate fluctuations; increased price volatility;
different accounting, reporting, and disclosure requirements; and
political or social instability. In the past, equity and debt instruments
of foreign issuers have been more volatile than equity and debt
instruments of U.S. issuers.
For additional information about other investments in which we may invest
the Fund's assets, see APPENDIX A on page 15.
6
<PAGE>
Investment Restrictions
The following restrictions may only be changed with shareholder approval:
* The Fund may not invest more than 25% 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.
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 $__ billion in total assets under
management. Our mailing address is 9800 Fredericksburg Road, San Antonio,
TX 78288.
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. This fee was computed and paid at three-fifths of one
percent (.60%) of average net assets for the fiscal year ended July 31,
1997.
We also provide services related to selling the Fund's shares 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.
7
<PAGE>
Portfolio Manager
The following individual is primarily responsible for managing the Fund:
R. David Ullom, Assistant Vice President of Equity Investments since
September 1994, has managed the Fund since its inception in June 1993. Mr.
Ullom has 22 years investment management experience and has worked for us
for 11 years. He earned the Chartered Financial Analyst designation in
1980 and is a member of the Association for Investment Management and
Research and the San Antonio Financial Analysts Society, Inc. He holds an
MBA from Washington University, Missouri, and a BS from Oklahoma State
University.
[PHOTOGRAPH OF
PORTFOLIO MANAGER]
R. David Ullom
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.
For example, assume you wish to invest in a widely-diversified, common
stock portfolio. You could combine an investment in the Growth & Income
Fund with investments in other mutual funds that primarily seek capital
appreciation by investing in stocks of large and small companies. This is
just one way you could combine funds that fit your own risk and reward
goals.
8
<PAGE>
III. USAA's Family of Funds
We offer you another alternative for asset allocation with our asset
strategy funds listed on page 16. 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 NYSE 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 effective date 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.
9
<PAGE>
MINIMUM INVESTMENTS
INITIAL PURCHASE * $3,000 [$500 Uniform Gifts/Transfers to Minor Act
[MONEY] (UGMA/UTMA) Accounts and $250 for IRAs] or no initial
investment if you elect to have monthly electronic
investments of at least $50 each. We may periodically
offer programs that reduce the minimum amounts for
monthly electronic investments. Employees of USAA
and its affiliated companies may open an account
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
[ENVELOPE] check to:
USAA Investment Management Company
9800 Fredericksburg Road, 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 Road, San Antonio, TX 78288
IN PERSON * To open an account, bring your application and
[MAN AND WOMAN] 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
[ELECTRONIC service) to wire the specified amount to the Fund as
ENVELOPE] follows:
State Street Bank and Trust Company, Boston,
MA 02101
ABA#011000028
Attn: USAA Growth & Income Fund
USAA AC-69384998
Shareholder(s) Name(s)_________________
Shareholder(s) Account Number___________________
ELECTRONIC * Addtional purchases on a regular basis can be deducted
FUNDS from a bank account, paycheck, income-producing
TRANSFER investment, or USAA money market fund account. Sign
[CALENDAR] up for these services when opening an account or call
1-800-531-8448 to add these services.
PHONE
1-800-531-8448 * If you have an existing USAA account and would like to
[PHONE] open a new account or 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.
10
<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 are 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 is
sent after 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 Road, San Antonio, TX 78288
[FAX MACHINE] * 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 privileges are 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 information on purchases, redemptions, 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
11
<PAGE>
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);
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 Statement of Additional
Information 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 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 11.
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).
12
<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. You may buy and sell Fund shares at the NAV
per share without a sales charge.
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.
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 quarterly. 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. Note that the
recently enacted Taxpayer Relief Act of 1997 and regulations that will
likely be created to implement the Act may affect the status and treatment
of certain distributions shareholders receive from the Fund. 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 (RIC)
under Subchapter M of the Internal Revenue Code of 1986, as amended. As a
RIC, 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.
13
<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 and 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, or
* fails to certify that he or she 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 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 this 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.
14
<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.
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.
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.
15
<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.
16
<PAGE>
If you would like more information about the Fund, you may call
1-800-531-8181 to request a free copy of the Fund's Statement of
Additional Information (SAI), dated December 1, 1997, or the Fund's Annual
Report for the year ended July 31, 1997. The SAI and the financial
statements contained with the Fund's Annual Report have been filed with
the SEC and are legally a part of this 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)
23453-1297 (C) 1997, USAA. All rights reserved. RECYCLED PAPER
<PAGE>
Part A
Prospectus for the
Income Stock Fund
is included herein
<PAGE>
USAA INCOME STOCK FUND
DECEMBER 1, 1997 PROSPECTUS
The Fund is a no-load mutual fund offered by USAA Investment Management
Company. USAA will seek current income with the prospect of increasing
dividend income and the potential for capital appreciation by investing
primarily in stocks of well-established, large companies with
above-average dividend yields.
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.
TABLE OF CONTENTS
Who Manages the Fund?.................................................. 2
What is the Investment Objective?...................................... 2
Is This Fund for You?.................................................. 2
How Do You Buy?........................................................ 2
Fees and Expenses...................................................... 3
Financial Highlights................................................... 3
Performance Information................................................ 4
Will the Value of Your Investment Fluctuate?........................... 4
A Word About Risk...................................................... 5
Fund Investments....................................................... 6
Fund Management........................................................ 7
Using Mutual Funds in an Investment Program............................ 8
How to Invest.......................................................... 9
Important Information About Purchases and Redemptions.................. 11
Exchanges.............................................................. 12
Shareholder Information................................................ 13
Description of Shares.................................................. 15
Appendix A............................................................. 16
USAA Family of No-Load Mutual Funds.................................... 17
<PAGE>
This Prospectus contains 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 current income with the prospect of
increasing dividend income and the potential for capital appreciation. See
FUND INVESTMENTS on page 6 for more information.
IS THIS FUND FOR YOU?
This fund might be appropriate as part of your investment portfolio if ...
X You are primarily looking for current income and secondarily capital
appreciation.
X You are willing to accept moderate risk.
X You are looking for a long-term investment.
This fund MAY NOT be appropriate as part of your investment portfolio
if ...
X Your primary goal is to maximize long-term growth through capital
appreciation.
X You are unable or reluctant invest for a period of five years or more.
X You need an investment that provides tax-free income.
If you feel this fund is not the one for you, refer to page 17 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. Generally, 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. If you
participate in one of our automatic investment plans, your minimum initial
investment may be less. There is more information about how to purchase
Fund shares on page 9.
2
<PAGE>
FEES AND EXPENSES
This summary shows what it will cost you 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
Fund expenses come out of the Fund's assets and are reflected in the
Fund's share price and dividends. "Other Expenses" include expenses such
as custodian and transfer agent fees. The figures below show actual
expenditures during the past fiscal year ended July 31, 1997, and are
calculated as a percentage of average net assets.
Management Fees .50%
12b-1 Fees None
Other Expenses .18%
---
Total Fund Operating Expenses .68%
===
o 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............................................ $ 7
3 years........................................... 22
5 years........................................... 38
10 years.......................................... 85
THIS EXAMPLE IS NOT A REPRESENTATION OF PAST OR FUTURE EXPENSES AND ACTUAL
EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
FINANCIAL HIGHLIGHTS
Please read the Fund's Annual Report furnished with this Prospectus. The
Annual Report includes the Fund's financial statements and financial
highlights audited by KPMG Peat Marwick LLP, which are legally a part of
this Prospectus. The Annual Report includes messages from the President
and the Fund's portfolio manager, a listing of the Fund's investments, and
additional performance information that you may wish to review.
3
<PAGE>
PERFORMANCE INFORMATION
(Tel)
TouchLINE(R)
1-800-531-8777
PRESS
(1)
THEN
(1)
THEN
(3)(5)(#)
Newspaper Symbol:
IncStk
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 35 followed by the pound sign when asked for a
Fund Code.
You also can find the most current price of your shares in the business
section of your newspaper in the mutual fund section under the heading
"USAA Group" and the symbol "IncStk."
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 dividend income and capital gain distributions. You
may also see a comparison of the Fund's performance to that of other
mutual funds with similar investment objectives and to bond or relevant
indexes. For the following periods ended September 30, 1997, the Fund's
average annual total returns have been:
1 year............................................ ___%
5 years........................................... ___%
10 years.......................................... ___%
Figures on page 5 are different because they are for periods which ended
December 31, 1996.
WILL THE VALUE OF YOUR INVESTMENT FLUCTUATE?
Yes, it will. The value of your investment could increase or decrease. The
bar chart and table shown below illustrate the Fund's risks and
performance from year to year over the life of the Fund and shows how the
Fund's average annual returns for the one- and five-year periods and the
life of the Fund compare to those of a broad-based securities market
index. Remember that this historical information may not be repeated in
the future.
4
<PAGE>
[BAR CHART]
CALENDAR TOTAL RETURN
YEAR PERCENTAGE
1987* -7.78
1988 19.43
1989 27.13
1890 -1.42
1991 27.33
1992 7.80
1993 11.56
1994 -0.70
1995 28.62
1996 18.70
* Fund commenced operations May 4, 1987.
o TOTAL RETURN MEASURES THE PRICE CHANGE IN A SHARE ASSUMING THE
REINVESTMENT OF ALL DIVIDEND INCOME AND CAPITAL GAIN DISTRIBUTIONS.
===============================================================================
Average Annual Total
Returns Since Inception
(for the periods ending Past 1 Past 5 on
December 31, 1996) Year Years May 4, 1987
- -------------------------------------------------------------------------------
Income Stock Fund 18.70% 12.76% 12.78%
- -------------------------------------------------------------------------------
S&P 500 Index 22.95% 15.20% 13.64%
===============================================================================
The S&P 500 Index is a broad-based composite unmanaged index that
represents the average performance of a group of 500 widely-held,
publicly-traded stocks.
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 also have by a higher risk of losing money. The
reverse is also generally true: the lower the risk, the lower the
potential reward. However, as you consider an investment in the Fund, you
should also take into account your tolerance for the daily fluctuations of
the financial markets and whether you can afford to leave your money in
this investment for long periods of time to ride out down periods.
[CAUTION SYMBOL]
Look for this symbol throughout the Prospectus. We use it to mark detailed
information about the main risks that you will face as a Fund shareholder.
5
<PAGE>
FUND INVESTMENTS
Investment Policies and Risks
Q What is the Fund's investment policy?
A We will invest the Fund's assets primarily in the equity securities
of well-established, large companies with above-average dividend
yields and in real estate investment trusts (REITs). We attempt to
provide a portfolio with a dividend yield above the average of the
S&P 500 Index. We use the term "equity securities" to include common
stocks, preferred stocks, securities convertible into common stocks,
and securities which carry the right to buy common stocks.
[CAUTION SYMBOL]
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
company's 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 SYMBOL]
REITs. Investing in REITs may subject the Fund to many of the same risks
associated with the direct ownership of real estate. REITs are dependent
upon the capabilities of the REIT manager(s) and have limited
diversification.
Q What other types of securities will the Fund purchase?
A We may also invest up to 35% of the Fund's net assets in convertible
preferred stocks and up to 5% of the Fund's net assets in convertible
debt securities measured at the time a security is purchased. These
convertible securities may be rated below investment grade as
determined by Moody's Investors Service, Inc. or Standard & Poor's
Ratings Group or may be unrated.
[CAUTION SYMBOL]
INTEREST RATE RISK. Because the value of convertible securities depends
partially on interest rate changes and the issuer's credit quality, the
value of the Fund's portfolio is subject to interest rate and credit risk.
Convertible securities also afford an investor the opportunity, through
their conversion feature, to participate in the capital appreciation of
the underlying common stock; and as such, they are subject to market risk
as described above.
[CAUTION SYMBOL]
CREDIT RISK. Credit risk is the possibility that an issuer of a security
will fail to make timely payments of interest or principal. When
evaluating potential investments for the Fund, our analysts also assess
credit risk and its impact on the Fund's portfolio. Securities rated below
investment grade 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 prices tend to go up or down
more than higher-quality securities. During periods of economic downturns
or rising interest rates, issuers of such securities may experience
financial difficulties which could affect their ability to make timely
principal and interest payments. The Fund's ability to
6
<PAGE>
timely and accurately value and dispose of lower-quality
securities may also be affected by the absence or periodic
discontinuance of liquid trading markets.
Q May the Fund's assets be invested in securities of foreign issuers?
A Yes. We may invest up to 10% of the Fund's total assets in American
Depositary Receipts (ADRs) or similar forms of ownership interest in
securities of foreign issuers deposited with a depositary, and
securities of foreign issuers that are traded on U.S. securities
exchanges or in U.S. over-the-counter markets.
[CAUTION SYMBOL]
FOREIGN INVESTING. Investing in securities of foreign issuers poses unique
risks: currency exchange rate fluctuations; increased price volatility;
different accounting, reporting, and disclosure requirements; and
political or social instability. In the past, equity and debt instruments
of foreign issuers have been more volatile than equity and debt
instruments of U.S. issuers.
As a temporary defensive measure, we may invest up to 100% of the Fund's
assets in high-quality, short-term debt instruments.
For additional information about other investments in which we may invest
the Fund's assets, see APPENDIX A on page 16.
Investment Restrictions
The following restrictions may only be changed with shareholder approval:
* The Fund may not invest more than 25% 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.
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 $__ billion in total assets under
management. Our mailing address is 9800 Fredericksburg Road, San Antonio,
TX 78288.
7
<PAGE>
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. This fee was computed and paid at one-half of one
percent (.50%) of average net assets for the fiscal year ended July 31,
1997.
We also provide services related to selling the Fund's shares 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:
Harry W. Miller, Senior Vice President of Equity Investments since October
1987, has managed the Fund since January 1989. Mr. Miller has 40 years
investment management experience and has worked for us for 23 years. He
earned the Chartered Financial Analyst designation in 1968 and is a member
of the Association for Investment Management and Research and the San
Antonio Financial Analysts Society, Inc. He holds an MBA from the
University of Southern California and a BS from Rider University, New
Jersey.
[PHOTOGRAPH OF
PORTFOLIO MANAGER]
Harry W. Miller
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.
8
<PAGE>
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.
For example, assume you wish to invest in a widely-diversified, common
stock portfolio. You could combine an investment in the Income Stock 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 17. 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
9
<PAGE>
Time) of the New York Stock Exchange (NYSE) each day the NYSE 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 effective date 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.
MINIMUM INVESTMENTS
INITIAL PURCHASE * $3,000 [$500 Uniform Gifts/Transfers to Minor Act
[MONEY] (UGMA/UTMA) Accounts and $250 for IRAs] or no initial
investment if you elect to have monthly electronic
investments of at least $50 each. We may periodically
offer programs that reduce the minimum amounts for
monthly electronic investments. Employees of USAA
and its affiliated companies may open an account
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
[ENVELOPE] check to:
USAA Investment Management Company
9800 Fredericksburg Road, 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 Road, San Antonio, TX 78288
IN PERSON * To open an account, bring your application and
[MAN AND WOMAN] 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
[ELECTRONIC service) to wire the specified amount to the Fund as
ENVELOPE] follows:
State Street Bank and Trust Company, Boston,
MA 02101
ABA#011000028
Attn: USAA Income Stock Fund
USAA AC-69384998
Shareholder(s) Name(s)_________________
Shareholder(s) Account Number___________________
ELECTRONIC * Addtional purchases on a regular basis can be deducted
FUNDS from a bank account, paycheck, income-producing
TRANSFER investment, or USAA money market fund account. Sign
[CALENDAR] up for these services when opening an account or call
1-800-531-8448 to add these services.
10
<PAGE>
PHONE
1-800-531-8448 * If you have an existing USAA account and would like to
[PHONE] open a new account or 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.
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 are 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 is
sent after 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 Road, San Antonio, TX 78288
[FAX MACHINE] * 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 privileges are 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 information on purchases, redemptions, and methods of
payment. You will also find in-depth information on automatic investment
plans, shareholder statements and reports, and other useful information.
11
<PAGE>
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 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);
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 Statement of Additional
Information 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 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 11.
12
<PAGE>
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).
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. You may buy and sell Fund shares at the NAV
per share without a sales charge.
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.
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 quarterly. 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.
13
<PAGE>
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. Note that the
recently enacted Taxpayer Relief Act of 1997 and regulations that will
likely be created to implement the Act may affect the status and treatment
of certain distributions shareholders receive from the Fund. 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 (RIC)
under Subchapter M of the Internal Revenue Code of 1986, as amended. As a
RIC, 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.
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 and 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, or
* fails to certify that he or she 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 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.
14
<PAGE>
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 this 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.
15
<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.
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.
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.
CALL OPTIONS
We may write covered call options with respect to not more than 5% of the
Fund's total assets.
16
<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.
17
<PAGE>
NOTES
18
<PAGE>
If you would like more information about the Fund, you may call 1-800-531-8181
to request a free copy of the Fund's Statement of Additional Information (SAI),
dated December 1, 1997, or the Fund's Annual Report for the year ended July 31,
1997. The SAI and the financial statements contained with the Fund's Annual
Report have been filed with the SEC and are legally a part of this 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)
23454-1297 (C) 1997, USAA. All rights reserved. RECYCLED PAPER
<PAGE>
Part A
Prospectus for the
Income Fund
is included herein
<PAGE>
USAA INCOME FUND
DECEMBER 1, 1997 PROSPECTUS
The Fund is a no-load mutual fund offered by USAA Investment Management
Company. USAA will seek maximum current income without undue risk to
principal by investing primarily in income producing securities.
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.
TABLE OF CONTENTS
Who Manages the Fund?.................................................. 2
What is the Investment Objective?...................................... 2
Is This Fund for You?.................................................. 2
How Do You Buy?........................................................ 2
Fees and Expenses...................................................... 3
Financial Highlights................................................... 3
Performance Information................................................ 4
Will the Value of Your Investment Fluctuate?........................... 4
A Word About Risk...................................................... 5
Fund Investments....................................................... 6
Fund Management........................................................ 8
Using Mutual Funds in an Investment Program............................ 9
How to Invest.......................................................... 10
Important Information About Purchases and Redemptions.................. 12
Exchanges.............................................................. 13
Shareholder Information................................................ 14
Description of Shares.................................................. 16
Appendix A............................................................. 17
USAA Family of No-Load Mutual Funds.................................... 20
<PAGE>
This Prospectus contains 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 maximum current income without undue
risk to principal. See FUND INVESTMENTS on page 6 for more information.
IS THIS FUND FOR YOU?
This fund might be appropriate as part of your investment portfolio if ...
X You need steady income.
X You are willing to accept moderate risk.
X You are looking for a long-term investment.
This fund MAY NOT be appropriate as part of your investment portfolio
if ...
X Your primary goal is to maximize long-term growth.
X You are unable or reluctant to invest for a period of four years
or more.
X You need an investment that provides tax-free income.
If you feel this fund is not the one for you, refer to page 20 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. Generally, 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. If you
participate in one of our automatic investment plans, your minimum initial
investment may be less. There is more information about how to purchase
Fund shares on page 10.
2
<PAGE>
FEES AND EXPENSES
This summary shows what it will cost you 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
Fund expenses come out of the Fund's assets and are reflected in the
Fund's share price and dividends. "Other Expenses" include expenses such
as custodian and transfer agent fees. The figures below show actual
expenditures during the past fiscal year ended July 31, 1997, and are
calculated as a percentage of average net assets.
Management Fees .24%
12b-1 Fees None
Other Expenses .15%
---
Total Fund Operating Expenses .39%
===
o 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............................................ $ 4
3 years........................................... 13
5 years........................................... 22
10 years.......................................... 49
THIS EXAMPLE IS NOT A REPRESENTATION OF PAST OR FUTURE EXPENSES AND ACTUAL
EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
FINANCIAL HIGHLIGHTS
Please read the Fund's Annual Report furnished with this Prospectus. The
Annual Report includes the Fund's financial statements and financial
highlights audited by KPMG Peat Marwick LLP, which are legally a part of
this Prospectus. The Annual Report includes messages from the President
and the Fund's portfolio manager, a listing of the Fund's investments, and
additional performance information that you may wish to review.
3
<PAGE>
PERFORMANCE INFORMATION
(Tel)
TouchLINE(R)
1-800-531-8777
PRESS
(1)
THEN
(1)
THEN
(4)(0)(#)
Newspaper Symbol:
Inco
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 40 followed by the pound sign when asked for a
Fund Code.
You also can find the most current price of your shares in the business
section of your newspaper in the mutual fund section under the heading
"USAA Group" and the symbol "Inco."
You may see the Fund's yield and total return quoted in advertisements and
reports. Yield is the annualized net income of the Fund during a specified
30-day period as a percentage of the Fund's share price. All mutual funds
must use the same formulas to calculate yield and total return. Total
return measures the price change in a share assuming the reinvestment of
all dividend income and capital gain distributions. You may also see a
comparison of the Fund's performance to that of other mutual funds with
similar investment objectives and to bond or relevant indexes. For the
following periods ended September 30, 1997, the Fund's average annual
total returns have been:
1 year............................................ ___%
5 years........................................... ___%
10 years.......................................... ___%
Figures on page 5 are different because they are for periods which ended
December 31, 1996.
WILL THE VALUE OF YOUR INVESTMENT FLUCTUATE?
Yes, it will. The value of your investment could increase or decrease. The
bar chart and table shown below illustrate the Fund's risks and
performance from year to year over the past ten years and shows how the
Fund's average annual returns for the one-, five-, and ten-year periods
compare to those of a broad-based securities market index. Remember that
this historical information may not be repeated in the future.
4
<PAGE>
[BAR CHART]
CALENDAR TOTAL RETURN
YEAR PERCENTAGE
1987 3.46
1988 9.98
1989 16.30
1890 7.69
1991 19.38
1992 8.37
1993 9.94
1994 -5.21
1995 24.47
1996 1.33
o TOTAL RETURN MEASURES THE PRICE CHANGE IN A SHARE ASSUMING THE
REINVESTMENT OF ALL DIVIDEND INCOME AND CAPITAL GAIN DISTRIBUTIONS.
===============================================================================
Average Annual Total
Returns
(for the periods ending Past 1 Past 5 Past 10
December 31, 1996) Year Years Years
- -------------------------------------------------------------------------------
Income Fund 1.33% 7.33% 9.25%
- -------------------------------------------------------------------------------
Lehman Bros. Aggregate 3.63% 7.04% 8.47%
Bond Index
===============================================================================
The Lehman Bros. Aggregate Bond Index is an unmanaged index of the
Government/Corporate Index, the Mortgage-Backed Securities Index, and
the Asset-Backed Securities Index.
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 also have by a higher risk of losing money. The
reverse is also generally true: the lower the risk, the lower the
potential reward. However, as you consider an investment in the Fund, you
should also take into account your tolerance for the daily fluctuations of
the financial markets and whether you can afford to leave your money in
this investment for long periods of time to ride out down periods.
[CAUTION SYMBOL]
Look for this symbol throughout the Prospectus. We use it to mark detailed
information about the main risks that you will face as a Fund shareholder.
5
<PAGE>
FUND INVESTMENTS
Investment Policies and Risks
Q What is the Fund's investment policy?
A We will invest the Fund's assets primarily in U.S. dollar-denominated
securities that have been selected for their high yields relative to
the risk involved. Consistent with this policy, when interest rates
rise, we will invest a greater portion of the Fund's portfolio in
securities whose value we believe to be less sensitive to interest
rate changes.
[CAUTION SYMBOL]
INTEREST RATE RISK. As a mutual fund investing in bonds, the Fund is
subject to the risk that the market value of the bonds will decline due to
rising interest rates. Bond prices are linked to the prevailing market
interest rates. In general, when interest rates rise, the prices of bonds
fall and when interest rates fall, bond prices generally rise. The price
volatility of a bond also depends on its maturity. Generally, the longer
the maturity of a bond, the greater its sensitivity to interest rates. To
compensate investors for this higher risk, bonds with longer maturities
generally offer higher yields than bonds with shorter maturities.
Q What types of securities will the Fund's portfolio consist of?
A The Fund's portfolio may consist of any of the following:
* Obligations of the U.S. Government, its agents, and
instrumentalities;
* Mortgage-backed securities;
* Asset-backed securities;
* Corporate debt securities such as notes, bonds, and commercial
paper;
* Debt securities of real estate investment trusts;
* U.S. bank obligations, including certificates of deposit and
banker's acceptances;
* Obligations of state and local governments and their agencies and
instrumentalities;
* Master demand notes;
* Eurodollar obligations;
* Yankee obligations;
* Other debt securities;
* Convertible securities;
* Common stocks;
* Preferred stocks.
Further description of these securities is found in APPENDIX A on page 17.
6
<PAGE>
Q What will be the quality of debt securities that the Fund's assets
will be invested in?
A We will invest the Fund's assets in debt securities, which at the
time of purchase, must be investment grade. Investment-grade
securities are those securities issued or guaranteed by the U.S.
Government, its agencies, and instrumentalities; those rated within
the four highest long-term rating categories by:
* Moody's Investors Services, Inc.,
* Standard & Poor's Ratings Group,
* Fitch Investors Service, Inc., or
* Duff and Phelps;
or . . . if unrated by those four agencies, we must determine that
these securities are of equivalent investment quality.
Q What happens if the rating of a security is downgraded?
A If the rating of a security is downgraded below investment grade, we
will determine whether it is in the best interest of the Fund's
shareholders to continue to hold the security in the Fund's
portfolio. If downgrades result in more than 5% of the Fund's net
assets being invested in securities that are less than
investment-grade quality, we will take immediate action to reduce the
Fund's holdings in such securities to 5% or less of the Fund's net
assets, unless otherwise directed by the Board of Directors.
[CAUTION SYMBOL]
CREDIT RISK. Credit risk is the possibility that an issuer of a fixed
income instrument such as a bond or repurchase agreement will fail to make
timely payments of interest or principal. We attempt to minimize the
Fund's credit risk by investing in securities considered investment grade
at the time of purchase. When evaluating potential investments for the
Fund, our analysts also assess credit risk and its impact on the Fund's
portfolio. Nevertheless, even investment-grade securities are subject to
some credit risk. Securities in the lowest-rated, investment-grade
category have speculative characteristics. Changes in economic conditions
or other circumstances are more likely to lead to a weakened capability to
make principal and interest payments on these securities than is the case
for higher-rated securities. In addition, the ratings of securities are
estimates by the rating agencies of the credit quality of the securities.
The ratings may not take into account every risk that interest or
principal will be repaid on a timely basis.
7
<PAGE>
Q What other risks apply to the Fund's portfolio?
A
[CAUTION SYMBOL]
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 an individual
company's 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.
As a temporary defensive measure, we may invest up to 100% of the Fund's
assets in high-quality, short-term debt instruments.
For additional information about other investments in which we may invest
the Fund's assets, see APPENDIX A on page 17.
Investment Restrictions
The following restrictions may only be changed with shareholder approval:
* The Fund may not invest more than 25% 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.
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 $__ billion in total assets under
management. Our mailing address is 9800 Fredericksburg Road, San Antonio,
TX 78288.
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. This fee was computed and paid at twenty-four one
hundredths of one percent (.24%) of average net assets for the fiscal year
ended July 31, 1997.
8
<PAGE>
We also provide services related to selling the Fund's shares 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:
John W. Saunders, Jr., Senior Vice President of Fixed Income Investments
since October 1985, has managed the Fund since October 1985. Mr. Saunders
has 28 years investment management experience and has worked for us for 27
years. He earned the Chartered Financial Analyst designation in 1976 and
is a member of the Association for Investment Management and Research and
the San Antonio Financial Analysts Society, Inc. He holds a BS from
Portland State University, Oregon.
[PHOTOGRAPH OF
PORTFOLIO MANAGER]
John W. Saunders, Jr.
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.
9
<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 portfolio.
You could combine an investment in the Income 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 20. 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 NYSE 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 effective date 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.
10
<PAGE>
MINIMUM INVESTMENTS
INITIAL PURCHASE * $3,000 [$500 Uniform Gifts/Transfers to Minor Act
[MONEY] (UGMA/UTMA) Accounts and $250 for IRAs] or no initial
investment if you elect to have monthly electronic
investments of at least $50 each. We may periodically
offer programs that reduce the minimum amounts for
monthly electronic investments. Employees of USAA
and its affiliated companies may open an account
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
[ENVELOPE] check to:
USAA Investment Management Company
9800 Fredericksburg Road, 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 Road, San Antonio, TX 78288
IN PERSON * To open an account, bring your application and
[MAN AND WOMAN] 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
[ELECTRONIC service) to wire the specified amount to the Fund as
ENVELOPE] follows:
State Street Bank and Trust Company, Boston,
MA 02101
ABA#011000028
Attn: USAA Income Fund
USAA AC-69384998
Shareholder(s) Name(s)_________________
Shareholder(s) Account Number___________________
ELECTRONIC * Addtional purchases on a regular basis can be deducted
FUNDS from a bank account, paycheck, income-producing
TRANSFER investment, or USAA money market fund account. Sign
[CALENDAR] up for these services when opening an account or call
1-800-531-8448 to add these services.
PHONE
1-800-531-8448 * If you have an existing USAA account and would like to
[PHONE] open a new account or 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.
11
<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 are 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 is
sent after 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 Road, San Antonio, TX 78288
[FAX MACHINE] * 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 privileges are 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 information on purchases, redemptions, 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
12
<PAGE>
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);
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 Statement of Additional
Information 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 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 12.
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).
13
<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. You may buy and sell Fund shares at the NAV
per share without a sales charge.
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.
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 monthly based on the projection of its
annual net investment income. Therefore, the amount of each monthly
distribution may be different from the actual net investment income. The
purpose of this distribution procedure is to attempt to provide you with
an even monthly distribution payment. If the total distributions in a year
exceed net investment income for the Fund's current year, a portion of
your distributions could be a return of capital for federal income tax
purposes and thereby reduce your cost basis in the Fund's shares. If you
receive distributions in additional Fund shares rather than cash, the
capital returned would be automatically reinvested, and your total cost
basis in the Fund would remain the same. 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.
14
<PAGE>
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. Note that the
recently enacted Taxpayer Relief Act of 1997 and regulations that will
likely be created to implement the Act may affect the status and treatment
of certain distributions shareholders receive from the Fund. 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 (RIC)
under Subchapter M of the Internal Revenue Code of 1986, as amended. As a
RIC, 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.
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 and 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, or
* fails to certify that he or she 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 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.
15
<PAGE>
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 this 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.
16
<PAGE>
APPENDIX A
The following are descriptions of certain types of securities in which we may
invest the Fund's assets:
PUT BONDS
We may invest in securities (including securities with variable interest rates)
which may be redeemed or sold back (put) to the issuer of the security or a
third party prior to stated maturity (put bonds). Such securities will normally
trade as if maturity is the earlier put date, even though stated maturity is
longer.
REPURCHASE AGREEMENTS
We may invest in repurchase agreements which are collateralized by obligations
issued or guaranteed by the U.S. Government, its agencies, and
instrumentalities. A repurchase agreement is a transaction in which a security
is purchased with a simultaneous commitment to sell it back to the seller (a
commercial bank or recognized securities dealer) at an agreed upon price on an
agreed upon date. This date is usually not more than seven days from the date
of purchase. The resale price reflects the purchase price plus an agreed upon
market rate of interest, which is unrelated to the coupon rate or maturity of
the purchased security.
VARIABLE RATE SECURITIES
We may invest in securities that bear interest at rates which are adjusted
periodically to market rates.
* These interest rate adjustments can both raise and lower the income
generated by such securities. These changes will have the same effect on the
income earned by the Fund depending on the proportion of such securities
held.
* The value of variable rate securities is less affected than fixed-coupon
securities by changes in prevailing interest rates because of the periodic
adjustment of their coupons to a market rate. The shorter the period between
adjustments, the smaller the impact of interest rate fluctuations on the
value of these securities.
* The market value of a variable rate security usually tends toward par (100%
of face value) at interest rate adjustment time.
WHEN-ISSUED SECURITIES
We may invest in new issues of debt securities offered on a when-issued basis.
* Delivery and payment take place after the date of the commitment to
purchase, normally within 45 days. Both price and interest rate are fixed at
the time of commitment.
* The Fund does not earn interest on the securities until settlement, and the
market value of the securities may fluctuate between purchase and
settlement.
* Such securities can be sold before settlement date.
17
<PAGE>
MORTGAGED-BACKED AND ASSET-BACKED SECURITIES
We may invest the Fund's assets in mortgage-backed and asset-backed securities.
Mortgage-backed securities include, but are not limited to, securities issued
by the Government National Mortgage Association (Ginnie Mae), the Federal
National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage
Corporation (Freddie Mac). These securities represent ownership in a pool of
mortgage loans. They differ from conventional bonds in that principal is paid
back to the investor as payments are made on the underlying mortgages in the
pool. Accordingly, the Fund receives monthly scheduled payments of principal
and interest along with any unscheduled principal prepayments on the underlying
mortgages. Because these scheduled and unscheduled principal payments must be
reinvested at prevailing interest rates, mortgage-backed securities do not
provide an effective means of locking in long-term interest rates for the
investor. Like other fixed income securities, when interest rates rise, the
value of a mortgage-backed security generally will decline; however, when
interest rates are declining, the value of mortgage-backed securities with
prepayment features may not increase as much as other fixed income securities.
Mortgage-backed securities also include collateralized mortgage obligations
(CMOs). CMOs are obligations fully collateralized by a portfolio of mortgages
or mortgage-related securities. CMOs are divided into pieces (tranches) with
varying maturities. The cash flow from the underlying mortgages is used to pay
off each tranche separately. CMOs are designed to provide investors with more
predictable maturities than regular mortgage securities but such maturities can
be difficult to predict because of the effect of prepayments. Failure to
accurately predict prepayments can adversely affect the Fund's return on these
investments. CMOs may also be less marketable than other securities.
Asset-backed securities represent a participation in, or are secured by and
payable from, a stream of payments generated by particular assets, such as
credit card, motor vehicle, or trade receivables. They may be pass-through
certificates, which have characteristics very similar to mortgage-backed
securities, discussed above. They may also be in the form of asset-backed
commercial paper, which is issued by a special purpose entity, organized solely
to issue the commercial paper and to purchase interests in the assets. The
credit quality of these securities depends primarily upon the quality of the
underlying assets and the level of credit support and enhancement provided.
The weighted average life of such securities is likely to be substantially
shorter than their stated final maturity as a result of scheduled principal
payments and unscheduled principal prepayments.
EURODOLLAR AND YANKEE OBLIGATIONS
We may invest a portion of the Fund's assets in dollar-denominated instruments
that have been issued outside the U.S. capital markets by foreign corporations
and financial institutions and by foreign branches of U.S. corporations and
financial institutions (Eurodollar) as well as dollar-denominated instruments
that have been issued by foreign issuers in the U.S. capital markets (Yankee).
In addition, we may invest a portion of the Fund's assets in Eurodollar and
Yankee obligations of investment-grade emerging market countries.
MASTER DEMAND NOTES
We may invest the Fund's assets in master demand notes, which are obligations
that permit the investment of fluctuating amounts by the Fund, at varying rates
of interest using direct arrangements between the Fund, as lender, and the
borrower. These notes permit daily changes in the amounts borrowed. The Fund
has the right to increase the amount under the note at any time up to the full
amount provided by the note agreement, or to decrease the amount, and the
18
<PAGE>
borrower may repay up to the full amount of the note without penalty.
Frequently, such obligations are secured by letters of credit or other credit
support arrangements provided by banks. Because master demand notes are direct
lending arrangements between the lender and borrower, these instruments
generally will not be traded, and there generally is no secondary market for
these notes, although they are redeemable (and immediately repayable by the
borrower) at face value, plus accrued interest, at any time. We will invest the
Fund's assets in master demand notes only if the Board of Directors or its
delegate has determined that they are of credit quality comparable to the debt
securities in which the Fund generally may invest.
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.
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.
19
<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 Strateg 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.
20
<PAGE>
If you would like more information about the Fund, you may call
1-800-531-8181 to request a free copy of the Fund's Statement of
Additional Information (SAI), dated December 1, 1997, or the Fund's Annual
Report for the year ended May 31, 1997. The SAI and the financial
statements contained with the Fund's Annual Report have been filed with
the SEC and are legally a part of this 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)
23455-1297 (C) 1997, USAA. All rights reserved. RECYCLED PAPER
<PAGE>
Part A
Prospectus for the
Short-Term Bond Fund
is included herein
<PAGE>
USAA SHORT-TERM BOND FUND
DECEMBER 1, 1997 PROSPECTUS
The Fund is a no-load mutual fund offered by USAA Investment Management
Company. USAA will seek high current income while preserving principal by
investing primarily in a broad range of investment-grade debt securities.
USAA will maintain a dollar-weighted average portfolio maturity of three
years or less.
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.
TABLE OF CONTENTS
Who Manages the Fund?................................................. 2
What is the Investment Objective?..................................... 2
Is This Fund for You?................................................. 2
How Do You Buy?....................................................... 2
Fees and Expenses..................................................... 3
Financial Highlights.................................................. 4
Performance Information............................................... 4
Will the Value of Your Investment Fluctuate?.......................... 5
A Word About Risk..................................................... 6
Fund Investments...................................................... 6
Fund Management....................................................... 8
Using Mutual Funds in an Investment Program........................... 9
How to Invest......................................................... 10
Important Information About Purchases and Redemptions................. 13
Exchanges............................................................. 13
Shareholder Information............................................... 14
Description of Shares................................................. 16
Appendix A............................................................ 17
USAA Family of No-Load Mutual Funds................................... 20
<PAGE>
This Prospectus contains 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 high current income consistent with
preservation of principal. See FUND INVESTMENTS on page 6 for more
information.
IS THIS FUND FOR YOU?
This fund might be appropriate as part of your investment portfolio if ...
X You are looking for current income.
X You are looking for an investment that is low risk.
X You are looking for a short-term investment.
This fund MAY NOT be appropriate as part of your investment portfolio
if ...
X Your primary goal is to maximize long-term growth.
X You need a high total return to achieve your goals.
X You need an investment that provides tax-free income.
If you feel this fund is not the one for you, refer to page 20 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. Generally, 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. If you
participate in one of our automatic investment plans, your minimum initial
investment may be less. There is more information about how to purchase
Fund shares on page 10.
2
<PAGE>
FEES AND EXPENSES
This summary shows what it will cost you 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
Fund expenses come out of the Fund's assets and are reflected in the
Fund's share price and dividends. "Other Expenses" include expenses such
as custodian and transfer agent fees. The figures below show actual
expenditures during the past fiscal year ended July 31, 1997, and are
calculated as a percentage of average net assets (ANA).
Management Fees (NET OF REIMBURSEMENTS) .13%
12b-1 Fees None
Other Expenses .37%
---
Total Fund Operating Expenses (NET OF
REIMBURSEMENTS) .50%
===
o 12B-1 FEES SOME MUTUAL FUNDS CHARGE THESE FEES TO PAY FOR THE COSTS OF
SELLING FUND SHARES.
During the year, we voluntarily limited the Fund's annual expenses to .50%
of its ANA and reimbursed the Fund for all expenses in excess of this
limitation. The Management Fees and Total Fund Operating Expenses reflect
all such expense reimbursements. Without these reimbursements, the amount
of the Management Fees and Total Fund Operating Expenses as a percentage
of the Fund's ANA would have been .24% and .61%, respectively. We have
again voluntarily agreed to limit the Fund's annual expenses to .50% of
its ANA and will reimburse the Fund for all expenses in excess of that
amount until December 1, 1998.
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............................................ $ 5
3 years........................................... 16
5 years........................................... 28
10 years.......................................... 63
THIS EXAMPLE IS NOT A REPRESENTATION OF PAST OR FUTURE EXPENSES AND ACTUAL
EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
3
<PAGE>
FINANCIAL HIGHLIGHTS
Please read the Fund's Annual Report furnished with this Prospectus. The
Annual Report includes the Fund's financial statements and financial
highlights audited by KPMG Peat Marwick LLP, which are legally a part of
this Prospectus. The Annual Report includes messages from the President
and the Fund's portfolio manager, a listing of the Fund's investments, and
additional performance information that you may wish to review.
PERFORMANCE INFORMATION
(Tel)
TouchLINE(R)
1-800-531-8777
PRESS
(1)
THEN
(1)
THEN
(3)(6)(#)
Newspaper Symbol:
ShtTBond
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 36 followed by the pound sign when asked for a
Fund Code.
You also can find the most current price of your shares in the business
section of your newspaper in the mutual fund section under the heading
"USAA Group" and the symbol "ShtTBond."
You may see the Fund's yield and total return quoted in advertisements and
reports. Yield is the annualized net income of the Fund during a specified
30-day period as a percentage of the Fund's share price. Total return
measures the price change in a share assuming the reinvestment of all
dividend income and capital gain distributions. All mutual funds must use
the same formulas to calculate yield and total return. You may also see a
comparison of the Fund's performance to that of other mutual funds with
similar investment objectives and to bond or relevant indexes. For the
following periods ended September 30, 1997, the Fund's average annual
total returns have been:
1 year............................................ ___%
Since Inception on June 1, 1993................... ___%
Figures on page 5 are different because they are for periods which ended
December 31, 1996.
4
<PAGE>
WILL THE VALUE OF YOUR INVESTMENT FLUCTUATE?
Yes, it will. The value of your investment could increase or decrease. The
bar chart and table shown below illustrate the Fund's risks and
performance from year to year over the life of the Fund and shows how the
Fund's average annual returns for one year and the life of the Fund
compare to those of a broad-based securities market index. Remember that
this historical information may not be repeated in the future.
[BAR CHART]
CALENDAR TOTAL RETURN
YEAR PERCENTAGE
1993* 2.85
1994 0.02
1995 11.18
1996 6.31
* Fund commenced operations June 1, 1993.
o TOTAL RETURN MEASURES THE PRICE CHANGE IN A SHARE ASSUMING THE
REINVESTMENT OF ALL DIVIDEND INCOME AND CAPITAL GAIN DISTRIBUTIONS.
===============================================================================
Average Annual Total
Returns Since Inception
(for the periods ending Past 1 on
December 31, 1996) Year June 1, 1993
- -------------------------------------------------------------------------------
Short-Term Bond Fund 6.31% 5.60%
- -------------------------------------------------------------------------------
Lehman Bros. 1-3 Year 5.14% 5.38%
Gov't/Corp Index
===============================================================================
The Lehman Bros. 1-3 Year Government/Corporate Index is an unmanaged index
of all the government, agency, and corporate bonds longer than one year
and less than three years.
5
<PAGE>
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 also have by a higher risk of losing money. The
reverse is also generally true: the lower the risk, the lower the
potential reward. However, as you consider an investment in the Fund, you
should also take into account your tolerance for the daily fluctuations of
the financial markets and whether you can afford to leave your money in
this investment for long periods of time to ride out down periods.
[CAUTION SYMBOL]
Look for this symbol throughout the Prospectus. We use it to mark detailed
information about the main risks that you will face as a Fund shareholder.
FUND INVESTMENTS
Investment Policies and Risks
Q What is the Fund's investment policy?
A We will invest the Fund's assets primarily in U.S. dollar-denominated
investment-grade debt securities. These debt securities must be
investment grade at the time of purchase. We will maintain a
dollar-weighted average portfolio maturity of three years or less.
o DOLLAR-WEIGHTED AVERAGE PORTFOLIO MATURITY is obtained by multiplying
the dollar value of each investment by the number of days left to its
maturity, then adding those figures together and dividing the total
by the dollar value of the Fund's portfolio.
Q What type of debt securities are included in the Fund's portfolio:
A The Fund's portfolio may consist of any of the following:
* Obligations of the U.S. Government, its agents, and
instrumentalities, and repurchase agreements collateralized by such
obligations;
* Mortgage-backed ecurities;
* Asset-backed securities;
* Corporate debt securities such as Notes, bonds, and commercial
paper;
* Debt securities of real estate
investment trusts;
* U.S. bank or foreign bank obligations, including certificates of
deposit and banker's acceptances;
* Obligations of state and local governments and their agencies and
instrumentalities;
* Master demand notes;
* Eurodollar obligations;
* Yankee obligations;
* Other Debt securities.
Further description of these securities is found in APPENDIX A on page 17.
6
<PAGE>
Q What are considered investment-grade securities?
A Investment-grade securities include securities issued or guaranteed
by the U.S. Government, its agencies, and instrumentalities, as well
as securities rated within the categories listed by the following
rating agencies:
===============================================================================
SHORT-TERM
DEBT SECURITIES
===============================================================================
Moody's Investors Services, Inc. At least Baa At least Prime-3 or
MIG 4/VMIG 4
- -------------------------------------------------------------------------------
Standard & Poor's Ratings Group At least BBB At least A-3 or
SP-2
- -------------------------------------------------------------------------------
Fitch Investors Service, Inc. At least BBB At least F-3
- -------------------------------------------------------------------------------
Duff and Phelps At least BBB At least D-3
===============================================================================
or . . . if unrated by those four agencies, we must determine that these
securities are of equivalent investment quality.
You will find a complete description of the above debt ratings in the
Fund's Statement of Additional Information.
Q What happens if the rating of a security is downgraded?
A If the rating of a security is downgraded below investment grade, we
will determine whether it is in the best interest of the Fund's
shareholders to continue to hold the security in the Fund's
portfolio. If downgrades result in more than 5% of the Fund's net
assets being invested in securities that are less than
investment-grade quality, we will take immediate action to reduce the
Fund's holdings in such securities to 5% or less of the Fund's net
assets, unless otherwise directed by the Board of Directors.
[CAUTION SYMBOL]
CREDIT RISK. The bonds in the Fund's portfolio are subject to credit risk.
Credit risk is the possibility that an issuer of a bond will fail to make
timely payments of interest or principal. We attempt to minimize the
Fund's credit risk by investing in securities considered investment grade
at the time of purchase. When evaluating potential investments for the
Fund, our analysts also assess credit risk and its impact on the Fund's
portfolio. Nevertheless, even investment-grade securities are subject to
some credit risk. Bonds in the lowest-rated investment grade category have
speculative characteristics. Changes in economic conditions or other
circumstances are more likely to lead to a weakened capability to make
principal and interest payments on these bonds than is the case for
higher-rated bonds. In addition, the ratings of securities are estimates
by the rating agencies of the credit quality of the securities. The
ratings may not take into account every risk that interest or principal
will be repaid on a timely basis.
7
<PAGE>
[CAUTION SYMBOL]
INTEREST RATE RISK. As a mutual fund investing in bonds, the Fund is
subject to the risk that the market value of the bonds will decline due to
rising interest rates. Bond prices are linked to the prevailing market
interest rates. In general, when interest rates rise, the prices of bonds
fall and when interest rates fall, bond prices generally rise. The price
volatility of a bond also depends on its maturity. Generally, the longer
the maturity of a bond, the greater its sensitivity to interest rates. To
compensate investors for this higher risk, bonds with longer maturity
generally offer higher yields than bonds with shorter maturity.
For additional information about other investments in which we may invest
the Fund's assets, see APPENDIX A on page 17.
Investment Restrictions
The following restrictions may only be changed with shareholder approval:
* The Fund may not invest more than 25% 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.
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 $__ billion in total assets under
management. Our mailing address is 9800 Fredericksburg Road, San Antonio,
TX 78288.
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. This fee is computed and paid at twenty-four one
hundredths of one percent (.24%) of average net assets. For the fiscal
year ended July 31, 1997, the fees paid to us, net of reimbursement, were
.13% of average net assets. We reimbursed the Fund $127,346 for its Total
Operating Expenses in excess of the .50% limitation.
We also provide services related to selling the Fund's shares and receive
no compensation for those services.
8
<PAGE>
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 Manager
The following individual is primarily responsible for managing the Fund:
Paul H. Lundmark, Assistant Vice President of Fixed Income Investments
since December 1996, has managed the Fund since its inception in June
1993. Mr. Lundmark has 11 years investment management experience and has
worked for us for five years. He earned the Chartered Financial Analyst
designation in 1989 and is a member of the Association for Investment
Management and Research and the San Antonio Financial Analysts Society,
Inc. He holds an MBA and BSB from the University of Minnesota.
[PHOTOGRAPH OF
PORTFOLIO MANAGER]
Paul H. Lundmark
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.
For example, assume you wish to invest in a widely-diversified portfolio.
You could combine an investment in the Short-Term Bond 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.
9
<PAGE>
III. USAA's Family of Funds
We offer you another alternative for asset allocation with our asset
strategy funds listed on page 20. 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 NYSE 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 effective date 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.
10
<PAGE>
MINIMUM INVESTMENTS
INITIAL PURCHASE * $3,000 [$500 Uniform Gifts/Transfers to Minor Act
[MONEY] (UGMA/UTMA) Accounts and $250 for IRAs] or no initial
investment if you elect to have monthly electronic
investments of at least $50 each. We may periodically
offer programs that reduce the minimum amounts for
monthly electronic investments. Employees of USAA
and its affiliated companies may open an account
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
[ENVELOPE] check to:
USAA Investment Management Company
9800 Fredericksburg Road, 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 Road, San Antonio, TX 78288
IN PERSON * To open an account, bring your application and
[MAN AND WOMAN] 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
[ELECTRONIC service) to wire the specified amount to the Fund as
ENVELOPE] follows:
State Street Bank and Trust Company, Boston,
MA 02101
ABA#011000028
Attn: USAA Short-Term Bond Fund
USAA AC-69384998
Shareholder(s) Name(s)_________________
Shareholder(s) Account Number___________________
ELECTRONIC * Addtional purchases on a regular basis can be deducted
FUNDS from a bank account, paycheck, income-producing
TRANSFER investment, or USAA money market fund account. Sign
[CALENDAR] up for these services when opening an account or call
1-800-531-8448 to add these services.
PHONE
1-800-531-8448 * If you have an existing USAA account and would like to
[PHONE] open a new account or 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.
11
<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 are 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 is
sent after 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 Road, San Antonio, TX 78288
[FAX MACHINE] * 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 privileges are 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.
CHECKWRITING * Return a signed signature card, which accompanies your
[CHECKBOOK] application, or request a signature card separately
and return to:
USAA Shareholder Account Services
9800 Fredericksburg Road, San Antonio, TX 78288
Your checkwriting privilege is subject to State Street Bank and Trust
Company's rules and regulations governing checking accounts. You may write
checks in the amount of $250 or more. Any checks written for less than
$250 will be returned. You will not be charged for the use of checks or
any subsequent reorders. Because the value of your account changes daily
as dividends accrue, you may not write a check to close your account.
Remember, writing a check results in a taxable event and is therefore
reportable for federal tax purposes.
12
<PAGE>
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 information on purchases, redemptions, 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 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);
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 Statement of Additional
Information 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 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
13
<PAGE>
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 12.
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).
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. You may buy and sell Fund shares at the NAV
per share without a sales charge.
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.
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
Net investment income is accrued daily and paid on the last business day
of the month. Daily dividends are declared at the time the NAV per share
is calculated. Dividends shall begin accruing on shares purchased the day
following the effective date and shall continue to accrue to the effective
date of redemption. When you choose to receive cash dividends monthly, we
will send you those funds that have accrued during the month after the
payment date. 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.
14
<PAGE>
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. Note that the
recently enacted Taxpayer Relief Act of 1997 and regulations that will
likely be created to implement the Act may affect the status and treatment
of certain distributions shareholders receive from the Fund. 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 (RIC)
under Subchapter M of the Internal Revenue Code of 1986, as amended. As a
RIC, 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.
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.
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 and 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, or
* fails to certify that he or she 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 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.
15
<PAGE>
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 this 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.
16
<PAGE>
APPENDIX A
The following are descriptions of certain types of securities in which we may
invest the Fund's assets:
PUT BONDS
We may invest in securities (including securities with variable interest rates)
which may be redeemed or sold back (put) to the issuer of the security or a
third party prior to stated maturity (put bonds). Such securities will normally
trade as if maturity is the earlier put date, even though stated maturity is
longer.
VARIABLE RATE SECURITIES
We may invest in securities that bear interest at rates which are adjusted
periodically to market rates.
* These interest rate adjustments can both raise and lower the income
generated by such securities. These changes will have the same effect on the
income earned by the Fund depending on the proportion of such securities
held.
* The value of variable rate securities is less affected than fixed-coupon
securities by changes in prevailing interest rates because of the periodic
adjustment of their coupons to a market rate. The shorter the period between
adjustments, the smaller the impact of interest rate fluctuations on the
value of these securities.
* The market value of a variable rate security usually tends toward par (100%
of face value) at interest rate adjustment time.
WHEN-ISSUED SECURITIES
We may invest in new issues of debt securities offered on a when-issued basis.
* Delivery and payment take place after the date of the commitment to
purchase, normally within 45 days. Both price and interest rate are fixed at
the time of commitment.
* The Fund does not earn interest on the securities until settlement, and the
market value of the securities may fluctuate between purchase and
settlement.
* Such securities can be sold before settlement date.
REPURCHASE AGREEMENTS
We may invest in repurchase agreements which are collateralized by obligations
issued or guaranteed by the U.S. Government, its agencies, and
instrumentalities. A repurchase agreement is a transaction in which a security
is purchased with a simultaneous commitment to sell it back to the seller (a
commercial bank or recognized securities dealer) at an agreed upon price on an
agreed upon date. This date is usually not more than seven days from the date
of purchase. The resale price reflects the purchase price plus an agreed upon
market rate of interest, which is unrelated to the coupon rate or maturity of
the purchased security.
17
<PAGE>
MUNICIPAL LEASE OBLIGATIONS
We may invest in a variety of instruments commonly referred to as municipal
lease obligations, including:
* Leases;
* Installment purchase contracts; and
* Certificates of participation in such leases and contracts.
MORTGAGED-BACKED AND ASSET-BACKED SECURITIES
We may invest the Fund's assets in mortgage-backed and asset-backed securities.
Mortgage-backed securities include, but are not limited to, securities issued
by the Government National Mortgage Association (Ginnie Mae), the Federal
National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage
Corporation (Freddie Mac). These securities represent ownership in a pool of
mortgage loans. They differ from conventional bonds in that principal is paid
back to the investor as payments are made on the underlying mortgages in the
pool. Accordingly, the Fund receives monthly scheduled payments of principal
and interest along with any unscheduled principal prepayments on the underlying
mortgages. Because these scheduled and unscheduled principal payments must be
reinvested at prevailing interest rates, mortgage-backed securities do not
provide an effective means of locking in long-term interest rates for the
investor. Like other fixed income securities, when interest rates rise, the
value of a mortgage-backed security generally will decline; however, when
interest rates are declining, the value of mortgage-backed securities with
prepayment features may not increase as much as other fixed income securities.
Mortgage-backed securities also include collateralized mortgage obligations
(CMOs). CMOs are obligations fully collateralized by a portfolio of mortgages
or mortgage-related securities. CMOs are divided into pieces (tranches) with
varying maturities. The cash flow from the underlying mortgages is used to pay
off each tranche separately. CMOs are designed to provide investors with more
predictable maturities than regular mortgage securities but such maturities can
be difficult to predict because of the effect of prepayments. Failure to
accurately predict prepayments can adversely affect the Fund's return on these
investments. CMOs may also be less marketable than other securities.
Asset-backed securities represent a participation in, or are secured by and
payable from, a stream of payments generated by particular assets, such as
credit card, motor vehicle, or trade receivables. They may be pass-through
certificates, which have characteristics very similar to mortgage-backed
securities, discussed above. They may also be in the form of asset-backed
commercial paper, which is issued by a special purpose entity, organized solely
to issue the commercial paper and to purchase interests in the assets. The
credit quality of these securities depends primarily upon the quality of the
underlying assets and the level of credit support and enhancement provided.
The weighted average life of such securities is likely to be substantially
shorter than their stated final maturity as a result of scheduled principal
payments and unscheduled principal prepayments.
18
<PAGE>
EURODOLLAR AND YANKEE OBLIGATIONS
We may invest a portion of the Fund's assets in dollar-denominated instruments
that have been issued outside the U.S. capital markets by foreign corporations
and financial institutions and by foreign branches of U.S. corporations and
financial institutions (Eurodollar) as well as dollar-denominated instruments
that have been issued by foreign issuers in the U.S. capital markets (Yankee).
In addition, we may invest a portion of the Fund's assets in Eurodollar and
Yankee obligations of investment-grade emerging market countries.
MASTER DEMAND NOTES
We may invest the Fund's assets in master demand notes, which are obligations
that permit the investment of fluctuating amounts by the Fund, at varying rates
of interest using direct arrangements between the Fund, as lender, and the
borrower. These notes permit daily changes in the amounts borrowed. The Fund
has the right to increase the amount under the note at any time up to the full
amount provided by the note agreement, or to decrease the amount, and the
borrower may repay up to the full amount of the note without penalty.
Frequently, such obligations are secured by letters of credit or other credit
support arrangements provided by banks. Because master demand notes are direct
lending arrangements between the lender and borrower, these instruments
generally will not be traded, and there generally is no secondary market for
these notes, although they are redeemable (and immediately repayable by the
borrower) at face value, plus accrued interest, at any time. We will invest the
Fund's assets in master demand notes only if the Board of Directors or its
delegate has determined that they are of credit quality comparable to the debt
securities in which the Fund generally may invest.
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.
19
<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.
20
<PAGE>
If you would like more information about the Fund, you may call
1-800-531-8181 to request a free copy of the Fund's Statement of
Additional Information (SAI), dated December 1, 1997, or the Fund's Annual
Report for the year ended May 31, 1997. The SAI and the financial
statements contained with the Fund's Annual Report have been filed with
the SEC and are legally a part of this 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)
23456-1297 (C) 1997, USAA. All rights reserved. RECYCLED PAPER
<PAGE>
Part A
Prospectus for the
Money Market Fund
is included herein
USAA MONEY MARKET FUND
DECEMBER 1, 1997 PROSPECTUS
The Fund is a no-load mutual fund offered by USAA Investment Management
Company. USAA will seek the highest income consistent with preservation of
capital and maintenance of liquidity by investing in high-quality debt
instruments with maturities of 397 days or less. USAA will maintain a
dollar-weighted average portfolio maturity of 90 days or less and will
endeavor to maintain a constant net asset value per share of $1.
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.
AN INVESTMENT IN THE FUND IS NEITHER INSURED NOR GUARANTEED BY THE U.S.
GOVERNMENT AND THERE CAN BE NO ASSURANCE THAT THE FUND WILL BE ABLE TO
MAINTAIN A STABLE NET ASSET VALUE OF $1 PER SHARE.
TABLE OF CONTENTS
Who Manages the Fund?................................................. 2
What is the Investment Objective?..................................... 2
How Does This Fund Differ From a Savings Account?..................... 2
Is This Fund for You?................................................. 2
How Do You Buy?....................................................... 3
Fees and Expenses..................................................... 3
Financial Highlights.................................................. 4
Performance Information............................................... 4
Fund Investments...................................................... 5
Fund Management....................................................... 7
Using Mutual Funds in an Investment Program........................... 7
How to Invest......................................................... 8
Important Information About Purchases and Redemptions................. 11
Exchanges............................................................. 12
Shareholder Information............................................... 12
Description of Shares................................................. 14
Appendix A............................................................ 15
USAA Family of No-Load Mutual Funds................................... 18
<PAGE>
This Prospectus contains 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 the highest income consistent with
preservation of capital and maintenance of liquidity. See FUND INVESTMENTS
on page 5 for more information.
HOW DOES THIS FUND DIFFER FROM A SAVINGS ACCOUNT?
As you know, a savings account is a deposit with a bank. The bank is
obligated to return the amount deposited and to pay you interest for the
use of your money. Up to a certain amount, the FDIC will insure that the
bank meets its obligations. The Fund is not a savings account but, rather,
is a money market mutual fund that issues and redeems its shares at the
Fund's per share net asset value (NAV). The Fund always seeks to maintain
a constant NAV of $1 per share. Unlike a savings account, the shares are
not insured by the FDIC or any other governmental agency and there can be
no assurance that shares will always be valued at $1 per share. We manage
the Fund, however, in accordance with strict SEC guidelines designed to
result in the value of your shares remaining the same. Just as a savings
account pays interest on the amount deposited, the Fund pays dividends on
the shares you own. If these dividends are reinvested in the Fund, the
value of your account will grow over time.
IS THIS FUND FOR YOU?
This fund might be appropriate as part of your investment portfolio
if ...
X You need your money back within a short period.
X You need to preserve principal.
X You want a low-risk investment.
This fund MAY NOT be appropriate as part of your investment portfolio
if ...
X You need a high total return to achieve your goals.
X You need an investment that provides tax-free income.
If you feel this fund is not the one for you, refer to page 18 for a
complete list of the USAA Family of No-Load Mutual Funds.
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HOW DO YOU BUY?
You may make your initial investment directly by mail, in person or, in
certain instances, by telephone. Generally, 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. If you
participate in one of our automatic investment plans, your minimum initial
investment may be less. There is more information about how to purchase
Fund shares on page 8.
FEES AND EXPENSES
This summary shows what it will cost you 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
Fund expenses come out of the Fund's assets and are reflected in the
Fund's share price and dividends. "Other Expenses" include expenses such
as custodian and transfer agent fees. The figures below show actual
expenditures during the past fiscal year ended July 31, 1997, and are
calculated as a percentage of average net assets (ANA).
Management Fees (NET OF REIMBURSEMENTS) .20%
12b-1 Fees None
Other Expenses .25%
---
Total Fund Operating Expenses (NET OF
REIMBURSEMENTS) .45%
===
o 12B-1 FEES SOME MUTUAL FUNDS CHARGE THESE FEES TO PAY FOR THE COSTS OF
SELLING FUND SHARES.
During the year, we voluntarily limited the Fund's annual expenses to .45%
of its ANA and reimbursed the Fund for all expenses in excess of this
limitation. The Management Fees and Total Fund Operating Expenses reflect
these expense reimbursements. Without these reimbursements, the amount of
the Management Fees and Total Fund Operating Expenses as a percentage of
the Fund's ANA would have been .24% and .49%, respectively. We have again
voluntarily agreed to limit the Fund's annual expenses to .45% of its ANA
and will reimburse the Fund for all expenses in excess of that amount
until December 1, 1998.
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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............................................ $ 5
3 years........................................... 14
5 years........................................... 25
10 years.......................................... 57
THIS EXAMPLE IS NOT A REPRESENTATION OF PAST OR FUTURE EXPENSES AND ACTUAL
EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
FINANCIAL HIGHLIGHTS
Please read the Fund's Annual Report furnished with this Prospectus. The
Annual Report includes the Fund's financial statements and financial
highlights audited by KPMG Peat Marwick LLP, which are legally a part of
this Prospectus. The Annual Report includes messages from the President
and the Fund's portfolio manager, a listing of the Fund's investments, and
additional performance information that you may wish to review.
PERFORMANCE INFORMATION
(Tel)
TouchLINE(R)
1-800-531-8777
PRESS
(1)
THEN
(1)
THEN
(4)(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 42 followed by the pound sign when asked for a
Fund Code.
You may see the Fund's yield or effective yield quoted in advertisements
and reports. Yield is annualized net income of the Fund during a specified
seven-day period as a percentage of the Fund's share price. The effective
yield is calculated in a similar way; however, when annualized, the income
earned is assumed to be reinvested. The effective yield will be slightly
higher than the yield because of the compounding effect of the assumed
reinvestment. All mutual funds must use the same formulas to calculate
yield and effective yield. You may also see a comparison of the Fund's
performance to that of other mutual funds with similar investment
objectives and to relevant indexes.
4
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FUND INVESTMENTS
Investment Policies and Risks
Q What is the Fund's investment policy?
A We will invest the Fund's assets in high-quality, U.S.
dollar-denominated debt securities of domestic and foreign issuers
which have been determined to present minimal credit risk.
Q What types of money market instruments are included in the Fund's
portfolio?
A The Fund's portfolio may include the following:
* Obligations of the U.S. Government, its agents, and
instrumentalities, and repurchase agreements collateralized by
such obligations;
* Short-term corporate debt obligations such as notes, bonds, and
commercial paper;
* U.S. bank or foreign bank obligations, including certificates of
deposit, banker's acceptances, and time deposits;
* Obligations of state and local governments and their agencies and
instrumentalities;
* Municipal lease obligations;
* Mortgage-backed securities;
* Asset-backed securities;
* Master demand notes;
* Eurodollar obligations;
* Yankee obligations;
* Other short-term debt securities.
Further description of these securities is found in APPENDIX A on page 15.
Q Are there any limits on how much we can invest in one issuer?
A Yes. The SEC has set certain diversification requirements for money
market funds. Generally, these requirements limit a money market
fund's investments in securities of any issuer to no more than 5% of
the fund's assets, excluding securities issued or guaranteed by the
U.S. Government or its agencies and instrumentalities.
Q What are the credit ratings of the Fund's investments?
A We will purchase only high-quality securities that qualify as
"first-tier" securities under the SEC rules that apply to money
market funds. In general, a first-tier security is defined as a
security that is:
* issued or guaranteed by the U.S. Government or any agency or
instrumentality thereof;
* rated in the highest category for short-term securities by at
least two Nationally Recognized Statistical Rating Organizations
(NRSROs), or by one NRSRO if the security is rated by only one
NRSRO;
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* unrated but issued by an issuer that has other comparable short-
term debt obligations so rated; or
* unrated but we have determined it to be of comparable quality.
Q Who are considered to be Nationally Recognized Statistical Rating
Organizations?
A Current NRSROs include:
* Moody's Investors Service, Inc.;
* Standard & Poor's Ratings Group;
* Fitch Investors Service, Inc.;
* Duff & Phelps Inc.;
* Thompson BankWatch, Inc.; and
* IBCA Inc.
Q What happens if the rating of a security is downgraded?
A If the rating of a security is downgraded after purchase, we will
determine whether it is in the best interest of the Fund's
shareholders to continue to hold the security in the Fund's
portfolio.
Q Will the Fund always maintain a net asset value of $1 per share?
A While we will endeavor to maintain a constant Fund net asset value of
$1 per share, there is no assurance that we will be able to do so.
Remember, the shares are neither insured nor guaranteed by the U.S.
Government. As such, the Fund carries some risk. For example, there
is always a risk that the issuer of a security held by the Fund will
fail to pay interest or principal when due. We attempt to minimize
this credit risk by investing only in securities rated in the highest
category for short-term securities, or, if not rated, of comparable
quality, at the time of purchase. In addition, we will not purchase a
security unless our analysts have determined that the security
presents minimal credit risk. There is also a risk that rising
interest rates will cause the value of the Fund's securities to
decline. We attempt to minimize this interest risk by limiting the
maturity of each security and maintaining an average weighted
maturity for the Fund of 90 days or less.
For additional information about other investments in which we may invest
the Fund's assets, see APPENDIX A on page 15.
Investment Restrictions
The following restrictions may only be changed with shareholder approval:
* The Fund may not invest more than 25% of its total assets in one
industry. For the purpose of this policy, banks are not considered a
single industry.
* 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.
6
<PAGE>
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 $__ billion in total assets under
management. Our mailing address is 9800 Fredericksburg Road, San Antonio,
TX 78288.
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. This fee is calculated and paid at twenty-four one
hundredths of one percent (.24%) of average net assets. For the fiscal
year ended July 31, 1997, the fees paid to us, net of reimbursement, were
.20% of average net assets. We reimbursed the Fund $815,135 for its Total
Operating Expenses in excess of the .45% limitation.
We also provide services related to selling the Fund's shares 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 Manager
The following individual is primarily responsible for managing the Fund:
Pamela K. Bledsoe, Executive Director of Money Market Funds since June
1995, has managed the Fund since May 1996. Ms. Bledsoe has nine years
investment management experience and has worked for us for six years. She
earned the Chartered Financial Analyst designation in 1992 and is a member
of the Association for Investment Management and Research and the San
Antonio Financial Analysts Society, Inc. She holds an MBA from Texas
Christian University and a BS from Louisiana Tech University.
[PHOTOGRAPH OF
PORTFOLIO MANAGER]
Pamela K. Bledsoe
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
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<PAGE>
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.
For example, assume you wish to invest in a widely-diversified portfolio.
You could combine an investment in the Money Market 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 18. 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.
8
<PAGE>
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 NYSE 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 effective date 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.
MINIMUM INVESTMENTS
INITIAL PURCHASE * $3,000 [$500 Uniform Gifts/Transfers to Minor Act
[MONEY] (UGMA/UTMA) Accounts and $250 for IRAs] or no initial
investment if you elect to have monthly electronic
investments of at least $50 each. We may periodically
offer programs that reduce the minimum amounts for
monthly electronic investments. Employees of USAA
and its affiliated companies may open an account
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
[ENVELOPE] check to:
USAA Investment Management Company
9800 Fredericksburg Road, 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 Road, San Antonio, TX 78288
IN PERSON * To open an account, bring your application and
[MAN AND WOMAN] 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
[ELECTRONIC service) to wire the specified amount to the Fund as
ENVELOPE] follows:
State Street Bank and Trust Company, Boston,
MA 02101
ABA#011000028
Attn: USAA Money Market Fund
USAA AC-69384998
Shareholder(s) Name(s)_________________
Shareholder(s) Account Number___________________
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<PAGE>
ELECTRONIC * Addtional purchases on a regular basis can be deducted
FUNDS from a bank account, paycheck, income-producing
TRANSFER investment, or USAA money market fund account. Sign
[CALENDAR] up for these services when opening an account or call
1-800-531-8448 to add these services.
PHONE
1-800-531-8448 * If you have an existing USAA account and would like to
[PHONE] open a new account or 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.
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 are 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 is
sent after 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 Road, San Antonio, TX 78288
[FAX MACHINE] * 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 privileges are 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.
CHECKWRITING * Return a signed signature card, which accompanies
[CHECKBOOK] your application, or request a signature card
separately and return to:
USAA Shareholder Account Services
9800 Fredericksburg Road, San Antonio, TX 78288
10
<PAGE>
You will not be charged for the use of checks or any subsequent reorders.
Your checkwriting privilege is subject to State Street Bank and Trust
Company's rules and regulations governing checking accounts. You may write
checks in the amount of $250 or more. Checks written for less than $250
will be returned unpaid. Because the value of your account changes daily
as dividends accrue, you may not write a check to close your account.
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 information on purchases, redemptions, 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 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);
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 Statement of Additional
Information contains information on acceptable guarantors;
* redeem an account with less than 500 shares, with certain limitations.
11
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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 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).
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. You may buy and sell Fund shares at the NAV
per share without a sales charge.
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.
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
Net investment income is accrued daily and paid on the last business day
of the month. Daily dividends are declared at the time the NAV per share
is calculated. Dividends shall begin accruing on shares purchased the day
following the effective date and shall continue to accrue to the effective
date of redemption. When you choose to receive cash dividends monthly, we
will send you those funds that have accrued during the month after the
payment date.
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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. Note that the
recently enacted Taxpayer Relief Act of 1997 and regulations that will
likely be created to implement the Act may affect the status and treatment
of certain distributions shareholders receive from the Fund. 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 (RIC)
under Subchapter M of the Internal Revenue Code of 1986, as amended. As a
RIC, 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.
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.
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.
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, or
* fails to certify that he or she 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 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.
13
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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 this 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.
14
<PAGE>
APPENDIX A
The following are descriptions of certain types of securities in which we may
invest the Fund's assets:
PUT BONDS
We may invest in securities (including securities with variable interest rates)
which may be redeemed or sold back (put) to the issuer of the security or a
third party prior to stated maturity (put bonds). Such securities will normally
trade as if maturity is the earlier put date, even though stated maturity is
longer.
VARIABLE RATE SECURITIES
We may invest in securities that bear interest at rates which are adjusted
periodically to market rates.
* These interest rate adjustments can both raise and lower the income
generated by such securities. These changes will have the same effect on the
income earned by the Fund depending on the proportion of such securities
held.
* The value of variable rate securities is less affected than fixed-coupon
securities by changes in prevailing interest rates because of the periodic
adjustment of their coupons to a market rate. The shorter the period between
adjustments, the smaller the impact of interest rate fluctuations on the
value of these securities.
* The market value of a variable rate security usually tends toward par (100%
of face value) at interest rate adjustment time.
WHEN-ISSUED SECURITIES
We may invest in new issues of debt securities offered on a when-issued basis.
* Delivery and payment take place after the date of the commitment to
purchase, normally within 45 days. Both price and interest rate are fixed at
the time of commitment.
* The Fund does not earn interest on the securities until settlement, and the
market value of the securities may fluctuate between purchase and
settlement.
* Such securities can be sold before settlement date.
REPURCHASE AGREEMENTS
We may invest in repurchase agreements which are collateralized by obligations
issued or guaranteed by the U.S. Government, its agencies, and
instrumentalities. A repurchase agreement is a transaction in which a security
is purchased with a simultaneous commitment to sell it back to the seller (a
commercial bank or recognized securities dealer) at an agreed upon price on an
agreed upon date. This date is usually not more than seven days from the date
of purchase. The resale price reflects the purchase price plus an agreed upon
market rate of interest, which is unrelated to the coupon rate or maturity of
the purchased security.
15
<PAGE>
MUNICIPAL LEASE OBLIGATIONS
We may invest in a variety of instruments commonly referred to as municipal
lease obligations, including:
* Leases;
* Installment purchase contracts; and
* Certificates of participation in such leases and contracts.
EURODOLLAR AND YANKEE OBLIGATIONS
We may invest a portion of the Fund's assets in dollar-denominated instruments
that have been issued outside the U.S. capital markets by foreign corporations
and financial institutions and by foreign branches of U.S. corporations and
financial institutions (Eurodollar) as well as dollar-denominated instruments
that have been issued by foreign issuers in the U.S. capital markets (Yankee).
In addition, we may invest a portion of the Fund's assets in Eurodollar and
Yankee obligations of investment-grade emerging market countries.
MORTGAGE-BACKED AND ASSET-BACKED SECURITIES
We may invest the Fund's assets in mortgage-backed and asset-backed securities.
Mortgage-backed securities include, but are not limited to, securities issued
by the Government National Mortgage Association (Ginnie Mae), the Federal
National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage
Corporation (Freddie Mac). These securities represent ownership in a pool of
mortgage loans. They differ from conventional bonds in that principal is paid
back to the investor as payments are made on the underlying mortgages in the
pool. Accordingly, the Fund receives monthly scheduled payments of principal
and interest along with any unscheduled principal prepayments on the underlying
mortgages. Because these scheduled and unscheduled principal payments must be
reinvested at prevailing interest rates, mortgage-backed securities do not
provide an effective means of locking in long-term interest rates for the
investor. Like other fixed income securities, when interest rates rise, the
value of a mortgage-backed security generally will decline; however, when
interest rates are declining, the value of mortgage-backed securities with
prepayment features may not increase as much as other fixed income securities.
Asset-backed securities represent a participation in, or are secured by and
payable from, a stream of payments generated by particular assets, such as
credit card, motor vehicle, or trade receivables. They may be pass-through
certificates, which have characteristics very similar to mortgage-backed
securities, discussed above. They may also be in the form of asset-backed
commercial paper, which is issued by a special purpose entity, organized solely
to issue the commercial paper and to purchase interests in the assets. The
credit quality of these securities depends primarily upon the quality of the
underlying assets and the level of credit support and enhancement provided.
MASTER DEMAND NOTES
We may invest the Fund's assets in master demand notes, which are obligations
that permit the investment of fluctuating amounts by the Fund, at varying rates
of interest using direct arrangements between the Fund, as lender, and the
borrower. These notes permit daily changes in the amounts borrowed. The Fund
has the right to increase the amount under the note at any time up to the full
amount provided by the note agreement, or to decrease the amount, and the
borrower may repay up to the full amount of the note without penalty.
Frequently, such obligations are secured by letters of credit or other credit
support arrangements provided by banks. Because master demand notes are direct
lending arrangements between the lender and borrower, these instruments
generally will not be traded, and there generally is no secondary market for
these
16
<PAGE>
notes, although they are redeemable (and immediately repayable by the borrower)
at face value, plus accrued interest, at any time. We will invest the Fund's
assets in master demand notes only if the Board of Directors or its delegate
has determined that they are of credit quality comparable to the debt
securities in which the Fund generally may invest.
ILLIQUID SECURITIES
We may not invest more than 10% 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.
17
<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 Trust4 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.
18
<PAGE>
If you would like more information about the Fund, you may call
1-800-531-8181 to request a free copy of the Fund's Statement of
Additional Information (SAI), dated December 1, 1997, or the Fund's Annual
Report for the year ended July 31, 1997. The SAI and the financial
statements contained with the Fund's Annual Report have been filed with
the SEC and are legally a part of this 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)
23457-1297 (C) 1997, USAA. All rights reserved. RECYCLED PAPER
<PAGE>
Part B
Statement of Additional Information for the
Aggressive Growth Fund, Growth Fund, Growth & Income Fund,
Income Stock Fund, Income Fund, Short-Term Bond,
and Money Market Fund
is included herein
Not included in this Post-Effective Amendment
is the Statement of Additional Information for
the S&P 500 Index Fund, Science & Technology
Fund, and First Start Growth Fund
[USAA EAGLE LOGO]
USAA STATEMENT OF
MUTUAL ADDITIONAL INFORMATION
FUND, INC. December 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, seven of which are described in
this Statement of Additional Information (SAI): the Aggressive Growth Fund,
Growth Fund, Growth & Income Fund, Income Stock Fund, Income Fund, Short-Term
Bond Fund, and Money Market Fund (collectively, the Funds). Each Fund is
classified as diversified and has its own investment objectives designed to
meet different investment goals.
You may obtain a free copy of a Prospectus for any Fund dated December 1, 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 the Funds. This SAI is
not a Prospectus and contains information in addition to and more detailed than
that set forth in each Fund's Prospectus. It is intended to provide you with
additional information regarding the activities and operations of the Company
and the Funds and should be read in conjunction with each Fund's Prospectus.
- -------------------------------------------------------------------------------
TABLE OF CONTENTS
PAGE
2 Valuation of Securities
3 Conditions of Purchase and Redemption
3 Additional Information Regarding Redemption of Shares
4 Investment Plans
5 Investment Policies
9 Investment Restrictions
10 Portfolio Transactions
12 Further Description of Shares
13 Tax Considerations
13 Directors and Officers of the Company
16 The Company's Manager
18 General Information
18 Calculation of Performance Data
19 Appendix A - Long-Term and Short-Term Debt Ratings
23 Appendix B - Comparison of Portfolio Performance
26 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.
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 the Aggressive Growth, Growth, Growth &
Income, Income Stock, Income, and Short-Term Bond Funds is determined by one or
more of the following methods:
(1) Portfolio securities, except as otherwise noted, traded primarily on a
domestic securities exchange are valued at the last sales price on that
exchange. Portfolio securities traded primarily on foreign securities
exchanges are generally valued at the closing values of such securities
on the exchange where primarily traded. If no sale is reported, the
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 a Fund's NAV therefore
may not take place contemporaneously with the determination of the prices of
securities held by a Fund. Events affecting the values of portfolio securities
that occur between the time their prices are determined and the close of normal
trading on the NYSE on a day a Fund's NAV is calculated will not be reflected
in a Fund's NAV, unless the Manager determines that the particular event would
materially affect NAV. In such a case, the Fund's Manager, under the
supervision of the Board of Directors, will use all relevant available
information to determine a fair value for the affected portfolio securities.
The value of the Money Market Fund's securities is stated at amortized
cost which approximates market value. This involves valuing a security at its
cost and thereafter assuming a constant amortization to maturity of any
discount or premium, regardless of the impact of fluctuating interest rates.
While this method provides certainty in valuation, it may result in periods
during which the value of an instrument, as determined by amortized cost, is
higher or lower than the price the Fund would receive upon the sale of the
instrument.
The valuation of the Money Market Fund's portfolio instruments based upon
their amortized cost is subject to the Fund's adherence to certain procedures
and conditions. Consistent with regulatory requirements, the Manager will only
purchase securities with remaining maturities of 397 days or less and will
maintain a dollar-weighted average portfolio maturity of no more than 90 days.
The Manager will invest only in securities that have been determined to present
minimal credit risk and that satisfy the quality and diversification
requirements of applicable rules and regulations of the Securities and Exchange
Commission (SEC).
The Board of Directors has established procedures designed to stabilize
the Money Market Fund's price per share, as computed for the purpose of sales
and redemptions, at $1.00. There can be no assurance, however, that the Fund
will at all times be able to maintain a constant $1.00 NAV per share. Such
procedures include review of the Fund's holdings at such intervals as is deemed
appropriate to determine whether the Fund's NAV calculated by using available
market quotations deviates from $1.00 per share and, if so, whether such
deviation may result in material dilution or is otherwise unfair to existing
shareholders. In the event
2
<PAGE>
that it is determined that such a deviation exists, the Board of Directors will
take such corrective action as it regards as necessary and appropriate. Such
action may include selling portfolio instruments prior to maturity to realize
capital gains or losses or to shorten average portfolio maturity, withholding
dividends, or establishing a NAV per share by using available market
quotations.
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 Transfer Agent will treat the cancellation 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, the Transfer Agent can
redeem shares 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
You may transfer Fund shares 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, you must complete and return
an application to the Transfer Agent.
ADDITIONAL INFORMATION REGARDING REDEMPTION OF SHARES
The value of your investment at the time of redemption may be more or less than
the cost at purchase, depending on the value of the securities held in each
Fund's portfolio. Requests for redemption which are subject to any special
conditions, or which specify an effective date other than as provided herein,
cannot be accepted. A gain or loss for tax purposes may be realized on the sale
of shares, depending upon the price when redeemed.
The Board of Directors may cause the redemption of an account with a
balance of less than 10 shares of the Aggressive Growth, Growth, Growth &
Income, Income Stock, Income, or Short-Term Bond Funds and less than 500 shares
of the Money Market Fund provided (1) the value of the account has been
reduced, for reasons other than market action, below the minimum initial
investment in such Fund at the time of the establishment of the account, (2)
the account has remained below the minimum level for six months, and (3) 60
days' prior written notice of the proposed redemption has been sent to you.
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 your last known
address.
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.
REDEMPTION BY CHECK
Shareholders in the Short-Term Bond Fund or Money Market Fund may request that
checks be issued for their accounts. Checks must be written in the amount of at
least $250.
Checks issued to shareholders of either Fund will be sent only to the
person in whose name the account is registered and only to the address of
record. The checks must be manually signed by the registered owner(s) exactly
as the account is registered. For joint accounts the signature of either or
both joint owners will be required on the check, according to the election made
on the signature card. Dividends will continue to be earned by you until the
shares are redeemed by the presentation of a check.
3
<PAGE>
When a check is presented to USAA Shareholder Account Services (Transfer
Agent) for payment, a sufficient number of full and fractional shares in the
investor's account will be redeemed to cover the amount of the check. If an
investor's account is not adequate to cover the amount of a check, the check
will be returned unpaid. A check drawn on an account in the Short-Term Bond
Fund may be returned for insufficient funds if the NAV per share of that Fund
declines over the time between the date the check was written and the date it
was presented for payment. Because the value of the account in either the
Short-Term Bond Fund or Money Market Fund changes as dividends are accrued on a
daily basis, checks may not be used to close an account.
The checkwriting privilege will be subject to the customary rules and
regulations of State Street Bank and Trust Company (State Street Bank or the
Custodian) governing checking accounts. There is no charge to you for the use
of the checks or for subsequent reorders of checks.
The Company reserves the right to assess a processing fee against your
account for any redemption check not honored by a clearing or paying agent.
Currently, this fee is $15 and is subject to change at any time. Some examples
of such dishonor are improper endorsement, checks written for an amount less
than the minimum check amount, and insufficient or uncollectible funds.
The Company, the Transfer Agent, and State Street Bank each reserve the
right to change or suspend the checkwriting privilege upon 30 days' written
notice to participating shareholders.
You may request that the Transfer Agent stop payment on a check. The
Transfer Agent will use its best efforts to execute stop payment instructions,
but does not guarantee that such efforts will be effective. The Transfer Agent
will charge you $10 for each stop payment you request.
INVESTMENT PLANS
The Company makes available the following investment plans to shareholders of
all the Funds. At the time you sign up for any of the following investment
plans that utilize the electronic funds transfer service, you will choose the
day of the month (the effective date) on which you would like to regularly
purchase shares. When this day falls on a weekend or holiday, the electronic
transfer will take place on the last business day before the effective date.
You may terminate your participation in a plan at any time. Please call the
Manager for details and necessary forms or applications.
AUTOMATIC PURCHASE OF SHARES
INVESTART(R) - A no initial investment purchase plan. With this plan the
regular minimum initial investment amount is waived if you make 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 you 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, you may choose to have withdrawals electronically deposited at their
bank or other financial institution. They may also elect to have checks mailed
to a designated address.
Such a plan may be initiated by depositing shares worth at least $5,000
with the Transfer Agent and by completing a Systematic Withdrawal Plan
application, which may be requested from the Manager. You may terminate
participation in the plan at any time. There is no charge to you 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.
4
<PAGE>
Withdrawals will be made by redeeming full and fractional shares on the
date you select 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 your
investment and eventually exhaust the account. Reinvesting dividends and
distributions helps replenish the account. Because share values and net
investment income can fluctuate, you 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 your income tax return. Therefore, you 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 you qualify for certain
types of retirement programs. For your convenience, the Manager makes available
various forms of IRA and 403(b)(7) accounts. The minimum initial investment in
each of these plans is $250, or no minimum is required with a minimum $50
monthly electronic investment. You may make subsequent investments of $50 or
more per account at any time. You may make investments 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 money sent to you after
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 you 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. You may
obtain detailed information about the plans 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.
TAX-EXEMPT SECURITIES
These securities include general obligation bonds, which are secured by the
issuer's pledge of its faith, credit and taxing power for the payment of
principal and interest; revenue bonds, which are payable from the revenue
derived from a particular facility or class of facilities or, in some cases,
from the proceeds of a special excise tax or other specific revenue source, but
not from the general taxing power; and certain types of industrial development
bonds issued by or on behalf of public authorities to obtain funds for
privately-operated facilities, provided that the interest paid on such
securities qualifies as exempt from federal income taxes.
SECTION 4(2) COMMERCIAL PAPER AND RULE 144A SECURITIES
Each Fund may invest in commercial paper issued in reliance on the "private
placement" exemption from registration afforded by Section 4(2) of the
Securities Act of 1933 (Section 4(2) Commercial Paper). Section 4(2) Commercial
Paper is restricted as to disposition under the federal securities laws;
therefore, any resale of Section 4(2) Commercial Paper must be effected in a
transaction exempt from registration under the Securities Act of 1933 (1933
Act). Section 4(2) Commercial Paper is normally resold to other investors
through or with the assistance of the issuer or investment dealers who make a
market in Section 4(2) Commercial Paper, thus providing liquidity.
Each Fund may also purchase restricted securities eligible for resale to
"qualified institutional buyers" pursuant to Rule 144A under the 1933 Act (Rule
144A Securities). Rule 144A provides a non-exclusive safe harbor from the
registration requirements of the 1933 Act for resales of certain securities to
institutional investors.
5
<PAGE>
Municipal Lease Obligations
The Short-Term Bond and Money Market Funds may invest in municipal lease
obligations and certificates of participation in such obligations
(collectively, lease obligations). A lease obligation does not constitute a
general obligation of the municipality for which the municipality's taxing
power is pledged, although the lease obligation is ordinarily backed by the
municipality's covenant to budget for the payments due under the lease
obligation.
Certain lease obligations contain "non-appropriation" clauses which
provide that the municipality has no obligation to make lease obligation
payments in future years unless money is appropriated for such purpose on a
yearly basis. Although "non-appropriation" lease obligations are secured by the
leased property, disposition of the property in the event of foreclosure might
prove difficult. In evaluating a potential investment in such a lease
obligation, the Manager will consider: (1) the credit quality of the obligor,
(2) whether the underlying property is essential to a governmental function,
and (3) whether the lease obligation contains covenants prohibiting the obligor
from substituting similar property if the obligor fails to make appropriations
for the lease obligation.
LIQUIDITY DETERMINATIONS
The Board of Directors has established guidelines pursuant to which Municipal
Lease Obligations, Section 4(2) Commercial Paper, Rule 144A Securities, and
certain restricted debt securities that are subject to unconditional put or
demand features exercisable within seven days (Restricted Put Bonds) may be
determined to be liquid for purposes of complying with the Funds' investment
restrictions applicable to investments in illiquid securities. In determining
the liquidity of Municipal Lease Obligations, Section 4(2) Commercial Paper and
Rule 144A Securities, the Manager will consider the following factors, among
others, established by the Board of Directors: (1) the frequency of trades and
quotes for the security, (2) the number of dealers willing to purchase or sell
the security and the number of other potential purchasers, (3) dealer
undertakings to make a market in the security, and (4) the nature of the
security and the nature of the marketplace trades, including the time needed to
dispose of the security, the method of soliciting offers, and the mechanics of
transfer. Additional factors considered by the Manager in determining the
liquidity of a municipal lease obligation are: (1) whether the lease obligation
is of a size that will be attractive to institutional investors, (2) whether
the lease obligation contains a non-appropriation clause and the likelihood
that the obligor will fail to make an appropriation therefor, and (3) such
other factors as the Manager may determine to be relevant to such
determination. In determining the liquidity of Restricted Put Bonds, the
Manager will evaluate the credit quality of the party (the Put Provider)
issuing (or unconditionally guaranteeing performance on) the unconditional put
or demand feature of the Restricted Put Bond. In evaluating the credit quality
of the Put Provider, the Manager will consider all factors that it deems
indicative of the capacity of the Put Provider to meet its obligations under
the Restricted Put Bond based upon a review of the Put Provider's outstanding
debt and financial statements and general economic conditions.
Certain foreign securities (including Eurodollar obligations) may be
eligible for resale pursuant to Rule 144A in the United States and may also
trade without restriction in one or more foreign markets. Such securities may
be determined to be liquid based upon these foreign markets without regard to
their eligibility for resale pursuant to Rule 144A. In such cases, these
securities will not be treated as Rule 144A securities for purposes of the
liquidity guidelines established by the Board of Directors.
CALCULATION OF PORTFOLIO WEIGHTED AVERAGE MATURITY
Weighted average maturity is derived by multiplying the value of each
investment by the number of days remaining to its maturity, adding these
calculations, and then dividing the total by the value of the Fund's portfolio.
An obligation's maturity is typically determined on a stated final maturity
basis, although there are some exceptions to this rule.
With respect to obligations held by the Funds, if it is probable that the
issuer of an instrument will take advantage of a maturity-shortening device,
such as a call, refunding, or redemption provision, the date on which the
instrument will probably be called, refunded, or redeemed may be considered to
be its maturity date. Also, the maturities of mortgage-backed securities, some
asset-backed securities and securities subject to sinking fund arrangements,
are determined on a weighted average life basis, which is the average time for
principal to be repaid. For mortgage-backed and some asset-backed securities,
this average time is calculated by assuming a constant prepayment rate (CPR)
for the life of the mortgages or assets backing the security. The CPR for a
security can vary depending upon the level and volatility of interest rates.
This, in turn, can affect the weighted average life of the security. The
weighted average lives of these securities will be shorter than their stated
final maturities. In addition, for purposes of the Fund's investment policies,
an instrument will be treated as having a maturity earlier than its stated
maturity date if the instrument has technical features such as puts or demand
features which, in the judgment of the Manager, will result in the instrument
being valued in the market as though it has the earlier maturity.
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The Money Market Fund will determine the maturity of an obligation in its
portfolio in accordance with Rule 2a-7 under the Investment Company Act of
1940, as amended (1940 Act).
WRITING COVERED CALL OPTIONS
The Income Stock Fund may write (sell) covered call options and purchase
options to close out options previously written by the Fund. The purpose of
writing covered call options is to generate additional premium income for the
Fund. This premium income will serve to enhance the Fund's total return and
will reduce the effect of any price decline of the security involved in the
option. Covered call options will generally be written on securities which, in
the Manager's opinion, are not expected to make any major price moves in the
near future but which, over the long term, are deemed to be attractive
investments for the Fund.
A call option gives the holder (buyer) the right to purchase a security at
a specified price (the exercise price) at any time until a certain date (the
expiration date). So long as the obligation of the writer of a call option
continues, he may be assigned an exercise notice by the broker-dealer through
whom such option was sold, requiring him to deliver the underlying security
against payment of the exercise price. This obligation terminates upon the
expiration of the call option, or such earlier time at which the writer effects
a closing purchase transaction by repurchasing the option which he previously
sold. To secure his obligation to deliver the underlying security in the case
of a call option, a writer is required to deposit in escrow the underlying
security or other assets in accordance with the rules of the particular
clearing corporations and of the exchanges. The Fund will write only covered
call options. This means that the Fund will only write a call option on a
security which the Fund already owns. The Fund will not write call options on
when-issued securities. The Fund will write covered call options in standard
contracts which may be quoted on NASDAQ, or on national securities exchanges.
To comply with the requirements of the securities laws in several states, the
Fund will not write a covered call option if, as a result, the aggregate market
value of all portfolio securities covering call options exceeds 5% of the
market value of the Fund's total assets.
Portfolio securities on which call options may be written will be
purchased solely on the basis of investment considerations consistent with the
Fund's investment objectives. The writing of covered call options is a
conservative investment technique believed to involve relatively little risk
(in contrast to the writing of naked or uncovered options, which the Fund will
not do), but capable of enhancing the Fund's total return. When writing a
covered call option, the Fund, in return for the premium, gives up the
opportunity for profit from a price increase in the underlying security above
the exercise price, but conversely retains the risk of loss should the price of
the security decline. Unlike one who owns securities not subject to an option,
the Fund has no control over when it may be required to sell the underlying
securities, since it may be assigned an exercise notice at any time prior to
the expiration of its obligation as a writer. If a call option which the Fund
has written expires, the Fund will realize a gain in the amount of the premium;
however, such gain may be offset by a decline in the market value of the
underlying security during the option period. If the call option is exercised,
the Fund will realize a gain or loss from the sale of the underlying security.
The security covering the call will be maintained in a segregated account of
the Fund's custodian. The Fund does not consider a security covered by a call
to be pledged as that term is used in the Fund's policy which limits the
pledging or mortgaging of its assets.
The premium received is the market value of an option. The premium the
Fund will receive from writing a call option will reflect, among other things,
the current market price of the underlying security, the relationship of the
exercise price to such market price, the historical price volatility of the
underlying security, and the length of the option period. In determining
whether a particular call option should be written on a particular security,
the Manager will consider the reasonableness of the anticipated premium and the
likelihood that a liquid secondary market will exist for those options. The
premium received by the Fund for writing covered call options will be recorded
as a liability in the Fund's statement of assets and liabilities. This
liability will be adjusted daily to the option's current market value, which
will be the latest sale price at the time at which the NAV per share of the
Fund is computed (close of the NYSE), or in the absence of such sale, the
latest asked price. The liability will be extinguished upon expiration of the
option, the purchase of an identical option in a closing transaction, or
delivery of the underlying security upon the exercise of the option.
Closing transactions may be effected to realize a profit on an outstanding
call option, to prevent an underlying security from being called, or to permit
the sale of the underlying security. Furthermore, effecting a closing
transaction will permit the Fund to write another call option on the underlying
security with either a different exercise price or expiration date or both.
If the Fund desires to sell a particular security from its portfolio on
which it has written a call option, it will seek to effect a closing
transaction prior to, or concurrently with, the sale of the security. There is,
of course, no assurance that the Fund will be able to effect such closing
transactions at a favorable price. If the Fund cannot enter into such a
transaction, it may be required to hold a security that it might otherwise have
sold, in which case it would continue to be at market risk on the security.
This could result in higher transaction costs, including brokerage commissions.
The Fund will pay brokerage commissions in connection
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with the writing of options to close out previously written options. Such
brokerage commissions are normally higher than those applicable to purchases
and sales of portfolio securities.
Call options written by the Fund will normally have expiration dates of
less than nine months from the date written. The exercise price of the options
may be below, equal to, or above the current market values of the underlying
securities at the time the options are written. From time to time, the Fund may
purchase an underlying security for delivery in accordance with an exercise
notice of a call option assigned to it, rather than delivering such security
from its portfolio. In such cases, additional brokerage commissions will be
incurred.
The Fund will realize a profit or loss from a closing purchase transaction
if the cost of the transaction is less or more than the premium received from
the writing of the option. Because increases in the market price of a call
option will generally reflect increases in the market price of the underlying
security, any loss resulting from the repurchase of a call option is likely to
be offset in whole or in part by appreciation of the underlying security owned
by the Fund.
FORWARD CURRENCY CONTRACTS
The Aggressive Growth Fund may enter into forward currency contracts in order
to protect against uncertainty in the level of future foreign exchange rates.
A forward contract involves an agreement to purchase or sell a specific
currency at a specified future date or over a specified time period at a price
set at the time of the contract. These contracts are usually traded directly
between currency traders (usually large commercial banks) and their customers.
A forward contract generally has no deposit requirements, and no commissions
are charged.
The Fund may enter into forward currency contracts under two
circumstances. First, when the Fund enters into a contract for the purchase or
sale of a security denominated in a foreign currency, it may desire to "lock
in" the U.S. dollar price of the security. By entering into such a contract,
the Fund will be able to protect itself against a possible loss resulting from
an adverse change in the relationship between the U.S. dollar and the foreign
currency from the date the security is purchased or sold to the date on which
payment is made or received. Second, when management of the Fund believes that
the currency of a specific country may deteriorate relative to the U.S. dollar,
it may enter into a forward contract to sell that currency. The Fund may not
hedge with respect to a particular currency for an amount greater than the
aggregate market value (determined at the time of making any sale of forward
currency) of the securities held in its portfolio denominated or quoted in, or
bearing a substantial correlation to, such currency.
The use of forward contracts involves certain risks. The precise matching
of contract amounts and the value of securities involved generally will not be
possible since the future value of such securities in currencies more than
likely will change between the date the contract is entered into and the date
it matures. The projection of short-term currency market movements is extremely
difficult and successful execution of a short-term hedging strategy is
uncertain. Under normal circumstances, consideration of the prospect for
currency parities will be incorporated into the longer term investment
strategies. The Manager believes it is important, however, to have the
flexibility to enter into such contracts when it determines it is in the best
interest of the Fund to do so. It is impossible to forecast what the market
value of portfolio securities will be at the expiration of a contract.
Accordingly, it may be necessary for the Fund to purchase additional currency
(and bear the expense of such purchase) if the market value of the security is
less than the amount of currency the Fund is obligated to deliver, and if a
decision is made to sell the security and make delivery of the currency.
Conversely, it may be necessary to sell some of the foreign currency received
on the sale of the portfolio security if its market value exceeds the amount of
currency the Fund is obligated to deliver.
The Fund is not required to enter into such transactions and will not do
so unless deemed appropriate by the Manager.
Although the Fund values its assets each business day in terms of U.S.
dollars, it does not intend to convert its foreign currencies into U.S. dollars
on a daily basis. It will do so from time to time, and you should be aware of
currency conversion costs. Although foreign exchange dealers do not charge a
fee for conversion, they do realize a profit based on the difference (spread)
between the prices at which they are buying and selling various currencies.
Thus, a dealer may offer to sell a foreign currency to the Fund at one rate,
while offering a lesser rate of exchange should the Fund desire to resell that
currency to the dealer.
INVESTMENTS IN REAL ESTATE INVESTMENT TRUSTS (REITS)
Because the Aggressive Growth, Growth, Growth & Income, and Income Stock Funds
may invest their assets in equity securities of REITs, these Funds may also be
subject to certain risks associated with direct investments in REITs. In
addition, the Short-Term Bond and Income Funds may invest their assets in the
debt securities of REITs and, therefore, may be subject to certain other risks,
such as credit risk, associated with investment in the debt securities of
REITs. REITs may be affected by changes in the value of their underlying
properties and by defaults by borrowers or tenants. Furthermore, REITs are
dependent upon specialized management skills of their managers and may have
limited geographic diversification, thereby,
8
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subjecting them to risks inherent in financing a limited number of projects.
REITs depend generally on their ability to generate cash flow to make
distributions to shareholders, and certain REITs have self-liquidation
provisions by which mortgages held may be paid in full and distributions of
capital returns may be made at any time.
CONVERTIBLE SECURITIES
Convertible securities are bonds, preferred stocks, and other securities that
pay interest or dividends and offer the buyer the option of converting the
security into common stock. The value of convertible securities depends
partially on interest rate changes and the credit quality of the issuer.
Because a convertible security affords an investor the opportunity, through its
conversion feature, to participate in the capital appreciation of the
underlying common stock, the value of convertible securities may also change
based on the price of the common stock.
The convertible securities in which the Funds will invest may be rated
below investment grade as determined by Moody's Investors Service, Inc.
(Moody's) or Standard & Poor's Ratings Group (S&P), or unrated but judged by
the Manager to be of comparable quality (commonly called junk bonds). For a
more complete description of debt ratings, see APPENDIX A. Such securities are
deemed to be speculative and involve greater risk of default due to changes in
interest rates, economic conditions, and the issuer's creditworthiness. As a
result, their market prices tend to fluctuate more than higher-quality
securities. During periods of general economic downturns or rising interest
rates, issuers of such securities may experience financial difficulties which
could affect their ability to make timely interest and principal payments. The
Fund's ability to timely and accurately value and dispose of lower quality
securities may also be affected by the absence or periodic discontinuance of
liquid trading markets.
INVESTMENT RESTRICTIONS
The following investment restrictions have been adopted by the Company for and
are applicable to each Fund. Except with respect to the Growth & Income Fund,
Income Stock Fund, and Short-Term Bond Fund, these restrictions may not be
changed for any given Fund without approval by the lesser of (1) 67% or more of
the voting securities present at a meeting of the Fund if more than 50% of the
outstanding voting securities of the Fund are present or represented by proxy
or (2) more than 50% of the Fund's outstanding voting securities. With respect
to the Growth & Income Fund, Income Stock Fund, and Short-Term Bond Fund, only
restrictions 3, 4, 6, 7, 10, 13, 16 and 17 may not be changed without approval
of shareholders, as defined herein. The investment restrictions of one Fund may
be changed without affecting those of any other Fund.
A Fund:
(1) May not purchase or retain securities of any issuer if any officer or
Director of the Company or its Manager own individually more than one-half
of one percent (1/2%) of the securities of that issuer, and collectively
the officers and Directors of the Company and Manager together own more
than 5% of the securities of that issuer.
(2) May not purchase from or sell to any officer or Director of the Company or
its Manager any securities other than shares of the capital stock of the
Funds.
(3) May not underwrite securities of other issuers, except that the Company
may be deemed to be a statutory underwriter in the distribution of any
restricted securities or not readily marketable securities.
(4) May not borrow money, except for temporary or emergency purposes in an
amount not exceeding 33 1/3% of its total assets (including the amount
borrowed) less liabilities (other than borrowings).
(5) May not invest in companies for the purpose of exercising control or
management.
(6) May not, with respect to 75% of its total assets, purchase the securities
of any issuer (except Government Securities, as such term is defined in
the 1940 Act) if, as a result, the Fund would own more than 10% of the
outstanding voting securities of such issuer or the Fund would have more
than 5% of the value of its total assets invested in the securities of
such issuer.
(7) May not lend any securities or make any loan if, as a result, more than 33
1/3% of its total assets would be lent to other parties, except that this
limitation does not apply to purchases of debt securities or to repurchase
agreements.
(8) May not invest in warrants more than 2% of the value of its assets, taken
at the lower of cost or market value. Warrants initially attached to
securities and acquired by the Fund upon original issuance thereof shall
be deemed to be without value.
(9) May not mortgage, pledge, or hypothecate any of its assets, except for the
Income Stock Fund. A security covered by a call is not considered pledged.
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(10) May not concentrate its investments in any one industry although it may
invest up to 25% of the value of its total assets in any one industry.
Banks are not considered a single industry for purposes of this policy
(solely with respect to the Money Market Fund), nor shall this limitation
apply to securities issued or guaranteed by the U.S. Government or its
corporate instrumentalities.
(11) May not acquire securities of other open-end investment companies, except
in connection with a merger, consolidation, or acquisition of assets
approved by the shareholders.
(12) May not invest more than 5% of the value of its total assets in any
closed-end investment company and will not hold more than 3% of the
outstanding voting stock of any closed-end investment company.
(13) May not purchase or sell commodities, commodity contracts, or real estate,
although a Fund may invest in the securities of real estate investment
trusts.
(14) May not engage in margin transactions or arbitrage or short sales, or in
put, call, straddle, or spread activities, except the Income Stock Fund
may write covered call options as described under INVESTMENT POLICIES in
this Statement of Additional Information.
(15) May not allow its Manager or officers or Directors of itself or its
Manager to take long or short positions in shares of a Fund, except that
such persons may purchase shares for their own account for investment
purposes only at the price available to the public at the moment of such
purchase.
(16) May not change the nature of its business so as to cease to be an
investment company.
(17) May not issue senior securities, as defined in the Investment Company Act
of 1940, as amended (the 1940 Act), except as permitted by Section
18(f)(2) and rules thereunder.
With respect to each Fund's concentration policies as described above and
in its Prospectus, the Manager uses industry classifications for industries
based on categories established by Standard & Poor's Corporation (Standard &
Poor's) for the Standard & Poor's 500 Composite Index, with certain
modifications. Because the Manager has determined that certain categories
within, or in addition to, those set forth by Standard & Poor's have unique
investment characteristics, additional industries are included as industry
classifications. The Manager classifies municipal obligations by projects with
similar characteristics, such as toll road revenue bonds, housing revenue bonds
or higher education revenue bonds.
In addition, with respect to the Money Market Fund's exclusion of
investment in banks for purposes of industry concentration limits contained in
investment restriction 10, certificates of deposit, time deposits, bankers
acceptances, and other similar money market instruments issued by domestic
banks may be excluded from the industry concentration limits set forth in that
restriction.
ADDITIONAL RESTRICTIONS
The following restriction is not considered to be fundamental policy of the
Funds. The Board of Directors may change this additional restriction without
notice to or approval by the shareholders.
A Fund:
(1) May not purchase any security while borrowings representing more than 5%
of the Fund's total assets are outstanding.
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
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broker-dealers that execute transactions on behalf of the Company may be useful
to the Manager in rendering investment management services to other clients
(including affiliates of the Manager), and conversely, such research provided
by broker-dealers who have executed transaction orders on behalf of other
clients may be useful to the Manager in carrying out its obligations to the
Company. While such research is available to and may be used by the Manager in
providing investment advice to all its clients (including affiliates of the
Manager), not all of such research may be used by the Manager for the benefit
of the Company. Such research and services will be in addition to and not in
lieu of research and services provided by the Manager, and the expenses of the
Manager will not necessarily be reduced by the receipt of such supplemental
research. See THE COMPANY'S MANAGER.
Securities of the same issuer may be purchased, held, or sold at the same
time by the Company for any or all of its Funds, or other accounts or companies
for which the Manager acts as the investment adviser (including affiliates of
the Manager). On occasions when the Manager deems the purchase or sale of a
security to be in the best interest of the Company, as well as the Manager's
other clients, the Manager, to the extent permitted by applicable laws and
regulations, may aggregate such securities to be sold or purchased for the
Company with those to be sold or purchased for other customers in order to
obtain best execution and lower brokerage commissions, if any. In such event,
allocation of the securities so purchased or sold, as well as the expenses
incurred in the transaction, will be made by the Manager in the manner it
considers to be most equitable and consistent with its fiduciary obligations to
all such customers, including the Company. In some instances, this procedure
may impact the price and size of the position obtainable for the Company.
BROKERAGE COMMISSIONS
During the last three fiscal years, the Funds paid the following brokerage
fees:
FUND 1995 1996 1997
---- ----------- ----------- -----------
Aggressive Growth $ 441,669 $ 124,620 $ 304,478
Growth 1,482,224 2,149,922 2,375,456
Growth & Income 154,393 332,154 480,256
Income Stock 1,157,186 1,668,406 1,522,541
Income 46,000 78,950 201,250
During the last three fiscal years, the Funds paid the following brokerage fees
to USAA Brokerage Services, a discount brokerage service of the Manager:
FUND 1995 1996 1997*
---- ----------- ----------- ----------
Aggressive Growth $ - $ - $ 2,000
Growth 110,000 21,360 87,280
Growth & Income 21,268 4,576 18,044
Income Stock 32,512 8,000 20,000
Income 16,000 21,200 -
- -------------
* These amounts are .7%, 3.7%, 3.8%, and 1.3%, respectively, of brokerage
fees paid by each Fund.
For the year ended July 31, 1997, .2%, 3.9%, 3.9%, and 1.8% of the aggregate
dollar amounts of transactions involving the payment of commissions by the
Aggressive Growth, Growth, Growth & Income, and Income Stock Funds,
respectively, were effected through USAA Brokerage Services.
The Manager directed a portion of the Fund's brokerage transactions to
certain broker-dealers that provided the Manager with research, analysis,
advice and similar services. Such transactions amounted to $4,039,131,
$427,797,187, $140,721,671, $359,282,741, $33,941,261, and $502,578, and the
related brokerage commissions or underwriting commissions were $7,285,
$718,403, $181,191, $421,150, $163,280, and $2,500 for the Aggressive Growth,
Growth, Growth & Income, Income Stock, Income, and Short-Term Bond Funds,
respectively for the year ended July 31, 1997.
PORTFOLIO TURNOVER RATES
The rate of portfolio turnover will not be a limiting factor when the Manager
deems changes in the Aggressive Growth, Growth, Growth & Income, Income Stock,
Income, and Short-Term Bond Funds' portfolios appropriate in view of each
Fund's investment objectives. Although no Fund will purchase or sell securities
solely to achieve short-term trading profits, a Fund may sell portfolio
securities without regard to the length of time held if consistent with the
Fund's investment objectives. 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, short-term U.S. Government securities, and variable rate securities
(those securities with put date intervals of less than one year) are not
considered when computing the turnover rate.
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For the last two fiscal years, the Funds' portfolio turnover rates were as
follows:
FUND 1996 1997
---- ------- ------
Aggressive Growth 43.75% 57.15%
Growth 62.30% 75.41%
Growth & Income 16.13% 14.67%
Income Stock 32.38% 34.95%
Income* 81.26% 57.50%
Short-Term Bond 66.81% 27.85%
- -------------
* The Fund has simultaneously purchased and sold the same securities. These
transactions have at times been high in volume and dissimilar to other
trade activity within the Fund. If these transactions were excluded from
the calculation, the portfolio turnover rate would have been as follows:
YEAR ENDED JULY 31,
------------------
1996 1997
---- ----
Portfolio turnover 44.69% 22.07%
Purchases and sales of this type are as follows:
Purchases (000) $648,396 $593,587
Sales (000) $649,193 $594,283
FURTHER DESCRIPTION OF SHARES
The Company is authorized to issue shares in separate series or Funds. Ten
Funds have been established, seven of which are described in this SAI. Under
the Articles of Incorporation, the Board of Directors is authorized to create
new Funds in addition to those already existing without shareholder approval.
The Growth, Income, and Money Market Funds were established in the Fall of 1980
and commenced public offering of their shares on February 2, 1981. The
Aggressive Growth Fund was established by the Board of Directors on July 8,
1981, and commenced public offering of its shares on October 19, 1981. The
Income Stock Fund was established by the Board of Directors on January 23,
1987, and commenced public offering of its shares on May 4, 1987. The Growth &
Income and Short-Term Bond Funds were established by the Board of Directors on
March 23, 1993, and commenced public offering of their shares on June 1, 1993.
Each Fund's assets and all income, earnings, profits, and proceeds
thereof, subject only to the rights of creditors, are specifically allocated to
such Fund. They constitute the underlying assets of each Fund, are required to
be segregated on the books of account, and are to be charged with the expenses
of such Fund. Any general expenses of the Company not readily identifiable as
belonging to a particular Fund are allocated on the basis of the Funds'
relative net assets during the fiscal year or in such other manner as the Board
determines to be fair and equitable. Each share of each Fund represents an
equal proportionate interest in that Fund with every other share and is
entitled to such dividends and distributions out of the net income and capital
gains belonging to that Fund when declared by the Board.
Under the provisions of the Bylaws of the Company, no annual meeting of
shareholders is required. Thus, there will ordinarily be no shareholder meeting
unless required by the 1940 Act. Under certain circumstances, however,
shareholders may apply for shareholder information 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 Funds' shares. However, on
matters affecting an individual Fund, a separate vote of the shareholders of
that Fund is required. Shareholders of a Fund are not entitled to vote on any
matter which does not affect that Fund but which requires a separate vote of
another Fund. Shares do not have cumulative voting rights, which means that
holders of more than 50% of the shares voting for the election of Directors can
elect 100% of the Company's Board of Directors, and the holders of less than
50% of the shares voting for the election of Directors will not be able to
elect any person as a Director.
Shareholders of a particular Fund might have the power to elect all of the
Directors of the Company because that Fund has a majority of the total
outstanding shares of the Company. When issued, each Fund's shares are fully
paid and nonassessable, have no pre-emptive or subscription rights, and are
fully transferable. There are no conversion rights.
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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: 51
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-present); Special Assistant to Chairman, United
Services Automobile Association (USAA) (6/96-12/96); President and 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: 56
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.
13
<PAGE>
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.
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.
14
<PAGE>
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.
Mark S. Howard 1
Assistant Secretary
Age: 34
Executive Director, Securities Counsel, USAA (9/96-present); Senior Associate
Counsel, Securities Counsel, USAA (5/95-8/96); Attorney, Kirkpatrick & Lockhart
LLP (9/90-4/95). Mr. Howard serves as Assistant Secretary of USAA Investment
Trust, USAA State Tax-Free Trust, and USAA Tax Exempt Fund, Inc., and as
Executive Director, Securities Counsel for various other USAA subsidiaries and
affiliates.
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.
15
<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, 1997.
Name Aggregate Total Compensation
of Compensation from the USAA
Director from the Company Family of Funds (b)
- -------- ------------------ ------------------
George E. Brown* $3,312 $13,400
Barbara B. Dreeben 8,873 35,900
Howard L. Freeman, Jr. 8,873 35,900
Robert L. Mason 5,561 22,500
Robert G. Davis None (a) None (a)
Michael J.C. Roth None (a) None (a)
John W. Saunders, Jr. None (a) None (a)
Richard A. Zucker 8,873 35,900
- ----------------
* Effective December 31, 1996, George E. Brown retired as a Director from
the Board of Directors.
(a) Robert G. Davis, 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.
(b) At July 31, 1997, 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 seven funds offered to investors in a fixed
and variable annuity contract with USAA Life Insurance Company. Mr. Roth
receives no compensation as Trustee of USAA Life Investment Trust.
All of the above Directors are also Directors/Trustees of the other funds
for which IMCO serves as investment adviser. No compensation is paid by any
fund to any Director/Trustee who is a director, officer, or employee of IMCO or
its affiliates. No pension or retirement benefits are accrued as part of fund
expenses. The Company reimburses certain expenses of the Directors who are not
affiliated with the investment adviser. As of August 31, 1997, the officers and
Directors of the Company and their families as a group owned beneficially or of
record less than 1% of the outstanding shares of the Company.
As of August 31, 1997, USAA and its affiliates (including related employee
benefit plans) owned 1,097,525 shares (4.8%) of the Aggressive Growth Fund,
1,440,033 shares (2.1%) of the Growth Fund, 8,095,684 shares (23.1%) of the S&P
500 Index Fund, 3,369,349 shares (2.9%) of the Income Stock Fund, 20,739,610
shares (15.7%) of the Income Fund, and 14,849,281 shares (.7%) of the Money
Market Fund, 2,000,010 shares (83.8%) of the Science & Technology Fund,
2,000,010 shares (97.1%) of the First Start Growth Fund, and no shares of the
Growth & Income Fund and Short-Term Bond Fund.
The Company knows of no other persons who, as of August 31, 1997, held of
record or owned beneficially 5% or more of any Fund's shares.
THE COMPANY'S MANAGER
As described in each Fund's Prospectus, USAA Investment Management Company is
the Manager and investment adviser, providing services under the Advisory
Agreement. The Manager was organized in May 1970 and has served as investment
adviser and underwriter for USAA Mutual Fund, Inc. from its inception.
In addition to managing the Company's assets, the Manager advises and
manages the investments for USAA and its affiliated companies as well as those
of USAA Tax Exempt Fund, Inc., USAA Investment Trust, and USAA State Tax-Free
Trust, and USAA Life Investment Trust. As of the date of this SAI, total assets
under management by the Manager were approximately $____ billion, of which
approximately $____ billion were in mutual fund portfolios.
ADVISORY AGREEMENT
Under the Advisory Agreement, the Manager provides an investment program,
carries out the investment policy, and manages the portfolio assets for each
Fund. The Manager is authorized, subject to the control of the Board of
Directors of the Company, to determine the selection, amount, and time to buy
or sell securities for each Fund. In addition to providing investment services,
the Manager pays for office space, facilities, business equipment, and
accounting services (in addition to those provided by the Custodian) for the
Company. The Manager compensates all personnel, officers, and Directors of the
Company if such persons are also employees of the Manager or its affiliates.
For these services under the Advisory Agreement, the Company has agreed to pay
the Manager a fee computed as described under FUND MANAGEMENT in each Fund's
Prospectus. Management fees are computed and accrued daily and are payable
monthly.
16
<PAGE>
Except for the services and facilities provided by the Manager, the Funds
pay all other expenses incurred in their operations. Expenses for which the
Funds are responsible include taxes (if any), brokerage commissions on
portfolio transactions (if any), expenses of issuance and redemption of shares,
charges of transfer agents, custodians and dividend disbursing agents, costs of
preparing and distributing proxy material, costs of printing and engraving
stock certificates, auditing and legal expenses, certain expenses of
registering and qualifying shares for sale, fees of Directors who are not
interested persons (not affiliated) of the Manager, costs of typesetting,
printing and mailing the Prospectus, SAI and periodic reports to existing
shareholders, and any other charges or fees not specifically enumerated. The
Manager pays the cost of printing and mailing copies of the Prospectus, the
SAI, and reports to prospective shareholders.
The Advisory Agreement will remain in effect until June 30, 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).
From time to time the Manager may, without prior notice to shareholders,
waive all or any portion of fees or agree to reimburse expenses incurred by a
Fund. The Manager has voluntarily agreed to continue to limit the annual
expenses of the Short-Term Bond Fund to .50% and the Money Market Fund to .45%,
of the Fund's ANA, respectively, until December 1, 1998, and will reimburse the
Funds for all expenses in excess of such limitations. After December 1, 1998,
any such waiver or reimbursement may be terminated by the Manager at any time
without prior notice to the shareholders.
For the last three fiscal years, management fees were as follows:
FUND 1995 1996 1997
---- ---------- ---------- ------------
Aggressive Growth $1,343,754 $2,039,878 $ 2,715,902
Growth 5,642,341 8,232,258 10,109,782
Growth & Income 976,982 1,761,482 3,379,571
Income Stock 6,261,966 8,097,232 9,671,336
Income 4,032,989 4,325,452 4,060,489
Short-Term Bond 136,870 218,705 277,525
Money Market 3,056,189 4,027,320 4,798,276
As a result of the Short-Term Bond and Money Market Funds' expenses exceeding
the expense limitations, the Manager did not receive fees to which it would
have been entitled as follows:
FUND 1995 1996 1997
------- ----------- ------------ -----------
Short-Term Bond $136,499 $ 145,849 $127,346
Money Market 154,109 1,002,670 815,135
UNDERWRITER
The Company has an agreement with the Manager for exclusive underwriting and
distribution of the Funds' shares on a continuing best efforts basis. This
agreement provides that the Manager will receive no fee or other compensation
for such distribution services.
TRANSFER AGENT
The Transfer Agent performs transfer agent services for the Company under a
Transfer Agency Agreement. Services include maintenance of shareholder account
records, handling of communications with shareholders, distribution of Fund
dividends, and production of reports with respect to account activity for
shareholders and the Company. For its services under the Transfer Agency
Agreement, USAA Shareholder Account Services is paid an annual fixed fee per
account ranging from $23.50 to $26.00 by each Fund. This fee is subject to
change at any time.
The fee to the Transfer Agent includes processing of all transactions and
correspondence. Fees are billed on a monthly basis at the rate of one-twelfth
of the annual fee. In addition, the Funds pay all out-of-pocket expenses of the
Transfer Agent and other expenses which are incurred at the specific direction
of the Company.
17
<PAGE>
GENERAL INFORMATION
CUSTODIAN
State Street Bank and Trust Company, P.O. Box 1713, Boston, MA 02105, is the
Company's Custodian. The Custodian is responsible for, among other things,
safeguarding and controlling the Company's cash and securities, handling the
receipt and delivery of securities, and collecting interest on the Company's
investments.
COUNSEL
Goodwin, Procter & Hoar LLP, Exchange Place, Boston, MA 02109, will review
certain legal matters for the Company in connection with the shares offered by
the Prospectus.
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP, 112 East Pecan, Suite 2400, San Antonio, TX 78205, is
the Company's independent auditor. In this capacity, the firm is responsible
for auditing the annual financial statements of the Funds and reporting
thereon.
FINANCIAL STATEMENTS
The financial statements for each of the Funds of USAA Mutual Fund, Inc. and
the Independent Auditors' Reports thereon for the fiscal year ended July 31,
1997, are included in the Annual Reports to Shareholders of that date and are
incorporated herein by reference. The Manager will deliver a copy of the Fund's
Annual Report free of charge with each SAI requested.
CALCULATION OF PERFORMANCE DATA
Information regarding the total return and yield of each Fund is provided under
PERFORMANCE INFORMATION in its Prospectus. See VALUATION OF SECURITIES herein
for a discussion of the manner in which each Fund's price per share is
calculated.
YIELD - MONEY MARKET FUND
When the Money Market Fund quotes a current annualized yield, it is based on a
specified recent seven-calendar-day period. It is computed by (1) determining
the net change, exclusive of capital changes, in the value of a hypothetical
preexisting account having a balance of one share at the beginning of the
period, (2) dividing the net change in account value by the value of the
account at the beginning of the base period to obtain the base return, then (3)
multiplying the base period return by 52.14 (365/7). The resulting yield figure
is carried to the nearest hundredth of one percent.
The calculation includes (1) the value of additional shares purchased with
dividends on the original share, and dividends declared on both the original
share and any such additional shares, and (2) any fees charged to all
shareholder accounts, in proportion to the length of the base period and Fund's
average account size.
The capital changes excluded from the calculation are realized capital
gains and losses from the sale of securities and unrealized appreciation and
depreciation. The Fund's effective (compounded) yield will be computed by
dividing the seven-day annualized yield as defined above by 365, adding 1 to
the quotient, raising the sum to the 365th power, and subtracting 1 from the
result.
Current and effective yields fluctuate daily and will vary with factors
such as interest rates and the quality, length of maturities, and type of
investments in the portfolio.
Yield For 7-day Period Ended 7/31/97 . . . 5.31%
Effective Yield For 7-day Period Ended 7/31/97 . . . 5.45%
YIELD - INCOME FUND AND SHORT-TERM BOND FUND
The Funds may advertise performance in terms of a 30-day yield quotation. The
30-day yield quotation is computed by dividing the net investment income per
share earned during the period by the maximum offering price per share on the
last day of the period, according to the following formula:
YIELD = 2 left [ left ({a-b} over cd + 1 right)^6 - 1 right]
Where: a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursement)
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends
d = the maximum offering price per share on the last day of the
period
18
<PAGE>
The yields for the 30-day period ended July 31, 1997, for the Income Fund
and Short-Term Bond Fund were 6.48% and 6.03%, respectively.
TOTAL RETURN
The Funds may advertise performance in terms of average annual total return for
1-, 5-, and 10-year periods, or for such lesser periods as any of such Funds
have been in existence. Average annual total return is computed by finding the
average annual compounded rates of return over the periods that would equate
the initial amount invested to the ending redeemable value, according to the
following formula:
P(1 + T)N = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment
made at the beginning of the 1-, 5- or 10-year periods at
the end of the year or period
The calculation assumes any charges are deducted from the initial $1,000
payment and assumes all dividends and distributions by such Fund are reinvested
at the price stated in the Prospectus on the reinvestment dates during the
period, and includes all recurring fees that are charged to all shareholder
accounts.
AVERAGE ANNUAL TOTAL RETURNS
FOR PERIODS ENDED 7/31/97
1 5 10 From
Fund year years years Inception*
----- ---- ----- ----- ----------
Aggressive Growth 20.00% 18.53% 11.29% -
Growth 42.48% 18.68% 12.75% -
Growth & Income 46.69% - - 19.92%
Income Stock 31.46% 14.41% 13.23% -
Income 12.15% 7.46% 9.80% -
Short-Term Bond 8.97% - - 5.97%
- --------------
* Data from inception is shown for Funds that are less than ten years old.
Growth & Income and Short-Term Bond Funds commenced operations on June 1,
1993.
APPENDIX A - LONG-TERM AND SHORT-TERM DEBT RATINGS
1. LONG-TERM DEBT RATINGS:
MOODY'S INVESTORS SERVICE, INC. (MOODY'S)
Aaa Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally
referred to as "gilt 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.
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<PAGE>
Ba Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate,
and thereby not well safeguarded during other good and bad times over
the future. Uncertainty of position characterizes bonds in this class.
B Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or
of maintenance of other terms of the contract over any long period of
time may be small.
Caa Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
Ca Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other
marked shortcomings.
C Bonds which are rated C are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of
ever attaining any real investment standing.
STANDARD & POOR'S RATINGS GROUP (S&P)
AAA Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small
degree.
A Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher
rated categories.
BBB Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than in higher
rated categories.
BB Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which
could lead to inadequate capacity to meet timely interest and
principal payments. 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.
20
<PAGE>
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.
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.
BBB Below average protection factors but still considered sufficient for
prudent investment. Considerable variability in risk during economic
cycles.
2. SHORT-TERM DEBT RATINGS:
MOODY'S CORPORATE AND GOVERNMENT
Prime-1 Issuers 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 short-term senior obligations.
The effect of industry characteristics and market composition may be
more pronounced. Variability in earnings and profitability may
result in changes in the level of debt protection measurements and
may require relatively high financial leverage. Adequate alternate
liquidity is maintained.
MOODY'S MUNICIPAL
MIG1/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.
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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.
MIG4/VMIG4 This designation denotes adequate quality. Protection commonly
regarded as required of an investment security is present and
although not distinctly or predominantly speculative, there is
specific risk.
S&P CORPORATE AND GOVERNMENT
A-1 This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely
strong safety characteristics are denoted with a plus (+) sign
designation.
A-2 Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as
for issues designated A-1.
A-3 Designation indicates a satisfactory capacity for timely payment.
Issues with this designation, however, are somewhat more vulnerable to
the adverse effects of changes in circumstances than obligations
carrying the higher designations.
S&P MUNICIPAL
SP-1 Strong capacity to pay principal and interest. Issues determined to
possess very strong characteristics are given a plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest, with some
vulnerability to adverse financial and economic changes over the term
of the notes.
FITCH
F-1+ Exceptionally strong credit quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely
payment.
F-1 Very strong credit quality. Issues assigned this rating reflect an
assurance for timely payment only slightly less in degree than issues
rated F-1+.
F-2 Good credit quality. Issues assigned this rating have a satisfactory
degree of assurance for timely payments, but the margin of safety is
not as great as for issuers 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.
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TBW-4 The lowest rating category; this rating is regarded as non-investment
grade and therefore speculative.
IBCA INC.
A1 Obligations supported by the highest capacity for timely repayment.
Where issues possess a particularly strong credit feature, a rating of
A1+ is assigned.
A2 Obligations supported by a 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 the Funds contained in this SAI and other Funds in the USAA Family of
Funds. These comparisons may include such topics as risk and reward, investment
objectives, investment strategies, and performance.
Fund performance also may be compared to the performance of broad groups
of mutual funds with similar investment goals or unmanaged indexes of
comparable securities. Evaluations of Fund performance made by independent
sources may also be used in advertisements concerning the Fund, including
reprints of, or selections from, editorials or articles about the Fund. The
Fund or its performance may also be compared to products and services not
constituting securities subject to registration under the 1933 Act such as, but
not limited to, certificates of deposit and money market accounts. Sources for
performance information and articles about the Fund may include but is not
restricted to the following:
AAII JOURNAL, a monthly association magazine for members of the American
Association of Individual Investors.
ARIZONA REPUBLIC, a newspaper which may cover financial and investment news.
AUSTIN AMERICAN-STATESMAN, a newspaper which may cover financial news.
BANK RATE MONITOR, a service which publishes rates on various bank products
such as CDs, MMDAs and credit cards.
BARRON'S, a Dow Jones and Company, Inc. business and financial weekly that
periodically reviews mutual fund performance data.
BUSINESS WEEK, a national business weekly that periodically reports the
performance rankings and ratings of a variety of mutual funds.
CHICAGO TRIBUNE, a newspaper which may cover financial news.
CONSUMER REPORTS, a monthly magazine which from time to time reports on
companies in the mutual fund industry.
DALLAS MORNING NEWS, a newspaper which may cover financial news.
DENVER POST, a newspaper which may quote financial news.
FINANCIAL PLANNING, a monthly magazine which may periodically review mutual
fund companies.
FINANCIAL SERVICES WEEK, a weekly newspaper which covers financial news.
FINANCIAL WORLD, a monthly magazine that periodically features companies in the
mutual fund industry.
FORBES, a national business publication that periodically reports the
performance of companies in the mutual fund industry.
FORTUNE, a national business publication that periodically rates the
performance of a variety of mutual funds.
FUND ACTION, a mutual fund news report.
HOUSTON CHRONICLE, a newspaper which may cover financial news.
HOUSTON POST, a newspaper which may cover financial news.
IBC/DONOGHUE'S MONEYLETTER, a biweekly newsletter which covers financial news
and from time to time rates specific mutual funds.
23
<PAGE>
IBC'S MONEY MARKET INSIGHT, a monthly money market industry analysis prepared
by IBC USA, Inc.
INCOME AND SAFETY, a monthly newsletter that rates mutual funds.
INVESTECH, a bimonthly investment newsletter.
INVESTMENT ADVISOR, a monthly publication directed primarily to the advisor
community; includes ranking of mutual funds using a proprietary methodology.
INVESTMENT COMPANY INSTITUTE, the national association of the American
investment company industry.
INVESTOR'S BUSINESS DAILY, a newspaper which covers financial news.
KIPLINGER'S PERSONAL FINANCE MAGAZINE, a monthly investment advisory
publication that periodically features the performance of a variety of
securities.
LIPPER ANALYTICAL SERVICES, INC.'S FIXED INCOME FUND PERFORMANCE ANALYSIS, a
monthly publication of industry-wide mutual fund performance averages by type
of fund.
LIPPER ANALYTICAL SERVICES, INC.'S MUTUAL FUND PERFORMANCE ANALYSIS, a monthly
publication of industry-wide mutual fund averages by type of fund.
LOS ANGELES TIMES, a newspaper which may cover financial news.
LOUIS RUKEYSER'S WALL STREET, a publication for investors.
MEDICAL ECONOMICS, a monthly magazine providing information to the medical
profession.
MONEY, a monthly magazine that features the performance of both specific funds
and the mutual fund industry as a whole.
MONEY FUND REPORT, a weekly publication of the Donoghue Organization, Inc.,
reporting on the performance of the nation's money market funds, summarizing
money market fund activity, and including certain averages as performance
benchmarks, specifically "Donoghue's Taxable First Tier Fund Average."
MORNINGSTAR 5 STAR INVESTOR, a monthly newsletter which covers financial news
and rates mutual funds by Morningstar, Inc. (a data service which tracks
open-end mutual funds).
MUTUAL FUND FORECASTER, a monthly newsletter that ranks mutual funds.
MUTUAL FUND INVESTING, a newsletter covering mutual funds.
MUTUAL FUND PERFORMANCE REPORT, a monthly publication of mutual fund
performance and rankings, produced by Morningstar, Inc.
MUTUAL FUNDS MAGAZINE, a monthly publication reporting on mutual fund
investing.
MUTUAL FUND SOURCE BOOK, an annual publication produced by Morningstar, Inc.
which describes and rates mutual funds.
MUTUAL FUND VALUES, a biweekly guidebook to mutual funds produced by
Morningstar, Inc.
NEWSWEEK, a national business weekly.
NEW YORK TIMES, a newspaper which may cover financial news.
NO LOAD FUND INVESTOR, a newsletter covering companies in the mutual fund
industry.
ORLANDO SENTINEL, a newspaper which may cover financial news.
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.
24
<PAGE>
WEISENBERGER MUTUAL FUNDS INVESTMENT REPORT, a monthly newsletter that reports
on both specific mutual fund companies and the mutual fund industry as a whole.
WORTH, a magazine which covers financial and investment subjects including
mutual funds.
YOUR MONEY, a monthly magazine directed toward the novice investor.
In addition to the sources above, Lipper Analytical Services, Inc.'s
tracking results may be used. A Fund will be compared to Lipper's appropriate
fund category according to fund objective and portfolio holdings. The
Aggressive Growth Fund will be compared to funds in Lipper's small company
growth funds category, the Growth Fund to funds in Lipper's growth fund
category, the Growth & Income Fund to Lipper's growth & income funds category,
the Income Stock Fund to Lipper's equity income funds category, the Income Fund
to funds in Lipper's corporate debt A rated funds category, the Short-Term Bond
Fund to Lipper's short investment grade debt funds category, and the Money
Market Fund to Lipper's taxable money market funds category. Footnotes in
advertisements and other marketing literature will include the time period
applicable for any ranking used.
For comparative purposes, unmanaged indexes of comparable securities or
economic data may be cited. Examples include the following:
- Ibbotson Associates, Inc., Stocks, Bonds, Bills, and Inflation Yearbook.
- Lehman Brothers 1-3 year Government/Corporate Index is an unmanaged index
of all the government, agency, and corporate bonds longer than one year and
less than three years.
- Lehman Brothers Aggregate Bond Index is an unmanaged index of the
Government/Corporate Index, the Mortgage Backed-Securities Index, and the
Asset-Backed Securities Index.
- NASDAQ Industrials, a composite index of approximately 3000 unmanaged
securities of industrial corporations traded over the counter.
- Russell 2000(R) Index is an index which consists of the 2,000 smallest
companies in the Russell 3000(R) Index, a widely recognized small cap index.
- S&P 500 Index, a broad-based 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.
25
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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.
26
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27
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06143-1297
<PAGE>
USAA MUTUAL FUND, INC.
PART C. OTHER INFORMATION
Item 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements:
Financial Statements included in Parts A and B (Prospectuses and
Statement of Additional Information) of this Registration
Statement:
Financial Statements and Independent Auditors' Reports are
incorporated by reference to the USAA Aggressive Growth, Growth,
Growth & Income, Income Stock, Income, Short-Term Bond, and Money
Market Funds' Annual Reports to Shareholders for the fiscal year
ended July 31, 1997.
(b) Exhibits:
EXHIBIT NO. DESCRIPTION OF EXHIBITS
1 (a) Articles of Incorporation dated October 10, 1980 (1)
(b) Articles of Amendment dated January 14, 1981 (1)
(c) Articles Supplementary dated July 28, 1981 (1)
(d) Articles Supplementary dated November 3, 1982 (1)
(e) Articles of Amendment dated May 18, 1983 (1)
(f) Articles Supplementary dated August 8, 1983 (1)
(g) Articles Supplementary dated July 27, 1984 (1)
(h) Articles Supplementary dated November 5, 1985 (1)
(i) Articles Supplementary dated January 23, 1987 (1)
(j) Articles Supplementary dated May 13, 1987 (1)
(k) Articles Supplementary dated January 25, 1989 (1)
(l) Articles Supplementary dated May 2, 1991 (1)
(m) Articles Supplementary dated November 14, 1991 (1)
(n) Articles Supplementary dated April 14, 1992 (1)
(o) Articles Supplementary dated November 4, 1992 (1)
(p) Articles Supplementary dated March 23, 1993 (1)
(q) Articles Supplementary dated May 5, 1993 (1)
(r) Articles Supplementary dated November 8, 1993 (1)
(s) Articles Supplementary dated January 18, 1994 (1)
(t) Articles Supplementary dated November 9, 1994 (1)
(u) Articles Supplementary dated November 8, 1995 (2)
(v) Articles Supplementary dated February 6, 1996 (3)
(w) Articles Supplementary dated March 12, 1996 (4)
(x) Articles Supplementary dated November 13, 1996 (7)
(y) Articles Supplementary dated May 9, 1997 (8)
(Z) Articles of Amendment dated July 9, 1997 (filed herewith)
2 Bylaws, as amended March 12, 1996 (4)
3 Voting trust agreement - Not Applicable
4 Specimen certificates for shares of
(a) Growth Fund (1)
(b) Income Fund (1)
(c) Money Market Fund (1)
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EXHIBIT NO. DESCRIPTION OF EXHIBITS
(d) Aggressive Growth Fund (1)
(e) Income Stock Fund (1)
(f) Growth & Income Fund (1)
(g) Short-Term Bond Fund (1)
(h) S&P 500 Index Fund (4)
(i) Science & Technology Fund (filed herewith)
(j) First Start Growth Fund (filed herewith)
5 (a) Advisory Agreement dated September 21, 1990 (1)
(b) Letter Agreement dated June 1, 1993 adding Growth & Income
Fund and Short-Term Bond Fund (1)
(c) Management Agreement dated May 1, 1996 with respect to the
S&P 500 Index Fund (5)
(d) Administration Agreement dated May 1, 1996 with respect to
the S&P 500 Index Fund (5)
(e) Letter Agreement to the Management Agreement dated May 1,
1996 with respect to the S&P 500 Index Fund (5)
(f) Amendment to Administration Agreement dated May 1, 1997 with
respect to the S&P 500 Index Fund (7)
(g) Letter Agreement to the Advisory Agreement dated August 1,
1997 adding the Science & Technology Fund and First Start
Growth Fund (filed herewith)
6 (a) Underwriting Agreement dated July 25, 1990 (1)
(b) Letter Agreement dated June 1, 1993 adding Growth & Income
Fund and Short-Term Bond Fund (1)
(c) Letter Agreement dated May 1, 1996 adding S&P 500 Index Fund
(5)
(d) Letter Agreement dated August 1, 1997 adding Science &
Technology Fund and First Start Growth Fund (filed herewith)
7 Not Applicable
8 (a) Custodian Agreement dated November 3, 1982 (1)
(b) Letter Agreement dated April 20, 1987 adding Income Stock Fund (1)
(c) Amendment No. 1 to the Custodian Contract dated October 30,
1987 (1)
(d) Amendment to the Custodian Contract dated November 3, 1988 (1)
(e) Amendment to the Custodian Contract dated February 6, 1989 (1)
(f) Amendment to the Custodian Contract dated November 8, 1993 (1)
(g) Letter Agreement dated June 1, 1993 adding Growth & Income
Fund and Short-Term Bond Fund (1)
(h) Subcustodian Agreement dated March 24, 1994 (3)
(i) Custodian Agreement dated May 1, 1996 with respect to the
S&P 500 Index Fund (5)
(j) Subcustodian Agreement dated May 1, 1996 with respect to the
S&P 500 Index Fund (5)
(k) Letter Agreement to the Custodian Agreement dated May 1, 1996
with respect to the S&P 500 Index Fund (5)
(l) Amendment to Custodian Contract dated May 13, 1996 (5)
(m) Letter Agreement to the Custodian Agreement dated August 1,
1997 with respect to the Science & Technology Fund and First
Start Growth Fund (filed herewith)
9 (a) Articles of Merger dated January 30, 1981 (1)
(b) Transfer Agency Agreement dated January 23, 1992 (1)
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<PAGE>
EXHIBIT NO. DESCRIPTION OF EXHIBITS
(c) Letter Agreement dated June 1, 1993 to Transfer Agency
Agreement adding Growth & Income Fund and Short-Term Bond
Fund (1)
(d) Amendments dated May 3, 1995 to the Transfer Agency Agreement
Fee Schedules for Growth Fund, Aggressive Growth Fund, Income
Fund, Growth & Income Fund, Income Stock Fund, Money Market
Fund, and Short-Term Bond Fund (1)
(e) Amendment No. 1 to Transfer Agency Agreement dated
November 14, 1995 (2)
(f) Third Party Feeder Fund Agreement dated May 1, 1996 with
respect to the S&P 500 Index Fund (5)
(g) Letter Agreement to Transfer Agency Agreement dated May 1,
1996 adding S&P 500 Index Fund (5)
(h) Transfer Agency Agreement Fee Schedule dated May 1, 1996 for
S&P 500 Index Fund (5)
(i) Master Revolving Credit Facility Agreement with USAA Capital
Corporation dated January 14, 1997 (7)
(j) Master Revolving Credit Facility Agreement with NationsBank
of Texas dated January 15, 1997 (7)
(k) Letter Agreement to Transfer Agency Agreement dated August 1,
1997 adding Science & Technology Fund and First Start Growth
Fund (filed herewith)
(l) Transfer Agency Agreement Fee Schedule for Science &
Technology Fund (filed herewith)
(m) Transfer Agency Agreement Fee Schedule for First Start Growth
Fund (filed herewith)
10 (a) Opinion of Counsel with respect to the Growth Fund,
Income Fund, Money Market Fund, Income Stock Fund, Growth &
Income Fund, and Short-Term Bond Fund (2)
(b) Opinion of Counsel with respect to the S&P 500 Index Fund (3)
(c) Consent of Counsel with respect to the S&P 500 Index Fund (7)
(d) Opinion of Counsel with respect to the Aggressive Growth Fund (6)
(e) Consent of Counsel with respect to the Aggressive Growth Fund,
Growth Fund, Income Fund, Money Market Fund, Income Stock
Fund, Growth & Income Fund, and Short-Term Bond Fund
(filed herewith)
(f) Opinion and Consent of Counsel with respect to the Science &
Technology Fund and First Start Growth Fund (8)
11 Consent of Independent Accountants (filed herewith)
12 Financial Statements omitted from prospectus - Not Applicable
13 (a) Subscription and Investment Letter for Growth & Income Fund
and Short-Term Bond Fund (1)
(b) Subscription and Investment Letter for S&P 500 Index Fund (5)
(c) Subscription and Investment Letter for Science & Technology
Fund and First Start Growth Fund (filed herewith)
14 Prototype Plans
(a) USAA INVESTMENT MANAGEMENT COMPANY IRA Custodial Agreement
(filed herewith)
(b) USAA INVESTMENT MANAGEMENT COMPANY SEP-IRA Custodial Agreement
(filed herewith)
(c) USAA INVESTMENT MANAGEMENT COMPANY 403(b)(7) Custodial Agreement
(filed herewith)
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EXHIBIT NO. DESCRIPTION OF EXHIBITS
(d) USAA INVESTMENT MANAGEMENT COMPANY Simple IRA Custodial
Agreement (filed herewith)
15 12b-1 Plans - Not Applicable
16 Schedule for Computation of Performance Quotation (1)
17 Financial Data Schedule
(a) Growth Fund (filed herewith)
(b) Aggressive Growth Fund (filed herewith)
(c) Income Fund (filed herewith)
(d) Money Market Fund (filed herewith)
(e) Income Stock Fund (filed herewith)
(f) Growth & Income Fund (filed herewith)
(g) Short-Term Bond Fund (filed herewith)
18 Plan Adopting Multiple Classes of Shares - Not Applicable
19 Powers of Attorney
(a) Powers of Attorney for Michael J.C. Roth, Sherron A. Kirk,
John W. Saunders, Jr., George E. Brown, Howard L. Freeman,
Jr., and Richard A. Zucker dated November 8, 1993 (1)
(b) Power of Attorney for Barbara B. Dreeben dated September 12,
1995 (1)
(c) With respect to the S&P 500 Index Fund, Powers of Attorney for
Ronald M. Petnuch, Philip W. Coolidge, Charles P. Biggar,
S. Leland Dill, and Philip Saunders, Jr., Trustees of the
Equity 500 Index Portfolio, dated September 30, 1996 (7)
(d) Power of Attorney for Robert G. Davis (7)
(e) Power of Attorney for Robert L. Mason (7)
- ---------------------
(1) Previously filed with Post-Effective Amendment No. 38 of the Registrant
(No. 2-49560) filed with the Securities and Exchange Commission on
September 29, 1995.
(2) Previously filed with Post-Effective Amendment No. 39 of the Registrant
(No. 2-49560) filed with the Securities and Exchange Commission on
November 21, 1995.
(3) Previously filed with Post-Effective Amendment No. 40 of the Registrant
(No. 2-49560) filed with the Securities and Exchange Commission on
February 15, 1996.
(4) Previously filed with Post-Effective Amendment No. 41 of the Registrant
(No. 2-49560) filed with the Securities and Exchange Commission on April
26, 1996.
(5) Previously filed with Post-Effective Amendment No. 42 of the Registrant
(No. 2-49560) filed with the Securities and Exchange Commission on
September 11, 1996.
(6) Previously filed with Post-Effective Amendment No. 43 of the Registrant
(No. 2-49560) filed with the Securities and Exchange Commission on October
1, 1996.
(7) Previously filed with Post-Effective Amendment No. 44 of the Registrant
(No. 2-49560) filed with the Securities and Exchange Commission on April
21, 1997.
(8) Previously filed with Post-Effective Amendment No. 45 of the Registrant
(No. 2-49560) filed with the Securities and Exchange Commission on May 16,
1997.
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Item 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Information pertaining to persons controlled by or under common
control with Registrant is hereby incorporated by reference to the
section captioned "Fund Management" in the Prospectus and the
section captioned "Directors and Officers of the Company" in the
Statement of Additional Information.
Item 26. NUMBER OF HOLDERS OF SECURITIES
Set forth below are the number of record holders, as of August 31,
1997, of each class of securities of the Registrant.
Title of Class Number of Record Holders
-------------- ------------------------
Aggressive Growth Fund 71,391
Growth Fund 95,182
Income Stock Fund 105,302
Income Fund 62,131
Money Market Fund 133,010
Growth & Income Fund 59,345
Short-Term Bond Fund 8,674
S&P 500 Index Fund 24,539
Science & Technology Fund 504
First Start Growth Fund 241
Item 27. INDEMNIFICATION
Protection for the liability of the adviser and underwriter and
for the officers and directors of the Registrant is provided by
two methods:
(a) THE DIRECTOR AND OFFICER LIABILITY POLICY. This policy covers all
losses incurred by the Registrant, its adviser and its underwriter
from any claim made against those entities or persons during the
policy period by any shareholder or former shareholder of the Fund
by reason of any alleged negligent act, error or omission
committed in connection with the administration of the investments
of said Registrant or in connection with the sale or redemption of
shares issued by said Registrant.
(b) STATUTORY INDEMNIFICATION PROVISIONS. Under Section 2-418 of the
Maryland General Corporation Law, the Registrant is authorized to
indemnify any past or present director, officer, agent or
employee against judgments, penalties, fines, settlements and
reasonable expenses actually incurred by him in connection with
any proceeding in which he is a party by reason of having served
as a director, officer, agent or employee, if he acted in good
faith and reasonably believed that, (i) in the case of conduct in
his official capacity with the Registrant, that his conduct was
in the best interests of the Registrant, or (ii) in all other
cases, that his conduct was at least not opposed to the best
interests of the Registrant. In the case of any criminal
proceeding, said director, officer, agent or employee must in
addition have had no reasonable cause to believe that his conduct
was unlawful. In the case of a proceeding by or in the right of
the Registrant, indemnification may only be made against
reasonable expenses and may not be made in respect of any
proceeding in which the director, officer, agent or employee
shall have been adjudged to be liable to the Registrant. The
termination of any proceeding by judgment, order, settlement,
conviction, or upon a plea
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of nolo contendere or its equivalent creates a rebuttable
presumption that the director, officer, agent or employee did not
meet the requisite standard of conduct for indemnification. No
indemnification may be made in respect of any proceeding charging
improper personal benefit to the director, officer, agent or
employee whether or not involving action in such person's
official capacity, if such person was adjudged to be liable on
the basis that improper personal benefit was received. If such
director, officer, agent or employee is successful, on the merits
or otherwise, in defense of any such proceeding against him, he
shall be indemnified against the reasonable expenses incurred by
him (unless such indemnification is limited by the Registrant's
charter, which it is not). Additionally, a court of appropriate
jurisdiction may order indemnification in certain circumstances
even if the appropriate standard of conduct set forth above was
not met.
Indemnification may not be made unless authorized in the specific
case after determination that the applicable standard of conduct
has been met. Such determination shall be made by either: (i) the
board of directors by either (x) a majority vote of a quorum
consisting of directors not parties to the proceeding or (y) if
such a quorum cannot be obtained, then by a majority vote of a
committee of the board consisting solely of two or more directors
not at the time parties to such proceeding who were duly
designated to act in the matter by a majority vote of the full
board in which the designated directors who are parties may
participate; (ii) special legal counsel selected by the board of
directors or a committee of the board by vote as set forth in (i)
above, or, if the requisite quorum of the board cannot be
obtained therefore and the committee cannot be established, by a
majority vote of the full board in which directors who are
parties may participate; or (iii) the stockholders.
Reasonable expenses may be reimbursed or paid by the Registrant
in advance of final disposition of a proceeding after a
determination, made in accordance with the procedures set forth
in the preceding paragraph, that the facts then known to those
making the determination would not preclude indemnification under
the applicable standards provided the Registrant receives (i) a
written affirmation of the good faith belief of the person
seeking indemnification that the applicable standard of conduct
necessary for indemnification has been met, and (ii) a written
undertaking to repay the advanced sums if it is ultimately
determined that the applicable standard of conduct has not been
met.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers
and controlling persons of the Registrant pursuant to the
Registrant's Articles of Incorporation or otherwise, the
Registrant has been advised that, in the opinion of the
Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of
any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities
being registered, then the Registrant will, unless in the opinion
of its counsel the matter has been settled by a controlling
precedent, submit to a court of appropriate jurisdiction the
question of whether indemnification by it is against public
policy as expressed in the Act and will be governed by the final
adjudication of such issue.
C-6
<PAGE>
Item 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
Information pertaining to business and other connections of the
Registrant's investment adviser is hereby incorporated by
reference to the section of the Prospectus captioned "Fund
Management" and to the section of the Statement of Additional
Information captioned "Directors and Officers of the Company."
Item 29. PRINCIPAL UNDERWRITERS
(a) USAA Investment Management Company (the "Adviser") acts as
principal underwriter and distributor of the Registrant's shares
on a best-efforts basis and receives no fee or commission for its
underwriting services. The Adviser, wholly-owned by United
Services Automobile Association, also serves as principal
underwriter for USAA Tax Exempt Fund, Inc., USAA Investment Trust,
and USAA State Tax-Free Trust.
(b) Set forth below is information concerning each director and
executive officer of USAA Investment Management Company.
Name and Principal Position and Offices Position and Offices
Business Address with Underwriter with Registrant
- ------------------ -------------------- --------------------
Robert G. Davis Director and Chairman Director and
9800 Fredericksburg Rd. of the Board of Chairman of the
San Antonio, TX 78288 Directors Board of Directors
Michael J.C. Roth Chief Executive Officer, President, Director
9800 Fredericksburg Rd. President, Director, and and Vice Chairman of
San Antonio, TX 78288 Vice Chairman of the the Board of Directors
Board of Directors
John W. Saunders, Jr. Senior Vice President, Vice President and
9800 Fredericksburg Rd. Fixed Income Investments, Director
San Antonio, TX 78288 and Director
Harry W. Miller Senior Vice President, None
9800 Fredericksburg Rd. Equity Investments,
San Antonio, TX 78288 and Director
John J. Dallahan Senior Vice President, None
9800 Fredericksburg Rd. Investment Services
San Antonio, TX 78288
Carl W. Shirley Senior Vice President, None
9800 Fredericksburg Rd. Insurance Company Portfolios
San Antonio, TX 78288
Michael D. Wagner Vice President, Secretary Secretary
9800 Fredericksburg Rd. and Counsel
San Antonio, TX 78288
Sherron A. Kirk Vice President and Treasurer
9800 Fredericksburg Rd. Controller
San Antonio, TX 78288
C-7
<PAGE>
Alex M. Ciccone Vice President, Assistant
9800 Fredericksburg Rd. Compliance Secretary
San Antonio, TX 78288
(c) Not Applicable
Item 30. LOCATION OF ACCOUNTS AND RECORDS
The following entities prepare, maintain and preserve the records
required by Section 31(a) of the Investment Company Act of 1940
(the "1940 Act") for the Registrant. These services are provided
to the Registrant through written agreements between the parties
to the effect that such services will be provided to the
Registrant for such periods prescribed by the Rules and
Regulations of the Securities and Exchange Commission under the
1940 Act and such records are the property of the entity required
to maintain and preserve such records and will be surrendered
promptly on request:
USAA Investment Management Company
9800 Fredericksburg Road
San Antonio, Texas 78288
USAA Shareholder Account Services
10750 Robert F. McDermott Freeway
San Antonio, Texas 78288
State Street Bank and Trust Company
1776 Heritage Drive
North Quincy, Massachusetts 02171
Item 31. MANAGEMENT SERVICES
Not Applicable
Item 32. UNDERTAKINGS
The Registrant hereby undertakes, if requested to do so by the
holders of at least 10% of the Registrant's outstanding shares,
to call a meeting of the shareholders for the purpose of voting
upon the question of removal of a Director or Directors and to
assist in communications with other shareholders as required by
Section 16(c) of the Investment Company Act of 1940.
The Registrant hereby undertakes to provide each person to whom
a prospectus is delivered a copy of the Registrant's latest
annual report(s) to shareholders upon request and without
charge.
C-8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it has duly
caused this amendment to its Registration Statement to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of San Antonio and
State of Texas on the 22nd day of September, 1997. USAA MUTUAL FUND, INC.
/S/ MICHAEL J.C. ROTH
---------------------
Michael J.C. Roth
President
Pursuant to the requirements of the Securities Act of 1933, this amendment
to its Registration Statement has been signed below by the following persons in
the capacities and on the date indicated.
(Signature) (Title) (Date)
Chairman of the
- -------------------------- Board of Directors
Robert G. Davis
/S/ MICHAEL J. C. ROTH Vice Chairman of the Board September 22, 1997
- -------------------------- of Directors and President
Michael J.C. Roth (Principal Executive Officer)
/S/ SHERRON A. KIRK Treasurer (Principal September 17, 1997
- -------------------------- Financial and
Sherron A. Kirk Accounting Officer)
/S/ JOHN W. SAUNDERS, JR. Director September 17, 1997
- --------------------------
John W. Saunders, Jr.
/S/ ROBERT L. MASON Director September 19, 1997
- --------------------------
Robert L. Mason
/S/ HOWARD L. FREEMAN, JR. Director September 26, 1997
- --------------------------
Howard L. Freeman, Jr.
/S/ RICHARD A. ZUCKER Director September 19, 1997
- --------------------------
Richard A. Zucker
/S/ BARBARA B. DREEBEN Director September 25, 1997
- --------------------------
Barbara B. Dreeben
C-9
<PAGE>
EXHIBIT INDEX
EXHIBIT ITEM PAGE NO. *
1 (a) Articles of Incorporation dated October 10, 1980 (1)
(b) Articles of Amendment dated January 14, 1981 (1)
(c) Articles Supplementary dated July 28, 1981 (1)
(d) Articles Supplementary dated November 3, 1982 (1)
(e) Articles of Amendment dated May 18, 1983 (1)
(f) Articles Supplementary dated August 8, 1983 (1)
(g) Articles Supplementary dated July 27, 1984 (1)
(h) Articles Supplementary dated November 5, 1985 (1)
(i) Articles Supplementary dated January 23, 1987 (1)
(j) Articles Supplementary dated May 13, 1987 (1)
(k) Articles Supplementary dated January 25, 1989 (1)
(l) Articles Supplementary dated May 2, 1991 (1)
(m) Articles Supplementary dated November 14, 1991 (1)
(n) Articles Supplementary dated April 14, 1992 (1)
(o) Articles Supplementary dated November 4, 1992 (1)
(p) Articles Supplementary dated March 23, 1993 (1)
(q) Articles Supplementary dated May 5, 1993 (1)
(r) Articles Supplementary dated November 8, 1993 (1)
(s) Articles Supplementary dated January 18, 1994 (1)
(t) Articles Supplementary dated November 9, 1994 (1)
(u) Articles Supplementary dated November 8, 1995 (2)
(v) Articles Supplementary dated February 6, 1996 (3)
(w) Articles Supplementary dated March 12, 1996 (4)
(x) Articles Supplementary dated November 13, 1996 (7)
(y) Articles supplementary dated May 9, 1997 (8)
(Z) Articles of Amendment dated July 9, 1997 (filed herewith) 188
2 Bylaws, as amended March 12, 1996 (4)
3 Voting trust agreement - Not Applicable
4 Specimen certificates for shares of
(a) Growth Fund (1)
(b) Income Fund (1)
(c) Money Market Fund (1)
(d) Aggressive Growth Fund (1)
(e) Income Stock Fund (1)
(f) Growth & Income Fund (1)
(g) Short-Term Bond Fund (1)
(h) S&P 500 Index Fund (4)
(i) Science & Technology Fund (filed herewith) 191
(j) First Start Growth Fund (filed herewith) 194
5 (a) Advisory Agreement dated September 21, 1990 (1)
(b) Letter Agreement dated June 1, 1993 adding Growth &
Income Fund and Short-Term Bond Fund (1)
(c) Management Agreement dated May 1, 1996 with respect
to the S&P 500 Index Fund (5)
(d) Administration Agreement dated May 1, 1996 with
respect to the S&P 500 Index Fund (5)
(e) Letter Agreement to the Management Agreement dated
May 1, 1996 with respect to the S&P 500 Index Fund (5)
(f) Amendment to Administration Agreement dated May 1,
1997 with respect to the S&P 500 Index Fund (7)
C-10
<PAGE>
EXHIBIT ITEM PAGE NO. *
(g) Letter Agreement to the Advisory Agreement dated
August 1, 1997 adding Science & Technology Fund
and First Start Growth Fund (filed herewith) 197
6 (a) Underwriting Agreement dated July 25, 1990 (1)
(b) Letter Agreement dated June 1, 1993 adding
Growth & Income Fund and hort-Term Bond Fund (1)
(c) Letter Agreement dated May 1, 1996 adding S&P 500
Index Fund (5)
(d) Letter Agreement dated August 1, 1997 adding Science
& Technology Fund and First Start Growth Fund
(filed herewith) 199
7 Not Applicable
8 (a) Custodian Agreement dated November 3, 1982 (1)
(b) Letter Agreement dated April 20, 1987 adding Income
Stock Fund (1)
(c) Amendment No. 1 to the Custodian Contract dated
October 30, 1987 (1)
(d) Amendment to the Custodian Contract dated November 3,
1988 (1)
(e) Amendment to the Custodian Contract dated February 6,
1989 (1)
(f) Amendment to the Custodian Contract dated November 8,
1993 (1)
(g) Letter Agreement dated June 1, 1993 adding Growth &
Income Fund and Short-Term Bond Fund (1)
(h) Subcustodian Agreement dated March 24, 1994 (3)
(i) Custodian Agreement dated May 1, 1996 with respect
to the S&P 500 Index Fund (5)
(j) Subcustodian Agreement dated May 1, 1996 with respect to
the S&P 500 Index Fund (5)
(k) Letter Agreement to the Custodian Agreement dated
May 1, 1996 with respect to the S&P 500 Index Fund (5)
(l) Amendment to Custodian Contract dated May 13, 1996 (5)
(m) Letter Agreement to the Custodian Agreement dated August 1,
1997 with respect to the Science & Technology Fund and
First Start Growth Fund (filed herewith) 201
9 (a) Articles of Merger dated January 30, 1981 (1)
(b) Transfer Agency Agreement dated January 23, 1992 (1)
(c) Letter Agreement dated June 1, 1993 to Transfer Agency
Agreement adding Growth & Income Fund and Short-Term
Bond Fund (1)
(d) Amendments dated May 3, 1995 to the Transfer Agency
Agreement Fee Schedules for Growth Fund, Aggressive
Growth Fund, Income Fund, Growth & Income Fund, Income
Stock Fund, Money Market Fund, and Short-Term Bond Fund (1)
(e) Amendment No. 1 to Transfer Agency Agreement dated
November 14, 1995 (2)
(f) Third Party Feeder Fund Agreement dated May 1, 1996 with
respect to the S&P 500 Index Fund (5)
(g) Letter Agreement to Transfer Agency Agreement dated
May 1, 1996 adding S&P 500 Index Fund (5)
(h) Transfer Agency Agreement Fee Schedule dated May 1,
1996 for S&P 500 Index Fund (5)
(i) Master Revolving Credit Facility Agreement with USAA
Capital Corporation dated January 14, 1997 (7)
(j) Master Revolving Credit Facility Agreement with
NationsBank of Texas dated January 15, 1997 (7)
C-11
<PAGE>
EXHIBIT ITEM AGE NO. *
(k) Letter Agreement to Transfer Agency Agreement dated
August 1, 1997 adding Science & Technology Fund
and First Start Growth Fund (filed herewith) 207
(l) Transfer Agency Agreement Fee Schedule for Science &
Technology Fund (filed herewith) 209
(m) Transfer Agency Agreement Fee Schedule for First Start
Growth Fund (filed herewith) 211
10 (a) Opinion of Counsel with respect to the Growth Fund,
Income Fund, Money Market Fund, Income Stock Fund,
Growth & Income Fund, and Short-Term Bond Fund (2)
(b) Opinion of Counsel with respect to the S&P 500 Index Fund (3)
(c) Consent of Counsel with respect to the S&P 500 Index Fund (7)
(d) Opinion of Counsel with respect to the Aggressive Growth
Fund (6)
(e) Consent of Counsel with respect to the Aggressive
Growth Fund, Growth Fund, Income Fund, Money Market Fund,
Income Stock Fund, Growth & Income Fund, and Short-Term
Bond Fund (filed herewith) 213
(f) Opinion and Consent of Counsel with respect to the
Science & Technology Fund and First Start Growth Fund (8)
11 Consent of Independent Accountants' (filed herewith) 215
12 Financial Statements omitted from prospectus - Not Applicable
13 (a) Subscription and Investment Letter for Growth & Income Fund
and Short-Term Bond Fund (1)
(b) Subscription and Investment Letter for S&P 500 Index Fund (5)
(c) Subscription and Investment Letter for Science & Technology
Fund and First Start Growth Fund (filed herewith) 217
14 Prototype Plans
(a) USAA INVESTMENT MANAGEMENT COMPANY IRA Custodial
Agreement (filed herewith) 219
(b) USAA INVESTMENT MANAGEMENT COMPANY SEP-IRA Custodial
Agreement (filed herewith) 226
(c) USAA INVESTMENT MANAGEMENT COMPANY 403(b)(7) Custodial
Agreement (filed herewith) 234
(d) USAA INVESTMENT MANAGEMENT COMPANY Simple IRA Custodial
Agreement (filed herewith) 254
15 12b-1 Plans - Not Applicable
16 Schedule for Computation of Performance Quotation (1)
17 Financial Data Schedule
(a) Growth Fund 262
(b) Aggressive Growth Fund 264
(c) Income Fund 266
(d) Money Market Fund 268
(e) Income Stock Fund 270
(f) Growth & Income Fund 272
(g) Short-Term Bond Fund 274
18 Plan Adopting Multiple Classes of Shares - Not Applicable
C-12
<PAGE>
EXHIBIT ITEM PAGE NO. *
19 Powers of Attorney
(a) Powers of Attorney for Michael J.C. Roth, Sherron A.
Kirk, John W. Saunders, Jr., George E. Brown, Howard L.
Freeman, Jr., and Richard A. Zucker dated November 8,
1993 (1)
(b) Power of Attorney for Barbara B. Dreeben dated
September 12, 1995 (1)
(c) With respect to the S&P 500 Index Fund, Powers of
Attorney for Ronald M. Petnuch, Philip W. Coolidge,
Charles P. Biggar, S. Leland Dill, and Philip Saunders,
Jr., Trustees of the Equity 500 Index Portfolio, dated
September 30, 1996 (7)
(d) Power of Attorney for Robert G. Davis (7)
(e) Power of Attorney for Robert L. Mason (7)
(1) Previously filed with Post-Effective Amendment No. 38 of the Registrant
(No. 2-49560) filed with the Securities and Exchange Commission on
September 29, 1995.
(2) Previously filed with Post-Effective Amendment No. 39 of the Registrant
(No. 2-49560) filed with the Securities and Exchange Commission on
November 21, 1995.
(3) Previously filed with Post-Effective Amendment No. 40 of the Registrant
(No. 2-49560) filed with the Securities and Exchange Commission on
February 15, 1996.
(4) Previously filed with Post-Effective Amendment No. 41 of the Registrant
(No. 2-49560) filed with the Securities and Exchange Commission on April
26, 1996.
(5) Previously filed with Post-Effective Amendment No. 42 of the Registrant
(No. 2-49560) filed with the Securities and Exchange Commission on
September 11, 1996.
(6) Previously filed with Post-Effective Amendment No. 43 of the Registrant
(No. 2-49560) filed with the Securities and Exchange Commission on October
1, 1996.
(7) Previously filed with Post-Effective Amendment No. 44 of the Registrant
(No. 2-49560) filed with the Securities and Exchange Commission on April
21, 1997.
(8) Previously filed with Post-Effective Amendment No. 45 of the Registrant
(No. 2-49560) filed with the Securities and Exchange Commission on May 16,
1997.
* Refers to sequentially numbered pages
C-13
<PAGE>
EXHIBIT 1(z)
USAA MUTUAL FUND, INC.
ARTICLES OF AMENDMENT
USAA MUTUAL FUND, INC., a Maryland corporation, having its principal
office in San Antonio, Texas (the "Corporation"), hereby certifies to the State
Department of Assessments and Taxation of Maryland that:
FIRST: The Charter of the Corporation is hereby amended as follows:
The name of the class of stock designated as the "Young
Investors Growth Fund" is changed to "First Start Growth Fund"
and in connection therewith all references in the Charter to
"Young Investors Growth Fund" are hereby deleted and the words
"First Start Growth Fund" shall be substituted therefor
wherever such words appear.
SECOND: The amendment does not increase the authorized stock of the
Corporation.
THIRD: The foregoing amendment to the Charter of the Corporation has
been approved by a majority of the entire Board of Directors
of the Corporation.
FOURTH: No stock of the Corporation entitled to vote on the foregoing
amendment was outstanding or Subscribed for at the time of its
approval.
IN WITNESS WHEREOF, USAA MUTUAL FUND, INC. has caused these presents to be
signed in its name and on its behalf by its President and witnessed by its
Assistant Secretary on July 9, 1997.
WITNESS: USAA MUTUAL FUND, INC.
/s/ Alex M. Ciccone By /s/ Michael J. C. Roth
- ------------------------ -------------------------------
Alex M. Ciccone Michael J. C. Roth
Assistant Secretary President
<PAGE>
THE UNDERSIGNED, President of USAA MUTUAL FUND, INC., who executed on
behalf of the Corporation the foregoing Articles of Amendment of which this
certificate is made a part, hereby acknowledges in the name and on behalf of
said Corporation the foregoing Articles of Amendment to be the corporate act of
said Corporation and hereby certifies that to the best of his knowledge,
information, and belief the matters and facts set forth therein with respect to
the authorization and approval thereof are true in all material respects under
the penalties of perjury.
/s/ Michael J. C. Roth
-------------------------------
Michael J. C. Roth
President
EXHIBIT 4(i)
Number USAA MUTUAL FUND, INC. Shares
SCIENCE & TECHNOLOGY FUND
Incorporated Under the Laws of the State of Maryland
Account No. Alpha Code CUSIP 903288 87 6
See Reverse Side for
Certain Definitions
THIS CERTIFIES that
is the owner of
fully paid and nonassessable shares of the common stock of the par value of one
cent per share of USAA MUTUAL FUND, INC., transferable on the books of the
Corporation by the holder thereof in person or by duly authorized attorney upon
surrender of this certificate properly endorsed. This certificate is not valid
unless countersigned by the Transfer Agent. Witness the facsimile seal of the
Corporation and the facsimile signatures of its duly authorized officers.
Dated:
/s/ SHERRON KIRK PICTURE of /s/ MICHAEL J.C. ROTH
TREASURER USAA MUTUAL FUND, INC. PRESIDENT
SEAL
Countersigned:
USAA SHAREHOLDER ACCOUNT SERVICES
(San Antonio) TRANSFER AGENT
By
AUTHORIZED SIGNATURE
<PAGE>
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common UNIF GIFT MIN ACT -. . .Custodian. . .
TEN ENT - as tenants by the entireties (Cust) (Minor)
JT TEN - as joint tenants with the under Uniform Gifts to Minors
right of survivorship and Act . . . . . . . . . . . .
not as tenants in common (State)
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, I/We hereby sell, assign and transfer unto
Please Insert Social Security or Other
Taxpayer Identification Number of Assignee
Please Print or Typewrite Name and Address of Assignee
( ) shares of the Capital Stock represented by the within Certificate, and do
hereby irrevocably constitute and appoint attorney to transfer the said stock
on the books of the within named Corporation with full power of substitution in
the premises.
Dated Signature(s)
Signature Guaranteed By
(The signature(s) to this assignment must
correspond with the name as written upon the
face of this certificate, in every
particular, without alteration or
enlargement, or any change whatsoever.)
This certificate is transferable or
redeemable at the offices of the Transfer
Agent, USAA Shareholder Account Services,
9800 Fredericksburg Rd.,
San Antonio, TX 78288.
The Signature Guarantee must be by an authorized person of a commercial
bank or trust company, a savings bank or savings and loan association, a credit
union, or by a member firm of a domestic stock exchange. A NOTARIZATION BY A
NOTARY PUBLIC IS NOT ACCEPTABLE.
<PAGE>
EXHIBIT 4(j)
Number USAA MUTUAL FUND, INC. Shares
FIRST START GROWTH FUND
Incorporated Under the Laws of the State of Maryland
Account No. Alpha Code CUSIP 903288 86 8
See Reverse Side for
Certain Definitions
THIS CERTIFIES that
is the owner of
fully paid and nonassessable shares of the common stock of the par value of one
cent per share of USAA MUTUAL FUND, INC., transferable on the books of the
Corporation by the holder thereof in person or by duly authorized attorney upon
surrender of this certificate properly endorsed. This certificate is not valid
unless countersigned by the Transfer Agent. Witness the facsimile seal of the
Corporation and the facsimile signatures of its duly authorized officers.
Dated:
/s/ SHERRON KIRK PICTURE of /s/ MICHAEL J.C. ROTH
TREASURER USAA MUTUAL FUND, INC. PRESIDENT
SEAL
Countersigned:
USAA SHAREHOLDER ACCOUNT SERVICES
(San Antonio) TRANSFER AGENT
By
AUTHORIZED SIGNATURE
<PAGE>
The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common UNIF GIFT MIN ACT -. . .Custodian. . .
TEN ENT - as tenants by the entireties (Cust) (Minor)
JT TEN - as joint tenants with the under Uniform Gifts to Minors
right of survivorship and Act . . . . . . . . . . . .
not as tenants in common (State)
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, I/We hereby sell, assign and transfer unto
Please Insert Social Security or Other
Taxpayer Identification Number of Assignee
Please Print or Typewrite Name and Address of Assignee
( ) shares of the Capital Stock represented by the within Certificate, and do
hereby irrevocably constitute and appoint attorney to transfer the said stock
on the books of the within named Corporation with full power of substitution in
the premises.
Dated Signature(s)
Signature Guaranteed By
(The signature(s) to this assignment must
correspond with the name as written upon the
face of this certificate, in every
particular, without alteration or
enlargement, or any change whatsoever.)
This certificate is transferable or
redeemable at the offices of the Transfer
Agent, USAA Shareholder Account Services,
9800 Fredericksburg Rd.,
San Antonio, TX 78288.
The Signature Guarantee must be by an authorized person of a commercial
bank or trust company, a savings bank or savings and loan association, a credit
union, or by a member firm of a domestic stock exchange. A NOTARIZATION BY A
NOTARY PUBLIC IS NOT ACCEPTABLE.
<PAGE>
EXHIBIT 5(g)
USAA Investment Management Company
10750 Robert F. McDermott Freeway
San Antonio, TX 78288
Gentlemen:
Pursuant to Section 1(b) of the Advisory Agreement dated as of September
21, 1990 between USAA Mutual Fund, Inc. (the "Company") and USAA Investment
Management Company (the "Manager"), please be advised that the Company has
established two new series of its shares, namely, the Science & Technology Fund
and the First Start Growth Fund (the "Funds"), and please be further advised
that the Company desires to retain the Manager to render management and
investment advisory services under the Advisory Agreement to the Funds at the
fee stated below:
Advisory Fee Schedule
Three-fourths of one percent (.75%) of the aggregate average net
assets of the Science & Technology Fund.
Three-fourths of one percent (.75%) of the aggregate average net
assets of the First Start Growth Fund.
Please state below whether you are willing to render such services at the
fee stated above.
USAA MUTUAL FUND, INC.
Attest: /s/ Michael D. Wagner By: /s/ Michael J.C. Roth
----------------------- ------------------------
Secretary President
Dated: August 1, 1997
We as the sole shareholder of the above named Funds, do hereby approve the
Advisory Agreement and are willing to render management and investment advisory
services to the Science & Techonology Fund and the First Start Growth Fund at
the fee stated above.
USAA INVESTMENT MANAGEMENT COMPANY
Attest: /s/ Alex M. Ciccone By: /s/ John W. Saunders, Jr.
----------------------- ------------------------------
Assistant Secretary Senior Vice President
Dated: August 1, 1997
contract\mf\advisory\advmfsci.fsg
EXHIBIT 6(d)
USAA Investment Management Company
10750 Robert F. McDermott Freeway
San Antonio, TX 78288
Gentlemen:
Pursuant to paragraph 12 of the Underwriting Agreement dated as of July
25, 1990 between USAA Mutual Fund, Inc. (the "Company") and USAA Investment
Management Company (the "Underwriter"), please be advised that the Company has
established two new series of its shares, namely, the Science & Technology Fund
and the First Strart Growth Fund ("the Funds"), and please be further advised
that the Company desires to retain the Underwriter to sell and distribute
shares of the Funds and to render other services to the Funds as provided in
the Underwriting Agreement.
Please state below whether you are willing to render such services as
provided in the Underwriting Agreement.
USAA MUTUAL FUND, INC.
Attest: /s/ Michael D. Wagner By: /s/ Michael J. C. Roth
------------------------ ----------------------------
Secretary President
Dated: August 1, 1997
We are willing to render services to the Science & Technology Fund and the
First Start Growth Fund as set forth in the Underwriting Agreement.
USAA INVESTMENT MANAGEMENT COMPANY
Attest: /s/ Alex M. Ciccone By: /s/ John W. Saunders, Jr.
------------------------- -----------------------------
Assistant Secretary Senior Vice President
Dated: August 1, 1997
contract\mf\underwri.tng\sci-tech.fsg
EXHIBIT 8(m)
State Street Bank and Trust Company
1776 Heritage Drive
North Quincy, MA 02171
Gentlemen:
Pursuant to Section 12 of the Custodian Agreement dated as of November 3,
1982 between USAA Mutual Fund, Inc. (the "Company") and State Street Bank and
Trust Company (the "Custodian"), please be advised that the Company has
established two new series of its shares, namely, the Science & Technology Fund
and the First Start Growth Fund (the "Funds"), and please be further advised
that the Company desires to retain the Custodian to render custody services
under the Custodian Agreement to the Funds in accordance with the fee schedule
attached hereto as Exhibit A.
Please state below whether you are willing to render such services in
accordance with the fee schedule attached hereto as Exhibit A.
USAA MUTUAL FUND, INC.
Attest: /s/ Michael D. Wagner By: /s/ Michael J. C. Roth
------------------------- ---------------------------
Secretary President
Dated: August 1, 1997
We are willing to render custody services to the Science & Technology Fund
and the First Start Growth Fund in accordance with the fee schedules attached
hereto as Exhibit A.
STATE STREET BANK AND TRUST COMPANY
Attest: /s/ Paul Kaminski By: /s/ Marguerite Summers
------------------------ -----------------------------
Dated: 8/1/97
contract\mf\custodia.n\cusmfsci.fsg
<PAGE>
STATE STREET BANK AND TRUST COMPANY
CUSTODIAN FEE SCHEDULE
USAA INVESTMENT TRUST
USAA MUTUAL FUND, INC.
USAA TAX EXEMPT FUND, INC.
USAA STATE TAX FREE TRUST
- --------------------------------------------------------------------------------
I. Custody, Portfolio and Fund Accounting Services - Mantain investment
ledgers, provide selected portfolio transactions, position and income
reports. Maintain general ledger, and capital stock accounts. Prepare
daily trial balance. Calculate net asset value daily. Provide selected
general ledger reports. Securities yield or market value quotations will
be provided to State Street by the fund or via State Streets Automated
Pricing service.
The administration fee shown below is an annual charge, in basis points,
billed and payable monthly, based on average monthly net assets.
ANNUAL FEES PER PORTFOLIO
-------------------------
Annual Full Service Fees
------------------------
First 50 Million 3.00 Basis Points
Next 50 Million 2.00 Basis Points
Next 100 Million 1.00 Basis Points
Excess .80 Basis Points
Minimum Monthly Charge WAIVED
II. Portfolio Trades - For Each Line Item Processed
-----------------------------------------------
State Street Bank Repos $ 7.00
DTC or Fed Book Entry $ 8.00
Boston/New York Physical $25.00
PTC Buy/Sell $20.00
All Other Trades $16.00
Maturity Collections (NY Physical) $ 8.00
Option Charge for each option written or
closing contract, per issue, per broker $25.00
Option expiration/Option exercised $15.00
Interest Rate Futures -- no security movement $ 8.00
Monitoring for calls and processing coupons --
for each coupon issue held -- monthly charge $ 5.00
Principal Reduction Payments Per Paydown $10.00
Interest/Dividend Claim Charges
(For items held at the Request of Traders
over record date in street form) $50.00
III. Holdings Charge
---------------
Per Security per Month (Domestic Securities Only) $ 5.00
<PAGE>
STATE STREET BANK AND TRUST COMPANY
CUSTODIAN FEE SCHEDULE
USAA INVESTMENT TRUST
USAA MUTUAL FUND, INC.
USAA TAX EXEMPT FUND, INC.
USAA STATE TAX FREE TRUST
- -------------------------------------------------------------------------------
IV. Affirmation Charge
------------------
Per Affirmation per Month $ 1.00
V. Global Custody
--------------
U.S. Equivalent Market Value 11.00 Basis Points
Euroclear 5.00 Basis Points
VI. Automated Pricing Via NAVigator
-------------------------------
Monthly Base Fee:
Funds with International Holdings $375.00
All other Funds $300.00
Monthly Quote Charge:
- Municipal Bonds via Muller Data $ 10.00
- Municipal Bonds via Kenny Information Systems $ 16.00
- Government, Corporate and Convertible Bonds
via Merrill Lynch $ 11.00
- Corporate and Government Bonds via Muller Data $ 11.00
- Options, Futures and Private Placements $ 6.00
- Foreign Equities and Bonds via Extel Ltd. $ 6.00
- Listed Equities, OTC Equities, and Bonds $ 6.00
- Corporate, Municipal, Convertible and
Government Bonds, Adjustable Rate Preferred
Stocks via IDSI $ 12.00
VII. Shareholder Check-Writing Service
---------------------------------
Per check presented for payment
(excluding postage) $ .65
VIII. Advertised Yield Service
------------------------
Annual Maintenance Fee:
For each portfolio maintained, monthly charge is based on the number of
holding as followed:
<PAGE>
STATE STREET BANK AND TRUST COMPANY
CUSTODIAN FEE SCHEDULE
USAA INVESTMENT TRUST
USAA MUTUAL FUND, INC.
USAA TAX EXEMPT FUND, INC.
USAA STATE TAX FREE TRUST
- -------------------------------------------------------------------------------
Holding per Portfolio Monthly Charge
--------------------- --------------
0 to 50 $250.00
50 to 100 $300.00
Over 100 $350.00
IX. Special Services
----------------
Fees for activities of a non-recurring nature such as fund consolidations
or reorganizations, extraordinary security shipments and the preparation
of special reports will be subject to negotiation. Fees for yield
calculation, securities lending, and other special items will be
negotiated separately.
X. Out-of-Pocket Expenses
----------------------
A billing for the recovery of applicable out-of-pocket expenses will be
made as of the end of each month. Out-of-pocket expenses include, but are
not limited to the following:
Telephone/Telex
Wire Charges ($5.25 per wire and $5.00 out)
Postage and Insurance (includes check writing postage)
Courier Service
Duplicating
Legal Fees
Supplies Related to Fund Records
Rush Transfer - $8.00 Each
Transfer Fees
Sub-Custodian Charges
Price Waterhouse Audit Letter
Federal Reserve Fee for Return Check items over $2,500 - $4.25
(Bill directly to USAA Transfer Agency Company)
GNMA Transfer - $15 each
PTC Deposit/Withdrawal for same day turnarounds - $50.00
<PAGE>
STATE STREET BANK AND TRUST COMPANY
CUSTODIAN FEE SCHEDULE
USAA INVESTMENT TRUST
USAA MUTUAL FUND, INC.
USAA TAX EXEMPT FUND, INC.
USAA STATE TAX FREE TRUST
USAA INVESTMENT TRUST
USAA MUTUAL FUND, INC.
USAA TAX EXEMPT FUND, INC.
USAA STATE TAX FREE TRUST
XXXXXXXXXXXXXXXXXXXXXXX STATE STREET BANK & TRUST CO.
BY: /s/ SHERRON KIRK BY: /s/ MARGUERITE SUMMERS
----------------------- --------------------------
Marguerite Summers
TITLE: TREASURER TITLE: VICE PRESIDENT
DATE: 7-10-97 DATE: 7/7/97
EXHIBIT 9(k)
USAA Transfer Agency Company
10750 Robert F. McDermott Freeway
San Antonio, TX 78288
Gentlemen:
Pursuant to Section 27 of the Transfer Agency Agreement dated as of
January 23, 1992 between USAA Mutual Fund, Inc. (the "Company") and USAA
Transfer Agency Company, (the "Transfer Agent") please be advised that the
Company has established two new series of its shares, namely, the Science &
Technology Fund and the First Start Growth Fund (the "Funds"), and please be
further advised that the Company desires to retain the Transfer Agent to render
transfer agency services under the Transfer Agency Agreement to the Funds in
accordance with the fee schedules attached hereto as Exhibit A.
Please state below whether you are willing to render such services in
accordance with the fee schedules attached hereto as Exhibit A.
USAA MUTUAL FUND, INC.
Attest: /s/ Michael D. Wagner By: /s/ Michael J. C. Roth
------------------------- ----------------------------
Secretary President
Dated: August 1, 1997
We are willing to render services to the Science & Technology Fund and the
First Start Growth Fund in accordance with the fee schedules attached hereto as
Exhibit A.
USAA TRANSFER AGENCY COMPANY
Attest: /s/ Alex Ciccone By: /s/ Joseph H. L. Jimenez
------------------------- -----------------------------
Assistant Secretary Vice President
Dated: August 1, 1997
<PAGE>
EXHIBIT 9(l)
Exhibit A
USAA TRANSFER AGENCY COMPANY
Fee Information for Services as
Plan, Transfer and Dividend Disbursing Agent
USAA MUTUAL FUND, INC.
Science & Technology Fund
- -------------------------------------------------------------------------------
General - Fees are based on an annual per shareholder account charge for
account maintenance plus out-of-pocket expenses. There is a minimum charge of
$2,000 per month applicable to the entire fund complex.
Annual Maintenance Charges - The annual maintenance charge includes the
processing of all transactions and correspondence. The fee is billable on a
monthly basis at the rate of 1/12 of the annual fee. USAA Transfer Agency
Company will charge for each open account from the month the account is opened
through January of the year following the year all funds are redeemed from the
account.
Science & Technology Fund - charge per account $23.50
USAA MUTUAL FUND, INC. USAA TRANSFER AGENCY COMPANY
Science & Technology Fund
By: /S/ MICHAEL J. C. ROTH By: /S/ JOSEPH H. L. JIMENEZ
------------------------ ----------------------------
Michael J. C. Roth Joseph H. L. Jimenez
President Vice President
Date: August 1, 1997 Date: August 1, 1997
contract\mf\transfer\ta-mfsci.yig
<PAGE>
EXHIBIT 9(m)
USAA TRANSFER AGENCY COMPANY
Fee Information for Services as
Plan, Transfer and Dividend Disbursing Agent
USAA MUTUAL FUND, INC.
First Start Growth Fund
- -------------------------------------------------------------------------------
General - Fees are based on an annual per shareholder account charge for
account maintenance plus out-of-pocket expenses. There is a minimum charge of
$2,000 per month applicable to the entire fund complex.
Annual Maintenance Charges - The annual maintenance charge includes the
processing of all transactions and correspondence. The fee is billable on a
monthly basis at the rate of 1/12 of the annual fee. USAA Transfer Agency
Company will charge for each open account from the month the account is opened
through January of the year following the year all funds are redeemed from the
account.
First Start Growth Fund - charge per account $23.50
USAA MUTUAL FUND, INC. USAA TRANSFER AGENCY COMPANY
First Start Growth Fund
By: /S/ MICHAEL J. C. ROTH By: /S/ JOSEPH H. L. JIMENEZ
------------------------- ----------------------------
Michael J. C. Roth Joseph H. L. Jimenez
President Vice President
Date: August 1, 1997 Date: August 1, 1997
contract\mf\transfer\ta-mfsci.fsg
EXHIBIT 10(e)
GOODWIN, PROCTER & HOAR LLP
COUNSELLORS AT LAW
EXCHANGE PLACE
BOSTON, MASSACHUSETTS 02109-2881
TELEPHONE (617) 570-1000
TELECOPIER (617) 523-1231
SEPTEMBER 30, 1997
USAA Mutual Fund, Inc.
USAA Building
9800 Fredericksburg Road
San Antonio, Texas 78288
Ladies and Gentlemen:
We hereby consent to the reference in Post-Effective Amendment No. 46 (the
"Amendment") to the Registration Statement (No. 2-49560) on Form N-1A of USAA
Mutual Fund, Inc. (the "Registrant"), a Maryland corporation, to (i) our
opinion with respect to the legality of the shares of the Registrant
representing interest in the Growth Fund, Income Fund, Money Market Fund,
Income Stock Fund, Growth & Income Fund and Short-Term Bond Fund series of the
Registrant, which opinion was filed with Post-Effective Amdnement No. 39 to the
Registration Statement, and (ii) our opinion with respect to the legality of
the shares of the Registrant representing interests in the Aggressive Growth
Fund series of the Registrant, which opinion was filed with Post-Effective
Amendment No. 43 to the Registration Statement.
We also hereby consent to the reference of this firm in the Statement of
Additional Information under the heading "General Information--Counsel" which
form a part of the Amendment and the filing of this consent as an exhibit to
the Amendment.
Very truly yours,
/s/ GOODWIN, PROCTER & HOAR LLP
------------------------------------
GOODWIN, PROCTER & HOAR LLP
EXHIBIT 11
CONSENT OF INDEPENDENT ACCOUNTANTS
The Shareholders and Board of Directors
USAA Mutual Fund, Inc.
We consent to the use of our reports incorporated herein by reference dated
September 3, 1997 on the Aggressive Growth, Growth, Growth & Income, Income
Stock, Income, Short-Term Bond, and Money Market Funds, separate funds of
USAA Mutual Fund, Inc. and to the references to our firm under the headings
"Financial Highlights" in the Funds' prospectuses.
/s/ KPMG Peat Marwick LLP
-------------------------------------
KPMG Peat Marwick LLP
San Antonio, Texas
September 30, 1997
<PAGE>
EXHIBIT 13(c)
SUBSCRIPTION
August 1, 1997
TO: Board of Directors
USAA Mutual Fund, Inc.
10750 Robert F. McDermott Freeway
San Antonio, TX 78288
Dear Sirs:
The undersigned hereby subscribes to 10 shares of the Science & Technology
Fund and 10 shares of the First Start Growth Fund series, on August 1, 1997,
with one cent par value, of USAA Mutual Fund, Inc. at a price of $10.00 per
share for each Fund and agrees to pay therefore upon demand, cash in the amount
of $100 to each of the named Funds.
Very truly yours,
USAA INVESTMENT MANAGEMENT COMPANY
/S/ MICHAEL J.C. ROTH
------------------------------
By: MICHAEL J. C. ROTH
President
contract\mf\subsci.fsg
EXHIBIT 14(a)
CUSTODIAL AGREEMENT
ARTICLE I
The Custodian may accept additional cash contributions on behalf of the
Depositor for a tax year of the Depositor. The total cash contributions are
limited to $2,000 for the tax year unless the contribution is a rollover
contribution described in section 402(c) (but only after December 31, 1992),
403(a)(4), 403(b)(8), 408(d)(3) or an employer contribution to a simplified
employee pension plan as described in section 408(k). Rollover contributions
before January 1, 1993, include rollovers described in section 402(a)(5),
402(a)(6), 402(a)(7), 403(a)(4), 403(b)(8), 408(d)(3), or an employer
contribution to a simplified employee pension plan as described in section
408(k).
ARTICLE II
The Depositor's interest in the balance in the custodial account is
nonforfeitable.
ARTICLE III
1. No part of the custodial funds may be invested in life insurance contracts,
nor may the assets of the custodial account be commingled with other property
except in a common trust fund or common investment fund (within the meaning of
section 408(a)(5).
2. No part of the custodial funds may be invested in collectibles (within the
meaning of section 408(m), except as otherwise permitted by section 408(m)(3)
which provides an exception for certain gold and silver coins and coins issued
under the laws of any state.
ARTICLE IV
1. Notwithstanding any provision of this agreement to the contrary, the
distribution of the Depositor's interest in the custodial account shall be made
in accordance with the following requirements and shall otherwise comply with
section 408(a)(6) and Proposed Regulations section 1.408-8, including the
incidental death benefit provisions of Proposed Regulations section
1.401(a)(9)-2, the provisions of which are incorporated by reference.
2. Unless otherwise elected by the time distributions are required to begin to
the Depositor under paragraph 3, or to the surviving spouse under paragraph 4,
other than in the case of a life annuity, life expectancies shall be
recalculated annually. Such election shall be irrevocable as to the Depositor
and the surviving spouse and shall apply to all subsequent years. The life
expectancy of a nonspouse beneficiary may not be recalculated.
3. The Depositor's entire interest in the custodial account must be, or begin
to be, distributed by the Depositor's required beginning date (April 1
following the calendar year end in which the Depositor reaches age 70 1/2). By
that date, the Depositor may elect, in a manner acceptable to the Custodian, to
have the balance in the custodial account distributed in:
(a) A single sum payment.
(b) An annuity contract that provides equal or substantially equal monthly,
quarterly, or annual payments over the life of the Depositor.
(c) An annuity contract that provides equal or substantially equal monthly,
quarterly, or annual payments over the joint and last survivor lives of the
Depositor and his or her designated beneficiary.
(d) Equal or substantially equal annual payments over a specified period that
may not be longer than the Depositor's life expectancy.
(e) Equal or substantially equal annual payments over a specified period that
may not be longer than the joint life and last survivor expectancy of the
Depositor and his or her designated beneficiary.
4. If the Depositor dies before his or her entire interest is distributed to
him or her, the entire remaining interest will be distributed as follows:
(a) If the Depositor dies on or after distribution of his or her interest has
begun, distribution must continue to be made in accordance with paragraph
3.
(b) If the Depositor dies before distribution of his or her interest has begun,
the entire remaining interest will, at the election of the Depositor
<PAGE>
or, if the Depositor has not so elected, at the election of beneficiary or
beneficiaries, either
(i) Be distributed by December 31 of the year containing the fifth
anniversary of the Depositor's death, or
(ii) Be distributed in equal or substantially equal payments over the life
or life expectancy of the designated beneficiary or beneficiaries,
starting by December 31 of the year following the year of the
Depositor's death. If, however, the beneficiary is the Depositor's
surviving spouse, then this distribution is not required to begin
before December 31 of the year in which the Depositor would have
turned age 70 1/2.
(c) Except where distribution in the form of an annuity meeting the
requirements of section 408(b)(3) and its related regulations has
irrevocably commenced distributions are treated as having begun on the
Depositor's required beginning date, even though payments may actually have
been made before that date.
(d) If the Depositor dies before his or her entire interest has been
distributed and if the beneficiary is other than the surviving spouse, no
additional cash contributions or rollover contributions may be accepted in
the account.
5. In the case of distribution over life expectancy in equal or substantially
equal annual payments, to determine the minimum annual payment for each year,
divide the Depositor's entire interest in the Custodial account as of the close
of business on December 31 of the preceding year by the life expectancy of the
Depositor (or the joint life and last survivor expectancy of the Depositor and
the Depositor's designated beneficiary, or the life expectancy of the
designated beneficiary, whichever applies). In the case of distributions under
paragraph (3), determine the initial life expectancy (or joint life and last
survivor expectancy) using the attained ages of the Depositor and designated
beneficiary as of their birthdays in the year the Depositor reaches age 70 1/2.
In the case of distribution in accordance with paragraph (4) (b)(ii), determine
life expectancy using the attained age of the designated beneficiary as of the
beneficiary's birthday in the year distributions are required to commence.
6. The owner of two or more individual retirement accounts may use the
"alternative method" described in Notice 88-38 1988-1 C.B. 524, to satisfy the
minimum distribution requirements described above. This method permits an
individual to satisfy these requirements by taking from one individual
retirement account the amount required to satisfy the requirement for another.
ARTICLE V
1. The Depositor agrees to provide the Custodian with information necessary for
the Custodian to prepare any reports required under section 408(i) and
Regulations sections 1.408-5 and 1.408-6.
2. The Custodian agrees to submit reports to the Internal Revenue Service and
the Depositor as prescribed by the Internal Revenue Service.
ARTICLE VI
Notwithstanding any other articles which may be added or incorporated, the
provisions of Articles I through III and this sentence will be controlling. Any
additional articles that are not consistent with section 408(a) and the related
regulations will be invalid.
ARTICLE VII
This agreement will be amended from time to time to comply with the provisions
of the Code and related regulations. Other amendments may be made with the
consent of the persons whose signatures appear below.
ARTICLE VIII
1. All assets in the Account shall be invested in such shares of one or more
Designated Investment Companies as the Depositor may from time to time specify.
The Depositor's instructions may relate to current contributions or to amounts
previously contributed (including earnings thereon) or to both. In the event
that the Custodian receives a contribution from the Depositor with respect to
which no investment direction is specifically applicable, or if any such
<PAGE>
investment direction is, in the opinion of the Custodian, unclear, the
Custodian may hold such amounts uninvested or return any such contributions
without liability for any loss, including any loss of income or appreciation,
and without liability for interest or any tax liability incurred by Depositor
pending receipt of instructions or clarification. For all purposes of this
Agreement, the term "Designated Investment Company" shall mean USAA INVESTMENT
TRUST or USAA MUTUAL FUND, INC. and any other regulated investment company for
which USAA INVESTMENT MANAGEMENT COMPANY (or any affiliate thereof) acts as
investment advisor and which is designated by USAA INVESTMENT MANAGEMENT
COMPANY as eligible for investment under this Agreement.
2. Except as otherwise permitted in paragraph 12 below, all contributions made
under this Agreement shall be deposited in the form of cash and shall be made
to the Custodian in accordance with such rules as the Custodian may establish.
Any contribution so made with respect to a tax year of the Depositor shall be
made prior to the due date of the Depositor's tax return (not including
extensions). Unless otherwise indicated in writing by the Depositor,
contributions shall be credited to the tax year in which they are received by
the Custodian. The Custodian, upon receipt of written instructions from the
Depositor, may exchange or cause to be exchanged shares of a Designated
Investment Company held by the Custodian on behalf of the Depositor for any
other shares of a Designated Investment Company available for investment
hereunder, subject to and in accordance with the terms and conditions of the
exchange privilege, as outlined in the current prospectuses of any such
Designated Investment Company and as may be agreed upon, in writing, from time
to time between the Custodian and USAA Investment Management Company. The
Depositor shall be the beneficial owner of the assets held in the Account. All
dividends and capital gains distributions received on shares of a Designated
Investment Company held in the Depositor's Account shall, unless received in
additional shares, be reinvested in shares of the Designated Investment Company
paying such dividends. If any distributions of the shares of a Designated
Investment Company may be received at the election of the Depositor in
additional shares or in cash or other property, the Custodian shall elect to
receive additional shares.
3. USAA INVESTMENT MANAGEMENT COMPANY may remove the Custodian at any time upon
thirty (30) days' notice in writing to the Custodian, and the Custodian may
resign at any time upon thirty (30) days' notice in writing to USAA INVESTMENT
MANAGEMENT COMPANY. Upon such resignation or removal, USAA INVESTMENT
MANAGEMENT COMPANY shall appoint a successor custodian, which successor
custodian shall be a "bank" as defined in Section 408(n) of the Code or another
person found qualified to act as a custodian of an Individual Retirement
Account by the Secretary of the Treasury or his delegate. Upon receipt by the
Custodian of written acceptance of such appointment by the successor custodian
or trustee, the Custodian shall transfer and pay over to such successor the
assets of the Account and all records pertaining thereto. The Custodian is
authorized, however, to reserve such sum of money as it may deem advisable for
payment of all its fees, compensation, costs, and expenses or for payment of
any other liabilities constituting a charge on or against the assets of the
Account or on or against the Custodian, with any balance of such reserve
remaining after the payment of all such items to be paid over to the successor
custodian or trustee. If within the thirty (30) day period provided for above,
USAA Investment Management Company has not appointed a successor custodian or
trustee which has accepted such appointment, the Custodian shall, unless it
elects to terminate the Custodial Account, appoint a successor custodian
itself.
4. The Custodian shall deliver, or cause to be delivered, to the Depositor all
notices, prospectuses, financial statements, proxies and
<PAGE>
proxy soliciting materials relating to Designated Investment Companies' shares
held for Depositor. The Custodian shall not vote any of the shares held
hereunder except in accordance with the written instructions of the Depositor.
5. (a) The Custodian shall, from time to time, in accordance with
instructions in writing from the Depositor (or the Depositor's
beneficiary if the Depositor is deceased), make distributions out of
the Account to the Depositor in the manner and amounts as may be
specified in such instructions. All such instructions shall be deemed
to cnstitute a certification by the Depositor (or the Depositor's
beneficiary if the Depositor is deceased) that the distribution
directed is one that the Depositor (or the Depositor's beneficiary if
the Depositor is deceased) is permitted to receive. Notwithstanding
the provision of Article IV above, the Custodian assumes (and shall
have) no responsibility to make any distribution to the Depositor (or
the Depositor's beneficiary if the Depositor is deceased) unless and
until such written instructions specify the occasion for such
distribution, the elected manner of distribution and any declaration
required by Article IV. Prior to making any such distribution from
the Account, the Custodian shall be furnished with any and all
applications, certificates, tax waivers, signature guarantees, and
other documents (including proof of any legal representative's
authority) deemed necessary or advisable by the Custodian, but the
Custodian shall not be liable for complying with written instructions
which appear on their face to be genuine, or for refusing to comply
if not satisfied such instructions are genuine, and assumes no duty
of further inquiry. Upon receipt of proper written instructions as
required above, the Custodian shall cause the assets of the Account
to be distributed in cash and/or in kind, as specified in such
written order. (b) Distribution of the assets of the Account shall be
made in accordance with the provisions of Article IV as the Depositor
(or the Depositor's beneficiary if the Depositor is deceased and has
not previously elected) shall elect by written instructions to the
Custodian; subject, however to the provisions of Sections 401(a)(9),
408(a)(6) and 408(b)(3) of the Code, the regulations promulgated
thereunder, and the following:
(i) No distribution from the Account shall be made in the form of an
annuity contract.
(ii) The recalculation of life expectancy of the Depositor and/or the
Depositor's spouse shall only be made at the written election of the
Depositor. The recalculation of life expectancy of the surviving
spouse shall only be made at the written election of the surviving
spouse.
(iii)If the Depositor dies before his/her entire interest in the Account
has been distributed, and if the designated beneficiary of the
Depositor is the Depositor's surviving spouse, the spouse may treat
the Account as his/her own individual retirement arrangement. This
election will be deemed to have been made if the surviving spouse
makes regular IRA contribution to the Account, makes a rollover to
or from such Account, or fails to receive a payment from the Account
within the appropriate time period applicable to the deceased
Depositor under Section 401(a)(9)(B) of the Code.
6. Any notice from the Custodian to the Depositor provided for in this
Agreement shall be effective if sent by regular mail to him at his last address
of record.
7. The Depositor hereby delegates to USAA Investment Management Company the
power to amend at any time and from time to time the terms and provisions of
the Agreement and hereby consents to such amendments, provided they shall
comply with all applicable provisions
<PAGE>
of the Code, the regulations thereunder and with any other governmental law,
regulation or ruling. Any such amendments shall be effective as of the date
specified in a written notice sent by first-class mail to the address of the
Depositor indicated by the Custodian's records. Notwithstanding the foregoing,
no amendment which increases the burdens of the Custodian shall take effect
without its prior written consent. Nothing in this paragraph 7 shall be
construed to restrict the Custodian's freedom to change or substitute fee
schedules in accordance with the provisions of the adoption agreement, and no
such change or substitution shall be deemed to be an amendment to this
Agreement.
8. The Custodian shall not be bound by any certificate, notice, order,
information or other communication unless and until it shall have been received
in writing at its place of business.
9. (a) The Custodian shall have the right to rely upon any information
furnished in writing by the Depositor. The Depositor and the
Depositor's legal representatives, as appropriate, shall always fully
indemnify the Custodian and USAA Investment Management Company and
save each of them harmless from any and all liability whatsoever
which may arise in connection with this Agreement and matters which
the Agreement contemplates, except that which arises due to the
Custodian's gross negligence, willful misconduct or lack of good
faith. The Custodian shall not be obligated or expected to commence
or defend any legal action or proceeding in connection with this
Agreement or such matters unless agreed upon by the Custodian and the
Depositor or said legal representatives and unless fully indemnified
for so doing to the Custodian's satisfaction.
(b) The Custodian shall be an agent for the Depositor to perform the
duties conferredon it by the Depositor. The parties do not intend to
confer any fiduciary duties on the Custodian and none shall be
implied. The Custodian shall not be liable (and does not assume any
responsibility for) the collection of contributions, the
deductibility of any contribution or the propriety of any
contributions under this Agreement, the selection of any shares of
any Designated Investment Company for the Account, or the purpose or
propriety of any distribution ordered in accordance with Article IV
or paragraph 5 of this Article VIII, which matters are the sole
responsibility of the Depositor or the Depositor's beneficiary, as
the case may be.
(c) The Custodian and USAA Investment Management Company shall not be
responsible for any losses, penalties or other consequences to the
Depositor or to any other person arising out of the making of any
contribution or withdrawal.
10. This Agreement together with the Application and Adoption Agreement
attached hereto and by this reference made a part hereof, constitutes the
entire agreement between the parties, and it shall be construed in accordance
with the laws of the State of Texas.
11. The Depositor shall have the right by written notice to the Custodian on a
form acceptable to the Custodian, to designate or to change a beneficiary to
receive any benefit to which such Depositor may be entitled in event of his
death prior to the complete distribution of such benefit. If no such
designation is in effect at the time of the Depositor's death, or if the
designated beneficiary has predeceased the Depositor, the Depositor's
beneficiary shall be his or her estate. The last designation filed with the
Custodian shall be controlling, and, whether or not it fully disposes the
Account, shall revoke all such other designations previously filed by the
Depositor.
12. (a) The Custodian shall have the right to receive rollover contributions
as described in the Code and if any property is so transferred to it
as a rollover contribution, such property shall be sold by the
<PAGE>
Custodian and the proceeds less any expenses, fees or commissions
reinvested as provided in paragraph 1 of this Article VIII. The
Custodian reserves the right to refuse to accept any property which
is not in the form of cash.
(b) The Custodian, upon written direction of the Depositor and after
submission to the Custodian of such documents as it may reasonably
require, shall transfer the assets held under this Agreement
(reduced by any amounts referred to in paragraph 3 of this Article
VIII) to a successor individual retirement account, or individual
retirement annuity (other than an endowment contract, for the
Depositor's benefit or to an exempt employee's trust established
under a plan which satisfies the qualification requirements of
Section 401(a) of the Code. Any amounts received or transferred by
the Custodian under this paragraph 12 shall be accompanied by such
records and other documents as the Custodian deems necessary to
establish the nature, value, and extent of the assets, and of the
various interests therein.
13. The benefits provided hereunder shall not be subject to alienation,
assignment, garnishment, attachment, execution or levy of any kind, and any
attempt to cause such benefits to be so subjected shall not be recognized,
except to such extent as may be required by law. Any pledging of assets in the
Account by the Depositor as security for a loan, or any loan or other extension
of credit from the Account to the Depositor shall be prohibited.
14. The Custodian may perform any of its administrative duties through such
other persons or entities as may be designated by the Custodian from time to
time with the prior approval of USAA Investment Management Company, except that
the Designated Investment Company shares must be registered in the name of the
Custodian or its nominee. No such delegation or subsequent change herein shall
be considered an amendment of this agreement.
15. In addition to the reports required by Article V, the Custodian shall cause
to be mailed to the Depositor in respect of each tax year an account of all
transactions affecting the Account during such year and a statement showing the
Account as of the end of such year. If, within sixty (60) days after such
mailing, the Depositor has not given the Custodian written notice of any
exception or objection thereto, the annual accounting shall be deemed to have
been approved, and in such case, or upon the written approval of the Depositor,
the Custodian shall be released, relieved and discharged with respect to all
matters and statements set forth in such accounting as though the account had
been settled by judgment or decree of a court of competent jurisdiction.
16. (a) The Custodian may charge the Depositor reasonable fees, including an
annual maintenance fee, for services hereunder according to
standard schedules of rates which may be in effect from time to time.
Initially, the fees payable to the Custodian shall be in the schedule
amount provided with the Agreement. Upon thirty (30) days' prior
written notice, the Custodian may substitute a fee schedule differing
from that schedule initially provided.
(b) Custodian's fees,any income (includingunrelated business income tax),
gift, state and inheritance taxes and other taxes of any kind
whatsoever, including transfer taxes incurred in connection with the
investment or reinvestment of the assets of the Account, that may be
levied or incurred by the Custodian in the performance of its duties
may be charged to the Account, with the right to liquidate shares of
any Designated Investment Company for this purpose, or (at
Custodian's option) to the Depositor.
<PAGE>
EXHIBIT 14(b)
CUSTODIAL AGREEMENT
ARTICLE I
The Custodian may accept additional cash contributions on behalf of the
Depositor for a tax year of the Depositor. The total cash contributions are
limited to $2,000 for the tax year unless the contribution is a rollover
contribution described in section 402(c) (but only after December 31, 1992),
403(a)(4), 403(b)(8), 408(d)(3) of the Code or an employer contribution to a
simplified employee pension plan as described in section 408(k). Rollover
contributions before January 1, 1993, include rollovers described in section
402(a)(5), 402(a)(6), 402(a)(7), 403(a)(4), 403(b)(8), 408(d)(3), or an
employer contribution to a simplified employee pension plan as described in
section 408(k).
ARTICLE II
The Depositor's interest in the balance in the custodial account is
nonforfeitable.
ARTICLE III
1. No part of the custodial funds may be invested in life insurance contracts,
nor may the assets of the custodial account be commingled with other property
except in a common trust fund or common investment fund [within the meaning of
section 408(a)(5)].
2. No part of the custodial funds may be invested in collectibles [within the
meaning of section 408(m), except as otherwise permitted by section 408(m)(3)
which provides an exception for certain gold and silver coins and coins issued
under the laws of any state.
ARTICLE IV
1. Notwithstanding any provision of this agreement to the contrary, the
distribution of the Depositor's interest in the custodial account shall be made
in accordance with the following requirements and shall otherwise comply with
section 408(a)(6) and Proposed Regulations section 1.408-8, including the
incidental death benefit provisions of Proposed Regulations section
1.401(a)(9)-2, the provisions of which are incorporated by reference.
2. Unless otherwise elected by the time distributions are required to begin to
the Depositor under paragraph 3, or to the surviving spouse under paragraph 4,
other than in the case of a life annuity, life expectancies shall be
recalculated annually. Such election shall be irrevocable as to the Depositor
and the surviving spouse and shall apply to all subsequent years. The life
expectancy of a nonspouse beneficiary may not be recalculated.
3. The Depositor's entire interest in the custodial account must be, or begin
to be, distributed by the Depositor's required beginning date (April 1
following the calendar year end in which the Depositor reaches age 70 1/2). By
that date, the Depositor may elect, in a manner acceptable to the Custodian, to
have the balance in the custodial account distributed in:
(a) A single sum payment.
(b) An annuity contract that provides equal or substantially equal monthly,
quarterly, or annual payments over the life of the Depositor.
(c) An annuity contract that provides equal or substantially equal monthly,
quarterly, or annual payments over the joint and last survivor lives of the
Depositor and his or her designated beneficiary.
(d) Equal or substantially equal annual payments over a specified period that
may not be longer than the Depositor's life expectancy.
(e) Equal or substantially equal annual payments over a specified period that
may not be longer than the joint life and last survivor expectancy of the
Depositor and his or her designated beneficiary.
4. If the Depositor dies before his or her entire interest is distributed to
him or her, the entire
<PAGE>
remaining interest will be distributed as follows:
(a) If the Depositor dies on or after distribution of his or her interest has
begun,distribution must continue to be made in accordance with paragraph 3.
(b) If the Depositor dies before distribution of his or her interest has begun,
the entire remaining interest will, at the election of the Depositor or, if
the Depositor has not so elected, at the election of beneficiary or
beneficiaries, either
(i) Be distributed by December 31 of the year containing the fifth
anniversary of the Depositor's death, or
(ii) Be distributed in equal or substantially equal payments over the life
or life expectancy of the designated beneficiary or beneficiaries,
starting by December 31 of the year following the year of the
Depositor's death. If, however, the beneficiary is the Depositor's
surviving spouse, then this distribution is not required to begin
before December 31 of the year in which the Depositor would have
turned age 70 1/2.
(c) Except where distribution in the form of an annuity meeting the
requirements of section 408(b)(3) and its related regulations has
irrevocably commenced, distributions are treated as having begun on the
Depositor's required beginning date, even though payments may actually have
been made before that date.
(d) If the Depositor dies before his or her entire interest has been
distributed and if the beneficiary is other than the surviving spouse, no
additional cash contributions or rollover contributions may be accepted in
the account.
5. In the case of distribution over life expectancy in equal or substantially
equal annual payments, to determine the minimum annual payment for each year,
divide the Depositor's entire interest in the Custodial account as of the close
of business on December 31 of the preceding year by the life expectancy of the
Depositor (or the joint life and last survivor expectancy of the Depositor and
the Depositor's designated beneficiary, or the life expectancy of the
designated beneficiary, whichever applies). In the case of distributions under
paragraph (3), determine the initial life expectancy (or joint life and last
survivor expectancy) using the attained ages of the Depositor and designated
beneficiary as of their birthdays in the year the Depositor reaches age 70 1/2.
In the case of distribution in accordance with paragraph (4) (b)(ii), determine
life expectancy using the attained age of the designated beneficiary as of the
beneficiary's birthday in the year distributions are required to commence.
6. The owner of two or more individual retirement accounts may use the
"alternative method" described in Notice 88-38 1988-1 C.B. 524, to satisfy the
minimum distribution requirements described above. This method permits an
individual to satisfy these requirements by taking from one individual
retirement account the amount required to satisfy the requirement for another.
ARTICLE V
1. The Depositor agrees to provide the Custodian with information necessary for
the Custodian to prepare any reports required under section 408(i) and
Regulations sections 1.408-5 and 1.408-6.
2. The Custodian agrees to submit reports to the Internal Revenue Service and
the Depositor as prescribed by the Internal Revenue Service.
<PAGE>
ARTICLE VI
Notwithstanding any other articles which may be added or incorporated, the
provisions of Articles I through III and this sentence will be controlling. Any
additional articles that are not consistent with section 408(a) and the related
regulations will be invalid.
ARTICLE VII
This agreement will be amended from time to time to comply with the provisions
of the Code and related regulations. Other amendments may be made with the
consent of the persons whose signatures appear below.
ARTICLE VIII
1. All assets in the Account shall be invested in such shares of one or more
Designated Investment Companies as the Depositor may from time to time specify.
The Depositor's instructions may relate to current contributions or to amounts
previously contributed (including earnings thereon) or to both. In the event
that the Custodian receives a contribution from the Depositor with respect to
which no investment direction is specifically applicable, or if any such
investment direction is, in the opinion of the Custodian, unclear, the
Custodian may hold such amounts uninvested or return any such contributions
without liability for any loss, including any loss of income or appreciation,
and without liability for interest or any tax liability incurred by Depositor
pending receipt of instructions or clarification. For all purposes of this
Agreement, the term "Designated Investment Company" shall mean USAA INVESTMENT
TRUST or USAA MUTUAL FUND, INC. and any other regulated investment company for
which USAA INVESTMENT MANAGEMENT COMPANY (or any affiliate thereof) acts as
investment advisor and which is designated by USAA INVESTMENT MANAGEMENT
COMPANY as eligible for investment under this Agreement.
2. Except as otherwise permitted in paragraph 12 below, all contributions made
under this Agreement shall be deposited in the form of cash and shall be made
to the Custodian in accordance with such rules as the Custodian may establish.
Any contribution so made with respect to a tax year of the Depositor shall be
made prior to the due date of the Depositor's tax return (not including
extensions). Unless otherwise indicated in writing by the Depositor,
contributions shall be credited to the tax year in which they are received by
the Custodian. The Custodian, upon receipt of written instructions from the
Depositor, may exchange or cause to be exchanged shares of a Designated
Investment Company held by the Custodian on behalf of the Depositor for any
other shares of a Designated Investment Company available for investment
hereunder, subject to and in accordance with the terms and conditions of the
exchange privilege, as outlined in the current prospectuses of any such
Designated Investment Company and as may be agreed upon, in writing, from time
to time between the Custodian and USAA Investment Management Company. The
Depositor shall be the beneficial owner of the assets held in the Account. All
dividends and capital gains distributions received on shares of a Designated
Investment Company held in the Depositor's Account shall, unless received in
additional shares, be reinvested in shares of the Designated Investment Company
paying such dividends. If any distributions of the shares of a Designated
Investment Company may be received at the election of the Depositor in
additional shares or in cash or other property, the Custodian shall elect to
receive additional shares.
3. USAA INVESTMENT MANAGEMENT COMPANY may remove the Custodian at any time upon
thirty (30) days' notice in writing to the Custodian, and the Custodian may
resign at any time upon thirty (30) days' notice in writing to USAA INVESTMENT
MANAGEMENT
<PAGE>
COMPANY. Upon such resignation or removal, USAA INVESTMENT MANAGEMENT COMPANY
shall appoint a successor custodian, which successor custodian shall be a
"bank" as defined in Section 408(n) of the Code or another person found
qualified to act as a custodian of an Individual Retirement Account by the
Secretary of the Treasury or his delegate. Upon receipt by the Custodian of
written acceptance of such appointment by the successor custodian or trustee,
the Custodian shall transfer and pay over to such successor the assets of the
Account and all records pertaining thereto. The Custodian is authorized,
however, to reserve such sum of money as it may deem advisable for payment of
all its fees, compensation, costs, and expenses or for payment of any other
liabilities constituting a charge on or against the assets of the Account or on
or against the Custodian, with any balance of such reserve remaining after the
payment of all such items to be paid over to the successor custodian or
trustee. If within the thirty (30) day period provided for above, USAA
Investment Management Company has not appointed a successor custodian or
trustee which has accepted such appointment, the Custodian shall, unless it
elects to terminate the Custodial Account, appoint a successor custodian
itself.
4. The Custodian shall deliver, or cause to be delivered, to the Depositor all
notices, prospectuses, financial statements, proxies and proxy soliciting
materials relating to Designated Investment Companies' shares held for
Depositor. The Custodian shall not vote any of the shares held hereunder except
in accordance with the written instructions of the Depositor.
5. (a) The Custodian shall, from time to time, in accordance with
instructions in writing from the Depositor (or the Depositor's
beneficiary if the Depositor is deceased), make distributions out of
the Account to the Depositor in the manner and amounts as may be
specified in such instructions. All such instructions shall be
deemed to constitute a certification by the Depositor (or the
Depositor's beneficiary if the Depositor is deceased) that the
distribution directed is one that the Depositor (or the Depositor's
beneficiary if the Depositor is deceased) is permitted to receive.
Notwithstanding the provision of Article IV above, the Custodian
assumes (and shall have) no responsibility to make any distribution
to the Depositor (or the Depositor's beneficiary if the Depositor is
deceased) unless and until such written instructions specify the
occasion for such distribution, the elected manner of distribution
and any declaration required by Article IV. Prior to making any such
distribution from the Account, the Custodian shall be furnished with
any and all applications, certificates, tax waivers, signature
guarantees, and other documents (including proof of any legal
representative's authority) deemed necessary or advisable by the
Custodian, but the Custodian shall not be liable for complying with
written instructions which appear on their face to be genuine, or
for refusing to comply if not satisfied such instructions are
genuine, and assumes no duty of further inquiry. Upon receipt of
proper written instructions as required above, the Custodian shall
cause the assets of the Account to be distributed in cash and/or in
kind, as specified in such written order.
(b) Distribution of the assets of the Account shall be made in
accordance with the provisions of Article IV as the Depositor
<PAGE>
(or the Depositor's beneficiary if the Depositor is deceased and
has not previously elected) shall elect by written instructions to
the Custodian; subject, however to the provisions of Sections
401(a)(9), 408(a)(6) and 408(b)(3) of the Code, the regulations
promulgated thereunder, and the following:
(i) No distribution from the Account shall be made in the form of an
annuity contract.
(ii)The recalculation of life expectancy of the Depositor and/or the
Depositor's spouse shall only be made at the written election of the
Depositor. The recalculation of life expectancy of the surviving
spouse shall only be made at the written election of the surviving
spouse.
(iii)If the Depositor dies before his/her entire interest in the Account
has been distributed, and if the designated beneficiary of the
Depositor is the Depositor's surviving spouse, the spouse may treat
the Account as his/her own individual retirement arrangement. This
election will be deemed to have been made if the surviving spouse
makes regular IRA contribution to the Account, makes a rollover to
or from such Account, or fails to receive a payment from the Account
within the appropriate time period applicable to the deceased
Depositor under Section 401(a)(9)(B) of the Code.
6. Any notice from the Custodian to the Depositor provided for in this greement
shall be effective if sent by regular mail to him at his last address of
record.
7. The Depositor hereby delegates to USAA Investment Management Company the
power to amend at any time and from time to time the terms and provisions of
the Agreement and hereby consents to such amendments, provided they shall
comply with all applicable provisions of the Code, the regulations thereunder
and with any other governmental law, regulation or ruling. Any such amendments
shall be effective as of the date specified in a written notice sent by
first-class mail to the address of the Depositor indicated by the Custodian's
records. Notwithstanding the foregoing, no amendment which increases the
burdens of the Custodian shall take effect without its prior written consent.
Nothing in this paragraph 7 shall be construed to restrict the Custodian's
freedom to change or substitute fee schedules in accordance with the provisions
of the adoption agreement, and no such change or substitution shall be deemed
to be an amendment to this Agreement.
8. The Custodian shall not be bound by any certificate, notice, order,
information or other communication unless and until it shall have been received
in writing at its place of business.
9. (a) The Custodian shall have the right to rely upon any information
furnished in writing by the Depositor. The Depositor and the
Depositor's legal representatives, as appropriate, shall always fully
indemnify the Custodian and USAA Investment Management Company and
save each of them harmless from any and all liability whatsoever
which may arise in connection with this Agreement and matters which
the Agreement contemplates, except that which arises due to the
Custodian's gross negligence, willful misconduct or lack of good
faith. The Custodian shall not be obligated or expected to commence
or defend any legal action or proceeding in connection with this
Agreement or such matters unless agreed upon by the Custodian and the
Depositor or said legal representatives
<PAGE>
and unless fully indemnified for so doing to the Custodian's
satisfaction.
(b) The Custodian shall be an agent for the Depositor to perform the
duties conferredon it by the Depositor. The parties do not intend to
confer any fiduciary duties on the Custodian and none shall be
implied. The Custodian shall not be liable (and does not assume any
responsibility for) the collection of contributions, the
deductibility of any contribution or the propriety of any
contributions under this Agreement, the selection of any shares of
any Designated Investment Company for the Account, or the purpose or
propriety of any distribution ordered in accordance with Article IV
or paragraph 5 of this Article VIII, which matters are the sole
responsibility of the Depositor or the Depositor's beneficiary, as
the case may be.
(c) The Custodian and USAA Investment Management Company shall not be
responsible for any losses, penalties or other consequences to the
Depositor or to any other person arising out of the making of any
contribution or withdrawal.
10. This Agreement together with the Application and Adoption Agreement
attached hereto and by this reference made a part hereof, constitutes the
entire agreement between the parties, and it shall be construed in accordance
with the laws of the State of Texas.
11. The Depositor shall have the right by written notice to the Custodian on a
form acceptable to the Custodian, to designate or to change a beneficiary to
receive any benefit to which such Depositor may be entitled in event of his
death prior to the complete distribution of such benefit. If no such
designation is in effect at the time of the Depositor's death, or if the
designated beneficiary has predeceased the Depositor, the Depositor's
beneficiary shall be his or her estate. The last designation filed with the
Custodian shall be controlling, and, whether or not it fully disposes the
Account, shall revoke all such other designations previously filed by the
Depositor.
12. (a) The Custodian shall have the right to receive rollover contributions
as described in the Code and if any property is so transferred to
it as a rollover contribution, such property shall be sold by the
Custodian and the proceeds less any expenses, fees or commissions
reinvested as provided in paragraph 1 of this Article VIII. The
Custodian reserves the right to refuse to accept any property which
is not in the form of cash.
(b) The Custodian, upon written direction of the Depositor and after
submission to the Custodian of such documents as it may reasonably
require, shall transfer the assets held under this Agreement (reduced
by any amounts referred to in paragraph 3 of this Article VIII) to a
successor individual retirement account, or individual retirement
annuity (other than an endowment contract, for the Depositor's
benefit or to an exempt employee's trust established under a plan
which satisfies the qualification requirements of Section 401(a) of
the Code. Any amounts received or transferred by the Custodian under
this paragraph 12 shall be accompanied by such records and other
documents as the Custodian deems necessary to establish the nature,
value, and extent of the assets, and of the various interests
therein.
13. The benefits provided hereunder shall not be subject to alienation,
assignment, garnishment, attachment, execution or levy of any kind, and any
<PAGE>
attempt to cause such benefits to be so subjected shall not be recognized,
except to such extent as may be required by law. Any pledging of assets in the
Account by the Depositor as security for a loan, or any loan or other extension
of credit from the Account to the Depositor shall be prohibited.
14. The Custodian may perform any of its administrative duties through such
other persons or entities as may be designated by the Custodian from time to
time with the prior approval of USAA Investment Management Company, except that
the Designated Investment Company shares must be registered in the name of the
Custodian or its nominee. No such delegation or subsequent change herein shall
be considered an amendment of this agreement.
15. In addition to the reports required by Article V, the Custodian shall cause
to be mailed to the Depositor in respect of each tax year an account of all
transactions affecting the Account during such year and a statement showing the
Account as of the end of such year. If, within sixty (60) days after such
mailing, the Depositor has not given the Custodian written notice of any
exception or objection thereto, the annual accounting shall be deemed to have
been approved, and in such case, or upon the written approval of the Depositor,
the Custodian shall be released, relieved and discharged with respect to all
matters and statements set forth in such accounting as though the account had
been settled by judgment or decree of a court of competent jurisdiction.
16. (a) The Custodian may charge the Depositor reasonable fees, including an
annual maintenance fee, for services hereunder according to standard
schedules of rates which may be in effect from time to time.
Initially, the fees payable to the Custodian shall be in the schedule
amount provided with the Agreement. Upon thirty (30) days' prior
written notice, the Custodian may substitute a fee schedule differing
from that schedule initially provided.
(b) Custodian's fees, any income (includingunrelated business income tax),
gift, state and inheritance taxes and other taxes of any kind
whatsoever, including transfer taxes incurred in connection with the
investment or reinvestment of the assets of the Account, that may be
levied or incurred by the Custodian in the performance of its duties
may be charged to the Account, with the right to liquidate shares of
any Designated Investment Company for this purpose, or (at Custodian's
option) to the Depositor.
<PAGE>
EXHIBIT 14(c)
CUSTODIAL AGREEMENT
INTRODUCTION TO THE USAA MUTUAL FUNDS SECTION CUSTODIAL ACCOUNT;
The attached documents are intended to establish an arrangement that satisfies
Section 403(b) of the Internal Revenue Code of 1986, as amended from time to
time (the "Code"). However, no Internal Revenue Service ruling has been
requested with respect to the tax consequences of the attached documents and
neither USAA INVESTMENT MANAGEMENT COMPANY nor the custodian, USAA Federal
Savings Bank, makes any representation with respect to such matters.
Arrangements such as those reflected in the attached documents should not be
entered into by any Employer or Employee who has not first obtained competent
independent professional advice on the tax and other consequences.
This material is not authorized for distribution unless preceded or accompanied
by an effective prospectus containing further information about the mutual
funds in which the assets of the account are to be invested.
ELIGIBILITY
Employees of organizations qualified under Section 501(c)(3) of the Code or
employees of an educational institution (including public school systems) are
eligible to arrange for tax-sheltered contributions to a Section 403(b)(7)
Custodial Account investing in mutual funds.
CONTRIBUTIONS
Each year, approximately 20 percent of an eligible Employee's includible
compensation (up to a maximum of $9,500, which dollar amount may be adjusted
upwards in the future by the Internal Revenue Service to reflect inflation) may
be contributed to a 403(b) account for that employee. It is also possible to
make additional catch-up contributions in certain limited circumstances.
Contributions must be made by the Employer and are arranged through a "salary
reduction agreement" such as the one enclosed. If your Employer has another
standard form which is used for all employees, it may be used instead of our
form. The $9,500 limit discussed above applies to the aggregate of all
"elective" contributions made for the Employee under all 403(b) accounts plus
certain elective contributions under other tax- qualified plans. If you exceed
this limit for any year, you may be subject to serious adverse tax
consequences. Accordingly, you should take care and consult with your tax
advisor to ensure that the limit is not exceeded.
In addition to the $9,500 per year limit on 403(b) "elective" contributions,
all 403(b) contributions are subject to annual contribution limits which are
quite complicated and depend on a variety of factors, including your age, your
years of service with an eligible employer, your participation in other
retirement programs, etc.
<PAGE>
If you choose, we will make all calculations for you. Requests for this service
may be made by calling 1-800-531-8292 (in San Antonio 456-9034) and asking for
a Tax-Sheltered Annuity representative.
Eligible contributions are not taxable as current income for federal income tax
purposes, giving you the benefit of investing money which would otherwise have
been paid in federal income tax. Your employer should exclude these amounts
from your federal gross income on your W-2, and you do not have to separately
deduct them on your annual federal income tax return. Amounts distributed from
a 403(b) account will be included in taxable gross income at that time.
(Contributions to the account may be subject to social security taxes or state
and local income taxes.)
DISTRIBUTION
The IRS requirements for mutual fund custodial accounts provide for
distribution to be made under several conditions. In general, you may begin to
receive assets held in your account at the time of termination of service,
death, attainment of age 59 1/2, or if you incur a "financial hardship." A
financial hardship will be present only if the Employee is faced with immediate
and heavy financial needs and does not have other resources reasonably
available to meet these needs. The determination that a financial hardship
exists and the amount needed to meet the hardship must be made by an
independent person or persons designated by the Employer. The Custodian will
not make any distribution based on financial hardship until it has received the
requisite written notice from the independent person or persons.
If you incur a "financial hardship," you will only be able to receive from the
403(b) account the "elective" contributions which the Employer has made on your
behalf under a "salary reduction agreement" and not any of the earnings in the
403(b) account.
In general, any distribution to you from the 403(b) account where you are
employed and before you reach age 59 1/2 may be subject to a 10 percent penalty
tax in addition to regular income tax. In addition, there are other special
taxes which may apply to your distribution. Further, in certain cases, your
distribution may be subject to mandatory 20% federal income tax withholding, if
it is not rolled over directly to an IRA or another Section 403(b) arrangement.
You should consult your tax advisor in conjunction with any election you make
with regard to distributions of amounts in your account.
INTRODUCTION
The Employer, the Employee and the Custodian, by signing the Application, have
established this tax-sheltered Custodial Account under Section 403(b)(7) of the
Internal Revenue Code. The Application is hereby made a part of this Agreement.
The Employer will make an initial contribution to the Account as indicated on
the
<PAGE>
Application. The Employer, the Employee and the Custodian agree that the terms
and conditions of the Custodial Account are as set forth in this Agreement.
This Agreement shall take effect upon acceptance by the custodian, USAA Federal
Savings Bank. As provided more fully in Article IV below, the Custodian is to
invest all contributions to the Custodial Account in shares of one or more
Designated Investment Companies.
ARTICLE I/DEFINITIONS
As used in this Agreement, the following terms shall have the meaning
hereinafter set forth, unless a different meaning is plainly required by the
context.
1. "Application" means the agreement between the Employer, the Employee and the
Custodian which incorporates this Agreement in order to establish a USAA Mutual
Funds Section 403(b)(7) Custodial Account for the Employee.
2. "Code" means the Internal Revenue Code of 1986, as amended from time to
time, or any successor thereto. References to the Code shall be deemed to
include any Treasury Regulations issued thereunder.
3. "Custodial Account" means the Section 403(b)(7) Custodial Account
established under this Agreement, and when the context so implies, refers to
the assets, if any, then held by the Custodian hereunder.
4. "Custodian" means USAA Federal Savings Bank, or any successor thereto as
provided in Article IX hereof.
5. "Designated Investment Company" means USAA MUTUAL FUND, INC., USAA
INVESTMENT TRUST, and any other regulated investment company (within the
meaning of Section 851(a) of the Code) for which USAA INVESTMENT MANAGEMENT
COMPANY (or any affiliate thereof) acts as investment advisor and which is
designated by USAA INVESTMENT MANAGEMENT COMPANY as eligible for investment
under this Agreement.
6. "Employee" means any person employed by the Employer on a full or part time
basis for whom the Employer and the Employee have agreed to execute an
Application. This term also includes any person formerly employed by the
Employer and who has assets in his Custodial Account.
7. "Employer" means the Employer named in the Application. The Employer shall
be an organization that is (i) described in Section 501(c)(3) of the Code and
exempt from tax under Section 501(a) of the Code, or (ii) an educational
organization described in Section 170(b)(1)(A)(ii) of the Code and which is a
State, political subdivision of a State, or an agency or instrumentality of one
or more of the foregoing.
<PAGE>
8. "ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time.
9. "Excess Contribution" means the amount of any contribution made by the
Employer on behalf of the Employee for any year which is an "excess
contribution" as that term is defined in Section 4973(c) of the Code.
10. "Excess Deferral" means the amount of any contribution made by the Employer
on behalf of the Employee for any year which is an "excess deferral" as that
term is defined in Section 402(g) of the Code.
11. "Rollover Contribution" means any amount distributed from an individual
retirement account or an individual retirement annuity described in Section 408
of the Code, the entire amount of which is attributable to a tax- sheltered
annuity contract described in Section 403(b) of the Code, or directly from such
a tax-sheltered annuity contract and then transferred to the Custodial Account
in accordance with Section 403(b)(8) or 408(d)(3)(A)(iii) of the Code.
12. "Sponsor" means USAA INVESTMENT MANAGEMENT COMPANY.
ARTICLE II/ESTABLISHMENT
OF CUSTODIAL ACCOUNT
The Custodian shall open and maintain a Custodial Account for the benefit of
the Employee. The Custodian may evidence its acceptance of its appointment by
sending to the Employee a confirmation of the Custodian's receipt of the first
contribution to the Custodial Account. The Employee shall be the beneficial
owner of all Designated Investment Company shares held in his Custodial
Account. The name, address and social security number of the Employee are set
forth in the Application, and it shall be the obligation of the Employee to
notify the Custodian of any address changes. The Custodian shall notify the
Employee of the identification number of the Custodial Account maintained for
his benefit hereunder.
ARTICLE III/CONTRIBUTIONS
1. EMPLOYER CONTRIBUTIONS. The Employer shall make contributions in cash to the
Custodian either in accordance with a salary reduction agreement between the
Employer and the Employee or otherwise. The initial contribution shall be
submitted to the Custodian with the executed Application. The aggregate
contribution by the Employer on behalf of the Employee during the first 12
months following the establishment of the Custodial Account shall be at least
$250; the Custodian shall not accept any contribution to the Custodial Account
of less than $25.
2. TRANSFERS FROM AND TO OTHER ACCOUNTS. The Employer or the Employee may cause
the transfer of assets acceptable to the Custodian from an existing custodial
account established
<PAGE>
under Section 403(b)(7) of the Code on behalf of the Employee and/or from an
existing annuity contract established under Section 403(b) of the Code on
behalf of the Employee to his Custodial Account hereunder. Such transferred
assets shall be treated as an Employer contribution for purposes of this
Agreement and shall be invested, distributed and otherwise dealt with as such;
provided, however, that such transferred amounts shall be disregarded in
applying the limitations on the amount of Employer contributions which can be
made hereunder. The Employee may cause the transfer of assets from the
Employee's Custodial Account hereunder to another custodial account established
under Section 403(b)(7) of the Code and/or to an annuity contract qualified
under Section 403(b) of the Code. It shall be the responsibility of the person
who causes a transfer under this Paragraph (i.e., the Employer or Employee),
and not the responsibility of the Custodian, the Sponsor, or any Designated
Investment Company, to determine and ensure that such transfer complies with
all applicable tax law requirements.
3. LIMITATIONS ON CONTRIBUTIONS. The Employee shall compute the maximum amount
that may be contributed on his behalf by the Employer for each tax year in
accordance with his "exclusion allowance" as that term is defined in Section
403(b)(2) of the Code. The Employee shall also determine the applicable
limitation(s) on contributions under Section 415 of the Code, and the Employee
shall have the right to avail himself of and make any of the elections provided
under such section.
In addition, the Employee shall determine the applicable limitation on
"elective" contributions to the Custodial Account under Section 402(g) of the
Code. Such computations and determinations shall be made at least annually, and
the Employee shall communicate the results to the Employer.
Neither the Custodian, the Sponsor nor any Designated Investment Company shall
have any duty or responsibility to determine that the amount of the initial or
any subsequent contribution made by the Employer on behalf of the Employee is
consistent with the terms of any applicable salary reduction agreement entered
into by and between the Employer and the Employee or to verify that such amount
is not in excess of the Employee's exclusion allowance under Section 403(b)(2)
of the Code or the applicable limitations under Sections 402(g) and 415 of the
Code.
4. ROLLOVER CONTRIBUTIONS. The Custodian may also accept Rollover Contributions
in cash as a deposit to the Custodial Account, provided, however, that any such
Rollover Contribution shall be held by the Custodian in a separate Custodial
Account for the benefit of the Depositor that consists only of Rollover
Contributions and the earnings thereof. Once transferred into the Employee's
Custodial Account, such assets shall be treated as an
<PAGE>
Employer contribution for purposes of this Agreement and shall be invested,
distributed and otherwise dealt with as such; provided, however, that such
Rollover Contributions shall be disregarded in applying the limitations on the
amount of Employer contributions which can be made hereunder. The Employee
shall execute such forms and provide such information as the Custodian may
require with respect to the source of Rollover Contributions. It shall be the
responsibility of the Employee, and not the responsibility of the Custodian,
the Sponsor, or any Designated Investment Company, to determine and ensure that
such Rollover Contribution complies with all applicable tax law requirements.
A Rollover Contribution also may be made in Designated Investment Company
shares and/or in other securities, provided that the Custodian reserves the
right to refuse to accept any property which is not in the form of cash or
Designated Investment Company shares. If securities, other than Designated
Investment Company shares, are accepted by the Custodian, they shall be sold by
the Custodian and the proceeds, after deduction of all expenses and charges
involved in the sale, shall be reinvested in accordance with Article IV.
ARTICLE IV/INVESTMENT OF
ACCOUNT ASSETS
1. CONTRIBUTIONS. All contributions to the Custodial Account shall be invested
in such shares of one or more Designated Investment Companies as the Employee
may direct. Such Designated Investment Company shares shall be acquired by the
Custodian at the price and in the manner in which such shares are then being
publicly offered by such Designated Investment Company. If such investment
instructions are not received by the Custodian, or are received but are, in the
opinion of the Custodian, unclear, the Custodian may hold or return all or a
portion of the contribution uninvested without liability for loss of income or
appreciation, and without liability for interest, pending receipt of proper
instructions or clarification. The Custodian shall advise the Employee of the
form and manner in which investment instructions must be given and shall not be
required to act or be held liable for failure to act upon improperly given
instructions.
2. CHANGES IN INVESTMENT. The Employee may from time to time direct the
Custodian to redeem any or all Designated Investment Company shares acquired by
the Custodian under this Agreement and to reinvest the proceeds in such other
Designated Investment Company shares as the Employee may specify. Any such
transaction must conform with the provisions of the current prospectus(es) of
the applicable Designated Investment Company(ies).
3. DIVIDENDS. All dividends or other distributions received by the Custodian on
shares of any Designated Investment Company held in the Custodial Account shall
(unless received in additional shares of such Designated Investment Company) be
reinvested in additional shares of
<PAGE>
the Designated Investment Company from which the distribution is made. If any
distribution on shares of a Designated Investment Company may be received at
the election of the shareholder in additional shares or cash or other property,
the Custodian shall elect to receive such distribution in additional shares.
4. REGISTRATION AND VOTING. All Designated Investment Company shares acquired
by the Custodian hereunder shall be registered in the name of the Custodian or
of its nominee. The Custodian shall deliver, or cause to be executed and
delivered, to the Employee all notices, prospectuses, financial statements,
proxies, and proxy soliciting materials relating to the Designated Investment
Company shares held in the Custodial Account. The Custodian shall not vote any
of the shares held hereunder except in accordance with written instructions
received from the Employee. Voting instructions which have not been timely
received by the Custodian shall not be voted by the Custodian.
ARTICLE V/DISTRIBUTIONS
1. TIME OF DISTRIBUTIONS.
(a) Subject to the remaining provisions of this Article V, distribution of
assets held in the Employee's Custodial Account shall begin at such
times as the Employee (or his beneficiary, if applicable) shall elect
by written notice to the Custodian at any time after the occurrence of
the earliest of these events:
(1) The Employee's
(a) separation from service with the Employer;
(b) disability (within the meaning of Section 72(m)(7) of the
Code);
(c) death;
(d) attainment of age 59 1/2.
(2) a financial hardship of the Employee, as determined by an
independent person or persons designated by the Employer.
"Financial hardship" shall include a financial need of the Employee
because of sickness, temporary disability, or any other immediate and
heavy financial need of the Employee, provided, however, that the term
financial hardship shall be limited so as to conform to the
requirements
<PAGE>
of Section 403(b)(7) of the Code. No distribution based on financial
hardship may exceed the amount determined to be required to meet the
immediate financial need created by the hardship and not reasonably
available from other resources of the Employee.
Effective in 1989, a distribution because of financial hardship is
limited to an Employee's "elective" contributions not previously
distributed, and the earnings on such contributions will not be
distributable on account of financial hardship. Any distribution prior
to age 59 1/2 even on account of a financial hardship, may subject the
Employee to a 10 percent penalty tax on the distribution.
No distribution based on financial hardship shall be made by the
Custodian until its receipt of written notice from such independent
person (or persons) that a qualifying hardship has been determined and
stating the amount required to be distributed to meet that hardship.
(b) If, and only if, contributions have been made to the Custodial Account
under this Agreement after December 31, 1986 then, subject to the
provisions of Paragraph 2(f), the distribution to an Employee of
amounts under this Agreement shall begin no later than the April 1
following the close of the calendar year in which the Employee attains
age 70 1/2 (the "Required Distribution Date"). Notwithstanding the
foregoing, the Required Distribution Date for any Employee who
attained age 70 1/2 before January 1, 1988 shall be no earlier than
the April 1 next following the calendar year in which the Employee
terminates employment.
(c) The Custodian shall not be responsible for making any distributions
until such time as it has received written instructions from the
Employee (or his beneficiary, if applicable) to begin making
distributions, and, in the case of financial hardship, it has received
the written notice of the designated independent person or persons.
(d) At any time before the commencement of distributions, the Employee (or
his beneficiary, if applicable, subject to the restrictions in
paragraph 4) shall instruct the Custodian of the method of
distribution. Upon receipt by the Custodian of any and all
certificates and other documents requested by the Custodian, the
Custodian will comply with the written instructions of the Employee
(or his beneficiary, if applicable) to make distribution in accordance
with one of the methods of distribution set forth.
<PAGE>
In the event that the Employee (or his beneficiary, if
applicable)fails to properly elect a method of distribution of his
Custodial Account, installment payments pursuant to sub-paragraph (b)
of paragraph 2 shall be made to the Employee (or his beneficiary) on a
monthly basis over a 10-year period if a systematic withdrawal plan is
available for the Designated Investment Company shares held in the
Custodial Account and if the assets in such Account are determined
sufficient by the Sponsor. If such a plan is unavailable and/or if
such assets are insufficient, the value of the shares held in the
Custodial Account will be distributed in a single lump sum in cash.
2. METHODS OF DISTRIBUTION.
(a) The value of the Custodial Account may be distributed in one of the
following ways:
(1) A single sum payment, in cash and/or in kind, consisting of the
entire balance in the Custodial Account; or a single sum payment, in
cash and/or in kind, consisting of part of the balance in the
Custodial Account with the remainder distributed pursuant to
sub-paragraph (b) or (c);
(2) In installments, in cash and/or in kind, over a period of years
not to exceed the life expectancy of the Employee or the joint life
and last survivor expectancy of the Employee and his beneficiary. The
installment payments shall be made in approximately equal amounts or
approximately equal fractions of the Employee's Custodial Account and
may be paid in monthly or other regular increments as elected by the
Employee and as agreed to by the Custodian.
(3) By the purchase and distribution of an annuity contract, utilizing
all available assets of the Custodial Account, from an insurance
company designated by the Employee, with either fixed or variable
annuity payments for the life of the Employee or, if the Employee so
elects, for the lives of the Employee and his beneficiary. Such policy
may provide for installment payments over a period measured by the
life expectancy of the Employee or the joint life expectancy of the
Employee and his beneficiary and the survivor, or over a shorter
period.
If the Employee elects the method of distribution described in (3)
above, the annuity contract must satisfy the requirements of Section
401(a)(9) of the Code. If the Employee elects the
<PAGE>
method of distribution described in (2), the annual payment required
to be made by the Employee's Required Distribution Date is for the
calendar year the Employee reached age 70 1/2. Annual payments for
subsequent years, including the year the Employee's Required
Distribution Date occurs, must be made by December 31 of that year.
(4) In the case of an Eligible Rollover Distribution, by a Direct
Rollover to an Eligible Retirement Plan, an Eligible Rollover
Distribution is any distribution of all or any portion of the balance
to the credit of the Employee, except that an Eligible Rollover
Distribution does not include: any distribution that is one of a
series of substantially equal periodic payments (not less frequently
than annually) made for the life (or life expectancy) of the Employee
or the joint lives (or life expectancies) of the Employee and the
Employee's designated beneficiary, or for a specified period of ten
years or more; any distribution to the extent such distribution is
required under Section 401(a)(9) of the Code; and the portion of any
distribution that is not includible in gross income. An Eligible
Retirement Plan is an individual retirement account describedin
Section 408(a) of the Code, an individual retirement annuity described
in Section 408(b) of the Code, an annuity or custodial account
described in Section 403(b) of the Code. A Direct Rollover is a
payment by the Custodian to the Eligible Retirement Plan specified by
the Employee.
(b) If, and only if, contributions have been made to the Custodial Account
under this Agreement after December 31, 1986, the method of
distribution
(1) may not extend the payment of such Employee's benefits beyond the
life expectancy of the Employee or the joint life and last survivor
expectancy of the Employee and his beneficiary (determined using
attained ages as of the calendar year in which payments commence under
Section 1.72-9 of the Treasury Regulations) and
(2) if someone other than the Employee's spouse is the beneficiary,
then the period of years over which installment payments are to be
paid shall be such that any period of years remaining as of the
calendar year in which the Employee attains age 70 1/2 or any
subsequent calendar year shall meet the minimum distribution
<PAGE>
incidental benefit requirement which shall be determined in accordance
with the regulations promulgated under Section 401(a)(9) of the Code.
(c) Notwithstanding the foregoing, if the value of the Custodial Account
at the time distribution is to be made or commenced is less than $250,
the full amount in the Custodial Account shall be distributed as a
single-sum payment in cash.
(d) The Employee (or his beneficiary, if applicable) shall be responsible
for insuring that distributions are made in accordance with this
Agreement and with all requirements of applicable law. The Custodian
shall have no responsibility regarding the method and timing of
distributions other than to follow the written instructions of the
Employee (or his beneficiary, if applicable).
(e) In the case of distributions to be made over the life expectancy of
the Employee (or over the joint lives of the Employee and his
beneficiary or the life expectancy of the beneficiary) in equal or
substantially equal annual payments, to determine the minimum annual
payments, to determine the minimum annual payment for each year,
divide the Employee's entire interest in the Custodial Account as of
the close of business on December 31 of the preceding year by the life
expectancy of the Employee (or the joint life and last survivor
expectancy of the Employee and his beneficiary, or the life expectancy
of the beneficiary, whichever applies). In the case of distributions
under paragraph 2, determine the initial life expectancy (or joint
life and last survivor expectancy) using the attained ages of the
Employee and beneficiary as of their birthdays in the year the
Employee reaches age 70 1/2. In the case of distributions in
accordance with paragraph 4, determine life expectancy using the
attained age of the beneficiary as of the beneficiary's birthday in
the year distributions are required to commence. The recalculation of
the life expectancy of the Employee and/or the Employee's spouse shall
only be made at the written election of the Employee. The
recalculation of the life expectancy of the Employee's surviving
spouse shall only be made at the written election of the surviving
spouse. Any recalculation of the Employee's and/or spouse's life
expectancy will be done annually using their attained ages as of their
birthdays in the year for which the minimum
<PAGE>
annual payment is being determined. The life expectancy of a
beneficiary (other than the spouse) will not be recalculated. The
minimum annual payment may be made in a series of installments (e.g.,
monthly, quarterly, etc.) as long as the total payments for the year
made by the date required are not less than the minimum amounts
required.
(f) If the Employee maintains one or more 403(b) accounts or annuities
with any institution other than the Custodian, the Employee may elect
to withdraw the minimum distribution required under sub-paragraph (e)
above from such other accounts or annuities.
(g) Within a reasonable time period before making an Eligible Rollover
Distribution, the Custodian shall provide an explanation to the
Employee of his right to elect a Direct Rollover and the income tax
withholding consequences of not electing a Direct Rollover.
3. DESIGNATION OF BENEFICIARY.
The Employee may designate and change his beneficiary or beneficiaries under
this Agreement on a form acceptable to the Custodian for such purpose. A
designation of beneficiary hereunder shall not become effective until it has
been filed with the Custodian. If no such designation is in effect at the time
of the Employee's death, the beneficiary shall be the Employee's surviving
spouse, or, if there is no surviving spouse, then the estate of the Employee.
The balance in the Custodial Account at the death of the Employee shall be
distributed to such beneficiary of beneficiaries. Such beneficiary shall have
the right to determine the timing and method of distribution, subject to any
applicable restrictions contained in this Article V.
4. DEATH BENEFITS. If the Employee dies before his entire interest is
distributed to him, the entire remaining interest will be distributed as
follows:
(a) If the Employee dies on or after his Required Distribution Date,
distribution must continue to be made in accordance with paragraph 2.
(b) If the Employee dies before his Required Distribution Date, the entire
remaining interest will, at the election of the beneficiary, either
(i) be distributed by the December 31 of the year containing the fifth
anniversary of the Employee's death, or (ii) be distributed in equal
or substantially equal payments over the life or life expectancy of
the beneficiary or (iii) by the purchase of an annuity contract. The
<PAGE>
election of either (i), (ii) or (iii) must be made by December 31 of
the year following the year of the Employee's death. If the
beneficiary does not elect either of the distribution options
described in (i), (ii) and (iii), distribution will be made in
accordance with (ii) if the beneficiary is the Employee's surviving
spouse and in accordance with (i) if the beneficiary is anyone other
than the surviving spouse. In the case of distributions under (ii) or
(iii), distributions must commence by December 31 of the year
following the year of the Employee's death. If the Employee's spouse
is the beneficiary, distributions need not commence until December 31
of the year the Employee would have attained age 70 1/2, if later.
(c) Following the death of the Employee and until distribution of the
Custodial Account has been completed, the beneficiary shall have the
right to control the investment of the assets of the Custodial Account
to the same extent as the Employee had such right under Article IV.
(d) If the beneficiary dies before receiving the entire balance of the
Custodial Account, such balance shall be paid to the executor of the
beneficiary's estate.
(e) If the Employee's spouse is the beneficiary, and is entitled to
receive an Eligible Rollover Distribution, she may direct the
Custodian to make a Direct Rollover of the Eligible Rollover
Distribution to an individual retirement account described in Section
408(a) of the Code or an individual retirement annuity described in
Section 408(b) of the Code. Within a reasonable time period before
making an Eligible Rollover Distribution, the Custodian shall provide
an explanation to the surviving spouse of her right to elect a Direct
Rollover and the income tax consequences of not electing a Direct
Rollover.
5. DISTRIBUTION OF EXCESS CONTRIBUTIONS AND EXCESS DEFERRALS.
Any provision herein to the contrary notwithstanding, if the Employee notifies
the Custodian in writing within the time prescribed by law (if any) that all or
any portion of a contribution made on behalf of the Employee was an Excess
Contribution or an Excess Deferral, then the Custodian may distribute, within
the time prescribed by law (if any), to the Employee Designated Investment
Company shares and/or cash representing the amount of
<PAGE>
such Excess Contribution or Excess Deferral, and in either case, the net income
attributable thereto, reduced by any administrative charges allocable to the
Excess Contribution or Excess Deferral.
ARTICLES VI/PROTECTION OF EMPLOYEE BENEFITS
1. NON-FORFEITABLE. The Custodial Account has been created for the exclusive
benefit of the Employee and his beneficiaries. The interest of the Employee in
the balance in the Custodial Account shall at all times be non-forfeitable, but
shall be subject to the fees, expenses and charges described in Article VII.
2. NON-ALIENABLE. Except as provided in Article V, no interest, right or claim
in or to any part of the Custodial Account or any payment therefrom shall be
assignable, transferable, or subject to sale, mortgage, pledge, hypothecation,
commutation, anticipation, garnishment, attachment, execution, or levy of any
kind, and the Custodian shall not recognize any attempt to assign, transfer,
sell, mortgage, pledge, hypothecate, commute, anticipate, garnish, attach,
execute upon or levy upon the same, except to the extent required by law.
ARTICLE VII/REPORTING,
CUSTODIAN FEES AND
EXPENSES OF THE ACCOUNT
1. FURNISHING OF DATA. The Employee agrees to provide at such times and in such
manner as may be requested by the Custodian, such information as may be
necessary for the Custodian to prepare any reports required by the Internal
Revenue Service, the Department of Labor or any other governmental agency.
2. REPORTS BY CUSTODIAN. The Custodian agrees to submit reports to the Internal
Revenue Service, other government agencies, and the Employee at such times and
in such manner and containing such information as may be prescribed as the
responsibility of the Custodian by applicable statues and regulations
thereunder.
3. CUSTODIAN FEES AND EXPENSES OF ACCOUNT. The Custodian shall advise the
Employer and the Employee of its fee schedule at the time of the execution of
the initial Application. All fees of the Custodian in the performance of its
duties hereunder may be charged against the Custodial Account in such manner as
may be determined by the Custodian, or at the Custodian's option, may be paid
by the Employer or the Employee directly. Upon thirty (30) days' prior written
notice, the Custodian may substitute a different fee schedule. The Custodian's
fees, any income or other taxes of any kind that may be levied or assessed in
respect to the assets of the Custodial Account, and all other administrative
expenses incurred by the Custodian in the performance of its duties, including
fees for legal services rendered to the Custodian, may be reserved by the
Custodian and charged to the Custodial
<PAGE>
Account, with the right to liquidate Designated Investment Company shares for
this purpose.
ARTICLE VIII/CONCERNING
THE CUSTODIAN
1. ANNUAL REPORT. The Custodian shall keep adequate records of transactions it
is required to perform hereunder. Not later than sixty (60) days after the
close of each calendar year or after the Custodian's resignation or removal
pursuant to Article IX, the Custodian shall render to the Employee a written
report or reports reflecting the transactions effected by it during such period
and the assets of the Custodial Account at the close of the period. Sixty (60)
days after rendering such reports(s), the Custodian shall, to the extent
permitted by applicable law, be forever released and discharged from all
liability and accountability to anyone with respect to its acts and
transactions shown in or reflected by such report(s), except with respect to
those as to which the recipient of such report(s) shall have filed written
objections with the Custodian within the later such sixty (60) day period.
2. ERISA REQUIREMENTS. Certain ERISA requirements will apply if the Custodial
Account and this Agreement are determined to constitute, or to be a part of, an
"employee pension benefit plan" subject to Title I of ERISA. This may occur if,
for example, the Employer makes any contributions on behalf of an Employee
other than the elective contributions contemplated herein. If the Custodial
Account becomes subject to Title I of ERISA, the Employer shall be responsible
for assuring that the Custodial Account complies with all requirements of the
provisions of Title I. The Custodian, the Employer and the Employee shall
furnish to one another such information relevant to the Custodial Account as
may be required in that respect.
3. DELEGATION OF AUTHORITY. The Custodian may perform any of its administrative
duties through such other persons or entities as may be designated from time to
time by the Custodian, with the prior approval of the Sponsor, except that
Designated Investment Company shares must be registered as provided in
paragraph 4 of Article IV. No such delegation or subsequent change therein
shall be considered an amendment of this Agreement. The Custodian shall not be
liable (and assumes no responsibility) for the collection of contributions, the
tax exclusion of any contribution or its propriety under this Agreement, or the
purpose, propriety, or timeliness of any distribution ordered in accordance
with Article V.
4. LIABILITY OF CUSTODIAN. The Custodian's liability under this Agreement and
matters which it contemplates shall be limited to matters arising from the
Custodian's negligence or willful misconduct. The Custodian shall not be
obligated or expected to commence or defend any legal action or proceeding in
connection
<PAGE>
with this Agreement unless agreed upon by the Custodian, the Employer and the
Employee and unless fully indemnified for so doing to the Custodian's
satisfaction.
5. RELIANCE ON DOCUMENTS. The Custodian may conclusively rely upon and shall be
protected in acting upon any written order from the Employer or the Employee or
his beneficiary or any other notice, request, consent, certificate or other
instrument or paper believed by it to be genuine and to have been properly
executed and, so long as it acts in good faith, in taking or omitting to take
any other action in reliance thereon.
6. CASH BALANCES. The Custodian shall not be liable for interest on any cash
balances maintained in the Custodial Account.
ARTICLE IX/RESIGNATION
OR REMOVAL OF CUSTODIAN
1. WITH RESPECT TO A CUSTODIAL ACCOUNT. Except as otherwise provided in
paragraph 2 of this Article IX, the Custodian may resign at any time upon
thirty (30) days' notice in writing to the Employer and the Employee, and may
be removed by the Employee at any time upon thirty (30) days' notice in writing
to the Custodian and the Employer. Upon such resignation or removal, the
Employee shall appoint a successor custodian or trustee, which successor shall
be a "bank" as defined in Section 401(d)(1) of the Code. Upon receipt by the
Custodian of written acceptance of such appointment by the successor custodian
or trustee, the Custodian shall transfer and pay over to such successor the
assets of the Custodial Account and all records pertaining thereto. The
Custodian is authorized, however, to reserve such sum of money as it may deem
advisable for payment of all its fees, compensation, costs, and expenses or for
payment of any other liabilities constituting a charge on or against the assets
of the Custodial Account or on or against the Custodian, with any balance of
such reserve remaining after the payment of all such items to be paid over to
the successor custodian or trustee. If within the thirty (30) day period
provided for, the Employee has not appointed a successor custodian or trustee
which has accepted such appointment, the Custodian shall, unless it elects to
terminate this Agreement, appoint a successor custodian itself.
2. WITH RESPECT TO ALL CUSTODIAL ACCOUNTS. The Sponsor may remove the Custodian
at any time upon thirty (30) days' notice in writing to the Custodian and the
Custodian may resign at anytime upon thirty (30) days' notice in writing to the
Sponsor. Upon such resignation or removal, the Sponsor shall appoint a
successor custodian, which successor custodian shall be a "bank" as defined in
Section 401(d)(1) of the Code and the provisions of paragraph 1 of this Article
IX shall apply with respect to the transfer of custodianship to such successor
custodian. The provisions of this paragraph 2 shall apply if,
<PAGE>
and only if, the resignation or removal of the Custodian relates to all Section
403(b)(7) Custodial Accounts established pursuant to agreements comparable to
this Agreement.
ARTICLE X/AMENDMENT
1. BY SPONSOR. The Employee also delegates to the Sponsor the Employee's rights
so to amend, provided that the Sponsor amends in the same manner all agreements
comparable to this one under which such power has been delegated to it. Such an
amendment by the Sponsor shall be communicated in writing to the Employee, the
Employer and the Custodian.
2. CHANGES IN CUSTODIAN'S FEE SCHEDULE. This Article X shall not be construed
to restrict the Custodian's freedom to change or substitute fee schedules in
the manner provided by paragraph 3 of Article VII, and no such change or
substitution shall be deemed to be an amendment of this Agreement.
3. LIMITATIONS ON AMENDMENTS. Notwithstanding the foregoing, no amendment shall
be made which would:
(a) cause or permit any part of the assets in the Custodial Account to be
diverted to purposes other than for the exclusive benefit of the
Employee and/or his beneficiaries, or cause or permit any portion of
such assets to revert to or become the property of the Employer:
(b) increase the burdens of the Custodian without its prior written
consent; or
(c) retroactively deprive the Employee of any benefit to which he was
entitled under the Agreement by reason of contributions made by the
Employer, unless such modification or amendment is necessary to
conform the Agreement to, or satisfy the conditions of, any law,
governmental regulation or ruling, and to permit the Agreement and
Custodial Account to meet the requirements of Section 403(b) of the
Code, or any similar statute enacted in lieu thereof, and any such
retroactive modification or amendment must be pursuant to an opinion
of counsel that it is necessary or advisable to conform the Agreement
to the requirements for qualification under Section 403(b) of the
Code.
ARTICLE XI/TERMINATION OF CUSTODIAL ACCOUNT
1. VOLUNTARY TERMINATION. With respect to amounts not yet earned by the
Employee the salary reduction agreement between the Employee and the Employer
may be terminated by either the Employee or the Employer by
<PAGE>
giving written notice to the other. Copies of such notice shall be sent
forthwith to the Custodian. Unless otherwise mutually agreed upon by the
Employer and the Employee, any such termination shall take effect as of the
last day of the month next following the month in which such written notice
shall have been given, the Employee's compensation level shall be increased by
the amount by which it otherwise would be reduced pursuant to any applicable
salary reduction agreement and the obligations under this Agreement of the
Employer with respect to future pay periods shall cease.
2. NO SUCCESSOR CUSTODIAN. If, within the time specified in paragraph 1 of
Article IX after the Custodian's resignation or removal, the Employee has not
appointed a successor Custodian which has accepted such appointment, termination
of the Custodial Account may be effected by the Custodian by distributing all
assets thereof in a lump sum in kind to the Employee (or his beneficiary, if
applicable), subject to the Custodian's right to reserve funds as provided in
Article VII. Upon such termination of the Custodial Account, this Agreement
shall terminate and have no further force and effect, and the Custodian shall be
relieved from all further liability with respect to this Agreement, the
Custodial Account, and all assets thereof so distributed.
3. TERMINATION ON DISQUALIFICATION. The Agreement shall terminate as to the
Employee if the Internal Revenue Service declares that this Custodial Account
does not constitute a tax-qualified custodial account under Section 403(b)(7)
of the Code. On such termination of this Agreement, all assets in the Custodial
Account shall be distributed in kind by the Custodian to the Employee (or his
beneficiary, if applicable), subject to the Custodian's right to reserve funds
as provided in Article VII.
4. TERMINATION ON DISTRIBUTION. This Agreement shall terminate as to the
Employee when all assets held in the Custodial Account for the Employee have
been distributed.
ARTICLE XII/MISCELLANEOUS
1. APPLICABLE LAW. This Agreement shall be construed, administered and enforced
according to the laws of the Commonwealth of Massachusetts; provided, however,
that it is intended that this Agreement create a tax-qualified custodial
account under Section 403(b)(7) of the Code and this Agreement shall be so
construed and limited and the powers hereunder exercised so as to accomplish
the purpose.
2. PRONOUNS. Whenever used in this Agreement, the masculine pronoun is to be
deemed to include feminine. The singular form, whenever used herein, shall mean
or include the plural form where applicable, and vice versa.
<PAGE>
3. NOTICES. Any notices, accounting or other communication which the Custodian
may give the Employer or the Employee shall be deemed given when mailed to the
Employer or Employee at the latest address which has been furnished to the
Custodian. Any notice or other communication which the Employer or Employee may
give to the Custodian shall not become effective until actual receipt of said
notice by the Custodian.
4. SEPARABILITY. If any provision of this Agreement shall be for any reason
invalid or unenforceable, the remaining provisions shall, nevertheless,
continue in effect and shall not be invalidated thereby unless they are
rendered unconscionable, inadequate, or incapable of being interpreted as a
result of the deletion of the invalid or unenforceable portions of the
Agreement.
5. SUCCESSORS. This Agreement shall be binding upon and shall inure to the
benefit of the successor in interest of the parties hereto.
6. NO EMPLOYMENT CONTRACT. This Agreement shall not be deemed to constitute a
contract of employment between the Employer and the Employee, nor shall any
provision hereof restrict the right of the Employer to discharge the Employee
or of the Employee to terminate his employment.
7. If the Custodial Account and this Agreement are determined to constitute, or
to be a part of, an "employee pension benefit plan" subject to Title I of ERISA
and, as a result, the Employer adopts a written plan document which has
provisions which are inconsistent with the provisions of this Agreement, then
provided such plan document complies with the requirements of the Code and
ERISA, the provisions of such plan document shall control, to the extent
necessary to comply with ERISA; provided, however, that nothing in such plan
document may be construed to increase the responsibilities of the Custodian or
the Sponsor, and, consistent with Paragraph 2 of Article VIII, the Employer
shall ensure compliance with applicable ERISA requirements.
EXHIBIT 14(d)
CUSTODIAL AGREEMENT
ARTICLE I
The Custodian will accept cash contributions on behalf of the participant by
the participant's employer under the terms of a SIMPLE plan described in
section 408(p). In addition, the custodian will accept transfers or rollovers
from other SIMPLE-IRAs of the participant. No other contributions will be
accepted by the custodian.
ARTICLE II
The Depositor's interest in the balance in the custodial account is
nonforfeitable.
ARTICLE III
1. No part of the custodial funds may be invested in life insurance contracts,
nor may the assets of the custodial account be commingled with other property
except in a common trust fund or common investment fund (within the meaning of
section 408(a)(5)).
2. No part of the custodial funds may be invested in collectibles (within the
meaning of section 408(m)) except as otherwise permitted by section 408(m)(3)
which provides an exception for certain gold and silver coins and coins issued
under the laws of any state.
ARTICLE IV
1. Notwithstanding any provision of this agreement to the contrary, the
distribution of the participant's interest in the custodial account shall be
made in accordance with the following requirements and shall otherwise comply
with section 408(a)(6) and Proposed Regulations section 1.408-8, including the
incidental death benefit provisions of Proposed Regulations section
1.401(a)(9)-2, the provisions of which are incorporated by reference.
2. Unless otherwise elected by the time distributions are required to begin to
the participant under paragraph 3, or to the surviving spouse under paragraph
4, other than in the case of a life annuity, life expectancies shall be
recalculated annually.
Such election shall be irrevocable as to the participant and the surviving
spouse and shall apply to all subsequent years. The life expectancy of a
nonspouse beneficiary may not be recalculated.
3. The participant's entire interest in the custodial account must be, or begin
to be, distributed by the participant's required beginning date, (April 1
following the calendar year end in which the participant reaches age 70 1/2).
By that date, the participant may elect, in a manner acceptable to the
Custodian, to have the balance in the custodial account distributed in:
(a) A single sum payment.
(b) An annuity contract that provides equal or substantially equal
monthly, quarterly, or annual payments over the life of the
participant.
(c) An annuity contract that provides equal or substantially equal
monthly, quarterly, or annual payments over the joint and last
survivor lives of the participant and his or her designated
beneficiary.
(d) Equal or substantially equal annual payments over a specified
period that may not be longer than the participant's life
expectancy.
(e) Equal or substantially equal annual payments over a specified
period that may not be longer than the joint life and last
survivor expectancy of the participant and his or her designated
beneficiary.
4. If the participant dies before his or her entire interest is distributed to
him or her, the entire remaining interest will be distributed as follows:
(a) If the participant dies on or after distribution of his or her
interest has begun, distribution must continue to be made in
accordance with paragraph 3.
<PAGE>
(b) If the participant dies before distribution of his or her interest
has begun, the entire remaining interest will, at the election of
the participant or, if the participant has not so elected, at the
election of beneficiary or beneficiaries, either
(i) Be distributed by December 31 of the year containing
the fifth anniversary of the participant's death, or
(ii) Be distributed in equal or substantially equal payments
over the life or life expectancy of the designated
beneficiary or beneficiaries, starting by December 31
of the year following the year of the participant's
death. If, however, the beneficiary is the
participant's surviving spouse, then this distribution
is not required to begin before December 31 of the year
in which the participant would have turned age 70 1/2.
(c) Except where distribution in the form of an annuity
meeting the requirements of section 408(b)(3) and its
related regulations has irrevocably commenced,
distributions are treated as having begun on the
participant's required beginning date, even though
payments may actually have been made before that date.
(d)If the participant dies before his or her entire
interest has been distributed and if the beneficiary is
other than the surviving spouse, no additional cash
contributions or rollover contributions may be accepted
in the account.
5. In the case of distribution over life expectancy in equal or substantially
equal annual payments, to determine the minimum annual payment for each year,
divide the participant's entire interest in the Custodial account as of the
close of business on December 31 of the preceding year by the life expectancy
of the participant (or the joint life and last survivor expectancy of the
participant and the participant's designated beneficiary, or the life
expectancy of the designated beneficiary, whichever applies). In the case of
distributions under paragraph (3), determine the initial life expectancy (or
joint life and last survivor expectancy) using the attained ages of the
participant and designated beneficiary as of their birthdays in the year the
participant reaches age 70 1/2. In the case of distribution in accordance with
paragraph (4)(b)(ii), determine life expectancy using the attained age of the
designated beneficiary as of the beneficiary's birthday in the year
distributions are required to commence.
6. The owner of two or more individual retirement accounts may use the
"alternative method" described in Notice 88-38 1988-1 C.B. 524, to satisfy the
minimum distribution requirements described above. This method permits an
individual to satisfy these requirements by taking from one individual
retirement account the amount required to satisfy the requirement for another.
ARTICLE V
1. The participant agrees to provide the Custodian with information necessary
for the Custodian to prepare any reports required under section 408(i) and
408(l)(2)and Regulations sections 1.408-5 and 1.408-6.
2. The Custodian agrees to submit reports to the Internal Revenue Service and
the participant as prescribed by the Internal Revenue Service.
3. The Custodian also agrees to provide the participant's employer the summary
description described in section 408(l)(2) unless this SIMPLE IRA is a transfer
SIMPLE IRA.
ARTICLE VI
Notwithstanding any other articles which may be added or incorporated, the
provisions of Articles
<PAGE>
I through III and this sentence will be controlling. Any additional articles
that are not consistent with section 408(a) and 408(p) and the related
regulations will be invalid.
ARTICLE VII
This agreement will be amended from time to time to comply with the provisions
of the Code and related regulations. Other amendments may be made with the
consent of the persons whose signatures appear below.
ARTICLE VIII
1. All assets in the Account shall be invested in such shares of one or more
Designated Investment Companies as the participant may from time to time
specify. The participant's instructions may relate to current contributions or
to amounts previously contributed (including earnings thereon) or to both. In
the event that the Custodian receives a contribution from the participant's
employer with respect to which no investment direction is specifically
applicable, or if any such investment direction is, in the opinion of the
Custodian, unclear, the Custodian may hold such amounts uninvested or return
any such contributions without liability for any loss, including any loss of
income or appreciation, and without liability for interest or any tax liability
incurred by participant pending receipt of instructions or clarification. For
all purposes of this Agreement, the term "Designated Investment Company" shall
mean USAA INVESTMENT TRUST or USAA MUTUAL FUND, INC. and any other regulated
investment company for which USAA INVESTMENT MANAGEMENT COMPANY (or any
affiliate thereof) acts as investment advisor and which is designated by USAA
INVESTMENT MANAGEMENT COMPANY as eligible for investment under this Agreement.
2. Except as otherwise permitted in paragraph 12 below, all contributions made
under this Agreement shall be deposited in the form of cash and shall be made
to the Custodian in accordance with such rules as the Custodian may establish.
The Custodian, upon receipt of instructions from the participant may exchange
or cause to be exchanged shares of a Designated Investment Company held by the
Custodian on behalf of the participant for any other shares of a Designated
Investment Company available for investment hereunder, subject to and in
accordance with the terms and conditions of the exchange privilege, as outlined
in the current prospectuses of any such Designated Investment Company and as
may be agreed upon, in writing, from time to time between the Custodian and
USAA Investment Management Company. The participant shall be the beneficial
owner of the assets held in the Account. All dividends and capital gains
distributions received on shares of a Designated Investment Company held in the
participant's Account shall, unless received in additional shares, be
reinvested in shares of the Designated Investment Company paying such
dividends. If any distributions of the shares of a Designated Investment
Company may be received at the election of the participant in additional shares
or in cash or other property, the Custodian shall elect to receive additional
shares.
3. USAA INVESTMENT MANAGEMENT COMPANY may remove the Custodian at any time upon
thirty (30) days' notice in writing to the Custodian, and the Custodian may
resign at any time upon thirty (30) days' notice in writing to USAA INVESTMENT
MANAGEMENT COMPANY. Upon such resignation or removal, USAA INVESTMENT
MANAGEMENT COMPANY shall appoint a successor custodian, which successor
custodian shall be a "bank" as defined in Section 408(n) of the Code or another
person found qualified to act as a custodian of an Individual Retirement
Account by the Secretary
<PAGE>
of the Treasury or his delegate. Upon receipt by the Custodian of written
acceptance of such appointment by the successor custodian or trustee, the
Custodian shall transfer and pay over to such successor the assets of the
Account and all records pertaining thereto. The Custodian is authorized,
however, to reserve such sum of money as it may deem advisable for payment of
all its fees, compensation, costs, and expenses or for payment of any other
liabilities constituting a charge on or against the assets of the Account or on
or against the Custodian, with any balance of such reserve remaining after the
payment of all such items to be paid over to the successor custodian or
trustee. If within the thirty (30) day period provided for above, USAA
Investment Management Company has not appointed a successor custodian or
trustee which has accepted such appointment, the Custodian shall, unless it
elects to terminate the Custodial Account, appoint a successor custodian
itself.
4. The Custodian shall deliver, or cause to be delivered, to the participant
all notices, prospectuses, financial statements, proxies and proxy soliciting
materials relating to Designated Investment Companies' shares held for
participant. The Custodian shall not vote any of the shares held hereunder
except in accordance with the written instructions of the participant.
5. (a) The Custodian shall, from time to time, in accordance with
instructions in writing from the participant (or the participant's
beneficiary if the participant is deceased), make distributions
out of the Account to the participant in the manner and amounts as
may be specified in such instructions. All such instructions shall
be deemed to constitute a certification by the participant (or the
participant's beneficiary if the participant is deceased) that the
distribution directed is one that the participant (or the
participant's beneficiary if the participant is deceased) is
permitted to receive. Notwithstanding the provision of Article IV
above, the Custodian assumes (and shall have) no responsibility to
make any distribution to the participant (or the participant's
beneficiary if the participant is deceased) unless and until such
written instructions specify the occasion for such distribution,
the elected manner of distribution and any declaration required by
Article IV. Prior to making any such distribution from the
Account, the Custodian shall be furnished with any and all
applications, certificates, tax waivers, signature guarantees, and
other documents (including proof of any legal representative's
authority) deemed necessary or advisable by the Custodian, but the
Custodian shall not be liable for complying with written
instructions which appear on their face to be genuine, or for
refusing to comply if not satisfied such instructions are genuine,
and assumes no duty of further inquiry. Upon receipt of proper
written instructions as required above, the Custodian shall cause
the assets of the Account to be distributed in cash and/or in
kind, as specified in such written order.
(b) Distribution of the assets of the Account shall be made in
accordance with the provisions of Article IV as the participant
(or the participant's beneficiary if the participant is deceased
and has not previously elected) shall elect by written
instructions to the Custodian; subject, however to the provisions
of Sections 401(a)(9), 408(a)(6) and 408(b)(3) of the Code, the
regulations promulgated thereunder, and the following: (i) No
distribution from the
<PAGE>
Account shall be made in the form of an annuity contract.
(ii) The recalculation of life expectancy of the participant and/or
the participant's spouse shall only be made at the written
election of the participant. The recalculation of life
expectancy of the surviving spouse shall only be made at the
written election of the surviving spouse.
(iii) If the participant dies before his/her entire interest in the
Account has been distributed, and if the designated beneficiary
of the participant is the participant's surviving spouse, the
spouse may treat the Account as his/her own individual
retirement arrangement. This election will be deemed to have
been made if the surviving spouse makes a regular IRA
contribution to the Account, makes a rollover to or from such
Account, or fails to receive a payment from the Account within
the appropriate time period applicable to the deceased
participant under Section 401(a)(9)(B) of the Code.
6. Any notice from the Custodian to the participant provided for in this
Agreement shall be effective if sent by regular mail to him at his last address
of record.
7. The participant hereby delegates to USAA Investment Management Company the
power to amend at any time and from time to time the terms and provisions of
the Agreement and hereby consents to such amendments, provided they shall
comply with all applicable provisions of the Code, the regulations there under
and with any other governmental law, regulation or ruling. Any such amendments
shall be effective as of the date specified in a written notice sent by
first-class mail to the address of the participant indicated by the Custodian's
records. Notwithstanding the foregoing, no amendment which increases the
burdens of the Custodian shall take effect without its prior written consent.
Nothing in this paragraph 7 shall be construed to restrict the Custodian's
freedom to change or substitute fee schedules in accordance with the provisions
of the adoption agreement, and no such change or substitution shall be deemed
to be an amendment to this Agreement.
8. The Custodian shall not be bound by any certificate, notice, order,
information or other communication unless and until it shall have been received
in writing at its place of business.
9. (a) The Custodian shall have the right to rely upon any information
furnished in writing by the participant. The participant and the
participant's legal representatives, as appropriate, shall always fully
indemnify the Custodian and USAA Investment Management Company and save
each of them harmless from any and all liability whatsoever which may
arise in connection with this Agreement and matters which the Agreement
contemplates, except that which arises due to the Custodian's gross
negligence, willful misconduct or lack of good faith. The Custodian
shall not be obligated or expected to commence or defend any legal
action or proceed-ing in connection with this Agreement or such matters
unless agreed upon by the Custodian and the participant or said legal
representatives and unless fully indemnified for so doing to the
Custodian's satisfaction.
(b) The Custodian shall be an agent for the participant to perform the
duties conferred on it by the participant. The parties do not intend to
confer any fiduciary duties on the Custodian and none shall be implied.
The Custodian
<PAGE>
shall not be liable (and does not assume any responsibility for) the
collection of contributions, the deductibility of any contribution or
the propriety of any contributions under this Agreement, the selection
of any shares of any Designated Investment Company for the Account, or
the purpose or propriety of any distribution ordered in accordance with
Article IV or paragraph 5 of this Article VIII, which matters are the
sole responsibility of the participant or the participant's
beneficiary, as the case may be. (c) The Custodian and USAA Investment
Management Company shall not be responsible for any losses, penalties
or other consequences to the Depositor or to any other person arising
out of the making of any contribution or withdrawal.
10. This Agreement together with the Application and Adoption Agreement
attached hereto and by this reference made a part hereof, constitutes the
entire agreement between the parties, and it shall be construed in accordance
with the laws of the state of Texas.
11. The participant shall have the right by written notice to the Custodian on
a form acceptable to the Custodian, to designate or to change a beneficiary to
receive any benefit to which such participant may be entitled in event of his
death prior to the complete distribution of such benefit. If no such
designation is in effect at the time of the participant's death, or if the
designated beneficiary has predeceased the participant, the participant's
beneficiary shall be his or her estate. The last designation filed with the
Custodian shall be controlling, and, whether or not it fully disposes the
Account, shall revoke all such other designations previously filed by the
participant.
12. (a) The Custodian shall have the right to receive rollover contributions
from another SIMPLE-IRA of the participant as described in the Code and
if any property is so transferred to it as a rollover contribution,
such property shall be sold by the Custodian and the proceeds less
any expenses, fees or commissions reinvested in paragrap 1 of this
Article VIII. The Custodian reserves the right to refuse to accept any
property which is not in the form of cash.
(b) The Custodian, upon written direction of the participant and after
submission to the Custodian of such documents as it may reasonably
require, shall transfer the assets held under this Agreement (reduced
by any amounts referred to in paragraph 3 of this Article VIII to a
successor SIMPLE individual retirement account, or regular or
individual retirement account. Any amounts received or transferred by
the Custodian under this paragraph 12 shall be accompanied by such
records and other documents as the Custodian deems necessary to
establish the nature, value, and extent of the assets, and of the
various interests therein.
13. The benefits provided hereunder shall not be subject to alienation,
assignment, garnishment, attachment, execution or levy of any kind, and any
attempt to cause such benefits to be so subjected shall not be recognized,
except to such extent as may be required by law. Any pledging of assets in the
Account by the participant as security for a loan, or any loan or other
extension of credit from the Account to the participant shall be prohibited.
<PAGE>
14. The Custodian may perform any of its administrative duties through such
other persons or entities as may be designated by the Custodian from time to
time with the prior approval of USAA Investment Management Company, except that
the Designated Investment Company shares must be registered in the name of the
Custodian or its nominee. No such delegation or subsequent change herein shall
be considered an amendment of this agreement.
15. In addition to the reports required by Article V, the Custodian shall cause
to be mailed to the participant in respect of each tax year an account of all
transactions affecting the Account during such year and a statement showing the
Account as of the end of such year. If, within sixty (60) days after such
mailing, the participant has not given the Custodian written notice of any
exception or objection thereto, the annual accounting shall be deemed to have
been approved, and in such case, or upon the written approval of the
participant, the Custodian shall be released, relieved and discharged with
respect to all matters and statements set forth in such accounting as though
the account had been settled by judgment or decree of a court of competent
jurisdiction.
16. (a) The Custodian may charge the participant reasonable fees, including an
annual maintenance fee, for services hereunder according to standard
schedules of rates which may be in effect from time to time. Initially,
the fees payable to the Custodian shall be in the schedule amount
provided with the Agreement. Upon thirty (30) days' prior written
notice, the Custodian may substitute a fee schedule differing from that
schedule initially provided.
(b) Custodian's fees, any income (including unrelated business income tax),
gift, estate and inheritance taxes and other taxes of any kind
whatsoever, including transfer taxes incurred in connection with the
investment or reinvestment of the assets of the Account, that may be
levied or incurred by the Custodian in the performance of its duties
may be charged to the Account, with the right to liquidate shares of
any Designated Investment Company for this purpose, or (at Custodian's
option) to the participant.
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