As filed with the Securities and Exchange Commission on September 30, 1998.
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. 49
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 X
Amendment No. 37
USAA MUTUAL FUND, INC.
-------------------------------------------------
(Exact Name of Registrant as Specified in Charter)
9800 Fredericksburg Road, 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 Road
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, 1998, 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.
Exhibit Index on Pages 247 - 250
Page 1 of 272
<PAGE>
USAA MUTUAL FUND, INC.
CROSS REFERENCE SHEET
PART A
------
FORM N-1A ITEM NO. SECTION IN PROSPECTUS
1. Front and Back Cover Pages.......... Same
2. Risk/Return Summary: Investments,
Risks, and Performance............. What is the Fund's Investment
Objective and Main Strategy?
Main Risks of Investing in This Fund
Could the Value of Your Investment
in This Fund Fluctuate?
3. Risk/Return Summary: Fee Table..... Fees and Expenses
4. Investment Objectives, Principal
Investment Strategies, and
Related Risks..................... What is the Fund's Investment
Objective and Main Strategy?
Fund Investments
5. Management's Discussion
of Fund Performance............... Not Applicable
6. Management, Organization, and
Capital Structure................. Fund Management
7. Shareholder Information............ How to Invest
Important Information About Purchases
and Redemptions
Exchanges
Shareholder Information
8. Distribution Arrangements.......... Not Applicable
9. Financial Highlights Information... Financial Highlights
<PAGE>
USAA MUTUAL FUND, INC.
CROSS REFERENCE SHEET
PART B
------
FORM N-1A ITEM NO. SECTION IN STATEMENT OF ADDITIONAL
INFORMATION
10. Cover Page and Table of Contents.... Same
11. Fund History........................ Description of Shares
12. Description of the Fund and
Its Investments and Risks.......... Investment Policies
Investment Restrictions
Portfolio Transactions
13. Management of the Fund.............. Directors and Officers of the Company
14. Control Persons and Principal
Holders of Securities.............. Directors and Officers of the Company
15. Investment Advisory and
Other Services..................... Directors and Officers of the Company
The Company's Manager
General Information
16. Brokerage Allocation and
Other Practices.................... Portfolio Transactions
17. Capital Stock and
Other Securities................... Description of Shares
18. Purchase, Redemption, and
Pricing of Shares.................. Valuation of Securities
Conditions of Purchase and Redemption
Additional Information Regarding
Redemption of Shares
Investment Plans
19. Taxation of the Fund................ Tax Considerations
20. Underwriters........................ The Company's Manager
21. Calculation of Performance Data..... Calculation of Performance Data
22. Financial Statements................ Cover Page
<PAGE>
Part A
Prospectuses for 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
are included herein
Not included in this Post-Effective Amendment
is the Prospectus for the
S&P 500 Index Fund
<PAGE>
Part A
Prospectus for the
Aggressive Growth Fund
is included herein
<PAGE>
USAA AGGRESSIVE
GROWTH FUND
PROSPECTUS
DECEMBER 1, 1998
As with other mutual funds, the Securities and Exchange Commission has not
approved or disapproved of this Fund's shares or determined whether this
prospectus is accurate or complete. Anyone who tells you otherwise is
committing a crime.
TABLE OF CONTENTS
What is the Fund's Investment Objective and Main Strategy?............. 2
Main Risks of Investing in This Fund................................... 2
Is This Fund for You?.................................................. 3
Could the Value of Your Investment in This Fund Fluctuate?............. 3
Fees and Expenses...................................................... 4
Fund Investments....................................................... 5
Fund Management........................................................ 7
Using Mutual Funds in an Investment Program............................ 9
How to Invest.......................................................... 10
Important Information About Purchases and Redemptions.................. 13
Exchanges.............................................................. 14
Shareholder Information................................................ 14
Financial Highlights................................................... 18
Appendix A ............................................................ 19
Appendix B ............................................................ 20
<PAGE>
USAA Investment Management Company manages this Fund. For easier reading, USAA
Investment Management Company will be referred to as "we" or "us" throughout
the Prospectus.
WHAT IS THE FUND'S INVESTMENT OBJECTIVE AND MAIN STRATEGY?
The Fund's investment objective is capital appreciation. We will attempt to
achieve this objective by investing the Fund's assets primarily in equity
securities of companies with the prospect of rapidly growing earnings.
In view of the risks inherent in all investments in securities, there is no
assurance that the Fund's objective will be achieved. See FUND INVESTMENTS on
page 5 for more information.
MAIN RISKS OF INVESTING IN THIS FUND
The primary risks of investing in this Fund are market risk and the risks of
investing in small capitalization companies.
* MARKET RISK involves the possibility that the Fund's investments in equity
securities will decline because of falls in the stock market, reducing the
value of individual company's stocks regardless of the success or failure
of an individual company's operations.
* SMALL CAPITALIZATION COMPANY RISK involves the greater risk of investing in
smaller less well-known companies, especially those that have a narrow
product line or are traded infrequently, than investing in established
companies with proven track records.
Other risks of the Fund described later in the Prospectus include the risks of
foreign investing and investing in real estate investment trusts (REITs). As
with other mutual funds, losing money is an additional risk associated with
investing in this Fund.
As you consider an investment in this 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 the investment for long periods of time
to ride out down periods.
An investment in this Fund is not a deposit of USAA Federal Savings Bank, or
any other bank, and is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency.
[CAUTION LIGHT]
Look for this symbol throughout the Prospectus. We use it to mark more detailed
information about the main risks you will face as a Fund shareholder.
2
<PAGE>
IS THIS FUND FOR YOU?
This Fund might be appropriate as part of your investment portfolio if . . .
* You are willing to accept very high risk.
* You are looking for a long-term investment.
* 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 . . .
* You are unwilling to take greater risk for long-term goals.
* You are unable or reluctant to invest for a period of seven years or more.
* You need an investment that provides steady income.
* You need an investment that provides tax-free income.
COULD THE VALUE OF YOUR INVESTMENT IN THIS FUND FLUCTUATE?
Yes, it could. In fact, the value of your investment in the Fund will likely
increase or decrease. While the portfolio will be broadly diversified, we
expect the Fund to be significantly more volatile than the average equity
mutual fund due to the Fund's investments in smaller less well-known companies.
The bar chart shown below illustrates the Fund's volatility and performance
from year to year over the past ten years.
TOTAL RETURN
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.
[BAR CHART]
CALENDAR TOTAL
YEAR RETURN
1988 14.25%
1989 16.59%
1990 -11.92%
1991 71.69%
1992 -8.51%
1993 8.14%
1994 -.81%
1995 50.42%
1996 16.47%
1997 7.56%
THE FUND'S TOTAL RETURN FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30,
1998, WAS _____%.
3
<PAGE>
During the periods shown in the bar chart, the highest total return for a
quarter was 28.32% (quarter ending March 31, 1991) and the lowest total return
for a quarter was -27.50% (quarter ending September 30, 1990).
The table below shows how the Fund's average annual returns for the one-,
five-, and ten-year periods as well as the life of the Fund compared to those
of broad-based securities market index. Remember, historical performance does
not necessarily indicate what will happen in the future.
===============================================================================
Average Annual Total Returns
(for the periods ending Past Past Past Life of
December 31, 1997) 1 Year 5 Years 10 Years the Fund
===============================================================================
Aggressive Growth Fund 7.56% 15.11% 14.05% 12.12%
- -------------------------------------------------------------------------------
Russell 2000 Index* 22.36% 16.40% 15.77% 14.40%
===============================================================================
* 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.
[TELEPHONE GRAPHIC]
TouchLINE (R)
1-800-531-8777
PRESS
1
THEN
1
THEN
3 8 #
Please consider performance information in light of the Fund's investment
objective and policies and market conditions during the reported time periods.
Again, you must remember that historical performance does not necessarily
indicate what will happen 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# when asked for the Fund Code.
NEWSPAPER SYMBOL
AgvGt
TICKER SYMBOL
USAUX
You can also 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." If you prefer to obtain this information from an on-line
computer service, you can do so by using the ticker symbol "USAUX."
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 or sales loads charged to your account when you buy or sell
Fund shares. However, if you sell shares and request your money by wire
transfer, there is 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
4
<PAGE>
custodian and transfer agent fees. The figures on the next page show actual
expenses during the past fiscal year ended July 31, 1998, and are calculated as
a percentage of average net assets.
12B-1 FEES -
SOME MUTUAL FUNDS
CHARGE THESE FEES
TO PAY FOR
ADVERTISING AND
OTHER COSTS OF
SELLING FUND SHARES.
Management Fees .38%
Distribution (12b-1) Fees None
Other Expenses .33%
----
Total Annual Fund Operating Expenses .71%
====
Example of Effect of Fund's Operating Expenses
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. Although your actual costs
may be higher or lower, you would pay the following expenses on a $10,000
investment, assuming (1) 5% annual return, (2) the Fund's operating expenses
remain the same, and (3) you redeem all of your shares at the end of the
periods shown.
1 year.......... $ 73
3 years......... 227
5 years......... 395
10 years......... 883
FUND INVESTMENTS
Principal Investment Strategies and Risks
Q What is the Fund's principal investment strategy?
A The Fund's principal investment strategy is to invest the Fund's assets
primarily in equity securities of companies with 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).
As a temporary defensive measure because of market, economic, political,
or other conditions, we may invest up to 100% of the Fund's assets in
investment-grade, short-term debt instruments, which may result in the
Fund not achieving its investment objective during the time it is in
this temporary defensive posture.
5
<PAGE>
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.
[CAUTION LIGHT]
MARKET RISK. Because this Fund invests in equity securities, it is subject to
stock 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. Stock markets tend to run in cycles, with periods when
stock prices generally go up, known as "bull" markets, and periods when stock
prices generally go down, referred to as "bear" markets. Equity securities tend
to go up and down more than bonds.
[CAUTION LIGHT]
SMALL CAPITALIZATION COMPANY RISKS. Small cap companies may be more vulnerable
than larger companies to adverse business or economic developments. Small cap
companies may also have limited product lines, markets, or financial resources.
Securities of such companies may be less liquid and more volatile than
securities of larger companies or the market averages in general and therefore
may involve greater risk than investing in larger companies. In addition, small
cap companies may not be well-known to the investing public, may not have
institutional ownership, and may have only cyclical, static, or moderate growth
prospects.
[CAUTION LIGHT]
REITs. Investing in REITs may subject the Fund to many of the same risks
associated with the direct ownership of real estate. Additionally, REITs are
dependent upon the capabilities of the REIT manager(s), have limited
diversification, and could be significantly impacted by changes in tax laws.
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 purchased in either foreign or U.S. markets. These
foreign holdings may include securities issued in emerging markets as
well as securities issued in established markets.
[CAUTION LIGHT]
FOREIGN INVESTING. Investing in foreign securities, including American
Depositary Receipts (ADRs) and Global Depositary Receipts (GDRs), 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
6
<PAGE>
instruments of foreign markets have been more volatile than equity and debt
instruments of U.S. securities markets.
ADR - FOREIGN
SHARES HELD BY
A U.S. BANK
WHICH ISSUES
A RECEIPT
EVIDENCING
OWNERSHIP.
DIVIDENDS ARE
PAID IN U.S.
DOLLARS.
GDR - FOREIGN
SHARES HELD BY
A U.S. OR
FOREIGN BANK
WHICH ISSUES
A RECEIPT
EVIDENCING
OWNERSHIP.
DIVIDENDS ARE
PAID IN U.S.
DOLLARS.
* 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.
* POLITICAL RISK. Political risk includes a greater potential for coups
d'etat, 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.
Q How are the decisions to buy and sell securities made?
A We tend to invest in small capitalization companies that have rapid
sales and earnings growth potential. We seek companies that are well
positioned to take advantage of emerging long-term social and economic
trends and have ample financial resources to sustain their growth. We
may reduce or sell the Fund's investments in companies if their stock
prices appreciate excessively in relation to fundamental prospects. We
will sell or reduce large capitalization equity holdings in the
portfolio if those holdings comprise an excessive weighting of total
assets. Companies will also be sold if they fail to realize their growth
potential or if there are more attractive opportunities elsewhere.
For additional information about other securities in which we may invest the
Fund's assets, see APPENDIX A on page 19.
FUND MANAGEMENT
The Company has retained us, USAA Investment Management Company, to serve as
the manager and distributor for 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 provide management services to the Fund pursuant to an Advisory Agreement.
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, 1998, were equal to .38% 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. John
K. Cabell, Jr. and Eric M. Efron, Assistant Vice Presidents of Equity
Investments, have managed the Fund since March 1995.
From Left to Right: [PHOTOGRAPH OF PORTFOLIO MANAGERS]
ERIC M. EFRON AND JOHN K. CABELL, JR.
8
<PAGE>
Mr. Cabell has 20 years investment management experience and has worked for us
for nine years. He served as Chief Economist for Retirement Systems of Alabama
from March 1991 to March 1994. He earned the Chartered Financial Analyst (CFA)
designation in 1982 and is a member of the Association for Investment
Management and Research (AIMR) and the San Antonio Financial Analysts Society,
Inc. (SAFAS). He holds an MA and a BS from the University of Alabama.
Mr. Efron has 23 years investment management experience and has worked for us
for six years. He earned the CFA designation in 1983 and is also a member of
AIMR and SAFAS. He holds an MBA from New York University, an MA from the
University of Michigan, and a BA from Oberlin College, Ohio.
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 to 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 in APPENDIX B under asset allocation on page 20. These unique
mutual funds provide a professionally-managed, diversified investment portfolio
within a mutual fund. Designed for the individual who prefers to delegate the
asset allocation process to an investment manager, their structure achieves
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 to meet your needs. Refer to APPENDIX B on page 20 for a
complete list of the USAA Family of No-Load Mutual Funds.
HOW TO INVEST
Purchase of Shares
OPENING AN ACCOUNT
You may open an account and make an investment as described below by mail, in
person, bank wire, electronic funds transfer (EFT), or phone. A complete,
signed application is required for each new account. However, after you open
your initial account with us, you will not need to fill out another application
unless the registration is different.
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. 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 and payment prior to that time, your
purchase price will be the NAV per share determined for that day. If we receive
your request or payment 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. This will 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
[MONEY GRAPHIC]
* $3,000 [$500 Uniform Gifts/Transfers to Minors Act (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 through
payroll deduction for as little as $25 per pay period with no initial
investment.
ADDITIONAL PURCHASES
* $50
HOW TO PURCHASE
MAIL
[ENVELOPE GRAPHIC]
* To open an account, send your application and 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
[HANDSHAKE GRAPHIC]
* To open an account, bring your application and check to:
USAA Investment Management Company
USAA Federal Savings Bank
10750 Robert F. McDermott Freeway
San Antonio, TX 78288
BANK WIRE
[WIRE GRAPHIC]
* Instruct your bank (which may charge a fee for the service) to wire the
specified amount to the Fund as follows:
State Street Bank and Trust Company
Boston, MA 02101
ABA#011000028
Attn: USAA Aggressive Growth Fund
USAA Account Number: 69384998
Shareholder(s) Name(s)__________________________________________
Shareholder(s) Mutual Fund Account Number_______________________
11
<PAGE>
Electronic Funds Transfer
[CALENDAR GRAPHIC]
* Additional purchases on a regular basis can be deducted from a bank
account, paycheck, income-producing investment, or USAA money market fund
account. Sign up for these services when opening an account or call
1-800-531-8448 to add these services.
Phone 1-800-531-8448
[TELEPHONE GRAPHIC]
* If you have an existing USAA mutual fund account and would like to 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.
We will send you your money within seven days after the effective date of
redemption. 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. Redemptions are
subject to taxes based on the difference between the cost of shares when
purchased and the price received upon redemption.
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, TELEGRAPH, OR TELEPHONE
[FAX MACHINE GRAPHIC]
* Send your written instructions to:
USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, TX 78288
* Send a signed fax to 1-800-292-8177, or send a telegram 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, the following information is obtained:
(1) USAA number or account number, (2) the
12
<PAGE>
name(s) on the account registration, and (3) social security number or tax
identification number for the account registration. Additionally, all telephone
communications with you are recorded and confirmations of account transactions
are sent to the address of record. If you were issued stock certificates for
your shares, redemption by telephone, fax, or telegram is not available.
IMPORTANT INFORMATION ABOUT PURCHASES AND REDEMPTIONS
Investor's Guide to USAA Mutual Fund Services
[INVESTOR'S GUIDE GRAPHIC]
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
USAA Shareholder Account Services (SAS), the Fund's transfer agent, may assess
annually 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
13
<PAGE>
authorized by the Board of Directors and the required notice has been given
to shareholders;
* require a signature guarantee for transactions 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. After the exchange order is received, the
Fund's transfer agent will simultaneously process exchange redemptions and
purchases at the share prices next determined. The investment minimums
applicable to share purchases also apply to exchanges. For federal income tax
purposes, an exchange between Funds is a taxable event; and as such, you may
realize a capital gain or loss. Such capital gains or losses are based on the
difference between the cost of shares when purchased and the price received
upon exchange.
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 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
NAV PER SHARE
EQUALS
TOTAL ASSETS
MINUS
LIABILITIES
DIVIDED BY
# OF SHARES
OUTSTANDING
The price at which you 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. 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.
14
<PAGE>
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.
Securities trading in various foreign markets may take place on days when the
NYSE is closed. Further, when the NYSE is open, the foreign markets may be
closed. Therefore, the calculation of the Fund's NAV may not take place at the
same time the prices of certain securities held by the Fund are determined. In
most cases, events affecting the values of portfolio securities that occur
between the time their prices are determined and the close of normal trading on
the NYSE on a day the Fund's NAV is calculated will not be reflected in the
Fund's NAV. If, however, we determine that a particular event would materially
affect the Fund's NAV, then we, under the general supervision of the Board of
Directors, will use all relevant, available information to determine a fair
value for the affected portfolio securities.
Over-the-counter securities are generally priced at the last sales price or, if
not available, at the average of the bid and asked prices.
Debt securities purchased with maturities of 60 days or less are stated at
amortized cost, which approximates market value. Other debt securities are
valued each business day at their current market value as determined by a
pricing service approved by the Board of Directors. Securities which cannot be
valued by these methods, and all other assets, are valued in good faith at fair
value using methods we have determined under the general supervision of the
Board of Directors.
For additional information on how securities are valued, see VALUATION OF
SECURITIES in the Fund's Statement of Additional Information.
Dividends and Distributions
The Fund pays net investment income dividends yearly. Any net capital gain
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.
We will automatically reinvest all income dividends and capital gain
distributions 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.
15
<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 Taxpayer
Relief Act of 1997 and the technical provisions adopted by the IRS
Restructuring and Reform Act of 1998 may affect the status and treatment of
certain distributions shareholders receive from the Fund. We urge you to
consult your tax adviser about the status of distributions from the Fund in
your own state and locality.
SHAREHOLDER - Dividends from taxable net investment income and distributions of
net short-term capital gains are taxable to you 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. These distributions may be
taxable at different rates depending on the length of time the Fund held the
applicable investment.
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 information to you annually concerning the tax
status of dividends and distributions for federal income tax purposes.
16
<PAGE>
Year 2000
Like other organizations around the world, the Fund could be adversely affected
if the computer systems used by the Fund, its service providers, or companies
in which the Fund invests do not properly process and calculate information
that relates to dates beginning on January 1, 2000, and beyond. This situation
may occur because for many years computer programmers used only two digits to
describe years, such as 98 for 1998. A program written in this manner may not
work when it encounters the year 00. To confront this situation, USAA companies
have spent much effort and money; and we expect to have our systems ready for
the Year 2000 by mid-1999. In addition, we are actively assessing the Year 2000
readiness of our service providers, partners, and companies in whose securities
we invest. It is not possible for us to say that you will experience no effect
from this situation, but we can say that we are making a large effort to avoid
any ill effects upon our shareholders.
We do believe you are entitled to know with certainty that we will stand behind
your share balance as of the close of business in 1999. When the market reopens
in 2000, should any computer problem cause a change in the number of shares in
your account, we will return your account to its proper share balance.
17
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the Fund's
financial performance for the past five-year period. Certain information
reflects financial results for a single Fund share. The total returns in the
table represent the rate that an investor would have earned (or lost) on an
investment in the Fund (assuming reinvestment of all dividends and
distributions). This information has been audited by KPMG Peat Marwick LLP,
whose report, along with the Fund's financial statements, are included in the
Annual Report, which is available upon request.
<TABLE>
<CAPTION>
Ten-Month
Period Ended
Year Ended July 31, July 31,
------------------------------------------------------------
1998 1997 1996 1995 1994
------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value at
beginning of period $ 32.82 $ 27.88 $ 24.49 $ 17.74 $ 20.40
Net investment loss (.12)(a) (.14)(a) (.12)(a) (.05)(a) (.02)(a)
Net realized and
unrealized gain (loss) 1.26 5.65 5.12 8.35 (1.37)
Distributions from net
investment income _ _ _ _ (.02)
Distributions of realized
capital gains (2.34) (.57) (1.61) (1.55) (1.25)
------------------------------------------------------------
Net asset value at
end of period $ 31.62 $ 32.82 $ 27.88 $ 24.49 $ 17.74
============================================================
Total return (%)* 3.91 20.00 21.16 49.98 (7.31)
Net assets at end of
period (000) $736,450 $753,984 $607,437 $363,390 $248,953
Ratio of expenses to
average net assets (%) .71 .74 .74 .86 .83(b)
Ratio of net investment
income to average net
assets (%) (.38) (.47) (.42) (.28) .10(b)
Portfolio turnover (%) 83.32 57.15 43.75 138.32 98.99
</TABLE>
- -----------------
(a) Calculated using weighted average shares.
(b) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
* Assumes reinvestment of all dividend income and capital gain distributions
during the period.
18
<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 the Fund's assets in convertible securities, which are bonds,
preferred stocks, and other securities that pay interest or dividends and offer
the buyer the ability to convert 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 also depends on the price of the underlying 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 invest up to 15% 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, 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, certificates of deposit,
bankers' acceptances, and other financial institution obligations. These
securities may carry fixed or variable interest rates.
19
<PAGE>
APPENDIX B
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 (1) Very high
First Start Growth Moderate to high
Gold (1) Very high
Growth Moderate to high
Growth & Income Moderate
International (1) Moderate to high
S&P 500 Index (2) Moderate
Science & Technology Very high
World Growth (1) Moderate to high
- ---------------------------------------------------------------
ASSET ALLOCATION
- ---------------------------------------------------------------
Balanced Strategy (1) Moderate
Cornerstone Strategy (1) Moderate
Growth and Tax Strategy Moderate
Growth Strategy (1) 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 (3) Moderate
Intermediate-Term (3) Low to moderate
Short-Term (3) Low
State Bond/Income (3,4) Moderate
- ---------------------------------------------------------------
MONEY MARKET
- ---------------------------------------------------------------
Money Market (5) Very low
Tax Exempt Money Market (3,5) Very low
Treasury Money Market Trust (5) Very low
State Money Market (3,4,5) Very low
===============================================================
1 FOREIGN INVESTING IS SUBJECT TO ADDITIONAL RISKS, SUCH AS CURRENCY
FLUCTUATIONS, MARKET ILLIQUIDITY, AND POLITICAL INSTABILITY.
2 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.
3 SOME INCOME MAY BE SUBJECT TO STATE OR LOCAL TAXES.
4 CALIFORNIA, FLORIDA, NEW YORK, TEXAS, AND VIRGINIA FUNDS ARE OFFERED ONLY TO
RESIDENTS OF THOSE STATES.
5 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.
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),
Annual or Semiannual Report, or to ask other questions about the Fund. The SAI
has been filed with the Securities and Exchange Commission (SEC) and is legally
a part of the Prospectus. In the Fund's Annual Report, you will find a
discussion of the market conditions and investment strategies that
significantly affected the Fund's performance during the last fiscal year.
To view these documents, along with other related documents, you can visit the
SEC's Internet web site (http://www.sec.gov) or the Commission's Public
Reference Room in Washington, D.C. Information on the operation of the public
reference room can be obtained by calling 1-800-SEC-0330. Additionally, copies
of this information can be obtained, for a duplicating fee, by writing the
Public Reference Section of the Commission, Washington, D.C. 20549-6009.
INVESTMENT ADVISER, UNDERWRITER AND DISTRIBUTOR
USAA Investment Management Company
9800 Fredericksburg Road
San Antonio, Texas 78288
-----------------------------------------------
TRANSFER AGENT CUSTODIAN
USAA Shareholder Account Services State Street Bank and Trust Company
9800 Fredericksburg Road P.O. Box 1713
San Antonio, Texas 78288 Boston, Massachusetts 02105
-----------------------------------------------
TELEPHONE ASSISTANCE HOURS
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
Investment Company Act File No. 811-2429
<PAGE>
Part A
Prospectus for the
Growth Fund
is included herein
<PAGE>
USAA GROWTH FUND
PROSPECTUS
DECEMBER 1, 1998
As with other mutual funds, the Securities and Exchange Commission has not
approved or disapproved of this Fund's shares or determined whether this
prospectus is accurate or complete. Anyone who tells you otherwise is
committing a crime.
TABLE OF CONTENTS
What is the Fund's Investment Objective and Main Strategy?.............. 2
Main Risks of Investing in This Fund.................................... 2
Is This Fund for You?................................................... 2
Could the Value of Your Investment in This Fund Fluctuate?.............. 3
Fees and Expenses....................................................... 4
Fund Investments........................................................ 5
Fund Management......................................................... 7
Using Mutual Funds in an Investment Program............................. 8
How to Invest........................................................... 9
Important Information About Purchases and Redemptions................... 12
Exchanges............................................................... 13
Shareholder Information................................................. 14
Financial Highlights.................................................... 17
Appendix A ............................................................. 18
Appendix B ............................................................. 19
<PAGE>
USAA Investment Management Company manages this Fund. For easier reading, USAA
Investment Management Company will be referred to as "we" or "us" throughout
the Prospectus.
WHAT IS THE FUND'S INVESTMENT OBJECTIVE AND MAIN STRATEGY?
The Fund's primary investment objective is long-term growth of capital with
secondary objectives of regular income and conservation of principal. We
attempt to achieve these objectives by investing in stocks that, at the time of
purchase, are considered out of favor and undervalued.
In view of the risks inherent in all investments in securities, there is no
assurance that the Fund's objectives will be achieved. See FUND INVESTMENTS on
page 5 for more information.
MAIN RISKS OF INVESTING IN THIS FUND
The primary risk of investing in this Fund is market risk.
* MARKET RISK involves the possibility that the Fund's investments in stocks
will decline because of falls in the stock market, reducing the value of
individual company's stocks regardless of the success or failure of an
individual company's operations.
Another risk of the Fund described later in the Prospectus is the risk of
foreign investing. As with other mutual funds, losing money is an additional
risk associated with investing in this Fund.
As you consider an investment in this 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 the investment for long periods of time
to ride out down periods.
An investment in this Fund is not a deposit of USAA Federal Savings Bank, or
any other bank, and is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency.
[CAUTION LIGHT]
Look for this symbol throughout the Prospectus. We use it to mark more detailed
information about the main risks you will face as a Fund shareholder.
IS THIS FUND FOR YOU?
This Fund might be appropriate as part of your investment portfolio if . . .
* You are looking for long-term growth.
* You are willing to accept moderate to high risk.
* You are looking for a long-term investment.
2
<PAGE>
This Fund may not be appropriate as part of your investment portfolio if . . .
* You are unwilling to take greater risk for long-term goals.
* You are unable or reluctant to invest for a period of five years or more.
* You need an investment that provides regular income or tax-free income.
COULD THE VALUE OF YOUR INVESTMENT IN THIS FUND FLUCTUATE?
Yes, it could. In fact, the value of your investment will likely increase or
decrease. The bar chart shown below illustrates the Fund's volatility and
performance from year to year over the past ten years.
TOTAL RETURN
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.
[BAR CHART]
CALENDAR TOTAL
YEAR RETURN
1988 6.57%
1989 27.33%
1990 -.05%
1991 27.81%
1992 9.95%
1993 7.45%
1994 3.35%
1995 32.06%
1996 17.80%
1997 3.69%
THE FUND'S TOTAL RETURN FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30,
1998, WAS ____%.
During the periods shown in the bar chart, the highest total return for a
quarter was 12.05% (quarter ending September 30, 1994) and the lowest total
return for a quarter was -16.14% (quarter ending December 31, 1997).
The table on the next page shows how the Fund's average annual returns for the
one-, five-, and ten-year periods as well as the life of the Fund compared to
those of a broad-based securities market index. Remember, historical
performance does not necessarily indicate what will happen in the future.
3
<PAGE>
===============================================================================
Average Annual
Total Returns
(for the periods ending Past Past Past Life of
December 31, 1997) 1 Year 5 Years 10 Years Fund
===============================================================================
Growth Fund 3.69% 12.36% 13.06% 8.43%
- -------------------------------------------------------------------------------
S&P 500 Index* 33.35% 20.25% 18.02% 13.02%
===============================================================================
* 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.
Please consider performance information in light of the Fund's investment
objectives and policies and market conditions during the reported time periods.
Again, you must remember that historical performance does not necessarily
indicate what will happen 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# when asked for the Fund Code.
You can also 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." If you prefer to obtain this information from an on-line
computer service, you can do so by using the ticker symbol "USAAX."
[TELEPHONE GRAPHIC]
TouchLINE (R)
1-800-531-8777
PRESS
1
THEN
1
THEN
4 1 #
NEWSPAPER SYMBOL
Grwth
TICKER SYMBOL
USAAX
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 or sales loads charged to your account when you buy or sell
Fund shares. However, if you sell shares and request your money by wire
transfer, there is 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 on the next page show actual expenses
during the past fiscal year ended July 31, 1998, and are calculated as a
percentage of average net assets.
4
<PAGE>
12B-1 FEES -
SOME MUTUAL FUNDS
CHARGE THESE FEES
TO PAY FOR
ADVERTISING AND
OTHER COSTS OF
SELLING FUND SHARES.
Management Fees .75%
Distribution (12b-1) Fees None
Other Expenses .21%
----
Total Annual Fund Operating Expenses .96%
====
Example of Effect of Fund's Operating Expenses
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. Although your actual costs
may be higher or lower, you would pay the following expenses on a $10,000
investment, assuming (1) 5% annual return, (2) the Fund's operating expenses
remain the same, and (3) you redeem all of your shares at the end of the
periods shown.
1 year.......... $ 98
3 years......... 306
5 years......... 531
10 years......... 1,178
FUND INVESTMENTS
Principal Investment Strategies and Risks
Q What is the Fund's principal investment strategy?
A The Fund's principal investment strategy is to 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.
As a temporary defensive measure because of market, economic, political,
or other conditions, we may invest up to 100% of the Fund's assets in
investment-grade, short-term debt instruments, which may result in the
Fund not achieving its investment objective during the time it is in
this temporary defensive posture.
5
<PAGE>
[CAUTION LIGHT]
MARKET RISK. Because this Fund invests in stocks, it is subject to stock 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.
Stock markets tend to run in cycles, with periods when stock prices generally
go up, known as "bull" markets, and periods when stock prices generally go
down, referred to as "bear" markets. Stocks tend to go up and down more than
bonds.
Q How will particular securities be selected?
A We look for stocks of companies we believe are superior but whose share
prices do not reflect this. Generally, we will invest the Fund's assets
in stocks that, at the time of purchase, are considered out of favor and
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.
Using these criteria, we shall attempt to build a portfolio of stocks
that are undervalued at the time of purchase, but which we believe in a
short time will return to and sustain a normal valuation.
At times it is likely to be difficult or impossible for us to find
stocks in sufficient quantity which conform to these criteria. In such
cases we will also invest the Fund's assets in other growth stocks.
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.
ADR - FOREIGN
SHARES HELD BY
A U.S. BANK
WHICH ISSUES
A RECEIPT
EVIDENCING
OWNERSHIP.
DIVIDENDS ARE
PAID IN U.S.
DOLLARS.
[CAUTION LIGHT]
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>
Q How are the decisions to buy and sell securities made?
A We generally purchases out-of-favor growth stocks. However, at times, it
may be difficult to find a sufficiently varied group of such companies.
In such cases, we will invest a portion of the Fund's assets in a
diversified group of large capitalization growth stocks. Stocks are sold
when we believe they are overvalued. Overvaluation is generally caused
either by earnings forecasts that are too optimistic or unrealistic
multiples that the market places on projected earnings.
For additional information about other securities in which we may invest the
Fund's assets, see Appendix A on page 18.
FUND MANAGEMENT
The Company has retained us, USAA Investment Management Company, to serve as
the manager and distributor for 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 provide management services to the Fund pursuant to an Advisory Agreement.
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, 1998. 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
[PHOTOGRAPH OF PORTFOLIO MANAGER
DAVID G. PARSONS
David G. Parsons, Assistant Vice President of Equity Investments, has managed
the Fund since January 1994. He has 15 years investment management experience
working for us. Mr. Parsons earned the Chartered Financial Analyst designation
in 1986 and is a member of the Association for Investment Management and
Research and the San Antonio Financial Analysts Society, Inc. He holds an MBA
from the University of Texas, an MA from Southern Illinois University, and a BA
from Austin College, Texas.
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 to 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 in APPENDIX B under asset allocation on page 19. These unique
mutual funds provide a professionally-managed, diversified investment portfolio
within a mutual fund. Designed for the individual who prefers to delegate the
asset allocation process to an investment manager, their structure achieves
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 to meet your needs. Refer to APPENDIX B on page 19 for a
complete list of the USAA Family of No-Load Mutual Funds.
HOW TO INVEST
Purchase of Shares
OPENING AN ACCOUNT
You may open an account and make an investment as described below by mail, in
person, bank wire, electronic funds transfer (EFT), or phone. A complete,
signed application is required for each new account. However, after you open
your initial account with us, you will not need to fill out another application
unless the registration is different.
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. 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 and payment prior to that time, your
purchase price will be the NAV per share determined for that day. If we receive
your request or payment 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. This will 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
[MONEY GRAPHIC]
* $3,000 [$500 Uniform Gifts/Transfers to Minors Act (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 through
payroll deduction for as little as $25 per pay period with no initial
investment.
ADDITIONAL PURCHASES
* $50
HOW TO PURCHASE
MAIL
[ENVELOPE GRAPHIC]
* To open an account, send your application and 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
[HANDSHAKE GRAPHIC]
* To open an account, bring your application and check to:
USAA Investment Management Company
USAA Federal Savings Bank
10750 Robert F. McDermott Freeway
San Antonio, TX 78288
BANK WIRE
[WIRE GRAPHIC]
* Instruct your bank (which may charge a fee for the service) to wire the
specified amount to the Fund as follows:
State Street Bank and Trust Company
Boston, MA 02101
ABA#011000028
Attn: USAA Growth Fund
USAA Account Number: 69384998
Shareholder(s) Name(s)__________________________________________
Shareholder(s) Mutual Fund Account Number_______________________
10
<PAGE>
ELECTRONIC FUNDS TRANSFER
[CALENDAR GRAPHIC]
* Additional purchases on a regular basis can be deducted from a bank account,
paycheck, income-producing investment, or USAA money market fund account.
Sign up for these services when opening an account or call 1-800-531-8448 to
add these services.
PHONE 1-800-531-8448
[TELEPHONE GRAPHIC]
* If you have an existing USAA mutual fund account and would like to 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.
We will send you your money within seven days after the effective date of
redemption. 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. Redemptions are
subject to taxes based on the difference between the cost of shares when
purchased and the price received upon redemption.
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, TELEGRAPH, OR TELEPHONE
[FAX MACHINE GRAPHIC]
* Send your written instructions to:
USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, TX 78288
* Send a signed fax to 1-800-292-8177, or send a telegram to USAA Shareholder
Account Services.
* Call toll free 1-800-531-8448, in San Antonio, 456-7202.
11
<PAGE>
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, the following information is obtained:
(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. Additionally, all telephone communications with you are recorded
and confirmations of account transactions are sent to the address of record. If
you were issued stock certificates for your shares, redemption by telephone,
fax, or telegram is not available.
IMPORTANT INFORMATION ABOUT PURCHASES AND REDEMPTIONS
Investor's Guide to USAA Mutual Fund Services
[INVESTOR'S GUIDE GRAPHIC]
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
USAA Shareholder Account Services (SAS), the Fund's transfer agent, may assess
annually 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).
12
<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 transactions 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. After the exchange order is received, the
Fund's transfer agent will simultaneously process exchange redemptions and
purchases at the share prices next determined. The investment minimums
applicable to share purchases also apply to exchanges. For federal income tax
purposes, an exchange between Funds is a taxable event; and as such, you may
realize a capital gain or loss. Such capital gains or losses are based on the
difference between the cost of shares when purchased and the price received
upon exchange.
The Fund has undertaken certain procedures regarding telephone transactions as
described on page 11.
13
<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 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
NAV PER SHARE
EQUALS
TOTAL ASSETS
MINUS
LIABILITIES
DIVIDED BY
# OF SHARES
OUTSTANDING
The price at which you 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. 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.
Portfolio securities, except as otherwise noted, traded primarily on a
securities exchange are valued at the last sales price on that exchange. If no
sale is reported, the average of the bid and asked prices is generally used.
Over-the-counter securities are generally priced at the last sales price or, if
not available, at the average of the bid and asked prices.
Debt securities purchased with maturities of 60 days or less are stated at
amortized cost, which approximates market value. Other debt securities are
valued each business day at their current market value as determined by a
pricing service approved by the Board of Directors. Securities which cannot be
valued by these methods, and all other assets, are valued in good faith at fair
value using methods we have determined under the general supervision of the
Board of Directors.
For additional information on how securities are valued, see VALUATION OF
SECURITIES in the Fund's Statement of Additional Information.
Dividends and Distributions
The Fund pays net investment income dividends yearly. Any net capital gain
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.
We will automatically reinvest all income dividends and capital gain
distributions unless we receive different instructions from you. The share
price will be the NAV of the Fund shares computed on the ex-dividend date.
14
<PAGE>
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 Taxpayer
Relief Act of 1997 and the technical provisions adopted by the IRS
Restructuring and Reform Act of 1998 may affect the status and treatment of
certain distributions shareholders receive from the Fund. We urge you to
consult your tax adviser about the status of distributions from the Fund in
your own state and locality.
SHAREHOLDER - Dividends from taxable net investment income and distributions of
net short-term capital gains are taxable to you 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. These distributions may be
taxable at different rates depending on the length of time the Fund held the
applicable investment.
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 information to you annually concerning the tax
status of dividends and distributions for federal income tax purposes.
15
<PAGE>
Year 2000
Like other organizations around the world, the Fund could be adversely affected
if the computer systems used by the Fund, its service providers, or companies
in which the Fund invests do not properly process and calculate information
that relates to dates beginning on January 1, 2000, and beyond. This situation
may occur because for many years computer programmers used only two digits to
describe years, such as 98 for 1998. A program written in this manner may not
work when it encounters the year 00. To confront this situation, USAA companies
have spent much effort and money; and we expect to have our systems ready for
the Year 2000 by mid-1999. In addition, we are actively assessing the Year 2000
readiness of our service providers, partners, and companies in whose securities
we invest. It is not possible for us to say that you will experience no effect
from this situation, but we can say that we are making a large effort to avoid
any ill effects upon our shareholders.
We do believe you are entitled to know with certainty that we will stand behind
your share balance as of the close of business in 1999. When the market reopens
in 2000, should any computer problem cause a change in the number of shares in
your account, we will return your account to its proper share balance.
16
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the Fund's
financial performance for the past five-year period. Certain information
reflects financial results for a single Fund share. The total returns in the
table represent the rate that an investor would have earned (or lost) on an
investment in the Fund (assuming reinvestment of all dividends and
distributions). This information has been audited by KPMG Peat Marwick LLP,
whose report, along with the Fund's financial statements, are included in the
Annual Report, which is available upon request.
<TABLE>
<CAPTION>
Ten-Month
Period Ended
Year Ended July 31, July 31,
------------------------------------------------------------
1998 1997 1996 1995 1994
------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value at
beginning of period $ 23.66 $ 20.05 $ 19.06 $ 17.63 $ 19.76
Net investment income .01 .24 .33 .26 .19
Net realized and
unrealized gain (loss) (1.31) 6.92 1.92 3.95 (.17)
Distributions from net
investment income (.09) (.34) (.29) (.27) (.16)
Distributions of realized
capital gains (2.23) (3.21) (.97) (2.51) (1.99)
-----------------------------------------------------------
Net asset value at
end of period $ 20.04 $ 23.66 $ 20.05 $ 19.06 $ 17.63
===========================================================
Total return (%)* (4.91) 42.48 12.44 26.46 .31
Net assets at end of
period (000) $1,403,573 $1,650,257 $1,162,262 $922,821 $618,685
Ratio of expenses to
average net assets (%) .96 .97 1.01 1.04 1.04(a)
Ratio of net investment
income to average net
assets (%) .04 1.28 1.70 1.63 1.33(a)
Portfolio turnover (%) 68.93 75.41 62.30 69.64 117.80
</TABLE>
- -----------------
(a) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
* Assumes reinvestment of all dividend income and capital gain distribution
during the period.
17
<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 the Fund's assets in convertible securities, which are bonds,
preferred stocks, and other securities that pay interest or dividends and offer
the buyer the ability to convert 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 also depends on the price of the underlying common stock.
ILLIQUID SECURITIES
We may invest up to 15% 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, 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, certificates of deposit,
bankers' acceptances, and other financial institution obligations. These
securities may carry fixed or variable interest rates.
18
<PAGE>
APPENDIX B
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 (1) Very high
First Start Growth Moderate to high
Gold (1) Very high
Growth Moderate to high
Growth & Income Moderate
International (1) Moderate to high
S&P 500 Index (2) Moderate
Science & Technology Very high
World Growth (1) Moderate to high
- ---------------------------------------------------------------
ASSET ALLOCATION
- ---------------------------------------------------------------
Balanced Strategy (1) Moderate
Cornerstone Strategy (1) Moderate
Growth and Tax Strategy Moderate
Growth Strategy (1) 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 (3) Moderate
Intermediate-Term (3) Low to moderate
Short-Term (3) Low
State Bond/Income (3,4) Moderate
- ---------------------------------------------------------------
MONEY MARKET
- ---------------------------------------------------------------
Money Market (5) Very low
Tax Exempt Money Market (3,5) Very low
Treasury Money Market Trust (5) Very low
State Money Market (3,4,5) Very low
===============================================================
1 FOREIGN INVESTING IS SUBJECT TO ADDITIONAL RISKS, SUCH AS CURRENCY
FLUCTUATIONS, MARKET ILLIQUIDITY, AND POLITICAL INSTABILITY.
2 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.
3 SOME INCOME MAY BE SUBJECT TO STATE OR LOCAL TAXES.
4 CALIFORNIA, FLORIDA, NEW YORK, TEXAS, AND VIRGINIA FUNDS ARE OFFERED ONLY TO
RESIDENTS OF THOSE STATES.
5 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.
19
<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),
Annual or Semiannual Report, or to ask other questions about the Fund. The SAI
has been filed with the Securities and Exchange Commission (SEC) and is legally
a part of the Prospectus. In the Fund's Annual Report, you will find a
discussion of the market conditions and investment strategies that
significantly affected the Fund's performance during the last fiscal year.
To view these documents, along with other related documents, you can visit the
SEC's Internet web site (http://www.sec.gov) or the Commission's Public
Reference Room in Washington, D.C. Information on the operation of the public
reference room can be obtained by calling 1-800-SEC-0330. Additionally, copies
of this information can be obtained, for a duplicating fee, by writing the
Public Reference Section of the Commission, Washington, D.C. 20549-6009.
INVESTMENT ADVISER, UNDERWRITER AND DISTRIBUTOR
USAA Investment Management Company
9800 Fredericksburg Road
San Antonio, Texas 78288
-----------------------------------------------
TRANSFER AGENT CUSTODIAN
USAA Shareholder Account Services State Street Bank and Trust Company
9800 Fredericksburg Road P.O. Box 1713
San Antonio, Texas 78288 Boston, Massachusetts 02105
-----------------------------------------------
TELEPHONE ASSISTANCE HOURS
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
Investment Company Act File No. 811-2429
<PAGE>
Part A
Prospectus for the
Growth & Income Fund
is included herein
<PAGE>
USAA GROWTH &
INCOME FUND
PROSPECTUS
DECEMBER 1, 1998
As with other mutual funds, the Securities and Exchange Commission has not
approved or disapproved of this Fund's shares or determined whether this
prospectus is accurate or complete. Anyone who tells you otherwise is
committing a crime.
TABLE OF CONTENTS
What is the Fund's Investment Objective and Main Strategy?.............. 2
Main Risks of Investing in This Fund.................................... 2
Is This Fund for You?................................................... 2
Could the Value of Your Investment in This Fund Fluctuate?.............. 3
Fees and Expenses....................................................... 4
Fund Investments........................................................ 5
Fund Management......................................................... 7
Using Mutual Funds in an Investment Program............................. 8
How to Invest........................................................... 9
Important Information About Purchases and Redemptions................... 12
Exchanges............................................................... 13
Shareholder Information................................................. 13
Financial Highlights.................................................... 16
Appendix A ............................................................. 17
Appendix B ............................................................. 18
<PAGE>
USAA Investment Management Company manages this Fund. For easier reading, USAA
Investment Management Company will be referred to as "we" or "us" throughout
the Prospectus.
WHAT IS THE FUND'S INVESTMENT OBJECTIVE AND MAIN STRATEGY?
The Fund's investment objectives are capital growth and current income. We will
attempt to achieve these objectives by investing the Fund's assets primarily in
dividend paying equity securities.
In view of the risks inherent in all investments in securities, there is no
assurance that the Fund's objectives will be achieved. See FUND INVESTMENTS on
page 5 for more information.
MAIN RISKS OF INVESTING IN THIS FUND
The primary risk of investing in this Fund is market risk.
* MARKET RISK involves the possibility that the Fund's investments in equity
securities will decline because of falls in the stock market, reducing the
value of individual company's stocks regardless of the success or failure
of an individual company's operations.
Other risks of the Fund described later in the Prospectus include the risks of
foreign investing and investing in real estate investment trusts (REITs). As
with other mutual funds, losing money is an additional risk associated with
investing in this Fund.
As you consider an investment in this 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 the investment for long periods of time
to ride out down periods.
An investment in this Fund is not a deposit of USAA Federal Savings Bank, or
any other bank, and is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency.
[CAUTION LIGHT]
Look for this symbol throughout the Prospectus. We use it to mark more detailed
information about the main risks you will face as a Fund shareholder.
IS THIS FUND FOR YOU?
This Fund might be appropriate as part of your investment portfolio if . . .
* You are looking for capital growth and current income.
* You are willing to accept moderate risk
* You are looking for a long-term investment.
2
<PAGE>
This Fund may not be appropriate as part of your investment portfolio if . . .
* You are unable or reluctant to invest for a period of five years or more.
* You need an investment that provides tax-free income.
COULD THE VALUE OF YOUR INVESTMENT IN THIS FUND FLUCTUATE?
Yes, it could. In fact, the value of your investment will likely increase or
decrease. The bar chart shown below illustrates the Fund's volatility and
performance from year to year over the life of the Fund.
TOTAL RETURN
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.
[BAR CHART]
CALENDAR TOTAL
YEAR RETURN
1994* 1.29%
1995 31.57%
1996 23.04%
1997 26.04%
*Fund began operations on June 1, 1993.
THE FUND'S TOTAL RETURN FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30,
1998, WAS _____%.
During the periods shown in the bar chart, the highest total return for a
quarter was 13.96% (quarter ending June 30, 1997) and the lowest total return
for a quarter was -3.96% (quarter ending March 31, 1994).
3
<PAGE>
The table below shows how the Fund's average annual returns for the one-year
period and the life of the Fund compared to those of a broad-based securities
market index. Remember, historical performance does not necessarily indicate
what will happen in the future.
===============================================================================
Average Annual
Total Returns
(for the periods ending Past Since Fund's Inception
December 31, 1997) 1 Year on June 1, 1993
===============================================================================
Growth & Income Fund 26.04% 18.30%
- -------------------------------------------------------------------------------
S&P 500 Index* 33.35% 21.10%
===============================================================================
* 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.
Please consider performance information in light of the Fund's investment
objectives and policies and market conditions during the reported time periods.
Again, you must remember that historical performance does not necessarily
indicate what will happen 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# when asked for the Fund Code.
You can also 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." If you prefer to obtain this information from an on-line
computer service, you can do so by using the ticker symbol "USGRX."
[TELEPHONE GRAPHIC]
TouchLINE (R)
1-800-531-8777
PRESS
1
THEN
1
THEN
3 7 #
NEWSPAPER SYMBOL
Gr&Inc
TICKER SYMBOL
USGRX
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 or sales loads charged to your account when you buy or sell
Fund shares. However, if you sell shares and request your money by wire
transfer, there is 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
4
<PAGE>
custodian and transfer agent fees. The figures below show actual expenses
during the past fiscal year ended July 31, 1998, and are calculated as a
percentage of average net assets.
12B-1 FEES -
SOME MUTUAL FUNDS
CHARGE THESE FEES
TO PAY FOR
ADVERTISING AND
OTHER COSTS OF
SELLING FUND SHARES.
Management Fees .60%
Distribution (12b-1) Fees None
Other Expenses .25%
----
Total Annual Fund Operating Expenses .85%
====
Example of Effect of Fund's Operating Expenses
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. Although your actual costs
may be higher or lower, you would pay the following expenses on a $10,000
investment, assuming (1) 5% annual return, (2) the Fund's operating expenses
remain the same, and (3) you redeem all of your shares at the end of the
periods shown.
1 year.......... $ 87
3 years......... 271
5 years......... 471
10 years......... 1,049
FUND INVESTMENTS
Principal Investment Strategies and Risks
Q What is the Fund's principal investment strategy?
A The Fund's principal investment strategy is to invest the Fund's assets
primarily in dividend paying equity securities. We 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.
As a temporary defensive measure because of market, economic, political,
or other conditions, we may invest up to 100% of the Fund's assets in
investment-grade short-term debt instruments, which may result in the
Fund not achieving its investment objective during the time it is in
this temporary defensive posture.
5
<PAGE>
[CAUTION LIGHT]
MARKET RISK. Because this Fund invests in equity securities, it is subject to
stock 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. Stock markets tend to run in cycles, with periods when
stock prices generally go up, known as "bull" markets, and periods when stock
prices generally go down, referred to as "bear" markets. Equity securities tend
to go up and down more than bonds.
[CAUTION LIGHT]
REITs. Investing in REITs may subject the Fund to many of the same risks
associated with the direct ownership of real estate. Additionally, REITs are
dependent upon the capabilities of the REIT manager(s), have limited
diversification, and could be significantly impacted by changes in tax laws.
ADR - FOREIGN
SHARES HELD BY
A U.S. BANK
WHICH ISSUES
A RECEIPT
EVIDENCING
OWNERSHIP.
DIVIDENDS ARE
PAID IN U.S.
DOLLARS.
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 LIGHT]
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.
Q How are the decisions to buy and sell securities made?
A We appraise a stock's price in relation to the company's earnings, cash
flow, book value, and yield. We also consider various qualitative
factors such as the number of shares the company's management owns, the
attitude of investors in general toward the company, and the quality of
management.
We use the same criteria in deciding which securities to sell. For
example, when a company's shares sell well above their relative
historical levels, we may decide to sell the stock.
For additional information about other securities in which we may invest the
Fund's assets, see APPENDIX A on page 17.
6
<PAGE>
FUND MANAGEMENT
The Company has retained us, USAA Investment Management Company, to serve as
the manager and distributor for 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 provide management services to the Fund pursuant to an Advisory Agreement.
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, 1998. 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
[PHOTOGRAPH OF PORTFOLIO MANAGER]
R. DAVID ULLOM
R. David Ullom, Assistant Vice President of Equity Investments, has managed the
Fund since its inception in June 1993. Mr. Ullom has 23 years investment
management experience and has worked for us for 12 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.
7
<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 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 to 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 in APPENDIX B under asset allocation on page 18. These unique
mutual funds provide a professionally-managed, diversified investment portfolio
within a mutual fund. Designed for the individual who prefers to delegate the
asset allocation process to an investment manager, their structure achieves
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
8
<PAGE>
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 to meet your needs. Refer to Appendix B on page 18 for a
complete list of the USAA Family of No-Load Mutual Funds.
HOW TO INVEST
Purchase of Shares
OPENING AN ACCOUNT
You may open an account and make an investment as described below by mail, in
person, bank wire, electronic funds transfer (EFT), or phone. A complete,
signed application is required for each new account. However, after you open
your initial account with us, you will not need to fill out another application
unless the registration is different.
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. 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 and payment prior to that time, your
purchase price will be the NAV per share determined for that day. If we receive
your request or payment 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. This will 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
[MONEY GRAPHIC]
* $3,000 [$500 Uniform Gifts/Transfers to Minors Act (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 through
payroll deduction for as little as $25 per pay period with no initial
investment.
9
<PAGE>
ADDITIONAL PURCHASES
* $50
HOW TO PURCHASE
MAIL
[ENVELOPE GRAPHIC]
* To open an account, send your application and 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
[HANDSHAKE GRAPHIC]
* To open an account, bring your application and check to:
USAA Investment Management Company
USAA Federal Savings Bank
10750 Robert F. McDermott Freeway
San Antonio, TX 78288
BANK WIRE
[WIRE GRAPHIC]
* Instruct your bank (which may charge a fee for the service) to wire the
specified amount to the Fund as follows:
State Street Bank and Trust Company
Boston, MA 02101
ABA#011000028
Attn: USAA Growth & Income Fund
USAA Account Number: 69384998
Shareholder(s) Name(s)___________________________________________
Shareholder(s) Mutual Fund Account Number________________________
ELECTRONIC FUNDS TRANSFER
[CALENDAR GRAPHIC]
* Additional purchases on a regular basis can be deducted from a bank
account, paycheck, income-producing investment, or USAA money market fund
account. Sign 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
[TELEPHONE GRAPHIC]
* If you have an existing USAA mutual fund account and would like to 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.
We will send you your money within seven days after the effective date of
redemption. 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. Redemptions are
subject to taxes based on the difference between the cost of shares when
purchased and the price received upon redemption.
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, TELEGRAPH, OR TELEPHONE
[FAX MACHINE GRAPHIC]
* Send your written instructions to:
USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, TX 78288
* Send a signed fax to 1-800-292-8177, or send a telegram 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, the following information is obtained:
(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. Additionally, all telephone communications with you are recorded
and confirmations of account transactions are sent to the address of record. If
you were issued stock certificates for your shares, redemption by telephone,
fax, or telegram is not available.
11
<PAGE>
IMPORTANT INFORMATION ABOUT PURCHASES AND REDEMPTIONS
Investor's Guide to USAA Mutual Fund Services
[INVESTOR'S GUIDE GRAPHIC]
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
USAA Shareholder Account Services (SAS), the Fund's transfer agent, may assess
annually 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 transactions 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.
12
<PAGE>
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. After the exchange order is received, the
Fund's transfer agent will simultaneously process exchange redemptions and
purchases at the share prices next determined. The investment minimums
applicable to share purchases also apply to exchanges. For federal income tax
purposes, an exchange between Funds is a taxable event; and as such, you may
realize a capital gain or loss. Such capital gains or losses are based on the
difference between the cost of shares when purchased and the price received
upon exchange.
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 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
NAV PER SHARE
EQUALS
TOTAL ASSETS
MINUS
LIABILITIES
DIVIDED BY
# OF SHARES
OUTSTANDING
The price at which you 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. 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.
Portfolio securities, except as otherwise noted, traded primarily on a
securities exchange are valued at the last sales price on that exchange. If no
sale is reported, the average of the bid and asked prices is generally used.
Over-the-counter securities are generally priced at the last sales price or, if
not available, at the average of the bid and asked prices.
Debt securities purchased with maturities of 60 days or less are stated at
amortized cost, which approximates market value. Other debt securities are
valued each business day at their current market value as determined by a
13
<PAGE>
pricing service approved by the Board of Directors. Securities which cannot be
valued by these methods, and all other assets, are valued in good faith at fair
value using methods we have determined under the general supervision of the
Board of Directors.
For additional information on how securities are valued, see VALUATION OF
SECURITIES in the Fund's Statement of Additional Information.
Dividends and Distributions
The Fund pays net investment income dividends quarterly. Any net capital gain
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.
We will automatically invest all income dividends and capital gain
distributions 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 Taxpayer
Relief Act of 1997 and the technical provisions adopted by the IRS
Restructuring and Reform Act of 1998 may affect the status and treatment of
certain distributions shareholders receive from the Fund. We urge you to
consult your tax adviser about the status of distributions from the Fund in
your own state and locality.
SHAREHOLDER - Dividends from taxable net investment income and distributions of
net short-term capital gains are taxable to you 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. These distributions may be
taxable at different rates depending on the length of time the Fund held the
applicable investment.
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 information to you annually concerning the tax
status of dividends and distributions for federal income tax purposes.
Year 2000
Like other organizations around the world, the Fund could be adversely affected
if the computer systems used by the Fund, its service providers, or companies
in which the Fund invests do not properly process and calculate information
that relates to dates beginning on January 1, 2000, and beyond. This situation
may occur because for many years computer programmers used only two digits to
describe years, such as 98 for 1998. A program written in this manner may not
work when it encounters the year 00. To confront this situation, USAA companies
have spent much effort and money; and we expect to have our systems ready for
the Year 2000 by mid-1999. In addition, we are actively assessing the Year 2000
readiness of our service providers, partners, and companies in whose securities
we invest. It is not possible for us to say that you will experience no effect
from this situation, but we can say that we are making a large effort to avoid
any ill effects upon our shareholders.
We do believe you are entitled to know with certainty that we will stand behind
your share balance as of the close of business in 1999. When the market reopens
in 2000, should any computer problem cause a change in the number of shares in
your account, we will return your account to its proper share balance.
15
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the Fund's
financial performance for the past five-year period. Certain information
reflects financial results for a single Fund share. The total returns in the
table represent the rate that an investor would have earned (or lost) on an
investment in the Fund (assuming reinvestment of all dividends and
distributions). This information has been audited by KPMG Peat Marwick LLP,
whose report, along with the Fund's financial statements, are included in the
Annual Report, which is available upon request.
<TABLE>
<CAPTION>
Ten-Month
Period Ended
Year Ended July 31, July 31,
------------------------------------------------------------
1998 1997 1996 1995 1994
------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value at
beginning of period $ 18.85 $ 13.46 $ 12.07 $ 10.36 $ 10.23
Net investment income .21 .23 .24(a) .24(a) .17(a)
Net realized and
unrealized gain .69 5.84 1.51 1.81 .16
Distributions from net
investment income (.21) (.23) (.23) (.23) (.18)
Distributions of realized
capital gains (.66) (.45) (.13) (.11) (.02)
------------------------------------------------------------
Net asset value at
end of period $ 18.88 $ 18.85 $ 13.46 $ 12.07 $ 10.36
============================================================
Total return (%)* 4.99 46.69 14.68 20.30 3.28
Net assets at end of
period (000) $1,078,589 $825,092 $371,801 $208,490 $134,622
Ratio of expenses to
average net assets (%) .85 .89 .95 1.01 1.12(b)
Ratio of net investment
income to average net
assets (%) 1.07 1.50 1.84 2.21 1.95(b)
Portfolio turnover (%) 29.38 14.67 16.13 19.45 13.90
</TABLE>
- -----------------
(a) Calculated using weighted average shares.
(b) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
* Assumes reinvestment of all dividend income and capital gain distributions
during the period.
16
<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 the Fund's assets in convertible securities, which are bonds,
preferred stocks, and other securities that pay interest or dividends and offer
the buyer the ability to convert 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 also depends on the price of the underlying common stock.
ILLIQUID SECURITIES
We may invest up to 15% 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, 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, certificates of deposit,
bankers' acceptances, and other financial institution obligations. These
securities may carry fixed or variable interest rates.
17
<PAGE>
APPENDIX B
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 (1) Very high
First Start Growth Moderate to high
Gold (1) Very high
Growth Moderate to high
Growth & Income Moderate
International (1) Moderate to high
S&P 500 Index (2) Moderate
Science & Technology Very high
World Growth (1) Moderate to high
- ---------------------------------------------------------------
ASSET ALLOCATION
- ---------------------------------------------------------------
Balanced Strategy (1) Moderate
Cornerstone Strategy (1) Moderate
Growth and Tax Strategy Moderate
Growth Strategy (1) 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 (3) Moderate
Intermediate-Term (3) Low to moderate
Short-Term (3) Low
State Bond/Income (3,4) Moderate
- ---------------------------------------------------------------
MONEY MARKET
- ---------------------------------------------------------------
Money Market (5) Very low
Tax Exempt Money Market (3,5) Very low
Treasury Money Market Trust (5) Very low
State Money Market (3,4,5) Very low
===============================================================
1 FOREIGN INVESTING IS SUBJECT TO ADDITIONAL RISKS, SUCH AS CURRENCY
FLUCTUATIONS, MARKET ILLIQUIDITY, AND POLITICAL INSTABILITY.
2 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.
3 SOME INCOME MAY BE SUBJECT TO STATE OR LOCAL TAXES.
4 CALIFORNIA, FLORIDA, NEW YORK, TEXAS, AND VIRGINIA FUNDS ARE OFFERED ONLY TO
RESIDENTS OF THOSE STATES.
5 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.
18
<PAGE>
NOTES
<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),
Annual or Semiannual Report, or to ask other questions about the Fund. The SAI
has been filed with the Securities and Exchange Commission (SEC) and is legally
a part of the Prospectus. In the Fund's Annual Report, you will find a
discussion of the market conditions and investment strategies that
significantly affected the Fund's performance during the last fiscal year.
To view these documents, along with other related documents, you can visit the
SEC's Internet web site (http://www.sec.gov) or the Commission's Public
Reference Room in Washington, D.C. Information on the operation of the public
reference room can be obtained by calling 1-800-SEC-0330. Additionally, copies
of this information can be obtained, for a duplicating fee, by writing the
Public Reference Section of the Commission, Washington, D.C. 20549-6009.
INVESTMENT ADVISER, UNDERWRITER AND DISTRIBUTOR
USAA Investment Management Company
9800 Fredericksburg Road
San Antonio, Texas 78288
-----------------------------------------------
TRANSFER AGENT CUSTODIAN
USAA Shareholder Account Services State Street Bank and Trust Company
9800 Fredericksburg Road P.O. Box 1713
San Antonio, Texas 78288 Boston, Massachusetts 02105
-----------------------------------------------
TELEPHONE ASSISTANCE HOURS
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
Investment Company Act File No. 811-2429
<PAGE>
Part A
Prospectus for the
Income Stock Fund
is included herein
<PAGE>
USAA INCOME
STOCK FUND
PROSPECTUS
DECEMBER 1, 1998
As with other mutual funds, the Securities and Exchange Commission has not
approved or disapproved of this Fund's shares or determined whether this
prospectus is accurate or complete. Anyone who tells you otherwise is
committing a crime.
TABLE OF CONTENTS
What is the Fund's Investment Objective and Main Strategy? ..... 2
Main Risks of Investing in This Fund ........................... 2
Is This Fund for You? .......................................... 3
Could the Value of Your Investment in This Fund Fluctuate? ..... 3
Fees and Expenses .............................................. 5
Fund Investments ............................................... 6
Fund Management ................................................ 8
Using Mutual Funds in an Investment Program .................... 10
How to Invest .................................................. 11
Important Information About Purchases and Redemptions .......... 14
Exchanges ...................................................... 15
Shareholder Information ........................................ 15
Financial Highlights ........................................... 18
Appendix A ..................................................... 19
Appendix B ..................................................... 20
<PAGE>
USAA Investment Management Company manages this Fund. For easier reading, USAA
Investment Management Company will be referred to as "we" or "us" throughout
the Prospectus.
WHAT IS THE FUND'S INVESTMENT OBJECTIVE AND MAIN STRATEGY?
The Fund's investment objective is current income with the prospect of
increasing dividend income and the potential for capital appreciation. We will
attempt to achieve the Fund's objective by investing primarily in common stocks
of well-established, large companies with above-average dividend yields.
In view of the risks inherent in all investments in securities, there is no
assurance that the Fund's objective will be achieved. See FUND INVESTMENTS on
page 6 for more information.
MAIN RISKS OF INVESTING IN THIS FUND
The primary risks of investing in this Fund are market risk, interest rate
risk, and credit risk.
* MARKET RISK involves the possibility that the Fund's investments in stocks
will decline because of falls in the stock market, reducing the value of
individual company's stocks, regardless of the success or failure of an
individual company's operations.
* INTEREST RATE RISK involves the possibility that the value of the Fund's
investments will decline because of an increase in interest rates.
IF INTEREST RATES INCREASE: the yield of the Fund may increase and the
market value of the Fund's securities will likely decline, adversely
affecting the net asset value and total return.
IF INTEREST RATES DECREASE: the yield of the Fund may decrease and the
market value of the Fund's securities may increase, which would likely
increase the Fund's net asset value and total return.
* CREDIT RISK involves the possibility that a borrower cannot make timely
interest and principal payments on its securities.
An additional risk of the Fund described later in the Prospectus is the risk of
foreign investing. As with other mutual funds, losing money is an additional
risk associated with investing in this Fund.
2
<PAGE>
As you consider an investment in this 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 the investment for long periods of time
to ride out down periods.
An investment in this Fund is not a deposit of USAA Federal Savings Bank, or
any other bank, and is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency.
[CAUTION LIGHT]
Look for this symbol throughout the Prospectus. We use it to mark more detailed
information about the main risks you will face as a Fund shareholder.
IS THIS FUND FOR YOU?
This Fund might be appropriate as part of your investment portfolio if . . .
* You are primarily looking for current income and secondarily capital
appreciation.
* You are willing to accept moderate risk.
* You are looking for a long-term investment.
This Fund may not be appropriate as part of your investment portfolio if . . .
* Your primary goal is to maximize long-term growth through capital
appreciation.
* You are unable or reluctant to invest for a period of five years or more.
* You need an investment that provides tax-free income.
COULD THE VALUE OF YOUR INVESTMENT IN THIS FUND FLUCTUATE?
Yes, it could. In fact, the value of your investment will likely increase or
decrease. The bar chart shown on the next page illustrates the Fund's
volatility and performance from year to year for the past ten years.
3
<PAGE>
TOTAL RETURN
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.
[BAR CHART]
CALENDAR TOTAL
YEAR RETURN
1988 19.43%
1989 27.13%
1990 -1.42%
1991 27.33%
1992 7.80%
1993 11.56%
1994 -.70%
1995 28.62%
1996 18.70%
1997 26.99%
THE FUND'S TOTAL RETURN FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30,
1998, WAS ____%.
During the periods shown in the bar chart, the highest total return for a
quarter was 10.81% (quarter ending March 31, 1991) and the lowest total return
for a quarter was -8.30% (quarter ending September 30, 1990).
The table below shows how the Fund's average annual returns for the one-,
five-, and ten-year periods as well as the life of the Fund compared to those
of a broad-based securities market index. Remember, historical performance does
not necessarily indicate what will happen in the future.
===============================================================================
Average Annual
Total Returns
(for the periods ending Past Past Past Life of
December 31, 1997) 1 Year 5 Years 10 Years Fund
===============================================================================
Income Stock Fund 26.99% 16.52% 16.00% 14.04%
- -------------------------------------------------------------------------------
S&P 500 Index* 33.35% 20.25% 18.02% 15.36%
===============================================================================
*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.
4
<PAGE>
[TELEPHONE GRAPHIC]
TOUCHLINE (R)
1-800-531-8777
PRESS
1
THEN
1
THEN 3 5 #
Please consider performance information in light of the Fund's investment
objective and policies and market conditions during the reported time periods.
Again, you must remember that historical performance does not necessarily
indicate what will happen 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# when asked for the Fund Code.
NEWSPAPER
SYMBOL
IncStk
TICKER
SYMBOL
USISX
You can also 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." If you prefer to obtain this information from an on-line
computer service, you can do so by using the ticker symbol "USISX."
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 or sales loads charged to your account when you buy or sell
Fund shares. However, if you sell shares and request your money by wire
transfer, there is 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 expenses during the past
fiscal year ended July 31, 1998, and are calculated as a percentage of average
net assets.
12B-1 FEES -
SOME MUTUAL
FUNDS CHARGE
THESE FEES
TO PAY FOR
ADVERTISING
AND OTHER
COSTS OF SELLING
FUND SHARES.
Management Fees .50%
Distribution (12b-1) Fees None
Other Expenses .15%
----
Total Annual Fund Operating Expenses .65%
====
5
<PAGE>
Example of Effect of Fund's Operating Expenses
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. Although your actual costs
may be higher or lower, you would pay the following expenses on a $10,000
investment, assuming (1) 5% annual return, (2) the Fund's operating expenses
remain the same, and (3) you redeem all of your shares at the end of the
periods shown.
1 year............... $ 66
3 years.............. 208
5 years.............. 362
10 years.............. 810
FUND INVESTMENTS
Principal Investment Strategies and Risks
Q What is the Fund's principal investment strategy?
A The Fund's principal investment strategy is to invest the Fund's assets
primarily in the common stocks of well-established, large companies that
have demonstrated an ability to increase their dividends. We attempt to
provide a portfolio with a dividend yield above the average of the S&P 500
Index. We may include common stocks, real estate investment trusts
(REITs), preferred stocks, securities convertible into common stocks, and
securities which carry the right to buy common stocks in the portfolio.
As a temporary defensive measure because of market, economic, political,
or other conditions, we may invest up to 100% of the Fund's assets in
investment-grade, short-term debt instruments, which may result in the
Fund not achieving its investment objective during the time it is in this
temporary defensive posture.
[CAUTION LIGHT]
MARKET RISK. Because this Fund invests in stocks, including convertible
securities, it is subject to stock 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. Stock markets tend to run in
cycles, with periods when stock prices generally go up, known as "bull"
markets, and periods when stock prices generally go down, referred to as "bear"
markets. Stocks tend to go up and down more than bonds.
6
<PAGE>
[CAUTION LIGHT]
REITS. Investing in REITs may subject the Fund to many of the same risks
associated with the direct ownership of real estate. Additionally, REITs are
dependent upon the capabilities of the REIT manager(s), have limited
diversification, and could be significantly impacted by changes in tax laws.
Q Are there any limitations on how much of the Fund's assets may be invested
in any particular securities?
A We may only 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 LIGHT]
INTEREST RATE RISK. Interest rate risk is the risk that the market value of
certain securities will decline because of rising interest rates. Certain of
the Fund's portfolio securities have similar interest rate risk characteristics
to bonds. In general, when interest rates rise, the prices of these securities
fall and when interest rates fall, the prices of these securities generally
rise.
[CAUTION LIGHT]
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 because of 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
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.
ADR - FOREIGN
SHARES HELD BY
A U.S. BANK
WHICH ISSUES
A RECEIPT
EVIDENCING
OWNERSHIP.
DIVIDENDS ARE
PAID IN U.S.
DOLLARS.
7
<PAGE>
[CAUTION LIGHT]
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.
Q How are the decisions to buy and sell securities made?
A We normally evaluate a universe of stocks with a dividend stream growing
faster than the average company. A stock is selected based on independent
research of the following: the quality of management, industry
fundamentals, and the company's future prospects. These factors are
combined with an attractive valuation to make the purchase decision. We
sell stocks when one or more of these factors change for the worse.
For additional information about other securities in which we may invest the
Fund's assets, see APPENDIX A on page 19.
FUND MANAGEMENT
The Company has retained us, USAA Investment Management Company, to serve as
the manager and distributor for 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 provide management services to the Fund pursuant to an Advisory Agreement.
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, 1998. 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.
8
<PAGE>
Portfolio Managers
A team of portfolio managers is responsible for the day-to-day management of
the Fund's portfolio. The members of the team include David G. Peebles, R.
David Ullom, and Stephan J. Klaffke, who collectively have 69 years investment
management experience and currently manage over $4 billion in assets. The team
meets regularly to review the portfolio holdings of the Fund and will make
adjustments when appropriate to keep the Fund in line with its investment
objectives.
[PHOTOGRAPH OF PORTFOLIO MANAGER]
DAVID G. PEEBLES
David G. Peebles, Vice President of Equity Investments, has co-managed the Fund
since August 1998. He has 32 years investment management experience and has
worked for us for 14 years. Mr. Peebles earned the Chartered Financial Analyst
(CFA) designation in 1971 and is a member of the Association for Investment
Management and Research (AIMR), the San Antonio Financial Analysts Society,
Inc. (SAFAS), and the International Society of Financial Analysts (ISFA). He
holds an MBA and a BS from Texas Christian University.
[PHOTOGRAPH OF PORTFOLIO MANAGER]
R. DAVID ULLOM
R. David Ullom, Assistant Vice President of Equity Investments, has co-managed
the Fund since August 1998. He has 23 years investment management experience
and has worked for us for 12 years. Mr. Ullom earned the CFA designation in
1980 and is a member of AIMR and SAFAS. He holds an MBA from Washington
University, Missouri, and a BS from Oklahoma State University.
[PHOTOGRAPH OF PORTFOLIO MANAGER]
STEPHAN J. KLAFFKE
Stephan J. Klaffke, Assistant Vice President of Insurance Company Portfolios,
has co-managed the Fund since August 1998. He has 14 years investment
management experience and has worked for us for five years. Mr. Klaffke earned
the CFA designation in 1987 and is a member of AIMR and SAFAS. He holds an MBA
from Texas Christian University and a BS from Indiana University.
9
<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 Income Stock Fund with
investments in other mutual funds that invest in stocks of large and small
companies emphasizing capital appreciation as their primary objective. This is
just one way you could combine funds to fit your own risk and reward goals.
III. USAA's Family of Funds
We offer you another alternative with our asset strategy funds listed in
APPENDIX B under asset allocation on page 20. These unique mutual funds provide
a professionally-managed, diversified investment portfolio within a mutual
fund. Designed for the individual who prefers to delegate the asset allocation
process to an investment manager, their structure achieves 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
10
<PAGE>
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 to meet your needs. Refer to APPENDIX B on page 20 for a
complete list of the USAA Family of No-Load Mutual Funds.
HOW TO INVEST
Purchase of Shares
OPENING AN ACCOUNT
You may open an account and make an investment as described below by mail, in
person, bank wire, electronic funds transfer (EFT), or phone. A complete,
signed application is required for each new account. However, after you open
your initial account with us, you will not need to fill out another application
unless the registration is different.
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. 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 and payment prior to that time, your
purchase price will be the NAV per share determined for that day. If we receive
your request or payment 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. This will 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
[MONEY GRAPHIC]
* $3,000. [$500 Uniform Gifts/Transfers to Minors Act (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 through payroll deduction for as little as $25 per pay period with
no initial investment.
11
<PAGE>
ADDITIONAL PURCHASES
* $50
HOW TO PURCHASE
MAIL
[ENVELOPE GRAPHIC]
* To open an account, send your application and 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
[HANDSHAKE GRAPHIC]
* To open an account, bring your application and check to:
USAA Investment Management Company
USAA Federal Savings Bank
10750 Robert F. McDermott Freeway
San Antonio, TX 78288
BANK WIRE
[WIRE GRAPHIC]
* Instruct your bank (which may charge a fee for the service) to wire the
specified amount to the Fund as follows:
State Street Bank and Trust Company
Boston, MA 02101
ABA#011000028
Attn: USAA Income Stock Fund
USAA Account Number: 69384998
Shareholder(s) Name(s) ____________________________
Shareholder(s) Mutual Fund Account Number__________
ELECTRONIC FUNDS TRANSFER
[CALENDAR GRAPHIC]
* Additional purchases on a regular basis can be deducted from a bank
account, paycheck, income-producing investment, or USAA money market fund
account. Sign up for these services when opening an account or call
1-800-531-8448 to add these services.
PHONE 1-800-531-8448
[TELEPHONE GRAPHIC]
* If you have an existing USAA mutual fund account and would like to 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.
12
<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.
We will send you your money within seven days after the effective date of
redemption. 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. Redemptions are
subject to taxes based on the difference between the cost of shares when
purchased and the price received upon redemption.
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, TELEGRAPH, OR TELEPHONE
[FAX MACHINE GRAPHIC]
* Send your written instructions to:
USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, TX 78288
* Send a signed fax to 1-800-292-8177, or send a telegram 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, the following information is obtained:
(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. Additionally, all telephone communications with you are recorded
and confirmations of account transactions are sent to the address of record. If
you were issued stock certificates for your shares, redemption by telephone,
fax, or telegram is not available.
13
<PAGE>
IMPORTANT INFORMATION ABOUT PURCHASES AND REDEMPTIONS
Investor's Guide to USAA Mutual Fund Services
[INVESTOR'S GUIDE GRAPHIC]
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
USAA Shareholder Account Services (SAS), the Fund's transfer agent, may assess
annually 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 transactions 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;
14
<PAGE>
* 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. After the exchange order is received, the
Fund's transfer agent will simultaneously process exchange redemptions and
purchases at the share prices next determined. The investment minimums
applicable to share purchases also apply to exchanges. For federal income tax
purposes, an exchange between Funds is a taxable event; and as such, you may
realize a capital gain or loss. Such capital gains or losses are based on the
difference between the cost of shares when purchased and the price received
upon exchange.
The Fund has undertaken certain procedures regarding telephone transactions as
described on page 13.
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 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
NAV PER SHARE
EQUALS
TOTAL ASSETS
MINUS
LIABILITIES
DIVIDED BY
# OF SHARES
OUTSTANDING
The price at which you 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. 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.
Portfolio securities, except as otherwise noted, traded primarily on a
securities exchange are valued at the last sales price on that exchange. If no
sale is reported, the average of the bid and asked prices is generally used.
Over-the-counter securities are generally priced at the last sales price or, if
not available, at the average of the bid and asked prices.
15
<PAGE>
Debt securities purchased with maturities of 60 days or less are stated at
amortized cost, which approximates market value. Other debt securities are
valued each business day at their current market value as determined by a
pricing service approved by the Board of Directors. Securities which cannot be
valued by these methods, and all other assets, are valued in good faith at fair
value using methods we have determined under the general supervision of the
Board of Directors.
For additional information on how securities are valued, see VALUATION OF
SECURITIES in the Fund's Statement of Additional Information.
Dividends and Distributions
The Fund pays net investment income dividends quarterly. Any net capital gain
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.
We will automatically reinvest all income dividends and capital gain
distributions 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 Taxpayer
Relief Act of 1997 and the technical provisions adopted by the IRS
Restructuring and Reform Act of 1998 may affect the status and treatment of
certain distributions shareholders receive from the Fund. We urge you to
consult your tax adviser about the status of distributions from the Fund in
your own state and locality.
SHAREHOLDER - Dividends from taxable net investment income and distributions of
net short-term capital gains are taxable to you 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.
16
<PAGE>
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. These distributions may be
taxable at different rates depending on the length of time the Fund held the
applicable investment.
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 information to you annually concerning the tax
status of dividends and distributions for federal income tax purposes.
Year 2000
Like other organizations around the world, the Fund could be adversely affected
if the computer systems used by the Fund, its service providers, or companies
in which the Fund invests do not properly process and calculate information
that relates to dates beginning on January 1, 2000, and beyond. This situation
may occur because for many years computer programmers used only two digits to
describe years, such as 98 for 1998. A program written in this manner may not
work when it encounters the year 00. To confront this situation, USAA companies
have spent much effort and money; and we expect to have our systems ready for
the Year 2000 by mid-1999. In addition, we are actively assessing the Year 2000
readiness of our service providers, partners, and companies in whose securities
we invest. It is not possible for us to say that you will experience no effect
from this situation, but we can say that we are making a large effort to avoid
any ill effects upon our shareholders.
We do believe you are entitled to know with certainty that we will stand behind
your share balance as of the close of business in 1999. When the market reopens
in 2000, should any computer problem cause a change in the number of shares in
your account, we will return your account to its proper share balance.
17
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the Fund's
financial performance for the past five-year period. Certain information
reflects financial results for a single Fund share. The total returns in the
table represent the rate that an investor would have earned (or lost) on an
investment in the Fund (assuming reinvestment of all dividends and
distributions). This information has been audited by KPMG Peat Marwick LLP,
whose report, along with the Fund's financial statements, are included in the
Annual Report, which is available upon request.
<TABLE>
<CAPTION>
Ten-Month
Period Ended
Year Ended July 31, July 31,
-------------------------------------------------------------
1998 1997 1996 1995 1994
-------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value at
beginning of period $ 19.01 $ 15.85 $ 14.96 $ 13.50 $ 14.95
Net investment income .75 .81 .77 .74 .60
Net realized and
unrealized gain (loss) 1.66 3.88 1.16 1.69 (1.12)
Distributions from net
investment income (.75) (.79) (.77) (.75) (.74)
Distributions of realized
capital gains (1.02) (.74) (.27) (.22) (.19)
-------------------------------------------------------------
Net asset value at
end of period $ 19.65 $ 19.01 $ 15.85 $ 14.96 $ 13.50
=============================================================
Total return (%)* 13.28 31.46 13.21 18.83 (3.53)
Net assets at end of
period (000) $2,496,570 $2,186,329 $1,710,769 $1,408,371 $1,190,024
Ratio of expenses to
average net assets (%) .65 .68 .72 .75 .73(a)
Ratio of net investment
income to average net
assets (%) 3.85 4.73 4.84 5.34 5.25(a)
Portfolio turnover (%) 22.34 34.95 32.38 34.94 24.82
</TABLE>
- --------------
* Assumes reinvestment of all dividend income and capital gain distributions
during the period.
(a) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
18
<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 the Fund's assets in convertible securities, which are bonds,
preferred stocks, and other securities that pay interest or dividends and offer
the buyer the ability to convert 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 also depends on the price of the underlying common stock.
ILLIQUID SECURITIES
We may invest up to 15% 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, 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, certificates of deposit,
bankers' acceptances, 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.
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 (1) Very high
First Start Growth Moderate to high
Gold (1) Very high
Growth Moderate to high
Growth & Income Moderate
International (1) Moderate to high
S&P 500 Index (2) Moderate
Science & Technology Very high
World Growth (1) Moderate to high
- ---------------------------------------------------------------
ASSET ALLOCATION
- ---------------------------------------------------------------
Balanced Strategy (1) Moderate
Cornerstone Strategy (1) Moderate
Growth and Tax Strategy Moderate
Growth Strategy (1) 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 (3) Moderate
Intermediate-Term (3) Low to moderate
Short-Term (3) Low
State Bond/Income (3,4) Moderate
- ---------------------------------------------------------------
MONEY MARKET
- ---------------------------------------------------------------
Money Market (5) Very low
Tax Exempt Money Market (3,5) Very low
Treasury Money Market Trust (5) Very low
State Money Market (3,4,5) Very low
===============================================================
1 FOREIGN INVESTING IS SUBJECT TO ADDITIONAL RISKS, SUCH AS CURRENCY
FLUCTUATIONS, MARKET ILLIQUIDITY, AND POLITICAL INSTABILITY.
2 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.
3 SOME INCOME MAY BE SUBJECT TO STATE OR LOCAL TAXES.
4 CALIFORNIA, FLORIDA, NEW YORK, TEXAS, AND VIRGINIA FUNDS ARE OFFERED ONLY TO
RESIDENTS OF THOSE STATES.
5 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.
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),
Annual or Semiannual Report, or to ask other questions about the Fund. The SAI
has been filed with the Securities and Exchange Commission (SEC) and is legally
a part of the Prospectus. In the Fund's Annual Report, you will find a
discussion of the market conditions and investment strategies that
significantly affected the Fund's performance during the last fiscal year.
To view these documents, along with other related documents, you can visit the
SEC's Internet web site (http://www.sec.gov) or the Commission's Public
Reference Room in Washington, D.C. Information on the operation of the public
reference room can be obtained by calling 1-800-SEC-0330. Additionally, copies
of this information can be obtained, for a duplicating fee, by writing the
Public Reference Section of the Commission, Washington, D.C. 20549-6009.
INVESTMENT ADVISER, UNDERWRITER AND DISTRIBUTOR
USAA Investment Management Company
9800 Fredericksburg Road
San Antonio, Texas 78288
-----------------------------------------------
TRANSFER AGENT CUSTODIAN
USAA Shareholder Account Services State Street Bank and Trust Company
9800 Fredericksburg Road P.O. Box 1713
San Antonio, Texas 78288 Boston, Massachusetts 02105
-----------------------------------------------
TELEPHONE ASSISTANCE HOURS
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
Investment Company Act File No. 811-2429
<PAGE>
Part A
Prospectus for the
Income Fund
is included herein
<PAGE>
USAA INCOME FUND
PROSPECTUS
DECEMBER 1, 1998
As with other mutual funds, the Securities and Exchange Commission has not
approved or disapproved of this Fund's shares or determined whether this
prospectus is accurate or complete. Anyone who tells you otherwise is
committing a crime.
TABLE OF CONTENTS
What is the Fund's Investment Objective and Main Strategy?...... 2
Main Risks of Investing in This Fund............................ 2
Is This Fund for You?........................................... 3
Could the Value of Your Investment in This Fund Fluctuate?...... 3
Fees and Expenses............................................... 4
Fund Investments................................................ 5
Fund Management................................................. 8
Using Mutual Funds in an Investment Program..................... 9
How to Invest................................................... 10
Important Information About Purchases and Redemptions........... 13
Exchanges....................................................... 14
Shareholder Information......................................... 15
Financial Highlights............................................ 18
Appendix A...................................................... 19
Appendix B...................................................... 22
<PAGE>
USAA Investment Management Company manages this Fund. For easier reading, USAA
Investment Management Company will be referred to as "we" or "us" throughout
the Prospectus.
WHAT IS THE FUND'S INVESTMENT OBJECTIVE AND MAIN STRATEGY?
The Fund's investment objective is maximum current income without undue risk to
principal. We will attempt to achieve the Fund's objective by investing
primarily in income producing securities.
In view of the risks inherent in all investments in securities, there is no
assurance that the Fund's objective will be achieved. See FUND INVESTMENTS on
page 5 for more information.
MAIN RISKS OF INVESTING IN THIS FUND
The primary risks of investing in this Fund are interest rate risk, credit
risk, and market risk.
* INTEREST RATE RISK involves the possibility that the value of the Fund's
investments will decline because of an increase in interest rates.
IF INTEREST RATES INCREASE: the yield of the Fund may increase and the
market value of the Fund's securities will likely decline, adversely
affecting the net asset value and total return.
IF INTEREST RATES DECREASE: the yield of the Fund may decrease and the
market value of the Fund's securities may increase, which would likely
increase the Fund's net asset value and total return.
* CREDIT RISK involves the possibility that a borrower cannot make timely
interest and principal payments on its securities.
* MARKET RISK involves the possibility that the Fund's investments in equity
securities will decline because of falls in the stock market, reducing the
value of individual company's stocks regardless of the success or failure
of an individual company's operations.
An additional risk of the Fund described later in the Prospectus is the risk of
investing in real estate investment trusts. As with other mutual funds, losing
money is an additional risk associated with investing in this Fund.
As you consider an investment in this 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 the investment for long periods of time
to ride out down periods.
An investment in this Fund is not a deposit of USAA Federal Savings Bank, or
any other bank, and is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency.
2
<PAGE>
[CAUTION LIGHT]
Look for this symbol throughout the Prospectus. We use it to mark more detailed
information about the main risks you will face as a Fund shareholder.
IS THIS FUND FOR YOU?
This Fund might be appropriate as part of your investment portfolio if . . .
* You need steady income.
* You are willing to accept moderate risk.
* You are looking for a long-term investment.
This Fund may not be appropriate as part of your investment portfolio if . . .
* Your primary goal is to maximize long-term growth.
* You are unable or reluctant to invest for a period of four years or more.
* You need an investment that provides tax-free income.
COULD THE VALUE OF YOUR INVESTMENT IN THIS FUND FLUCTUATE?
Yes, it could. In fact, the value of your investment will likely increase or
decrease. The bar chart shown below illustrates the Fund's volatility and
performance from year to year over the past ten years.
TOTAL RETURN
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.
[BAR CHART]
CALENDAR TOTAL
YEAR RETURN
1988 9.98%
1989 16.30%
1990 7.69%
1991 19.38%
1992 8.37%
1993 9.94%
1994 -5.21%
1995 24.47%
1996 1.33%
1997 11.05%
THE FUND'S TOTAL RETURN FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30,
1998, WAS _____%.
During the periods shown in the bar chart, the highest total return for a
quarter was 8.99% (quarter ending June 30, 1989) and the lowest total return
for a quarter was -5.83% (quarter ending March 31, 1994).
3
<PAGE>
The table below shows how the Fund's average annual returns for the one-,
five-, and ten-year periods and the life of the Fund compared to those of a
broad-based securities market index. Remember, historical performance does not
necessarily indicate what will happen in the future.
===============================================================================
Average Annual
Total Returns
(for the periods ending Past Past Past Life of
December 31, 1997) 1 Year 5 Years 10 Years Fund
===============================================================================
Income Fund 11.05% 7.86% 10.03% 10.37%
- -------------------------------------------------------------------------------
Lehman Bros. Aggregate
Bond Index* 9.65% 7.48% 9.18% N/A
===============================================================================
* 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.
YIELD
All mutual funds must use the same formula to calculate yield. The Fund may
advertise performance in terms of a 30-day yield quotation. The Fund's 30-day
yield for the period ended December 31, 1997, was 6.40%.
YIELD IS THE ANNUALIZED
NET INCOME OF THE FUND
DURING A SPECIFIED
PERIOD AS A PERCENTAGE
OF THE FUND'S SHARE PRICE.
You may obtain the most current yield information for the Fund by calling
1-800-531-8777.
Please consider performance information in light of the Fund's investment
objective and policies and market conditions during the reported time periods.
Again, you must remember that historical performance does not necessarily
indicate what will happen in the future. The value of your shares may go up or
down. For the most current price, yield, 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, yields, and returns. Then, press 40# when asked for
the Fund code.
[TELEPHONE GRAPHIC]
TouchLINE (R)
1-800-531-8777
PRESS
1
THEN
1
THEN
4 0 #
NEWSPAPER SYMBOL
Inco
TICKER SYMBOL
USAIX
You can also 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." If you prefer to obtain this information from an on-line
computer service, you can do so by using the ticker symbol "USAIX."
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 or sales loads charged to your account when you buy or sell
Fund shares. However, if you sell shares and request your money by
4
<PAGE>
wire transfer, there is 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 expenses during the past
fiscal year ended July 31, 1998, and are calculated as a percentage of average
net assets.
12B-1 FEES -
SOME MUTUAL FUNDS
CHARGE THESE FEES
TO PAY FOR
ADVERTISING AND
OTHER COSTS OF
SELLING FUND SHARES.
Management Fees .24%
Distribution (12b-1) Fees None
Other Expenses .14%
----
Total Annual Fund Operating Expenses .38%
====
Example of Effect of Fund's Operating Expenses
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. Although your actual costs
may be higher or lower, you would pay the following expenses on a $10,000
investment, assuming (1) 5% annual return, (2) the Fund's operating expenses
remain the same, and (3) you redeem all of your shares at the end of the
periods shown.
1 year.......... $ 39
3 years......... 122
5 years......... 213
10 years......... 480
FUND INVESTMENTS
Principal Investment Strategies and Risks
Q What is the Fund's principal investment strategy?
A The Fund's principal investment strategy is to 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.
5
<PAGE>
As a temporary defensive measure because of market, economic, political,
or other conditions, we may invest up to 100% of the Fund's assets in
investment-grade, short-term debt instruments, which may result in the
Fund not achieving its investment objective during the time it is in
this temporary defensive posture.
[CAUTION LIGHT]
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 because of 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 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 securities;
* asset-backed securities;
* corporate debt securities such as notes, bonds, and commercial paper;
* U.S. bank obligations, including certificates of deposit and banker's
acceptances;
* obligation of state and local governments and their agencies and
instrumentalities;
* Eurodollar obligations;
* Yankee obligations;
* other debt securities;
* convertible securities;
* equity and debt securities of real estate investment trusts;
* common stocks; and
* preferred stocks.
Further description of these securities is found in APPENDIX A on page
19.
6
<PAGE>
Q What will be the quality of the debt securities included in the Fund's
portfolio?
A The debt securities included in the Fund's portfolio must be investment
grade at the time of purchase. 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 IBCA, Inc., or
* Duff and Phelps;
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.
[CAUTION LIGHT]
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
related to whether interest or principal will be repaid on a timely basis.
Q What happens if the rating of a security is downgraded below investment
grade?
A 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.
7
<PAGE>
Q What other risks apply to the Fund's portfolio?
[CAUTION LIGHT]
A MARKET RISK. Because this Fund may invest in equity securities, it can
be subject to stock 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. Stock markets tend to run
in cycles, with periods when stock prices generally go up, known as
"bull" markets, and periods when stock prices generally go down,
referred to as "bear" markets. Equity securities tend to go up and down
more than bonds.
Q How are the decisions to buy and sell securities made?
A We search for securities that represent value at the time given current
market conditions. For fixed income securities, value is a combination
of yield, credit quality, structure (maturity, coupon, redemption
features), and liquidity. Recognizing value is the result of
simultaneously analyzing the interaction of these factors among the
securities available in the market. For common stocks, value involves
selecting dividend paying stocks, whose yields are sensitive to interest
rate levels, when their dividend yields are close to bond yields which
implies undervaluation. Such stocks are generally sold when their yields
return to a normal relationship versus bonds through price appreciation.
For additional information about other securities in which we may invest the
Fund's assets, see APPENDIX A on page 19.
FUND MANAGEMENT
The Company has retained us, USAA Investment Management Company, to serve as
the manager and distributor for 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 provide management services to the Fund pursuant to an Advisory Agreement.
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 (.24%)
of average net assets for the fiscal year ended July 31, 1998. 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 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
[PHOTOGRAPH OF PORTFOLIO MANAGER]
JOHN W. SAUNDERS
John W. Saunders, Jr., Senior Vice President of Fixed Income Investments, has
managed the Fund since October 1985. He has 29 years investment management
experience and has worked for us for 28 years. Mr. Saunders earned the
Chartered Financial Analyst designation in 1976 and is a member of the
Association for Investment Management and Research and the San Antonio
Financial Analysts Society, Inc. He holds a BS from Portland State University,
Oregon.
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 to fit your own risk and
reward goals.
III. USAA's Family of Funds
We offer you another alternative with our asset strategy funds listed in
APPENDIX B under asset allocation on page 22. These unique mutual funds provide
a professionally-managed, diversified investment portfolio within a mutual
fund. Designed for the individual who prefers to delegate the asset allocation
process to an investment manager, their structure achieves 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 to meet your needs. Refer to APPENDIX B on page 22 for a
complete list of the USAA Family of No-Load Mutual Funds.
HOW TO INVEST
Purchase of Shares
OPENING AN ACCOUNT
You may open an account and make an investment as described below by mail, in
person, bank wire, electronic funds transfer (EFT), or phone. A complete,
signed application is required for each new account. However, after you open
your initial account with us, you will not need to fill out another application
unless the registration is different.
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. The
Fund's NAV is determined at the close of the regular trading session
10
<PAGE>
(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 and payment prior to that
time, your purchase price will be the NAV per share determined for that day. If
we receive your request or payment 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. This will 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
[MONEY GRAPHIC]
* $3,000 [$500 Uniform Gifts/Transfers to Minors Act (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 through
payroll deduction for as little as $25 per pay period with no initial
investment.
ADDITIONAL PURCHASES
* $50
HOW TO PURCHASE
MAIL
[ENVELOPE GRAPHIC]
* To open an account, send your application and 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
[HANDSHAKE GRAPHIC]
* To open an account, bring your application and check to:
USAA Investment Management Company
USAA Federal Savings Bank
10750 Robert F. McDermott Freeway
San Antonio, TX 78288
11
<PAGE>
BANK WIRE
[WIRE GRAPHIC]
* Instruct your bank (which may charge a fee for the service) to wire the
specified amount to the Fund as follows:
State Street Bank and Trust Company
Boston, MA 02101
ABA#011000028
Attn: USAA Income Fund
USAA Account Number: 69384998
Shareholder(s) Name(s)_____________________________________________
Shareholder(s) Mutual Fund Account Number__________________________
ELECTRONIC FUNDS TRANSFER
[CALENDAR GRAPHIC]
* Additional purchases on a regular basis can be deducted from a bank account,
paycheck, income-producing investment, or USAA money market fund account.
Sign up for these services when opening an account or call 1-800-531-8448 to
add these services.
PHONE 1-800-531-8448
[TELEPHONE GRAPHIC]
* If you have an existing USAA mutual fund account and would like to 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.
We will send you your money within seven days after the effective date of
redemption. 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. Redemptions are
subject to taxes based on the difference between the cost of shares when
purchased and the price received upon redemption.
In addition, the Company may elect to suspend the redemption of shares or
postpone the date of payment in limited circumstances.
12
<PAGE>
HOW TO REDEEM
WRITTEN, FAX, TELEGRAPH, OR TELEPHONE
[FAX MACHINE GRAPHIC]
* Send your written instructions to:
USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, TX 78288
* Send a signed fax to 1-800-292-8177, or send a telegram 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, the following information is obtained:
(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. Additionally, all telephone communications with you are recorded
and confirmations of account transactions are sent to the address of record. If
you were issued stock certificates for your shares, redemption by telephone,
fax, or telegram is not available.
IMPORTANT INFORMATION ABOUT PURCHASES AND REDEMPTIONS
Investor's Guide to USAA Mutual Fund Services
[INVESTOR'S GUIDE GRAPHIC]
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
USAA Shareholder Account Services (SAS), the Fund's transfer agent, may assess
annually 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
13
<PAGE>
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 transactions 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. After the exchange order is received, the
Fund's transfer agent will simultaneously process exchange redemptions and
purchases at the share prices next determined. The investment minimums
applicable to share purchases also apply to exchanges. For federal income tax
purposes, an exchange between Funds is a taxable event; and as such, you may
realize a capital gain or loss. Such capital gains or losses are based on the
difference between the cost of shares when purchased and the price received
upon exchange.
The Fund has undertaken certain procedures regarding telephone transactions as
described on page 13.
14
<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 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
NAV PER SHARE
EQUALS
TOTAL ASSETS
MINUS
LIABILITIES
DIVIDED BY
# OF SHARES
OUTSTANDING
The price at which you 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. 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.
Portfolio securities, except as otherwise noted, traded primarily on a
securities exchange are valued at the last sales price on that exchange. If no
sale is reported, the average of the bid and asked prices is generally used.
Over-the-counter securities are generally priced at the last sales price or, if
not available, at the average of the bid and asked prices.
Debt securities purchased with maturities of 60 days or less are stated at
amortized cost, which approximates market value. Other debt securities are
valued each business day at their current market value as determined by a
pricing service approved by the Board of Directors. Securities which cannot be
valued by these methods, and all other assets, are valued in good faith at fair
value using methods we have determined under the general supervision of the
Board of Directors.
For additional information on how securities are valued, see VALUATION OF
SECURITIES in the Fund's Statement of Additional Information.
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
15
<PAGE>
would be automatically reinvested, and your total cost basis in the Fund would
remain the same. Any net capital gain 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.
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 Taxpayer
Relief Act of 1997 and the technical provisions adopted by the IRS
Restructuring and Reform Act of 1998 may affect the status and treatment of
certain distributions shareholders receive from the Fund. We urge you to
consult your tax adviser about the status of distributions from the Fund in
your own state and locality.
SHAREHOLDER - Dividends from taxable net investment income and distributions of
net short-term capital gains are taxable to you 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. These distributions may be
taxable at different rates depending on the length of time the Fund held the
applicable investment.
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 information to you annually concerning the tax
status of dividends and distributions for federal income tax purposes.
16
<PAGE>
Year 2000
Like other organizations around the world, the Fund could be adversely affected
if the computer systems used by the Fund, its service providers, or companies
in which the Fund invests do not properly process and calculate information
that relates to dates beginning on January 1, 2000, and beyond. This situation
may occur because for many years computer programmers used only two digits to
describe years, such as 98 for 1998. A program written in this manner may not
work when it encounters the year 00. To confront this situation, USAA companies
have spent much effort and money; and we expect to have our systems ready for
the Year 2000 by mid-1999. In addition, we are actively assessing the Year 2000
readiness of our service providers, partners, and companies in whose securities
we invest. It is not possible for us to say that you will experience no effect
from this situation, but we can say that we are making a large effort to avoid
any ill effects upon our shareholders.
We do believe you are entitled to know with certainty that we will stand behind
your share balance as of the close of business in 1999. When the market reopens
in 2000, should any computer problem cause a change in the number of shares in
your account, we will return your account to its proper share balance.
17
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the Fund's
financial performance for the past five-year period. Certain information
reflects financial results for a single Fund share. The total returns in the
table represent the rate that an investor would have earned (or lost) on an
investment in the Fund (assuming reinvestment of all dividends and
distributions). This information has been audited by KPMG Peat Marwick LLP,
whose report, along with the Fund's financial statements, are included in the
Annual Report, which is available upon request.
<TABLE>
<CAPTION>
Ten-Month
Period Ended
Year Ended July 31, July 31,
------------------------------------------------------------
1998 1997 1996 1995 1994
------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value at
beginning of period $ 12.54 $ 11.97 $ 12.11 $ 11.67 $ 13.28
Net investment income .85 .83 .83 .84 .72
Net realized and
unrealized gain (loss) .33 .57 (.13) .45 (1.30)
Distributions from net
investment income (.84) (.83) (.84) (.85) (.78)
Distributions of realized
capital gains - - - - (.25)
------------------------------------------------------------
Net asset value at
end of period $ 12.88 $ 12.54 $ 11.97 $ 12.11 $ 11.67
============================================================
Total return (%)* 9.72 12.15 5.78 11.64 (4.52)
Net assets at end of
period (000) $1,751,574 $1,662,981 $1,737,306 $1,755,171 $1,718,934
Ratio of expenses to
average net assets (%) .38 .39 .40 .41 .41(a)
Ratio of net investment
income to average net
assets (%) 6.62 6.76 6.64 7.27 6.98(a)
Portfolio turnover (%) 47.35(b) 57.50(b) 81.26(b) 30.86(b) 25.36(b)
</TABLE>
- -----------------
* Assumes reinvestment of all dividend income and capital gain distributions
during the period.
(a) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
(b) At times, the Fund has simultaneously purchased and sold the same
securities. These transactions sometimes were high in volume and were
dissimilar to other trade activity within the Fund. If these transactions
were excluded from the calculation, the portfolio turnover rate would have
been:
<TABLE>
<CAPTION>
Ten-Month
Period Ended
Year Ended July 31, July 31,
------------------------------------------------------------
1998 1997 1996 1995 1994
------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Portfolio turnover (%) 42.11 22.07 44.69 9.09 16.79
Purchases and sales of this type are as follows:
Purchases (000) $ 88,811 $ 593,587 $ 648,396 $ 360,943 $ 155,322
Sales (000) $ 88,915 $ 594,283 $ 649,193 $ 361,366 $ 155,497
</TABLE>
18
<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 the Fund's assets 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 the Fund's assets in repurchase agreements which are
collateralized by obligations issued or guaranteed as to both principal and
interest 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 the Fund's assets 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 the Fund's assets 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.
19
<PAGE>
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.
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.
20
<PAGE>
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.
CONVERTIBLE SECURITIES
We may invest the Fund's assets in convertible securities, which are bonds,
preferred stocks, and other securities that pay interest or dividends and offer
the buyer the ability to convert 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 also depends on the price of the underlying common stock.
ILLIQUID SECURITIES
We may invest up to 15% 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, seven days or less, at approximately the
value at which the Fund has valued the securities.
REAL ESTATE INVESTMENT TRUSTS (REITs)
We may invest the Fund's assets in REITs which may subject the Fund to many of
the same risks associated with the direct ownership of real estate.
Additionally, REITs are dependent upon the capabilities of the REIT manager(s),
have limited diversification, and could be significantly impacted by changes in
tax laws.
21
<PAGE>
APPENDIX B
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 (1) Very high
First Start Growth Moderate to high
Gold (1) Very high
Growth Moderate to high
Growth & Income Moderate
International (1) Moderate to high
S&P 500 Index (2) Moderate
Science & Technology Very high
World Growth (1) Moderate to high
- ---------------------------------------------------------------
ASSET ALLOCATION
- ---------------------------------------------------------------
Balanced Strategy (1) Moderate
Cornerstone Strategy (1) Moderate
Growth and Tax Strategy Moderate
Growth Strategy (1) 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 (3) Moderate
Intermediate-Term (3) Low to moderate
Short-Term (3) Low
State Bond/Income (3,4) Moderate
- ---------------------------------------------------------------
MONEY MARKET
- ---------------------------------------------------------------
Money Market (5) Very low
Tax Exempt Money Market (3,5) Very low
Treasury Money Market Trust (5) Very low
State Money Market (3,4,5) Very low
===============================================================
1 FOREIGN INVESTING IS SUBJECT TO ADDITIONAL RISKS, SUCH AS CURRENCY
FLUCTUATIONS, MARKET ILLIQUIDITY, AND POLITICAL INSTABILITY.
2 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.
3 SOME INCOME MAY BE SUBJECT TO STATE OR LOCAL TAXES.
4 CALIFORNIA, FLORIDA, NEW YORK, TEXAS, AND VIRGINIA FUNDS ARE OFFERED ONLY TO
RESIDENTS OF THOSE STATES.
5 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.
22
<PAGE>
NOTES
<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),
Annual or Semiannual Report, or to ask other questions about the Fund. The SAI
has been filed with the Securities and Exchange Commission (SEC) and is legally
a part of the Prospectus. In the Fund's Annual Report, you will find a
discussion of the market conditions and investment strategies that
significantly affected the Fund's performance during the last fiscal year.
To view these documents, along with other related documents, you can visit the
SEC's Internet web site (http://www.sec.gov) or the Commission's Public
Reference Room in Washington, D.C. Information on the operation of the public
reference room can be obtained by calling 1-800-SEC-0330. Additionally, copies
of this information can be obtained, for a duplicating fee, by writing the
Public Reference Section of the Commission, Washington, D.C. 20549-6009.
INVESTMENT ADVISER, UNDERWRITER AND DISTRIBUTOR
USAA Investment Management Company
9800 Fredericksburg Road
San Antonio, Texas 78288
-----------------------------------------------
TRANSFER AGENT CUSTODIAN
USAA Shareholder Account Services State Street Bank and Trust Company
9800 Fredericksburg Road P.O. Box 1713
San Antonio, Texas 78288 Boston, Massachusetts 02105
-----------------------------------------------
TELEPHONE ASSISTANCE HOURS
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
Investment Company Act File No. 811-2429
<PAGE>
Part A
Prospectus for the
Short-Term Bond Fund
is included herein
<PAGE>
USAA SHORT-TERM
BOND FUND
PROSPECTUS
DECEMBER 1, 1998
As with other mutual funds, the Securities and Exchange Commission has not
approved or disapproved of this Fund's shares or determined whether this
prospectus is accurate or complete. Anyone who tells you otherwise is
committing a crime.
TABLE OF CONTENTS
What is the Fund's Investment Objective and Main Strategy? ... 2
Main Risks of Investing in This Fund ......................... 2
Is This Fund for You? ........................................ 3
Could the Value of Your Investment in This Fund Fluctuate? ... 3
Fees and Expenses ............................................ 4
Fund Investments ............................................. 6
Fund Management .............................................. 9
Using Mutual Funds in an Investment Program .................. 9
How to Invest ................................................ 10
Important Information About Purchases and Redemptions ........ 14
Exchanges .................................................... 15
Shareholder Information ...................................... 15
Financial Highlights ......................................... 18
Appendix A ................................................... 19
Appendix B ................................................... 22
<PAGE>
USAA Investment Management Company manages this Fund. For easier reading, USAA
Investment Management Company will be referred to as "we" or "us" throughout
the Prospectus.
WHAT IS THE FUND'S INVESTMENT OBJECTIVE AND MAIN STRATEGY?
The Fund's investment objective is high current income consistent with
preservation of principal. We will attempt to achieve the Fund's objective by
investing the Fund's assets primarily in a broad range of investment-grade debt
securities. We will maintain a dollar-weighted average portfolio maturity of
three years or less.
In view of the risks inherent in all investments in securities, there is no
assurance that the Fund's objective will be achieved. See FUND INVESTMENTS on
page 6 for more information.
MAIN RISKS OF INVESTING IN THIS FUND
The primary risks of investing in this Fund are credit risk and interest rate
risk.
* CREDIT RISK involves the possibility that a borrower cannot make timely
interest and principal payments on its securities.
* INTEREST RATE RISK involves the possibility that the value of the Fund's
investments will decline because of an increase in interest rates.
IF INTEREST RATES INCREASE: the yield of the Fund may increase and the
market value of the Fund's securities will likely decline, adversely
affecting the net asset value and total return.
IF INTEREST RATES DECREASE: the yield of the Fund may decrease and the
market value of the Fund's securities may increase, which would likely
increase the Fund's net asset value and total return.
The Fund is also subject to prepayment risk and risks of investing in real
estate investment trusts, which are discussed later in the Prospectus. As
with other mutual funds, losing money is an additional risk associated with
investing in this Fund.
As you consider an investment in this 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 the investment for long periods of time
to ride out down periods.
An investment in this Fund is not a deposit of USAA Federal Savings Bank, or
any other bank, and is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency.
[CAUTION LIGHT]
Look for this symbol throughout the Prospectus. We use it to mark more detailed
information about the main risks you will face as a Fund shareholder.
2
<PAGE>
IS THIS FUND FOR YOU?
This Fund might be appropriate as part of your investment portfolio if . . .
* You are looking for current income.
* You are looking for an investment that is low risk.
* You are looking for a short-term investment.
This Fund may not be appropriate as part of your investment portfolio if . . .
* Your primary goal is to maximize long-term growth.
* You need a high total return to achieve your goals.
* You need an investment that provides tax-free income.
COULD THE VALUE OF YOUR INVESTMENT IN THIS FUND FLUCTUATE?
Yes, it could. In fact, the value of your investment will likely increase or
decrease. The bar chart shown below illustrates the Fund's volatility and
performance from year to year over the life of the Fund.
TOTAL RETURN
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.
[BAR CHART]
CALENDAR TOTAL
YEAR RETURN
1994* .02%
1995 11.18%
1996 6.31%
1997 7.16%
* FUND BEGAN OPERATIONS ON JUNE 1, 1993.
THE FUND'S TOTAL RETURN FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1998,
WAS ____%.
During the periods shown in the bar chart, the highest total return for a
quarter was 4.72% (quarter ending June 30, 1995) and the lowest total return
for a quarter was -.82% (quarter ending March 31, 1994).
3
<PAGE>
The table below shows how the Fund's average annual returns for the one-year
period as well as the life of the Fund compared to those of a broad-based
securities market index. Remember, historical performance does not necessarily
indicate what will happen in the future.
=====================================================================
Average Annual Total Returns Since Fund's
(for the periods ending Past Inception on
December 31, 1997) 1 Year June 1, 1993
=====================================================================
Short-Term Bond Fund 7.16% 5.94%
- ---------------------------------------------------------------------
Lehman Bros. 1-3 Gov't Corp Index* 6.66% 5.66%
=====================================================================
* 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.
YIELD
YIELD IS THE
ANNUALIZED NET
INCOME OF THE
FUND DURING A
SPECIFIED PERIOD
AS A PERCENTAGE
OF THE FUND'S
SHARE PRICE.
All mutual funds must use the same formulas to calculate yield. The Fund may
advertise performance in terms of a 30-day yield quotation. The Fund's 30-day
yield for the period ended December 31, 1997, was 6.14%.
You may obtain the most current yield information for the Fund by calling
1-800-531-8777.
[TELEPHONE GRAPHIC]
TOUCHLINE (R)
1-800-531-8777
PRESS
1
THEN
1
THEN 3 6 #
Please consider performance information in light of the Fund's investment
objective and policies and market conditions during the reported time periods.
Again, you must remember that historical performance does not necessarily
indicate what will happen in the future. The value of your shares may go up or
down. For the most current price, yield, 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, yields, and returns. Then, press 36# when asked for
the Fund Code.
NEWSPAPER
SYMBOL
ShtTBond
TICKER
SYMBOL
USSBX
You can also 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." If you prefer to obtain this information from an on-line
computer service, you can do so by using the ticker symbol "USSBX."
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 or sales loads charged to your account when you buy or sell
Fund shares. However, if you sell shares and request your money by
4
<PAGE>
wire transfer, there is 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 expenses before waivers
during the past fiscal year ended July 31, 1998, and are calculated as a
percentage of average net assets (ANA).
12B-1 FEES -
SOME MUTUAL
FUNDS CHARGE
THESE FEES
TO PAY FOR
ADVERTISING
AND OTHER
COSTS OF SELLING
FUND SHARES.
Management Fees .24%
Distribution (12b-1) Fees None
Other Expenses .32%
----
Total Annual Fund Operating Expenses* .56%
====
- --------------
* During the year, we voluntarily limited the Total Annual Fund Operating
Expenses to .50% as follows:
Total Annual Fund Operating Expenses .56%
Reimbursement from USAA Investment
Management Company (.06%)
----
Actual Fund Operating Expenses
After Reimbursement .50%
====
We have 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, 1999.
Example of Effect of Fund's Operating Expenses
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. Although your actual costs
may be higher or lower, you would pay the following expenses on a $10,000
investment, assuming (1) 5% annual return, (2) the Fund's operating expenses
(before any applicable reimbursement) remain the same, and (3) you redeem all
of your shares at the end of the periods shown.
1 year.............. $ 57
3 years............. 179
5 years............. 313
10 years............. 701
5
<PAGE>
FUND INVESTMENTS
Principal Investment Strategies and Risks
Q What is the Fund's principal investment strategy?
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.
A The Fund's principal investment strategy is to 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.
Q What types 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 securities;
* asset-backed securities;
* corporate debt securities such as notes, bonds, and commercial paper;
* debt securities of real estate investment trusts (REITs);
* 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;
* Eurodollar obligations;
* Yankee obligations; and
* other debt securities.
Further description of these securities is found in APPENDIX A on page 19.
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:
6
<PAGE>
===========================================================================
LONG-TERM SHORT-TERM
RATING AGENCY DEBT SECURITIES DEBT SECURITIES
===========================================================================
Moody's Investors At least Prime-3
Services, Inc. At least Baa or MIG 4/VMIG 4
---------------------------------------------------------------------------
Standard & Poor's At least A-3
Ratings Group At least BBB or SP-2
---------------------------------------------------------------------------
Fitch IBCA, 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 below investment
grade?
A 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 LIGHT]
CREDIT RISK. The bonds in the Fund's portfolio are subject to 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 related to whether interest or
principal will be repaid on a timely basis.
7
<PAGE>
[CAUTION LIGHT]
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.
[CAUTION LIGHT]
PREPAYMENT RISK. Mortgagors may generally pay off mortgages without penalty
before the due date. When mortgaged property is sold, which can occur at any
time for a variety of reasons, the old mortgage is usually prepaid. Also, when
mortgage interest rates fall far enough to make refinancing attractive,
prepayments tend to accelerate. Prepayments require reinvestment of the
principal at the then-current level of interest rates, which are often at a
lower level than when the mortgages were originally issued. Reinvestment at
lower rates tends to reduce the interest payments received by the Fund and,
therefore, the size of the dividend payments available to shareholders. If
reinvestment occurs at a higher level of interest rates, the opposite effect is
true.
[CAUTION LIGHT]
REITS. Investing in REITs may subject the Fund to many of the same risks
associated with the direct ownership of real estate. Additionally, REITs are
dependent upon the capabilities of the REIT manager(s), have limited
diversification, and could be significantly impacted by changes in tax laws.
Moreover, by investing in the debt securities of REITs, the Fund is also
subject to credit risk.
Q How are the decisions to buy and sell securities made?
A We search for securities that represent value at the time given current
market conditions. Value is a combination of yield, credit quality,
structure (maturity, coupon, redemption features) and liquidity.
Recognizing value is the result of simultaneously analyzing the
interaction of these factors among the securities available in the market.
We will sell a security if we become concerned about its credit risk, we
are forced by market factors to raise money, or an attractive replacement
is available.
For additional information about other securities in which we may invest the
Fund's assets, see APPENDIX A on page 19.
8
<PAGE>
FUND MANAGEMENT
The Company has retained us, USAA Investment Management Company, to serve as
the manager and distributor for 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 provide management services to the Fund pursuant to an Advisory Agreement.
We are responsible for managing the Fund's portfolio (including placement of
brokerage orders) and its business affairs, subject to the authority of and
supervision by the Board of Directors. For our services, the Fund pays us an
annual fee. The fee is computed at twenty-four one hundredths of one percent
(.24%) of average net assets. The fee we received for the fiscal year ended
July 31, 1998, after reimbursements we made to the Fund, was equal to .18% 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 Manager
[PHOTOGRAPH OF PORTFOLIO MANAGER]
PAUL H. LUNDMARK
Paul H. Lundmark, Assistant Vice President of Fixed Income Investments, has
managed the Fund since its inception in June 1993. Mr. Lundmark has 12 years
investment management experience and has worked for us for six 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.
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,
9
<PAGE>
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 to fit your
own risk and reward goals.
III. USAA's Family of Funds
We offer you another alternative with our asset strategy funds listed in
APPENDIX B under asset allocation on page 22. These unique mutual funds provide
a professionally-managed, diversified investment portfolio within a mutual
fund. Designed for the individual who prefers to delegate the asset allocation
process to an investment manager, their structure achieves 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 to meet your needs. Refer to APPENDIX B on page 22 for a
complete list of the USAA Family of No-Load Mutual Funds.
HOW TO INVEST
Purchase of Shares
OPENING AN ACCOUNT
You may open an account and make an investment as described below by mail, in
person, bank wire, electronic funds transfer (EFT), or phone. A complete,
signed application is required for each new account. However,
10
<PAGE>
after you open your initial account with us, you will not need to fill out
another application unless the registration is different.
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. 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 and payment prior to that time, your
purchase price will be the NAV per share determined for that day. If we receive
your request or payment 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. This will 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
[MONEY GRAPHIC]
* $3,000. [$500 Uniform Gifts/Transfers to Minors Act (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 through payroll deduction for as little as $25 per pay period with
no initial investment.
ADDITIONAL PURCHASES
* $50
HOW TO PURCHASE
MAIL
[ENVELOPE GRAPHIC]
* To open an account, send your application and check to:
USAA Investment Management Company
9800 Fredericksburg Road
San Antonio, TX 78288
11
<PAGE>
* 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
[HANDSHAKE GRAPHIC]
* To open an account, bring your application and check to:
USAA Investment Management Company
USAA Federal Savings Bank
10750 Robert F. McDermott Freeway
San Antonio, TX 78288
BANK WIRE
[WIRE GRAPHIC]
* Instruct your bank (which may charge a fee for the service) to wire the
specified amount to the Fund as follows:
State Street Bank and Trust Company
Boston, MA 02101
ABA#011000028
Attn: USAA Short-Term Bond Fund
USAA Account Number: 69384998
Shareholder(s) Name(s) _________________________________________
Shareholder(s) Mutual Fund Account Number ______________________
ELECTRONIC FUNDS TRANSFER
[CALENDAR GRAPHIC]
* Additional purchases on a regular basis can be deducted from a bank
account, paycheck, income-producing investment, or USAA money market fund
account. Sign up for these services when opening an account or call
1-800-531-8448 to add these services.
PHONE 1-800-531-8448
[TELEPHONE GRAPHIC]
* If you have an existing USAA mutual fund account and would like to 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.
We will send you your money within seven days after the effective date of
redemption. Payment for redemption of shares purchased by EFT or check is
12
<PAGE>
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. Redemptions
are subject to taxes based on the difference between the cost of shares when
purchased and the price received upon redemption.
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, TELEGRAPH, OR TELEPHONE
[FAX MACHINE GRAPHIC]
* Send your written instructions to:
USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, TX 78288
* Send a signed fax to 1-800-292-8177, or send a telegram 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, the following information is obtained:
(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. Additionally, all telephone communications with you are recorded
and confirmations of account transactions are sent to the address of record. If
you were issued stock certificates for your shares, redemption by telephone,
fax, or telegram is not available.
CHECKWRITING
[CHECKBOOK GRAPHIC]
* Return a signed signature card, which accompanies your 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.
13
<PAGE>
IMPORTANT INFORMATION ABOUT PURCHASES AND REDEMPTIONS
Investor's Guide to USAA Mutual Fund Services
[INVESTOR'S GUIDE GRAPHIC]
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
USAA Shareholder Account Services (SAS), the Fund's transfer agent, may assess
annually 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 transactions 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;
14
<PAGE>
* 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. After the exchange order is received, the
Fund's transfer agent will simultaneously process exchange redemptions and
purchases at the share prices next determined. The investment minimums
applicable to share purchases also apply to exchanges. For federal income tax
purposes, an exchange between Funds is a taxable event; and as such, you may
realize a capital gain or loss. Such capital gains or losses are based on the
difference between the cost of shares when purchased and the price received
upon exchange.
The Fund has undertaken certain procedures regarding telephone transactions as
described on page 13.
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 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
NAV PER SHARE
EQUALS
TOTAL ASSETS
MINUS
LIABILITIES
DIVIDED BY
# OF SHARES
OUTSTANDING
The price at which you 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. 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.
Portfolio securities, except as otherwise noted, traded primarily on a
securities exchange are valued at the last sales price on that exchange. If no
sale is reported, the average of the bid and asked prices is generally used.
Over-the-counter securities are generally priced at the last sales price or, if
not available, at the average of the bid and asked prices.
15
<PAGE>
Debt securities purchased with maturities of 60 days or less are stated at
amortized cost, which approximates market value. Other debt securities are
valued each business day at their current market value as determined by a
pricing service approved by the Board of Directors. Securities which cannot be
valued by these methods, and all other assets, are valued in good faith at fair
value using methods we have determined under the general supervision of the
Board of Directors.
For additional information on how securities are valued, see VALUATION OF
SECURITIES in the Fund's Statement of Additional Information.
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 gain 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.
We will automatically reinvest all income dividends and capital gain
distributions 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
capital gain distribution paid by the Fund will reduce the NAV per share by the
amount of the 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 Taxpayer
Relief Act of 1997 and the technical provisions adopted by the IRS
Restructuring and Reform Act of 1998 may affect the status and treatment of
certain distributions shareholders receive from the Fund. We urge you to
consult your tax adviser about the status of distributions from the Fund in
your own state and locality.
16
<PAGE>
SHAREHOLDER - Dividends from taxable net investment income and distributions of
net short-term capital gains are taxable to you 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. These distributions may be
taxable at different rates depending on the length of time the Fund held the
applicable investment.
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 information to you annually concerning the tax
status of dividends and distributions for federal income tax purposes.
Year 2000
Like other organizations around the world, the Fund could be adversely affected
if the computer systems used by the Fund, its service providers, or companies
in which the Fund invests do not properly process and calculate information
that relates to dates beginning on January 1, 2000, and beyond. This situation
may occur because for many years computer programmers used only two digits to
describe years, such as 98 for 1998. A program written in this manner may not
work when it encounters the year 00. To confront this situation, USAA companies
have spent much effort and money; and we expect to have our systems ready for
the Year 2000 by mid-1999. In addition, we are actively assessing the Year 2000
readiness of our service providers, partners, and companies in whose securities
we invest. It is not possible for us to say that you will experience no effect
from this situation, but we can say that we are making a large effort to avoid
any ill effects upon our shareholders.
We do believe you are entitled to know with certainty that we will stand behind
your share balance as of the close of business in 1999. When the market reopens
in 2000, should any computer problem cause a change in the number of shares in
your account, we will return your account to its proper share balance.
17
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the Fund's
financial performance for the past five-year period. Certain information
reflects financial results for a single Fund share. The total returns in the
table represent the rate that an investor would have earned (or lost) on an
investment in the Fund (assuming reinvestment of all dividends and
distributions). This information has been audited by KPMG Peat Marwick LLP,
whose report, along with the Fund's financial statements, are included in the
Annual Report, which is available upon request.
Ten-Month
Period Ended
Year Ended July 31, July 31,
---------------------------------------------------------
1998 1997 1996 1995 1994
---------------------------------------------------------
Net asset value at
beginning of period $ 10.03 $ 9.79 $ 9.87 $ 9.74 $ 10.08
Net investment income .62 .61 .62 .61 .37
Net realized and
unrealized gain (loss) (.04) .25 (.08) .13 (.33)
Distributions from net
investment income (.62) (.61) (.62) (.61) (.37)
Distributions of realized
capital gains -- (.01) -- -- (.01)
---------------------------------------------------------
Net asset value at
end of period $ 9.99 $ 10.03 $ 9.79 $ 9.87 $ 9.74
=========================================================
Total return (%)* 5.91 8.97 5.62 7.90 .39
Net assets at end of
period (000) $181,171 $133,746 $101,032 $76,190 $48,228
Ratio of expenses to
average net assets (%) .50 .50 .50 .50 .50(a)
Ratio of expenses
to average net
assets excluding
reimbursements (%) .56 .61 .66 .74 .87(a)
Ratio of net investment
income to average net
assets (%) 6.16 6.14 6.29 6.34 4.51(a)
Portfolio turnover (%) 48.24 27.85 66.81 103.02 142.08
- --------------
* Assumes reinvestment of all dividend income and capital gain distributions
during the period.
(a) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
18
<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 the Fund's assets 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 the Fund's assets 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 the Fund's assets 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 the Fund's assets in repurchase agreements which are
collateralized by obligations issued or guaranteed as to both principal and
interest 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.
19
<PAGE>
MUNICIPAL LEASE OBLIGATIONS
We may invest the Funds assets in a variety of instruments referred to as
municipal lease obligations, including:
* Leases,
* Installment purchase contracts, and
* Certificates of participation in such leases and contracts.
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.
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.
20
<PAGE>
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
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 invest up to 15% 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, seven days or less, at approximately the
value at which the Fund has valued the securities.
21
<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 (1) Very high
First Start Growth Moderate to high
Gold (1) Very high
Growth Moderate to high
Growth & Income Moderate
International (1) Moderate to high
S&P 500 Index (2) Moderate
Science & Technology Very high
World Growth (1) Moderate to high
- ---------------------------------------------------------------
ASSET ALLOCATION
- ---------------------------------------------------------------
Balanced Strategy (1) Moderate
Cornerstone Strategy (1) Moderate
Growth and Tax Strategy Moderate
Growth Strategy (1) 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 (3) Moderate
Intermediate-Term (3) Low to moderate
Short-Term (3) Low
State Bond/Income (3,4) Moderate
- ---------------------------------------------------------------
MONEY MARKET
- ---------------------------------------------------------------
Money Market (5) Very low
Tax Exempt Money Market (3,5) Very low
Treasury Money Market Trust (5) Very low
State Money Market (3,4,5) Very low
===============================================================
1 FOREIGN INVESTING IS SUBJECT TO ADDITIONAL RISKS, SUCH AS CURRENCY
FLUCTUATIONS, MARKET ILLIQUIDITY, AND POLITICAL INSTABILITY.
2 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.
3 SOME INCOME MAY BE SUBJECT TO STATE OR LOCAL TAXES.
4 CALIFORNIA, FLORIDA, NEW YORK, TEXAS, AND VIRGINIA FUNDS ARE OFFERED ONLY TO
RESIDENTS OF THOSE STATES.
5 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.
22
<PAGE>
NOTES
<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),
Annual or Semiannual Report, or to ask other questions about the Fund. The SAI
has been filed with the Securities and Exchange Commission (SEC) and is legally
a part of the Prospectus. In the Fund's Annual Report, you will find a
discussion of the market conditions and investment strategies that
significantly affected the Fund's performance during the last fiscal year.
To view these documents, along with other related documents, you can visit the
SEC's Internet web site (http://www.sec.gov) or the Commission's Public
Reference Room in Washington, D.C. Information on the operation of the public
reference room can be obtained by calling 1-800-SEC-0330. Additionally, copies
of this information can be obtained, for a duplicating fee, by writing the
Public Reference Section of the Commission, Washington, D.C. 20549-6009.
INVESTMENT ADVISER, UNDERWRITER AND DISTRIBUTOR
USAA Investment Management Company
9800 Fredericksburg Road
San Antonio, Texas 78288
-----------------------------------------------
TRANSFER AGENT CUSTODIAN
USAA Shareholder Account Services State Street Bank and Trust Company
9800 Fredericksburg Road P.O. Box 1713
San Antonio, Texas 78288 Boston, Massachusetts 02105
-----------------------------------------------
TELEPHONE ASSISTANCE HOURS
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
Investment Company Act File No. 811-2429
<PAGE>
Part A
Prospectus for the
Money Market Fund
is included herein
<PAGE>
USAA MONEY MARKET FUND
PROSPECTUS
DECEMBER 1, 1998
As with other mutual funds, the Securities and Exchange Commission has not
approved or disapproved of this Fund's shares or determined whether this
prospectus is accurate or complete. Anyone who tells you otherwise is
committing a crime.
TABLE OF CONTENTS
What is the Fund's Investment Objective and Main Strategy? .. 2
Main Risks of Investing in This Fund ........................ 2
Is This Fund for You? ....................................... 3
Could the Value of Your Investment in This Fund Fluctuate? .. 3
Fees and Expenses ........................................... 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 ....... 14
Exchanges ................................................... 15
Shareholder Information ..................................... 15
Financial Highlights ........................................ 18
Appendix A .................................................. 19
Appendix B .................................................. 22
<PAGE>
USAA Investment Management Company manages this Fund. For easier reading, USAA
Investment Management Company will be referred to as "we" or "us" throughout
the Prospectus.
WHAT IS THE FUND'S INVESTMENT OBJECTIVE AND MAIN STRATEGY?
The Fund's investment objective is the highest income consistent with
preservation of capital and the maintenance of liquidity. We will attempt to
achieve the Fund's objective by investing the Fund's assets in high-quality,
U.S. dollar-denominated short-term debt instruments that present minimal credit
risk and comply with strict Securities and Exchange Commission (SEC) guidelines
applicable to money market funds.
In view of the risks inherent in all investments in securities, there is no
assurance that the Fund's objective will be achieved. See FUND INVESTMENTS on
page 6 for more information.
MAIN RISKS OF INVESTING IN THIS FUND
The primary risks of investing in this Fund are interest rate risk and credit
risk.
* INTEREST RATE RISK involves the possibility that the value of the Fund's
investments will decline because of an increase in interest rates.
IF INTEREST RATES INCREASE: the yield of the Fund may increase and the
market value of the Fund's securities will likely decline, adversely
affecting the net asset value and total return.
IF INTEREST RATES DECREASE: the yield of the Fund may decrease and the
market value of the Fund's securities may increase, which would likely
increase the Fund's net asset value and total return.
* Credit risk involves the possibility that a borrower cannot make timely
interest and principal payments on its securities.
Money market funds are sometimes confused with savings accounts. 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 Federal Deposit Insurance Corporation (FDIC) will insure that the
bank meets its obligations.
2
<PAGE>
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.
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.
Unlike a savings account, however, an investment in this Fund is not a deposit
of USAA Federal Savings Bank, or any other bank, and is not insured or
guaranteed by the FDIC or any other government agency. Although the Fund seeks
to preserve the value of your investment at $1 per share, it is possible to
lose money by investing in the Fund.
IS THIS FUND FOR YOU?
This Fund might be appropriate as part of your investment portfolio if . . .
* You need your money back within a short period.
* You need to preserve principal.
* You want a low-risk investment.
* You would like checkwriting privileges on the account.
This Fund MAY NOT be appropriate as part of your investment portfolio if . . .
* You need a high total return to achieve your goals.
* You need an investment that provides tax-free income.
COULD THE VALUE OF YOUR INVESTMENT IN THIS FUND FLUCTUATE?
Yes, it could. We manage the Fund with strict SEC guidelines designed to
preserve the Fund's value at $1 per share, although, of course, we cannot
guarantee that the value will remain at $1 per share. The value of your
investment typically will grow through reinvested dividends. The bar chart
shown on the next page illustrates the Fund's volatility and performance from
year to year over the past ten years.
3
<PAGE>
TOTAL RETURN
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.
[BAR CHART]
CALENDAR TOTAL
YEAR RETURN
1988 7.25%
1989 8.93%
1990 7.97%
1991 6.07%
1992 3.80%
1993 3.01%
1994 4.05%
1995 5.80%
1996 5.24%
1997 5.40%
THE FUND'S TOTAL RETURN FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30,
1998, WAS _____%.
During the periods shown in the bar chart, the highest total return for a
quarter was 2.31% (quarter ending June 30, 1989) and the lowest total return
for a quarter was .73% (quarter ending December 31, 1993).
YIELD
YIELD IS THE
ANNUALIZED NET
INCOME OF THE
FUND DURING A
SPECIFIED PERIOD
AS A PERCENTAGE
OF THE FUND'S
SHARE PRICE.
EFFECTIVE YIELD
IS CALCULATED
SIMILAR TO
THE YIELD,
HOWEVER, WHEN
ANNUALIZED,
THE INCOME
EARNED IS
ASSUMED TO BE
REINVESTED.
All mutual funds must use the same formulas to calculate yield and effective
yield. The Fund typically advertises performance in terms of a 7-day yield and
effective yield and may advertise total return. The 7-day yield quotation more
closely reflects current earnings of the Fund than the total return quotation.
The effective yield will be slightly higher than the yield because of the
compounding effect of the assumed reinvestment. Current yields 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.
The Fund's 7-day yield for the period ended December 31, 1997, was 5.55%.
You may obtain the most current yield information for the Fund by calling
1-800-531-8777.
[TELEPHONE GRAPHIC]
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 does not necessarily indicate what will happen
in the future. The value of your shares may go up or down. For the most current
price, yield, and return information for this Fund, you
4
<PAGE>
may call TouchLINE(R) at 1-800-531-8777. Press 1 for the Mutual Fund Menu,
press 1 again for prices, yields, and returns. Then, press 42# when asked for
the Fund Code.
TICKER
SYMBOL
USAXX
If you prefer to obtain this information from an on-line computer service, you
can do so by using the ticker symbol "USAXX."
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 or sales loads charged to your account when you buy or sell
Fund shares. However, if you sell shares and request your money by wire
transfer, there is 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 expenses before waivers
during the past fiscal year ended July 31, 1998, and are calculated as a
percentage of average net assets (ANA).
12B-1 FEES -
SOME MUTUAL
FUNDS CHARGE
THESE FEES
TO PAY FOR
ADVERTISING
AND OTHER
COSTS OF SELLING
FUND SHARES.
Management Fees .24%
Distribution (12b-1) Fees None
Other Expenses .24%
----
Total Annual Fund Operating Expenses* .48%
====
- --------------
* During the year, we voluntarily limited the Total Annual Fund Operating
Expenses to .45% as follows:
Total Annual Fund Operating Expenses .48%
Reimbursement from USAA Investment
Management Company (.03%)
----
Actual Fund Operating Expenses
After Reimbursement .45%
====
We have 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, 1999.
5
<PAGE>
Example of Effect of the Fund's Operating Expenses
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. Although your actual costs
may be higher or lower, you would pay the following expenses on a $10,000
investment, assuming (1) 5% annual return, (2) the Fund's operating expenses
(before any applicable reimbursement) remain the same, and (3) you redeem all
of your shares at the end of the periods shown.
1 year ............. $ 49
3 years ............. 154
5 years ............. 269
10 years ............. 604
FUND INVESTMENTS
Principal Investment Strategies and Risks
Q What is the Fund's principal investment strategy?
A The Fund's principal investment strategy is to 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 will the Fund's assets be invested
in?
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;
6
<PAGE>
* Yankee obligations; and
* other short-term debt securities.
Further description of these securities is found in APPENDIX A on page 19.
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. Also, strict SEC guidelines do not permit us to invest, with
respect to 75% of the Fund's assets, greater than 10% of the Fund's assets
in securities issued by or subject to guarantees by the same institution.
Purchases of securities issued or guaranteed by the U.S. Government or its
agencies or instrumentalities are not counted toward these limitations.
Q What is the credit quality of the Fund's investments?
A The Fund's investments consist of 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 or subject to a guarantee that is 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;
* unrated but issued by an issuer or guaranteed by a guarantor that has
other comparable short-term obligations so rated; or
* unrated but determined by us to be of comparable quality.
In addition, we must consider whether a particular investment presents
minimal credit risk.
Q Who are the Nationally Recognized Statistical Rating Organizations?
A Current NRSROs include:
* Moody's Investors Service, Inc.;
* Standard & Poor's Ratings Group;
* Fitch IBCA, Inc.;
* Duff & Phelps Inc.; and
* Thompson BankWatch, Inc.
7
<PAGE>
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. Additionally, 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
rate risk by limiting the maturity of each security to 397 days or less
and maintaining a dollar-weighted average portfolio maturity for the Fund
of 90 days or less.
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 How are the decisions to buy and sell securities made?
A We balance factors such as credit quality and maturity to purchase the
best relative value available in the market at any given time. While rare,
sell decisions are usually based on a change in our credit analysis or to
take advantage of an opportunity to reinvest at a higher yield.
For additional information about other securities in which we may invest the
Fund's assets, see APPENDIX A on page 19.
FUND MANAGEMENT
The Company has retained us, USAA Investment Management Company, to serve as
the manager and distributor for 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.
8
<PAGE>
We provide management services to the Fund pursuant to an Advisory Agreement.
We are responsible for managing the Fund's portfolio (including placement of
brokerage orders) and its business affairs, subject to the authority of and
supervision by the Board of Directors. For our services, the Fund pays us an
annual fee. The fee is computed at twenty-four one hundredths of one percent
(.24%) of average net assets. The fee we received for the fiscal year ended
July 31, 1998, after reimbursements we made to the Fund, was equal to .21% 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 Manager
[PHOTOGRAPH OF PORTFOLIO MANAGER]
PAMELA K. BLEDSOE
Pamela K. Bledsoe, Assistant Vice President of Money Market Funds, has managed
the Fund since May 1996. Ms. Bledsoe has ten years investment management
experience and has worked for us for seven 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.
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
9
<PAGE>
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 to fit your
own risk and reward goals.
III. USAA's Family of Funds
We offer you another alternative with our asset strategy funds listed in
APPENDIX B under asset allocation on page 22. These unique mutual funds provide
a professionally-managed, diversified investment portfolio within a mutual
fund. Designed for the individual who prefers to delegate the asset allocation
process to an investment manager, their structure achieves 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 to meet your needs. Refer to APPENDIX B on page 22 for a
complete list of the USAA Family of No-Load Mutual Funds.
HOW TO INVEST
Purchase of Shares
OPENING AN ACCOUNT
You may open an account and make an investment as described below by mail, in
person, bank wire, electronic funds transfer (EFT), or phone. A complete,
signed application is required for each new account. However, after you open
your initial account with us, you will not need to fill out another application
unless the registration is different.
TAX ID NUMBER
Each shareholder named on the account must provide a social security number or
tax identification number to avoid possible withholding requirements.
10
<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. 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 and payment prior to that time, your
purchase price will be the NAV per share determined for that day. If we receive
your request or payment 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. This will 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
[MONEY GRAPHIC]
* $3,000. [$500 Uniform Gifts/Transfers to Minors Act (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 through payroll deduction for as little as $25 per pay period with
no initial investment.
ADDITIONAL PURCHASES
* $50 (Except transfers from brokerage accounts, which are exempt from the
minimum).
HOW TO PURCHASE
MAIL
[ENVELOPE GRAPHIC]
* To open an account, send your application and 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
11
<PAGE>
IN PERSON
[HANDSHAKE GRAPHIC]
* To open an account, bring your application and check to:
USAA Investment Management Company
USAA Federal Savings Bank
10750 Robert F. McDermott Freeway
San Antonio, TX 78288
BANK WIRE
[WIRE GRAPHIC]
* Instruct your bank (which may charge a fee for the service) to wire the
specified amount to the Fund as follows:
State Street Bank and Trust Company
Boston, MA 02101
ABA#011000028
Attn: USAA Money Market Fund
USAA Account Number: 69384998
Shareholder(s) Name(s)_______________________________________
Shareholder(s) Mutual Fund Account Number____________________
ELECTRONIC FUNDS TRANSFER
[CALENDAR GRAPHIC]
* Additional purchases on a regular basis can be deducted from a bank
account, paycheck, income-producing investment, or USAA money market fund
account. Sign up for these services when opening an account or call
1-800-531-8448 to add these services.
PHONE 1-800-531-8448
[TELEPHONE GRAPHIC]
* If you have an existing USAA mutual fund account and would like to 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.
We will send you your money within seven days after the effective date of
redemption. 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. Redemptions are
subject to taxes based on the difference between the cost of shares when
purchased and the price received upon redemption.
12
<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, TELEGRAPH, OR TELEPHONE
[FAX MACHINE GRAPHIC]
* Send your written instructions to:
USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, TX 78288
* Send a signed fax to 1-800-292-8177, or send a telegram 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, the following information is obtained:
(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. Additionally, all telephone communications with you are recorded
and confirmations of account transactions are sent to the address of record. If
you were issued stock certificates for your shares, redemption by telephone,
fax, or telegram is not available.
CHECKWRITING
[CHECKBOOK GRAPHIC]
* Return a signed signature card, which accompanies your application, or
request a signature card separately and return to:
USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, TX 78288
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.
13
<PAGE>
IMPORTANT INFORMATION ABOUT PURCHASES AND REDEMPTIONS
Investor's Guide to USAA Mutual Fund Services
[INVESTOR'S GUIDE GRAPHIC]
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
USAA Shareholder Account Services (SAS), the Fund's transfer agent, may assess
annually 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 transactions 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;
14
<PAGE>
* redeem an account with less than 500 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. After the exchange order is received, the
Fund's transfer agent will simultaneously process exchange redemptions and
purchases at the share prices next determined. The investment minimums
applicable to share purchases also apply to exchanges. For federal income tax
purposes, an exchange between Funds is a taxable event; and as such, you may
realize a capital gain or loss. Such capital gains or losses are based on the
difference between the cost of shares when purchased and the price received
upon exchange.
The Fund has undertaken certain procedures regarding telephone transactions as
described on page 13.
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 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
NAV PER SHARE
EQUALS
TOTAL ASSETS
MINUS
LIABILITIES
DIVIDED BY
# OF SHARES
OUTSTANDING
The price at which you 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. 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.
Securities are stated at amortized cost, which approximates market value.
For additional information on how securities are valued, see VALUATION OF
SECURITIES in the Fund's Statement of Additional Information.
15
<PAGE>
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.
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 Taxpayer
Relief Act of 1997 and the technical provisions adopted by the IRS
Restructuring and Reform Act of 1998 may affect the status and treatment of
certain distributions shareholders receive from the Fund. We urge you to
consult your tax adviser about the status of distributions from the Fund in
your own state and locality.
SHAREHOLDER - Dividends from taxable net investment income and distributions of
net short-term capital gains are taxable to you 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. These distributions may be
taxable at different rates depending on the length of time the Fund held the
applicable investment.
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.
16
<PAGE>
REPORTING - The Fund will report information to you annually concerning the tax
status of dividends and distributions for federal income tax purposes.
Year 2000
Like other organizations around the world, the Fund could be adversely affected
if the computer systems used by the Fund, its service providers, or companies
in which the Fund invests do not properly process and calculate information
that relates to dates beginning on January 1, 2000, and beyond. This situation
may occur because for many years computer programmers used only two digits to
describe years, such as 98 for 1998. A program written in this manner may not
work when it encounters the year 00. To confront this situation, USAA companies
have spent much effort and money; and we expect to have our systems ready for
the Year 2000 by mid-1999. In addition, we are actively assessing the Year 2000
readiness of our service providers, partners, and companies in whose securities
we invest. It is not possible for us to say that you will experience no effect
from this situation, but we can say that we are making a large effort to avoid
any ill effects upon our shareholders.
We do believe you are entitled to know with certainty that we will stand behind
your share balance as of the close of business in 1999. When the market reopens
in 2000, should any computer problem cause a change in the number of shares in
your account, we will return your account to its proper share balance.
17
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the Fund's
financial performance for the past five-year period. Certain information
reflects financial results for a single Fund share. The total returns in the
table represent the rate that an investor would have earned (or lost) on an
investment in the Fund (assuming reinvestment of all dividends and
distributions). This information has been audited by KPMG Peat Marwick LLP,
whose report, along with the Fund's financial statements, are included in the
Annual Report, which is available upon request.
<TABLE>
<CAPTION>
Ten-Month
Period Ended
Year Ended July 31, July 31,
-------------------------------------------------------------
1998 1997 1996 1995 1994
-------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value at
beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
Net investment income .05 .05 .05 .05 .03
Distributions from net
investment income (.05) (.05) (.05) (.05) (.03)
-------------------------------------------------------------
Net asset value at
end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
=============================================================
Total return (%)* 5.45 5.28 5.41 5.49 2.74
Net assets at end of
period (000) $2,491,473 $2,161,691 $1,828,749 $1,540,055 $1,006,020
Ratio of expenses to
average net assets (%) .45 .45 .45 .45 .46(a)
Ratio of expenses
to average net
assets excluding
reimbursements (%) .48 .49 .51 .46 -
Ratio of net investment
income to average net
assets (%) 5.32 5.16 5.27 5.44 3.28(a)
</TABLE>
- --------------
* Assumes reinvestment of all dividend income distributions during the
period.
(a) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
18
<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 the Fund's assets 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 the Fund's assets 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 the Fund's assets 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 the Fund's assets in repurchase agreements which are
collateralized by obligations issued or guaranteed as to both principal and
interest 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.
19
<PAGE>
MUNICIPAL LEASE OBLIGATIONS
We may invest the Fund's assets 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.
20
<PAGE>
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 invest up to 10% 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, seven days or less, at approximately the
value at which the Fund has valued the securities.
21
<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 (1) Very high
First Start Growth Moderate to high
Gold (1) Very high
Growth Moderate to high
Growth & Income Moderate
International (1) Moderate to high
S&P 500 Index (2) Moderate
Science & Technology Very high
World Growth (1) Moderate to high
- ---------------------------------------------------------------
ASSET ALLOCATION
- ---------------------------------------------------------------
Balanced Strategy (1) Moderate
Cornerstone Strategy (1) Moderate
Growth and Tax Strategy Moderate
Growth Strategy (1) 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 (3) Moderate
Intermediate-Term (3) Low to moderate
Short-Term (3) Low
State Bond/Income (3,4) Moderate
- ---------------------------------------------------------------
MONEY MARKET
- ---------------------------------------------------------------
Money Market (5) Very low
Tax Exempt Money Market (3,5) Very low
Treasury Money Market Trust (5) Very low
State Money Market (3,4,5) Very low
===============================================================
1 FOREIGN INVESTING IS SUBJECT TO ADDITIONAL RISKS, SUCH AS CURRENCY
FLUCTUATIONS, MARKET ILLIQUIDITY, AND POLITICAL INSTABILITY.
2 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.
3 SOME INCOME MAY BE SUBJECT TO STATE OR LOCAL TAXES.
4 CALIFORNIA, FLORIDA, NEW YORK, TEXAS, AND VIRGINIA FUNDS ARE OFFERED ONLY TO
RESIDENTS OF THOSE STATES.
5 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.
22
<PAGE>
NOTES
<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),
Annual or Semiannual Report, or to ask other questions about the Fund. The SAI
has been filed with the Securities and Exchange Commission (SEC) and is legally
a part of the Prospectus. In the Fund's Annual Report, you will find a
discussion of the market conditions and investment strategies that
significantly affected the Fund's performance during the last fiscal year.
To view these documents, along with other related documents, you can visit the
SEC's Internet web site (http://www.sec.gov) or the Commission's Public
Reference Room in Washington, D.C. Information on the operation of the public
reference room can be obtained by calling 1-800-SEC-0330. Additionally, copies
of this information can be obtained, for a duplicating fee, by writing the
Public Reference Section of the Commission, Washington, D.C. 20549-6009.
INVESTMENT ADVISER, UNDERWRITER AND DISTRIBUTOR
USAA Investment Management Company
9800 Fredericksburg Road
San Antonio, Texas 78288
-----------------------------------------------
TRANSFER AGENT CUSTODIAN
USAA Shareholder Account Services State Street Bank and Trust Company
9800 Fredericksburg Road P.O. Box 1713
San Antonio, Texas 78288 Boston, Massachusetts 02105
-----------------------------------------------
TELEPHONE ASSISTANCE HOURS
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
Investment Company Act File No. 811-2429
<PAGE>
Part A
Prospectus for the
Science & Technology Fund
is included herein
<PAGE>
USAA SCIENCE &
TECHNOLOGY FUND
PROSPECTUS
DECEMBER 1, 1998
As with other mutual funds, the Securities and Exchange Commission has not
approved or disapproved of this Fund's shares or determined whether this
prospectus is accurate or complete. Anyone who tells you otherwise is
committing a crime.
TABLE OF CONTENTS
What is the Fund's Investment Objective and Main Strategy? .. 2
Main Risks of Investing in This Fund ........................ 2
Is This Fund for You? ....................................... 3
Could the Value of Your Investment in This Fund Fluctuate? .. 3
Fees and Expenses ........................................... 4
Fund Investments ............................................ 5
Fund Management ............................................. 7
Using Mutual Funds in an Investment Program ................. 8
How to Invest................................................ 9
Important Information About Purchases and Redemptions ....... 12
Exchanges.................................................... 13
Shareholder Information...................................... 14
Financial Highlights......................................... 17
Appendix A .................................................. 18
Appendix B .................................................. 19
<PAGE>
USAA Investment Management Company manages this Fund. For easier reading, USAA
Investment Management Company will be referred to as "we" or "us" throughout
the Prospectus.
WHAT IS THE FUND'S INVESTMENT OBJECTIVE AND MAIN STRATEGY?
The Fund's investment objective is long-term capital appreciation. We will
attempt to achieve the Fund's objective by investing the Fund's assets in
equity securities of companies expected to benefit from the development and use
of scientific and technological advances and improvements.
In view of the risks inherent in all investments in securities, there is no
assurance that the Fund's objective will be achieved. See FUND INVESTMENTS on
page 5 for more information.
MAIN RISKS OF INVESTING IN THIS FUND
The primary risks of investing in this Fund are market risk and industry risk.
* MARKET RISK involves the possibility that the Fund's investments in equity
securities will decline because of falls in the stock market, reducing the
value of individual company's stocks, regardless of the success or failure
of an individual company's operations.
* INDUSTRY RISK involves the possibility that the Fund's investments in
companies whose value is highly dependent on scientific and technological
developments may be more volatile because of the short life cycles and
competitive pressures of many of the products or services of these
companies.
An additional risk of the Fund described later in the Prospectus is the risk of
foreign investing. As with other mutual funds, losing money is an additional
risk associated with investing in this Fund.
As you consider an investment in this 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 the investment for long periods of time
to ride out down periods.
An investment in this Fund is not a deposit of USAA Federal Savings Bank, or
any other bank, and is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency.
[CAUTION LIGHT]
Look for this symbol throughout the Prospectus. We use it to mark more detailed
information about the main risks you will face as a Fund shareholder.
2
<PAGE>
IS THIS FUND FOR YOU?
This Fund might be appropriate as part of your investment portfolio if . . .
* You are looking for significant growth.
* You are willing to accept very high risk.
* You are looking for a long-term investment.
This Fund MAY NOT be appropriate as part of your investment portfolio if . . .
* You need steady income.
* You are unwilling to take greater risk for long-term goals.
* You are unable or reluctant to invest for a period of seven years or more.
* You need an investment that provides tax-free income.
COULD THE VALUE OF YOUR INVESTMENT IN THIS FUND FLUCTUATE?
Yes, it could. In fact, the value of your investment in the Fund will likely
increase or decrease with the changing market of the Fund's portfolio. The
Fund's portfolio consists of companies whose value is highly dependent on
scientific and technological developments. Many of the products and services of
these companies are subject to short life cycles and competitive pressures.
Therefore, the market value of the Fund's portfolio and the Fund's price per
share are likely to fluctuate significantly. The table below shows how the
Fund's cumulative total return since inception compared to that of a
broad-based securities market index. Remember, historical performance does not
necessarily indicate what will happen in the future.
TOTAL RETURN
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.
===================================================================
Cumulative Total Returns
(for the period ending Since Fund's Inception
December 31, 1997) on August 1, 1997
===================================================================
Science & Technology Fund (9.30%)
- -------------------------------------------------------------------
S&P 500 Index* 2.43%
===================================================================
* 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.
3
<PAGE>
Since the Fund's inception, the highest total return for a quarter was 17.50%
(quarter ending March 31, 1998) and the lowest total return for a quarter was
- -7.45% (quarter ending December 31, 1997). The Fund's total return for the
nine-month period ended September 30, 1998, was ____%.
[TELEPHONE GRAPHIC]
TOUCHLINE (R)
1-800-531-8777
PRESS
1
THEN
1
THEN 3 1 #
Please consider performance information in light of the Fund's investment
objective and policies and market conditions during the reported time periods.
Again, you must remember that historical performance does not necessarily
indicate what will happen in the future. The value of your shares may go up or
down. For the most current price and return information for this Fund, you may
call TouchLINE(R) at 1-800-531-8777. Press 1 for the Mutual Fund Menu, press 1
again for prices and returns. Then, press 31# when asked for the Fund Code.
NEWSPAPER
SYMBOL
SciTech
TICKER
SYMBOL
USSCX
You can also 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 "SciTech." If you prefer to obtain this information from an on-line
computer service, you can do so by using the ticker symbol "USSCX."
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 or sales loads charged to your account when you buy or sell
Fund shares. However, if you sell shares and request your money by wire
transfer, there is 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 expenses during the past
fiscal year ended July 31, 1998, and are calculated as a percentage of average
net assets.
12B-1 FEES -
SOME MUTUAL
FUNDS CHARGE
THESE FEES
TO PAY FOR
ADVERTISING
AND OTHER
COSTS OF SELLING
FUND SHARES.
Management Fees .75%
Distribution (12b-1) Fees None
Other Expenses .67%
-----
Total Annual Fund Operating Expenses 1.42%
=====
4
<PAGE>
Example of Effect of Fund's Operating Expenses
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. Although your actual costs
may be higher or lower, you would pay the following expenses on a $10,000
investment, assuming (1) 5% annual return, (2) the Fund's operating expenses
remain the same, and (3) you redeem all of your shares at the end of the
periods shown.
1 year........... $ 145
3 years.......... 449
5 years.......... 776
10 years.......... 1,702
FUND INVESTMENTS
Principal Investment Strategies and Risks
Q What is the Fund's principal investment strategy?
A The Fund's principal investment strategy is to invest at least 80% of the
Fund's net assets in equity securities of companies that we expect will
benefit from the development and use of scientific and technological
advances and improvements. 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.
As a temporary defensive measure because of market, economic, political,
or other conditions, we may invest up to 100% of the Fund's assets in
investment-grade, short-term debt instruments, which may result in the
Fund not achieving its investment objective during the time it is in this
temporary defensive posture.
We generally will not trade the Fund's assets in securities for short-term
profits; however, if circumstances warrant, we may purchase and sell
securities without regard to the length of time held. The Fund's portfolio
turnover rate will vary from year to year depending on market conditions,
and is not expected to exceed 150%. A high turnover rate increases
transaction costs and may increase taxable capital gains; therefore, we
will carefully weigh the anticipated benefits of trading.
5
<PAGE>
[CAUTION LIGHT}
MARKET RISK. Because this Fund invests in equity securities, it is subject to
stock 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. Stock markets tend to run in cycles, with periods when
stock prices generally go up, known as "bull" markets, and periods when stock
prices generally go down, referred to as "bear" markets. Equity securities tend
to go up and down more than bonds.
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 the Fund's assets in foreign securities purchased in
either foreign or U.S. markets when they are in line with the Fund's
investment objective.
[CAUTION LIGHT}
FOREIGN INVESTING. Investing in foreign securities, including American
Depositary Receipts (ADRs) and Global Depositary Receipts (GDRs), 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; political
instability; 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.
ADR - FOREIGN
SHARES HELD BY
A U.S. BANK
WHICH ISSUES
A RECEIPT
EVIDENCING
OWNERSHIP.
DIVIDENDS ARE
PAID IN U.S.
DOLLARS.
GDR - FOREIGN
SHARES HELD BY
A U.S. OR
FOREIGN BANK
WHICH ISSUES
A RECEIPT
EVIDENCING
OWNERSHIP.
DIVIDENDS ARE
PAID IN U.S.
DOLLARS.
Q In what industries will the Fund's assets be invested?
A We will invest at least 80% of the Fund's net assets in industries such
as, but not limited to, biotechnology, computer hardware, software and
services, communication and telecommunication equipment and services,
electronics, health care, drugs, medical products and supplies,
specialized health care services, aerospace and defense, and other
industries we believe may benefit directly or indirectly from research and
development in the science and technology fields. We may invest the Fund's
remaining assets in any other industry.
[CAUTION LIGHT}
INDUSTRY RISK. A mutual fund portfolio consisting of investments related to the
fields of science and technology is likely to be more volatile than a portfolio
that is more widely diversified in other economic sectors. Because of the
competitiveness and rapid changes in the fields of science and technology, many
of the companies in the Fund's portfolio are subject to distinctive risks. The
products and services of these companies may not be economically successful or
may quickly become outdated. Additionally, many of these companies must comply
with significant governmental regulations and may need governmental approval of
their products and services.
6
<PAGE>
Q How are the decisions to buy or sell securities made?
A We generally invest in companies producing sales and earnings growth rates
greater than those of the overall market. Investment considerations
include a company's ability to exceed earnings expectations over the near
or long term, valuation, cash flow, acquisitions, and other corporate
actions. We employ a bottoms-up, stock-picking strategy, focusing on these
factors. We monitor our positions continually and will sell a stock when
we perceive our original investment thesis to no longer hold.
For additional information about other securities in which we may invest the
Fund's assets, see APPENDIX A on page 18.
FUND MANAGEMENT
The Company has retained us, USAA Investment Management Company, to serve as
the manager and distributor for 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 provide management services to the Fund pursuant to an Advisory Agreement.
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, 1998. 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
[PHOTOGRAPH OF PORTFOLIO MANAGER]
CURT ROHRMAN
Curt Rohrman, Assistant Vice President of Equity Investments, has managed the
Fund since August 1997. He has ten years investment management experience and
has worked for us for three years. Prior to joining us, Mr. Rohrman worked for
CS First Boston Corporation from June 1988 to March 1995. He earned the
Chartered Financial Analyst designation in 1991 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
at Austin and a BBA from Texas Christian University.
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 Science & Technology Fund
with investments in other mutual funds that invest in value-oriented
8
<PAGE>
stocks and high-dividend stocks. This is just one way you could combine funds
to fit your own risk and reward goals.
III. USAA's Family of Funds
We offer you another alternative with our asset strategy funds listed in
APPENDIX B under asset allocation on page 19. These unique mutual funds provide
a professionally-managed, diversified investment portfolio within a mutual
fund. Designed for the individual who prefers to delegate the asset allocation
process to an investment manager, their structure achieves 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 to meet your needs. Refer to APPENDIX B on page 19 for a
complete list of the USAA Family of No-Load Mutual Funds.
HOW TO INVEST
Purchase of Shares
OPENING AN ACCOUNT
You may open an account and make an investment as described below by mail, in
person, bank wire, electronic funds transfer (EFT), or phone. A complete,
signed application is required for each new account. However, after you open
your initial account with us, you will not need to fill out another application
unless the registration is different.
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. 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 and payment prior to that time, your
purchase price will be the NAV per share determined for that day. If we receive
your request or payment 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. This will avoid a
9
<PAGE>
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
[MONEY GRAPHIC]
* $3,000 [$500 Uniform Gifts/Transfers to Minors Act (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 through payroll deduction for as little as $25 per pay period with
no initial investment.
ADDITIONAL PURCHASES
* $50
HOW TO PURCHASE
MAIL
[ENVELOPE GRAPHIC]
* To open an account, send your application and 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
[HANDSHAKE GRAPHIC]
* To open an account, bring your application and check to:
USAA Investment Management Company
USAA Federal Savings Bank
10750 Robert F. McDermott Freeway
San Antonio, TX 78288
10
<PAGE>
BANK WIRE
[WIRE GRAPHIC]
* Instruct your bank (which may charge a fee for the service) to wire the
specified amount to the Fund as follows:
State Street Bank and Trust Company
Boston, MA 02101
ABA#011000028
Attn: USAA Science & Technology Fund
USAA Account Number: 69384998
Shareholder(s) Name(s)_________________________________
Shareholder(s) Mutual Fund Account Number _____________
ELECTRONIC FUNDS TRANSFER
[CALENDAR GRAPHIC]
* Additional purchases on a regular basis can be deducted from a bank
account, paycheck, income-producing investment, or USAA money market fund
account. Sign up for these services when opening an account or call
1-800-531-8448 to add these services.
PHONE 1-800-531-8448
[TELEPHONE GRAPHIC]
* If you have an existing USAA mutual fund account and would like to 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.
We will send you your money within seven days after the effective date of
redemption. 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. Redemptions are
subject to taxes based on the difference between the cost of shares when
purchased and the price received upon redemption.
In addition, the Company may elect to suspend the redemption of shares or
postpone the date of payment in limited circumstances.
11
<PAGE>
HOW TO REDEEM
WRITTEN, FAX, TELEGRAPH, OR TELEPHONE
[FAX MACHINE GRAPHIC]
* Send your written instructions to:
USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, TX 78288
* Send a signed fax to 1-800-292-8177, or send a telegram 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, the following information is obtained:
(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. Additionally, all telephone communications with you are recorded
and confirmations of account transactions are sent to the address of record. If
you were issued stock certificates for your shares, redemption by telephone,
fax, or telegram is not available.
IMPORTANT INFORMATION ABOUT
PURCHASES AND REDEMPTIONS
Investor's Guide to USAA Mutual Fund Services
[INVESTOR'S GUIDE GRAPHIC]
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
USAA Shareholder Account Services (SAS), the Fund's transfer agent, may assess
annually 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
12
<PAGE>
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 transactions 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. After the exchange order is received, the
Fund's transfer agent will simultaneously process exchange redemptions and
purchases at the share prices next determined. The investment minimums
applicable to share purchases also apply to exchanges. For federal income tax
purposes, an exchange between Funds is a taxable event; and as such, you may
realize a capital gain or loss. Such capital gains or losses are based on the
difference between the cost of shares when purchased and the price received
upon exchange.
The Fund has undertaken certain procedures regarding telephone transactions as
described on page 12.
13
<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 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
NAV PER SHARE
EQUALS
TOTAL ASSETS
MINUS
LIABILITIES
DIVIDED BY
# OF SHARES
OUTSTANDING
The price at which you 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. 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.
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.
Securities trading in various foreign markets may take place on days when the
NYSE is closed. Further, when the NYSE is open, the foreign markets may be
closed. Therefore, the calculation of the Fund's NAV may not take place at the
same time the prices of certain securities held by the Fund are determined. In
most cases, events affecting the values of portfolio securities that occur
between the time their prices are determined and the close of normal trading on
the NYSE on a day the Fund's NAV is calculated will not be reflected in the
Fund's NAV. If, however, we determine that a particular event would materially
affect the Fund's NAV, then we, under the general supervision of the Board of
Directors, will use all relevant, available information to determine a fair
value for the affected portfolio securities.
Over-the-counter securities are generally priced at the last sales price or, if
not available, at the average of the bid and asked prices.
Debt securities purchased with maturities of 60 days or less are stated at
amortized cost, which approximates market value. Other debt securities are
valued each business day at their current market value as determined by a
pricing service approved by the Board of Directors. Securities which cannot be
valued by these methods, and all other assets, are valued in good faith at
14
<PAGE>
fair value using methods we have determined under the general supervision of
the Board of Directors.
For additional information on how securities are valued, see VALUATION OF
SECURITIES in the Fund's Statement of Additional Information.
Dividends and Distributions
The Fund pays net investment income dividends yearly. Any net capital gain
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.
We will automatically reinvest all income dividends and capital gain
distributions 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 Taxpayer
Relief Act of 1997 and the technical provisions adopted by the IRS
Restructuring and Reform Act of 1998 may affect the status and treatment of
certain distributions shareholders receive from the Fund. We urge you to
consult your tax adviser about the status of distributions from the Fund in
your own state and locality.
SHAREHOLDER - Dividends from taxable net investment income and distributions of
net short-term capital gains are taxable to you 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. These distributions may be
taxable at different rates depending on the length of time the Fund held the
applicable investment.
15
<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 information to you annually concerning the tax
status of dividends and distributions for federal income tax purposes.
Year 2000
Like other organizations around the world, the Fund could be adversely affected
if the computer systems used by the Fund, its service providers, or companies
in which the Fund invests do not properly process and calculate information
that relates to dates beginning on January 1, 2000, and beyond. This situation
may occur because for many years computer programmers used only two digits to
describe years, such as 98 for 1998. A program written in this manner may not
work when it encounters the year 00. To confront this situation, USAA companies
have spent much effort and money; and we expect to have our systems ready for
the Year 2000 by mid-1999. In addition, we are actively assessing the Year 2000
readiness of our service providers, partners, and companies in whose securities
we invest. It is not possible for us to say that you will experience no effect
from this situation, but we can say that we are making a large effort to avoid
any ill effects upon our shareholders.
We do believe you are entitled to know with certainty that we will stand behind
your share balance as of the close of business in 1999. When the market reopens
in 2000, should any computer problem cause a change in the number of shares in
your account, we will return your account to its proper share balance.
16
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the Fund's
financial performance since inception. Certain information reflects financial
results for a single Fund share. The total return in the table represents the
rate that an investor would have earned (or lost) on an investment in the Fund
(assuming reinvestment of all dividends and distributions). This information
has been audited by KPMG Peat Marwick LLP, whose report, along with the Fund's
financial statements, are included in the Annual Report, which is available
upon request.
Year Ended
July 31,
----------
1998*
----------
Net asset value at
beginning of period $ 10.00
Net investment loss (.07)(a)
Net realized and
unrealized gain 1.24
---------
Net asset value at
end of period $ 11.17
=========
Total return (%) 11.70
Net assets at end of
period (000) $111,318
Ratio of expenses to
average net assets (%) 1.42
Ratio of net investment
loss to average net
assets (%) (.69)
Portfolio turnover (%) 76.31
- --------------
* Fund commenced operations August 1, 1997.
(a) Calculated using weighted average shares.
17
<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 the Fund's assets in convertible securities, which are bonds,
preferred stocks, and other securities that pay interest or dividends and offer
the buyer the ability to convert 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 also depends on the price of the underlying common stock.
MONEY MARKET INSTRUMENTS
We may hold a certain portion of the Fund's assets in high-quality, U.S.
dollar-denominated debt securities that have remaining maturities of one year
or less. Such securities may include U.S. Government obligations, commercial
paper and other short-term corporate obligations, repurchase agreements
collateralized with U.S. Government securities, certificates of deposit,
bankers' acceptances, and other financial institution obligations. These
securities may carry fixed or variable interest rates.
ILLIQUID SECURITIES
We may invest up to 15% 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, seven days or less, at approximately the
value at which the Fund has valued the securities.
FORWARD CURRENCY CONTRACTS
We may hold securities denominated in foreign currencies. As a result, the
value of these securities will be affected by changes in the exchange rate
between the dollar and the foreign currencies. In managing currency exposure,
the Fund may enter into forward currency contracts. A forward currency contract
is an agreement to purchase or sell a specified currency at a specified future
date or over a specified time period at a price set at the time of the
contract. The Fund may only enter into forward currency contracts. When the
Fund enters into a contract for the purchase or sale of a security denominated
in a foreign currency, it desires to "lock in" the U.S. dollar price of that
security.
18
<PAGE>
APPENDIX B
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 (1) Very high
First Start Growth Moderate to high
Gold (1) Very high
Growth Moderate to high
Growth & Income Moderate
International (1) Moderate to high
S&P 500 Index (2) Moderate
Science & Technology Very high
World Growth (1) Moderate to high
- ---------------------------------------------------------------
ASSET ALLOCATION
- ---------------------------------------------------------------
Balanced Strategy (1) Moderate
Cornerstone Strategy (1) Moderate
Growth and Tax Strategy Moderate
Growth Strategy (1) 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 (3) Moderate
Intermediate-Term (3) Low to moderate
Short-Term (3) Low
State Bond/Income (3,4) Moderate
- ---------------------------------------------------------------
MONEY MARKET
- ---------------------------------------------------------------
Money Market (5) Very low
Tax Exempt Money Market (3,5) Very low
Treasury Money Market Trust (5) Very low
State Money Market (3,4,5) Very low
===============================================================
1 FOREIGN INVESTING IS SUBJECT TO ADDITIONAL RISKS, SUCH AS CURRENCY
FLUCTUATIONS, MARKET ILLIQUIDITY, AND POLITICAL INSTABILITY.
2 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.
3 SOME INCOME MAY BE SUBJECT TO STATE OR LOCAL TAXES.
4 CALIFORNIA, FLORIDA, NEW YORK, TEXAS, AND VIRGINIA FUNDS ARE OFFERED ONLY TO
RESIDENTS OF THOSE STATES.
5 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.
19
<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),
Annual or Semiannual Report, or to ask other questions about the Fund. The SAI
has been filed with the Securities and Exchange Commission (SEC) and is legally
a part of the Prospectus. In the Fund's Annual Report, you will find a
discussion of the market conditions and investment strategies that
significantly affected the Fund's performance during the last fiscal year.
To view these documents, along with other related documents, you can visit the
SEC's Internet web site (http://www.sec.gov) or the Commission's Public
Reference Room in Washington, D.C. Information on the operation of the public
reference room can be obtained by calling 1-800-SEC-0330. Additionally, copies
of this information can be obtained, for a duplicating fee, by writing the
Public Reference Section of the Commission, Washington, D.C. 20549-6009.
INVESTMENT ADVISER, UNDERWRITER AND DISTRIBUTOR
USAA Investment Management Company
9800 Fredericksburg Road
San Antonio, Texas 78288
-----------------------------------------------
TRANSFER AGENT CUSTODIAN
USAA Shareholder Account Services State Street Bank and Trust Company
9800 Fredericksburg Road P.O. Box 1713
San Antonio, Texas 78288 Boston, Massachusetts 02105
-----------------------------------------------
TELEPHONE ASSISTANCE HOURS
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
Investment Company Act File No. 811-2429
<PAGE>
Part A
Prospectus for the
First Start Growth Fund
is included herein
<PAGE>
USAA FIRST START
GROWTH FUND
PROSPECTUS
DECEMBER 1, 1998
The USAA First Start Growth Fund is designed to stimulate interest in long-term
investing by young people. It is part of USAA First Start, a money management
plan for young people.
As with other mutual funds, the Securities and Exchange Commission has not
approved or disapproved of this Fund's shares or determined whether this
prospectus is accurate or complete. Anyone who tells you otherwise is
committing a crime.
TABLE OF CONTENTS
What is the Fund's Investment Objective and Main Strategy?......... 2
Main Risks of Investing in This Fund............................... 2
Is This Fund for You?.............................................. 2
Could the Value of Your Investment in This Fund Fluctuate?......... 3
Fees and Expenses.................................................. 4
Fund Investments................................................... 5
Fund Management.................................................... 7
Using Mutual Funds in an Investment Program........................ 8
How to Invest...................................................... 9
Important Information About Purchases and Redemptions.............. 12
Exchanges.......................................................... 13
Shareholder Information............................................ 14
Financial Highlights............................................... 17
Appendix A......................................................... 18
Appendix B......................................................... 19
<PAGE>
USAA Investment Management Company manages this Fund. For easier reading, USAA
Investment Management Company will be referred to as "we" or "us" throughout
the Prospectus.
WHAT IS THE FUND'S INVESTMENT OBJECTIVE AND MAIN STRATEGY?
The Fund's investment objective is long-term capital appreciation. We attempt
to achieve this objective by investing in equity securities of companies that
provide goods or services that we believe are familiar to young people.
In view of the risks inherent in all investments in securities, there is no
assurance that the Fund's objective will be achieved. See FUND INVESTMENTS on
page 5 for more information.
MAIN RISKS OF INVESTING IN THIS FUND
The primary risk of investing in this Fund is market risk.
* MARKET RISK involves the possibility that the Fund's investments in equity
securities will decline because of falls in the stock market, reducing the
value of individual company's stocks regardless of the success or failure
of an individual company's operations.
Another risk of the Fund described later in the Prospectus is the risk of
foreign investing. As with other mutual funds, losing money is an additional
risk associated with investing in this Fund.
As you consider an investment in this 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 the investment for long periods of time
to ride out down periods.
An investment in this Fund is not a deposit of USAA Federal Savings Bank, or any
other bank, and is not insured or guaranteed by the Federal Deposit Insurance
Corporation or any other government agency.
[CAUTION LIGHT]
Look for this symbol throughout the Prospectus. We use it to mark more detailed
information about the main risks you will face as a Fund shareholder.
IS THIS FUND FOR YOU?
This Fund might be appropriate as part of your investment portfolio if . . .
* You are interested in learning about investments.
* You are willing to accept moderate to high risk.
* You are looking for a long-term investment.
2
<PAGE>
This Fund MAY NOT be appropriate as part of your investment portfolio if . . .
* You need steady income.
* You are unwilling to take greater risk for long-term goals.
* You are unable or reluctant to invest for a period of five years or more.
* You need an investment that provides tax-free income.
COULD THE VALUE OF YOUR INVESTMENT IN THIS FUND FLUCTUATE?
Yes, it could. In fact, the value of your investment in the Fund will likely
increase or decrease with the changing market of the Fund's portfolio. You may
have a gain or loss when you sell your shares. The table below shows how the
Fund's cumulative total return since inception compared to that of a
broad-based securities market index. Remember, historical performance does not
necessarily indicate what will happen in the future.
TOTAL RETURN
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.
===============================================================================
Cumulative Total Returns
(for the period ending Since Fund's Inception
December 31, 1997) on August 1, 1997
===============================================================================
First Start Growth Fund (.20%)
- -------------------------------------------------------------------------------
S&P 500 Index* 2.43%
===============================================================================
* 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.
Since the Fund's inception, the highest total return for a quarter was 16.53%
(quarter ending March 31, 1998) and the lowest total return for a quarter was
.50% (quarter ending December 31, 1997). The Fund's total return for the
nine-month period ended September 30, 1998, was ____%.
Please consider performance information in light of the Fund's investment
objective and policies and market conditions during the reported time periods.
Again, you must remember that historical performance does not necessarily
indicate what will happen in the future. The value of your shares may go up or
down. For the most current price and return information for this Fund, you may
call TouchLINE(R) at 1-800-531-8777. Press 1 for the Mutual Fund Menu, press 1
again for prices and returns. Then, press 32# when asked for the Fund Code.
[TELEPHONE GRAPHIC]
TouchLINE (R)
1-800-531-8777
PRESS
1
THEN
1
THEN
3 2 #
3
<PAGE>
NEWSPAPER SYMBOL
FStrtGr
TICKER SYMBOL
UFSGX
You can also 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 "FStrtGr." If you prefer to obtain this information from an on-line
computer service, you can do so by using the ticker symbol "UFSGX."
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 or sales loads charged to your account when you buy or sell
Fund shares. However, if you sell shares and request your money by wire
transfer, there is 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 expenses during the past
fiscal year ended July 31, 1998, and are calculated as a percentage of average
net assets.
12B-1 FEES -
SOME MUTUAL FUNDS
CHARGE THESE FEES
TO PAY FOR
ADVERTISING AND
OTHER COSTS OF
SELLING FUND SHARES.
Management Fees .75%
Distribution (12b-1) Fees None
Other Expenses .90%
-----
Total Annual Fund Operating Expenses 1.65%
=====
Example of Effect of Fund's Operating Expenses
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. Although your actual costs
may be higher or lower, you would pay the following expenses on a $10,000
investment, assuming (1) 5% annual return, (2) the Fund's operating expenses
remain the same, and (3) you redeem all of your shares at the end of the
periods shown.
1 year........... $ 168
3 years.......... 520
5 years.......... 897
10 years.......... 1,955
4
<PAGE>
FUND INVESTMENTS
Principal Investment Strategies and Risks
Q What is the Fund's principal investment strategy?
A The Fund's principal investment strategy is to invest the Fund's assets
in equity securities of companies providing goods or services we believe
are familiar to young people. 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 designed the Fund as part of a program to stimulate interest in
long-term investing by young people. Shareholders of the Fund may give
us their suggestions about the types of companies they would like us to
consider for investment by the Fund. We invite shareholders to tell us
the investment topics or the names of stocks they would like us to
feature in the Fund's communications to shareholders.
As a temporary defensive measure because of market, economic, political,
or other conditions, we may invest up to 100% of the Fund's assets in
investment-grade, short-term debt instruments, which may result in the
Fund not achieving its investment objective during the time it is in
this temporary defensive posture.
[CAUTION LIGHT]
MARKET RISK. Because this Fund invests in equity securities, it is subject to
stock 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. Stock markets tend to run in cycles, with periods when
stock prices generally go up, known as "bull" markets, and periods when stock
prices generally go down, referred to as "bear" markets. Equity securities tend
to go up and down more than bonds.
ADR - FOREIGN
SHARES HELD BY
A U.S. BANK
WHICH ISSUES
A RECEIPT
EVIDENCING
OWNERSHIP.
DIVIDENDS ARE
PAID IN U.S.
DOLLARS.
GDR - FOREIGN
SHARES HELD BY
A U.S. OR
FOREIGN BANK
WHICH ISSUES
A RECEIPT
EVIDENCING
OWNERSHIP.
DIVIDENDS ARE
PAID IN U.S.
DOLLARS.
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 the Fund's assets in foreign securities
purchased on either foreign or U.S. markets when they are in line with
the Fund's investment objective.
5
<PAGE>
[CAUTION LIGHT]
FOREIGN INVESTING. Investing in foreign securities, including American
Depositary Receipts (ADRs) and Global Depositary Receipts (GDRs), 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; political
instability; 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.
Q In what industries will the Fund's assets be invested?
A We will invest the Fund's assets in many different industries. The Fund
is not a "sector" fund that focuses its investments in a specific
industry or sector of the economy. We believe that goods or services
that are likely to be familiar to young investors are provided by
companies engaged in many different types of industries. Such companies
may include computer hardware and software manufacturers, Internet
service providers, and companies in the apparel, automobile,
communications, entertainment, financial services, health services, and
travel industries, among others. We believe that the flexibility to
select equity securities of companies across a broad universe of
industries maximizes our opportunity to find attractive investments as
we pursue the Fund's objective of long-term capital appreciation.
Q Are the Fund's assets prohibited from being invested in any specific
industries?
A Yes. We will not invest the Fund's assets in companies whose primary
line of business is the production of tobacco products or alcoholic
beverages. Investments in firms primarily focused on gaming activities
are also prohibited.
Q What special services are provided to shareholders in this Fund?
A In addition to providing an investment opportunity for long-term capital
appreciation, shareholders will receive educational information targeted
to young people about the basic concepts of saving and investing.
6
<PAGE>
Q How are the decisions to buy and sell securities made?
A We buy stocks of companies that provide goods or services we believe are
familiar to young people. We generally invest in companies producing
sales and earnings growth rates greater than those of the overall
market. Investment considerations include a company's ability to exceed
earnings expectations over the near or long term, valuation, cash flow,
acquisitions, and other corporate actions. We employ a bottoms-up,
stock-picking strategy, focusing on these factors. We monitor our
positions continually and will sell a stock when we perceive our
original investment thesis to no longer hold.
For additional information about other securities in which we may invest the
Fund's assets, see APPENDIX A on page 18.
FUND MANAGEMENT
The Company has retained us, USAA Investment Management Company, to serve as
the manager and distributor for 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 provide management services to the Fund pursuant to an Advisory Agreement.
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, 1998. 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.
7
<PAGE>
Portfolio Transactions
USAA Brokerage Services, our discount brokerage service, may execute purchases
and sales of equity securities for the Fund's portfolio. The Board of Directors
has adopted procedures to ensure that any commissions paid to USAA Brokerage
Services are reasonable and fair.
Portfolio Manager
[PHOTOGRAPH OF PORTFOLIO MANAGER]
CURT ROHRMAN
Curt Rohrman, Assistant Vice President of Equity Investments, has managed the
Fund since August 1997. He has ten years investment management experience and
has worked for us for three years. Prior to joining us, Mr. Rohrman worked for
CS First Boston Corporation from June 1988 to March 1995. He earned the
Chartered Financial Analyst designation in 1991 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
at Austin and a BBA from Texas Christian University.
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.
8
<PAGE>
You, however, retain at least part of the responsibility for an equally
important decision. This decision involves determining a portfolio of mutual
funds that balances your investment goals with your tolerance for risk. It is
likely that this decision may include the use of more than one fund of the USAA
Family of Funds.
For example, assume you wish to invest in a widely-diversified, common stock
portfolio. You could combine an investment in the First Start Growth Fund with
investments in other mutual funds that invest in high-dividend stocks. This is
just one way you could combine funds to fit your own risk and reward goals.
III. USAA's Family of Funds
We offer you another alternative with our asset strategy funds listed in
APPENDIX B under asset allocation on page 19. These unique mutual funds provide
a professionally-managed, diversified investment portfolio within a mutual
fund. Designed for the individual who prefers to delegate the asset allocation
process to an investment manager, their structure achieves 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 to meet your needs. Refer to APPENDIX B on page 19 for a
complete list of the USAA Family of No-Load Mutual Funds.
HOW TO INVEST
Purchase of Shares
OPENING AN ACCOUNT
You may open an account and make an investment as described below by mail, in
person, bank wire, electronic funds transfer (EFT), or phone. A complete,
signed application is required for each new account. However, after you open
your initial account with us, you will not need to fill out another application
unless the registration is different.
TAX ID NUMBER
Each shareholder named on the account must provide a social security number or
tax identification number to avoid possible withholding requirements.
9
<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. 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 and payment prior to that time, your
purchase price will be the NAV per share determined for that day. If we receive
your request or payment 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. This will 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
[MONEY GRAPHIC]
* $3,000 [$250 Uniform Gifts/Transfers to Minors Act (UGMA/UTMA) accounts and
$250 for IRAs] or no initial investment if you elect to have monthly
electronic investments of at least $20 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 through
payroll deduction for as little as $25 per pay period with no initial
investment.
ADDITIONAL PURCHASES
* $20
HOW TO PURCHASE
MAIL
[ENVELOPE GRAPHIC]
* To open an account, send your application and 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
10
<PAGE>
IN PERSON
[HANDSHAKE GRAPHIC]
* To open an account, bring your application and check to:
USAA Investment Management Company
USAA Federal Savings Bank
10750 Robert F. McDermott Freeway
San Antonio, TX 78288
BANK WIRE
[WIRE GRAPHIC]
* Instruct your bank (which may charge a fee for the service) to wire the
specified amount to the Fund as follows:
State Street Bank and Trust Company
Boston, MA 02101
ABA#011000028
Attn: USAA First Start Growth Fund
USAA Account Number: 69384998
Shareholder(s) Name(s)_________________________________________
Shareholder(s) Mutual Fund Account Number______________________
ELECTRONIC FUNDS TRANSFER
[CALENDAR GRAPHIC]
* Additional purchases on a regular basis can be deducted from a bank account,
paycheck, income-producing investment, or USAA money market fund account.
Sign up for these services when opening an account or call 1-800-531-8448 to
add these services.
PHONE 1-800-531-8448
[TELEPHONE GRAPHIC]
* If you have an existing USAA mutual fund account and would like to 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.
We will send you your money within seven days after the effective date of
redemption. 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. Redemptions are
subject to taxes based on the difference between the cost of shares when
purchased and the price received upon redemption.
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, TELEGRAPH, OR TELEPHONE
[FAX MACHINE GRAPHIC]
* Send your written instructions to:
USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, TX 78288
* Send a signed fax to 1-800-292-8177, or send a telegram 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, the following information is obtained:
(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. Additionally, all telephone communications with you are recorded
and confirmations of account transactions are sent to the address of record. If
you were issued stock certificates for your shares, redemption by telephone,
fax, or telegram is not available.
IMPORTANT INFORMATION ABOUT PURCHASES AND REDEMPTIONS
Investor's Guide to USAA Mutual Fund Services
[INVESTOR'S GUIDE GRAPHIC]
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
USAA Shareholder Account Services (SAS), the Fund's transfer agent, may assess
annually 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
12
<PAGE>
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
* require a signature guarantee for transactions 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. After the exchange order is received, the
Fund's transfer agent will simultaneously process exchange redemptions and
purchases at the share prices next determined. The investment minimums
applicable to share purchases also apply to exchanges. For federal income tax
purposes, an exchange between Funds is a taxable event; and as such, you may
realize a capital gain or loss. Such capital gains or losses are based on the
difference between the cost of shares when purchased and the price received
upon exchange.
The Fund has undertaken certain procedures regarding telephone transactions as
described on page 12.
13
<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 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
NAV PER SHARE
EQUALS
TOTAL ASSETS
MINUS
LIABILITIES
DIVIDED BY
# OF SHARES
OUTSTANDING
The price at which you 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. 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.
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.
Securities trading in various foreign markets may take place on days when the
NYSE is closed. Further, when the NYSE is open, the foreign markets may be
closed. Therefore, the calculation of the Fund's NAV may not take place at the
same time the prices of certain securities held by the Fund are determined. In
most cases, events affecting the values of portfolio securities that occur
between the time their prices are determined and the close of normal trading on
the NYSE on a day the Fund's NAV is calculated will not be reflected in the
Fund's NAV. If, however, we determine that a particular event would materially
affect the Fund's NAV, then we, under the general supervision of the Board of
Directors, will use all relevant, available information to determine a fair
value for the affected portfolio securities.
Over-the-counter securities are generally priced at the last sales price or, if
not available, at the average of the bid and asked prices.
Debt securities purchased with maturities of 60 days or less are stated at
amortized cost, which approximates market value. Other debt securities are
valued each business day at their current market value as determined by a
pricing service approved by the Board of Directors. Securities which cannot
14
<PAGE>
be valued by these methods, and all other assets, are valued in good faith at
fair value using methods we have determined under the general supervision of
the Board of Directors.
For additional information on how securities are valued, see VALUATION OF
SECURITIES in the Fund's Statement of Additional Information.
Dividends and Distributions
The Fund pays net investment income dividends yearly. Any net capital gain
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.
We will automatically reinvest all income dividends and capital gain
distributions 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 Taxpayer
Relief Act of 1997 and the technical provisions adopted by the IRS
Restructuring and Reform Act of 1998 may affect the status and treatment of
certain distributions shareholders receive from the Fund. We urge you to
consult your tax adviser about the status of distributions from the Fund in
your own state and locality.
SHAREHOLDER - Dividends from taxable net investment income and distributions of
net short-term capital gains are taxable to you 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. These distributions may be
taxable at different rates depending on the length of time the Fund held the
applicable investment.
15
<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 information to you annually concerning the tax
status of dividends and distributions for federal income tax purposes.
Year 2000
Like other organizations around the world, the Fund could be adversely affected
if the computer systems used by the Fund, its service providers, or companies
in which the Fund invests do not properly process and calculate information
that relates to dates beginning on January 1, 2000, and beyond. This situation
may occur because for many years computer programmers used only two digits to
describe years, such as 98 for 1998. A program written in this manner may not
work when it encounters the year 00. To confront this situation, USAA companies
have spent much effort and money; and we expect to have our systems ready for
the Year 2000 by mid-1999. In addition, we are actively assessing the Year 2000
readiness of our service providers, partners, and companies in whose securities
we invest. It is not possible for us to say that you will experience no effect
from this situation, but we can say that we are making a large effort to avoid
any ill effects upon our shareholders.
We do believe you are entitled to know with certainty that we will stand behind
your share balance as of the close of business in 1999. When the market reopens
in 2000, should any computer problem cause a change in the number of shares in
your account, we will return your account to its proper share balance.
16
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the Fund's
financial performance since inception. Certain information reflects financial
results for a single Fund share. The total return in the table represents the
rate that an investor would have earned (or lost) on an investment in the Fund
(assuming reinvestment of all dividends and distributions). This information
has been audited by KPMG Peat Marwick LLP, whose report, along with the Fund's
financial statements, are included in the Annual Report, which is available
upon request.
Year Ended
July 31,
----------
1998*
----------
Net asset value at
beginning of period $ 10.00
Net investment loss (.10)(a)
Net realized and
unrealized gain 2.37
----------
Net asset value at
end of period $ 12.27
==========
Total return (%) 22.70
Net assets at end of
period (000) $ 45,344
Ratio of expenses to
average net assets (%) 1.65
Ratio of net investment
loss to average net
assets (%) (.83)
Portfolio turnover (%) 52.11
- -----------------
* Fund commenced operations August 1, 1997.
(a) Calculated using weighted average shares.
17
<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 the Fund's assets in convertible securities, which are bonds,
preferred stocks, and other securities that pay interest or dividends and offer
the buyer the ability to convert 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 also depends on the price of the underlying common stock.
MONEY MARKET INSTRUMENTS
We may hold a certain portion of the Fund's assets in high-quality, U.S.
dollar-denominated debt securities that have remaining maturities of one year
or less. Such securities may include U.S. Government obligations, commercial
paper and other short-term corporate obligations, repurchase agreements
collateralized with U.S. Government securities, certificates of deposit,
bankers' acceptances, and other financial institution obligations. These
securities may carry fixed or variable interest rates.
ILLIQUID SECURITIES
We may invest up to 15% 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, seven days or less, at approximately the
value at which the Fund has valued the securities.
FORWARD CURRENCY CONTRACTS
We may hold securities denominated in foreign currencies. As a result, the
value of these securities will be affected by changes in the exchange rate
between the dollar and the foreign currencies. In managing currency exposure,
the Fund may enter into forward currency contracts. A forward currency contract
is an agreement to purchase or sell a specified currency at a specified future
date or over a specified time period at a price set at the time of the
contract. The Fund may only enter into forward currency contracts. When the
Fund enters into a contract for the purchase or sale of a security denominated
in a foreign currency, it desires to "lock in" the U.S. dollar price of that
security.
18
<PAGE>
APPENDIX B
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 (1) Very high
First Start Growth Moderate to high
Gold (1) Very high
Growth Moderate to high
Growth & Income Moderate
International (1) Moderate to high
S&P 500 Index (2) Moderate
Science & Technology Very high
World Growth (1) Moderate to high
- ---------------------------------------------------------------
ASSET ALLOCATION
- ---------------------------------------------------------------
Balanced Strategy (1) Moderate
Cornerstone Strategy (1) Moderate
Growth and Tax Strategy Moderate
Growth Strategy (1) 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 (3) Moderate
Intermediate-Term (3) Low to moderate
Short-Term (3) Low
State Bond/Income (3,4) Moderate
- ---------------------------------------------------------------
MONEY MARKET
- ---------------------------------------------------------------
Money Market (5) Very low
Tax Exempt Money Market (3,5) Very low
Treasury Money Market Trust (5) Very low
State Money Market (3,4,5) Very low
===============================================================
1 FOREIGN INVESTING IS SUBJECT TO ADDITIONAL RISKS, SUCH AS CURRENCY
FLUCTUATIONS, MARKET ILLIQUIDITY, AND POLITICAL INSTABILITY.
2 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.
3 SOME INCOME MAY BE SUBJECT TO STATE OR LOCAL TAXES.
4 CALIFORNIA, FLORIDA, NEW YORK, TEXAS, AND VIRGINIA FUNDS ARE OFFERED ONLY TO
RESIDENTS OF THOSE STATES.
5 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.
19
<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),
Annual or Semiannual Report, or to ask other questions about the Fund. The SAI
has been filed with the Securities and Exchange Commission (SEC) and is legally
a part of the Prospectus. In the Fund's Annual Report, you will find a
discussion of the market conditions and investment strategies that
significantly affected the Fund's performance during the last fiscal year.
To view these documents, along with other related documents, you can visit the
SEC's Internet web site (http://www.sec.gov) or the Commission's Public
Reference Room in Washington, D.C. Information on the operation of the public
reference room can be obtained by calling 1-800-SEC-0330. Additionally, copies
of this information can be obtained, for a duplicating fee, by writing the
Public Reference Section of the Commission, Washington, D.C. 20549-6009.
INVESTMENT ADVISER, UNDERWRITER AND DISTRIBUTOR
USAA Investment Management Company
9800 Fredericksburg Road
San Antonio, Texas 78288
-----------------------------------------------
TRANSFER AGENT CUSTODIAN
USAA Shareholder Account Services State Street Bank and Trust Company
9800 Fredericksburg Road P.O. Box 1713
San Antonio, Texas 78288 Boston, Massachusetts 02105
-----------------------------------------------
TELEPHONE ASSISTANCE HOURS
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
Investment Company Act File No. 811-2429
<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 Fund,
Money Market Fund, Science & Technology Fund, and
First Start Growth Fund
is included herein
Not included in this Post-Effective Amendment
is the Statement of Additional Information for the
S&P 500 Index Fund
<PAGE>
USAA USAA STATEMENT OF
EAGLE MUTUAL ADDITIONAL INFORMATION
LOGO FUND, INC. December 1, 1998
- -------------------------------------------------------------------------------
USAA MUTUAL FUND, INC.
USAA MUTUAL FUND, INC. (the Company) is a registered investment company
offering shares of ten no-load mutual funds, nine 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, Money Market Fund, Science & Technology Fund, and First Start Growth
Fund (collectively, the Funds). Each Fund is classified as diversified.
You may obtain a free copy of a Prospectus dated December 1, 1998, for any Fund
by writing to USAA Mutual Fund, Inc., 9800 Fredericksburg Road, 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.
The financial statements of the Funds and the Independent Auditors' Report
thereon for the fiscal year ended July 31, 1998, are included in the
accompanying Annual Report to Shareholders of that date and are incorporated
herein by reference.
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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
13 Description of Shares
13 Tax Considerations
14 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
22 Appendix B - Comparison of Portfolio Performance
25 Appendix C - Dollar-Cost Averaging
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VALUATION OF SECURITIES
Shares of each Fund are offered on a continuing best efforts basis through USAA
Investment Management Company (IMCO or the Manager). The offering price for
shares of each Fund is equal to the current net asset value (NAV) per share.
The NAV per share of each Fund is calculated by adding the value of all its
portfolio securities and other assets, deducting its liabilities, and dividing
by the number of shares outstanding.
A Fund's NAV per share is calculated each day, Monday through Friday,
except days on which the New York Stock Exchange (NYSE) is closed. The NYSE is
currently scheduled to be closed on New Year's Day, 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, Short-Term Bond, Science & Technology, and First
Start Growth 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.
The value of the Money Market Fund's securities is stated at amortized
cost which approximates market value. This involves valuing a security at its
cost and thereafter assuming a constant amortization to maturity of any
discount or premium, regardless of the impact of fluctuating interest rates.
While this method provides certainty in valuation, it may result in periods
during which the value of an instrument, as determined by amortized cost, is
higher or lower than the price the Fund would receive upon the sale of the
instrument.
The valuation of the Money Market Fund's portfolio instruments based upon
their amortized cost is subject to the Fund's adherence to certain procedures
and conditions. Consistent with regulatory requirements, the Manager will only
purchase securities with remaining maturities of 397 days or less and will
maintain a dollar-weighted average portfolio maturity of no more than 90 days.
The Manager will invest only in securities that have been determined to present
minimal credit risk and that satisfy the quality and diversification
requirements of applicable rules and regulations of the Securities and Exchange
Commission (SEC).
The Board of Directors has established procedures designed to stabilize
the Money Market Fund's price per share, as computed for the purpose of sales
and redemptions, at $1.00. There can be no assurance, however, that the Fund
will at all times be able to maintain a constant $1.00 NAV per share. Such
procedures include review of the Fund's holdings at such intervals as is deemed
appropriate to determine whether the Fund's NAV calculated by using available
market quotations deviates from $1.00 per share and, if so, whether such
deviation may result in material dilution or is otherwise unfair to existing
shareholders. In the event that it is determined that such a deviation exists,
the Board of Directors will take such corrective action as it regards as
necessary and appropriate. Such action may include selling portfolio
instruments prior to maturity to realize capital gains or losses or to shorten
average portfolio maturity, withholding dividends, or establishing a NAV per
share by using available market quotations.
2
<PAGE>
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, USAA Shareholder Account Services (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 the Transfer Agent. The account must be clearly identified, and you must
include the number of shares to be transferred, the signatures of all
registered owners, and all stock certificates, if any, which are the subject of
transfer. You also need to send written instructions signed by all registered
owners and supporting documents to change an account registration due to events
such as divorce, marriage, or death. If a new account needs to be established,
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, Short-Term Bond, Science & Technology, or First
Start Growth 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 amounts 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. You will continue to earn dividends until the shares are
redeemed by the presentation of a check.
When a check is presented to the Transfer Agent for payment, a sufficient
number of full and fractional shares from your account will be redeemed to
cover the amount of the check. If the account balance 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.
3
<PAGE>
The checkwriting privilege is 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 a non-governmental employer, an income-producing
investment, or an account with a participating financial institution.
DIRECT DEPOSIT PROGRAM - The monthly transfer of certain federal benefits to
directly purchase shares of a USAA mutual fund. Eligible federal benefits
include: Social Security, Supplemental Security Income, Veterans Compensation
and Pension, Civil Service Retirement Annuity, and Civil Service Survivor
Annuity.
GOVERNMENT ALLOTMENT - The transfer of military pay by the U.S. Government
Finance Center for the purchase of USAA mutual fund shares.
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. You may
initiate a "buy" or "sell" whenever you choose.
DIRECTED DIVIDENDS - If you own shares in more than one of the Funds in the
USAA Family of Funds, you may direct that dividends and/or capital gain
distributions earned in one Fund be used to purchase shares automatically in
another fund.
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 you own shares having a NAV of $5,000 or more in a single investment account
(accounts in different Funds cannot be aggregated for this purpose), you 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. You may also elect to have checks mailed to a designated address.
This 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. You are not charged 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 offers
403(b)(7) accounts and various forms of IRAs. 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 Road,
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 sections captioned WHAT IS THE FUND'S INVESTMENT OBJECTIVE AND MAIN
STRATEGY? and FUND INVESTMENTS in each Fund's Prospectus describe the
fundamental investment objective(s) and the investment policies applicable to
each Fund. Each Fund's objective(s) cannot be changed without shareholder
approval. 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.
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.
5
<PAGE>
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 SEC limitations
applicable to each Fund's investments in illiquid securities. In determining
the liquidity of Municipal Lease Obligations, Section 4(2) Commercial Paper and
Rule 144A Securities, the Manager will consider the following factors, among
others, established by the Board of Directors: (1) the frequency of trades and
quotes for the security, (2) the number of dealers willing to purchase or sell
the security and the number of other potential purchasers, (3) dealer
undertakings to make a market in the security, and (4) the nature of the
security and the nature of the marketplace trades, including the time needed to
dispose of the security, the method of soliciting offers, and the mechanics of
transfer. Additional factors considered by the Manager in determining the
liquidity of a municipal lease obligation are: (1) whether the lease obligation
is of a size that will be attractive to institutional investors, (2) whether
the lease obligation contains a non-appropriation clause and the likelihood
that the obligor will fail to make an appropriation therefor, and (3) such
other factors as the Manager may determine to be relevant to such
determination. In determining the liquidity of Restricted Put Bonds, the
Manager will evaluate the credit quality of the party (the Put Provider)
issuing (or unconditionally guaranteeing performance on) the unconditional put
or demand feature of the Restricted Put Bond. In evaluating the credit quality
of the Put Provider, the Manager will consider all factors that it deems
indicative of the capacity of the Put Provider to meet its obligations under
the Restricted Put Bond based upon a review of the Put Provider's outstanding
debt and financial statements and general economic conditions.
Certain foreign securities (including Eurodollar obligations) may be
eligible for resale pursuant to Rule 144A in the United States and may also
trade without restriction in one or more foreign markets. Such securities may
be determined to be liquid based upon these foreign markets without regard to
their eligibility for resale pursuant to Rule 144A. In such cases, these
securities will not be treated as Rule 144A securities for purposes of the
liquidity guidelines established by the Board of Directors.
CALCULATION OF PORTFOLIO WEIGHTED AVERAGE MATURITY
Weighted average maturity is derived by multiplying the value of each
investment by the number of days remaining to its maturity, adding these
calculations, and then dividing the total by the value of the Fund's portfolio.
An obligation's maturity is typically determined on a stated final maturity
basis, although there are some exceptions to this rule.
With respect to obligations held by the Funds, if it is probable that the
issuer of an instrument will take advantage of a maturity-shortening device,
such as a call, refunding, or redemption provision, the date on which the
instrument will probably be called, refunded, or redeemed may be considered to
be its maturity date. Also, the maturities of mortgage-backed securities, some
asset-backed securities and securities subject to sinking fund arrangements,
are determined on a weighted average life basis, which is the average time for
principal to be repaid. For mortgage-backed and some asset-backed securities,
this average time is calculated by assuming a constant prepayment rate (CPR)
for the life of the mortgages or assets backing the security. The CPR for a
security can vary depending upon the level and volatility of interest rates.
This, in turn, can affect the weighted average life of the security. The
weighted average lives of these securities will be shorter than their stated
final maturities. In addition, for purposes of the Fund's investment policies,
an instrument will be treated as having a maturity earlier than its stated
maturity date if the instrument has technical features such as puts or demand
features which, in the judgment of the Manager, will result in the instrument
being valued in the market as though it has the earlier maturity.
The Money Market Fund will determine the maturity of an obligation in its
portfolio in accordance with Rule 2a-7 under the Investment Company Act of
1940, as amended (1940 Act).
WRITING COVERED CALL OPTIONS
The Income Stock Fund may write (sell) covered call options and purchase
options to close out options previously written by the Fund. The purpose of
writing covered call options is to generate additional premium income for the
Fund. This premium income will serve to enhance the Fund's total return and
will reduce the effect of any price decline of the security involved in the
option. Covered call options will
6
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 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.
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<PAGE>
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, Science & Technology, and First Start Growth Funds may
enter into forward currency contracts in order to protect against uncertainty
in the level of future foreign exchange rates.
A forward contract involves an agreement to purchase or sell a specific
currency at a specified future date or over a specified time period at a price
set at the time of the contract. These contracts are usually traded directly
between currency traders (usually large commercial banks) and their customers.
A forward contract generally has no deposit requirements, and no commissions
are charged.
Each Fund may enter into forward currency contracts under two
circumstances. First, when each 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,
each 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 each 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. Each 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 each 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 each 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 each 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 each Fund is obligated to deliver.
Each Fund is not required to enter into such transactions and will not do
so unless deemed appropriate by the Manager.
Although each Fund values its assets each business day in terms of U.S.
dollars, it does not intend to convert its foreign currencies into U.S. dollars
on a daily basis. It will do so from time to time, and 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 each 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, Income, Income Stock,
Science & Technology, and First Start Growth 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, 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 ability to convert 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
8
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appreciation of the underlying common stock, the value of convertible
securities also depends on the price of the underlying 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.
TEMPORARY DEFENSIVE POLICY
Each Fund may on a temporary basis because of market, economic, political, or
other conditions, invest up to 100% of its assets in investment-grade,
short-term debt instruments. Such securities may consist of obligations of the
U.S. Government, its agencies or instrumentalities, and repurchase agreements
secured by such instruments; certificates of deposit of domestic banks having
capital, surplus, and undivided profits in excess of $100 million; banker's
acceptances of similar banks; commercial paper and other corporate debt
obligations.
INVESTMENT RESTRICTIONS
The following investment restrictions have been adopted by the Company for and
are applicable to each Fund except the Science & Technology and First Start
Growth Funds, which are listed separately below. 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 may not:
(1) 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) 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) 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) 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) Invest in companies for the purpose of exercising control or management.
(6) 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) 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) 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) Mortgage, pledge, or hypothecate any of its assets, except for the Income
Stock Fund. A security covered by a call is not considered pledged.
(10) 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.
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(11) Acquire securities of other open-end investment companies, except in
connection with a merger, consolidation, or acquisition of assets approved
by the shareholders.
(12) 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) Purchase or sell commodities, commodity contracts, or real estate,
although a Fund may invest in the securities of real estate investment
trusts.
(14) 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) 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) Change the nature of its business so as to cease to be an investment
company.
(17) 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.
Each of the Science & Technology and First Start Growth Funds may not:
(1) With respect to 75% of its total assets, purchase the securities of any
issuer (except U.S. Government Securities, as such term is defined in the
1940 Act) if, as a result, it would own more than 10% of the outstanding
voting securities of such issuer or it would have more than 5% of the
value of its total assets invested in the securities of such issuer.
(2) Borrow money, except for temporary or emergency purposes in an amount not
exceeding 33 1/3% of its total assets (including the amount borrowed) less
liabilities (other than borrowings).
(3) Invest 25% or more of the value of its total assets in any one industry;
provided, this limitation does not apply to securities issued or
guaranteed by the U.S. Government and its agencies or instrumentalities.
(4) Issue senior securities, except as permitted under the 1940 Act.
(5) Underwrite securities of other issuers, except to the extent that it may
be deemed to act as a statutory underwriter in the distribution of any
restricted securities or not readily marketable securities.
(6) Lend any securities or make any loan if, as a result, more than 33 1/3% of
its total assets would be lent to other parties, except that this
limitation does not apply to purchases of debt securities or to repurchase
agreements.
(7) Purchase or sell commodities, except that each Fund may invest in
financial futures contracts, options thereon, and similar instruments.
(8) Purchase or sell real estate unless acquired as a result of ownership of
securities or other instruments, except that each Fund may invest in
securities or other instruments backed by real estate or securities of
companies that deal in real estate or are engaged in the real estate
business.
With respect to each Fund's concentration policies as described above, 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 RESTRICTION
The following restriction is not considered to be a fundamental policy of the
Funds. The Board of Directors may change this additional restriction without
notice to or approval by the shareholders.
Each Fund 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
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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.
The Funds will have no obligation to deal with any particular broker or
group of brokers in the execution of portfolio transactions. The Funds
contemplate that, consistent with obtaining the best overall terms available,
brokerage transactions may be effected through USAA Brokerage Services, a
discount brokerage service of the Manager. The Company's Board of Directors has
adopted procedures in conformity with Rule 17e-1 under the 1940 Act designed to
ensure that all brokerage commissions paid to USAA Brokerage Services are
reasonable and fair. The Company's Board of Directors has authorized the
Manager, as a member of the Chicago Stock Exchange, to effect portfolio
transactions for the Funds on such exchange and to retain compensation in
connection with such transactions. Any such transactions will be effected and
related compensation paid only in accordance with applicable SEC regulations.
In the allocation of brokerage business, preference may be given to those
broker-dealers who provide research or other services to the Manager as long as
there is no sacrifice in obtaining the best overall terms available. Such
research and other services may include, for example: advice concerning the
value of securities, the advisability of investing in, purchasing, or selling
securities, and the availability of securities or the purchasers or sellers of
securities; analyses and reports concerning issuers, industries, securities,
economic factors and trends, portfolio strategy, and performance of accounts;
and various functions incidental to effecting securities transactions, such as
clearance and settlement. In return for such services, a Fund may pay to those
brokers a higher commission than may be charged by other brokers, provided that
the Manager determines in good faith that such commission is reasonable in
terms of either that particular transaction or of the overall responsibility of
the Manager to the Funds and its other clients. The receipt of research from
broker-dealers that execute transactions on behalf of the Company may be useful
to the Manager in rendering investment management services to other clients
(including affiliates of the Manager), and conversely, such research provided
by broker-dealers who have executed transaction orders on behalf of other
clients may be useful to the Manager in carrying out its obligations to the
Company. While such research is available to and may be used by the Manager in
providing investment advice to all its clients (including affiliates of the
Manager), not all of such research may be used by the Manager for the benefit
of the Company. Such research and services will be in addition to and not in
lieu of research and services provided by the Manager, and the expenses of the
Manager will not necessarily be reduced by the receipt of such supplemental
research. See THE COMPANY'S MANAGER.
Securities of the same issuer may be purchased, held, or sold at the same
time by the Company for any or all of its Funds, or other accounts or companies
for which the Manager acts as the investment adviser (including affiliates of
the Manager). On occasions when the Manager deems the purchase or sale of a
security to be in the best interest of the Company, as well as the Manager's
other clients, the Manager, to the extent permitted by applicable laws and
regulations, may aggregate such securities to be sold or purchased for the
Company with those to be sold or purchased for other customers in order to
obtain best execution and lower brokerage commissions, if any. In such event,
allocation of the securities so purchased or sold, as well as the expenses
incurred in the transaction, will be made by the Manager in the manner it
considers to be most equitable and consistent with its fiduciary obligations to
all such customers, including the Company. In some instances, this procedure
may impact the price and size of the position obtainable for the Company.
BROKERAGE COMMISSIONS
During the last three fiscal years, the Funds paid the following brokerage
fees:
FUND 1996 1997 1998
---- ---- ---- ----
Aggressive Growth $ 124,620 $ 304,478 $ 663,760
Growth $2,149,922 $2,375,456 $1,372,786
Growth & Income $ 332,154 $ 480,256 $ 818,620
Income Stock $1,668,406 $1,522,541 $1,277,682
Income $ 78,950 $ 201,250 $ 204,200
Science & Technology -- -- $ 126,610
First Start Growth -- -- $ 49,219
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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 1996 1997 1998*
---- ---- ---- -----
Aggressive Growth $ -- $ 2,000 $ 1,800
Growth $21,360 $87,280 $159,936
Growth & Income $ 4,576 $18,044 $ 33,400
Income Stock $ 8,000 $20,000 $139,527
Income $21,200 -- $ 19,200
Science & Technology -- -- $ 12,435
First Start Growth -- -- $ 6,159
- --------------
*These amounts are .27%, 11.65%, 4.08%, 10.92%, 9.40%, 9.82%, and 12.51%,
respectively, of brokerage fees paid by each Fund.
For the year ended July 31, 1998, .48%, 12.68%, 4.65% 22.84%, 10.65%, 15.03%,
and 14.70% of the aggregate dollar amounts of transactions involving the
payment of commissions by the Aggressive Growth, Growth, Growth & Income,
Income Stock, Science & Technology, and First Start Growth 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 $17,258,592,
$299,575,175, $201,362,987, $139,438,215, $27,494,752, and $15,988,425, and the
related brokerage commissions or underwriting commissions were $50,989,
$303,670, $199,445, $166,618, $28,575, and $15,185 for the Aggressive Growth,
Growth, Growth & Income, Income Stock, Science & Technology, and First Start
Growth Funds, respectively for the year ended July 31, 1998.
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, Short-Term Bond, Science & Technology, and First Start Growth 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.
For the last two fiscal years, the Funds' portfolio turnover rates were as
follows:
FUND 1997 1998
---- ---- ----
Aggressive Growth 57.15% 83.32%
Growth 75.41% 68.93%
Growth & Income 14.67% 29.38%
Income Stock 34.95% 22.34%
Income* 57.50% 47.35%
Short-Term Bond 27.85% 48.24%
Science & Technology -- 76.31%
First Start Growth -- 52.11%
- --------------
* 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
------------------
1997 1998
---- ----
Portfolio turnover 22.07% 42.11%
Purchases and sales of this type are as follows:
Purchases (000) $593,587 $88,811
Sales (000) $594,283 $88,915
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DESCRIPTION OF SHARES
The Funds are a series of the Company and are 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 in separate series or
Funds. There are ten mutual funds in the Company, nine of which are described
in this SAI. Under the Articles of Incorporation, the Board of Directors is
authorized to create new Funds in addition to those already existing without
shareholder approval. The Growth, Income, and Money Market Funds were
established in the Fall of 1980 and commenced public offering of their shares
on February 2, 1981. The Aggressive Growth Fund was established by the Board of
Directors on July 8, 1981, and commenced public offering of its shares on
October 19, 1981. The Income Stock Fund was established by the Board of
Directors on January 23, 1987, and commenced public offering of its shares on
May 4, 1987. The Growth & Income and Short-Term Bond Funds were established by
the Board of Directors on March 23, 1993, and commenced public offering of
their shares on June 1, 1993. The Science & Technology and First Start Growth
Funds were established by the Board of Directors on May 9, 1997, and commenced
public offering of their shares on August 4, 1997.
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. The Company 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. 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.
The Company will assist in communicating to other shareholders about the
meeting. On any matter submitted to the shareholders, the holder of each Fund
share is entitled to one vote per share (with proportionate voting for
fractional shares) regardless of the relative net asset values of the Funds'
shares. However, on matters affecting an individual Fund, a separate vote of
the shareholders of that Fund is required. Shareholders of a Fund are not
entitled to vote on any matter which does not affect that Fund but which
requires a separate vote of another Fund. Shares do not have cumulative voting
rights, which means that holders of more than 50% of the shares voting for the
election of Directors can elect 100% of the Company's Board of Directors, and
the holders of less than 50% of the shares voting for the election of Directors
will not be able to elect any person as a Director.
Shareholders of a particular Fund might have the power to elect all of the
Directors of the Company because that Fund has a majority of the total
outstanding shares of the Company. When issued, each Fund's shares are fully
paid and nonassessable, have no pre-emptive or subscription rights, and are
fully transferable. There are no conversion rights.
TAX CONSIDERATIONS
Each Fund intends to qualify as a regulated investment company under Subchapter
M of the Internal Revenue Code of 1986, as amended (the Code). Accordingly,
each Fund will not be liable for federal income taxes on its taxable net
investment income and net capital gains (capital gains in excess of capital
losses) that are distributed to shareholders, provided that each Fund
distributes at least 90% of its net investment income and net short-term
capital gain for the taxable year.
To qualify as a regulated investment company, 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) and (2) 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.
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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 who supervise
the business affairs of the Company. 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 Road, San Antonio, TX 78288.
Robert G. Davis 1, 2
Director and Chairman of the Board of Directors
Age: 52
Deputy Chief Executive Officer for Capital Management of United Services
Automobile Association (USAA) (6/98-present); 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);
President, Chief Executive Officer, Director and Chairman of the Board of
Directors of USAA Financial Planning Network, Inc. (1/97-present); Executive
Vice President, Chief Operating Officer, Director, and Vice Chairman of the
Board of Directors of USAA Financial Planning Network, Inc. (6/96-12/96);
Special Assistant to Chairman, 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 serves as a
Director/Trustee and Chairman of the Boards of Directors/Trustees of each of
the remaining funds within the USAA Family of Funds; Director and Chairman of
the Boards of Directors of USAA Investment Management Company (IMCO), 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: 57
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, Director/Trustee and Vice Chairman of the Boards of
Directors/Trustees of each of the remaining Funds within the USAA Family of
Funds and USAA Shareholder Account Services; Director of USAA Life Insurance
Company; Trustee and Vice Chairman of USAA Life Investment Trust.
John W. Saunders, Jr. 1, 2, 4
Director and Vice President
Age: 63
Senior Vice President, Fixed Income Investments, IMCO (10/85-present). Mr.
Saunders serves as Director/Trustee and Vice President of each of the remaining
Funds within the USAA Family of Funds; Director of IMCO; Senior Vice President
of USAA Shareholder Account Services; Vice President of USAA Life Investment
Trust.
Barbara B. Dreeben 3, 4, 5
200 Patterson #1008
San Antonio, TX 78209
Director
Age: 53
President, Postal Addvantage (7/92-present); Consultant, Nancy Harkins
Stationer (8/91-12/95). Mrs. Dreeben serves as a Director/Trustee of each of
the remaining Funds within the USAA Family of Funds.
Howard L. Freeman, Jr. 2, 3, 4, 5
2710 Hopeton
San Antonio, TX 78230
Director
Age: 63
Retired. Assistant General Manager for Finance, San Antonio City Public Service
Board (1976-1996). Mr. Freeman serves as a Director/Trustee of each of the
remaining Funds within the USAA Family of Funds.
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<PAGE>
Robert L. Mason, Ph.D. 3, 4, 5
12823 Queens Forest
San Antonio, TX 78230
Director
Age: 52
Manager, Statistical Analysis Section, Southwest Research Institute
(8/75-present). Dr. Mason serves as a Director/Trustee of each of the remaining
Funds within the USAA Family of Funds.
Richard A. Zucker 3, 4, 5
407 Arch Bluff
San Antonio, TX 78216
Director
Age: 55
Vice President, Beldon Roofing and Remodeling (1985-present). Mr. Zucker serves
as a Director/Trustee of each of the remaining Funds within the USAA Family of
Funds.
Michael D. Wagner 1
Secretary
Age: 50
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 of each of the remaining Funds within the USAA Family of Funds; Vice
President, Corporate Counsel for various other USAA subsidiaries and
affiliates.
Alex M. Ciccone 1
Assistant Secretary
Age: 48
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 each of the remaining Funds within the USAA Family of Funds.
Mark S. Howard 1
Assistant Secretary
Age: 35
Assistant Vice President, Securities Counsel, USAA (2/98-present); Executive
Director, Securities Counsel, USAA (9/96-2/98); Senior Associate Counsel,
Securities Counsel, USAA (5/95-8/96); Attorney, Kirkpatrick & Lockhart LLP
(9/90-4/95). Mr. Howard serves as Assistant Vice President and Assistant
Secretary of IMCO and USAA Shareholder Account Services; Assistant Secretary of
each of the remaining Funds within the USAA Family of Funds; Assistant Vice
President, Securities Counsel, for various other USAA subsidiaries and
affiliates.
Sherron A. Kirk 1
Treasurer
Age: 53
Vice President, Senior Financial Officer, IMCO (8/98-present); Vice President,
Controller, IMCO (10/92-8/98). Mrs. Kirk serves as Treasurer of each of the
remaining Funds in the USAA Family of Funds; Vice President, Senior Financial
Officer of USAA Shareholder Account Services.
Caryl Swann 1
Assistant Treasurer
Age: 51
Director, Mutual Fund Portfolio Analysis & Support, IMCO (2/98-present);
Manager, Mutual Fund Accounting, IMCO (7/92-2/98). Ms. Swann serves as
Assistant Treasurer for each of the remaining Funds in the USAA Family of
Funds.
- --------------
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
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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:
Carl W. Shirley, Senior Vice President, Insurance Company Portfolios, and John
J. Dallahan, Senior Vice President, Investment Services. There are no family
relationships among the Directors, officers, and managerial level employees of
the Company or its Manager.
The following table sets forth information describing the compensation of
the current Directors of the Company for their services as Directors for the
fiscal year ended July 31, 1998.
NAME AGGREGATE TOTAL COMPENSATION
OF COMPENSATION FROM THE USAA
DIRECTOR FROM THE COMPANY FAMILY OF FUNDS (b)
- -------- ---------------- -------------------
Robert G. Davis None (a) None (a)
Barbara B. Dreeben $9,175 $36,500
Howard L. Freeman, Jr. $9,175 $36,500
Robert L. Mason $9,175 $36,500
Michael J.C. Roth None (a) None (a)
John W. Saunders, Jr. None (a) None (a)
Richard A. Zucker $9,175 $36,500
- --------------
(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, 1998, the USAA Family of Funds consisted of four registered
investment companies offering 35 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
in the USAA Family of Funds. 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, 1998, 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, 1998, USAA and its affiliates owned 24,450,337 shares
(29.7%) of the S&P 500 Index Fund, 4,144,586 shares (3.3%) of the Income Stock
Fund, 23,931,946 shares (17.5%) of the Income Fund, 2,859,279 shares (.1%) of
the Money Market Fund, 2,000,000 shares (19.3%) of the Science & Technology
Fund, 2,000,000 shares (49.6%) of the First Start Growth Fund, and no shares of
the Aggressive Growth Fund, Growth Fund, Growth & Income Fund, and Short-Term
Bond Fund.
The Company knows of no other persons who, as of August 31, 1998, 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, an affiliate of United Services Automobile Association
(USAA), a large diversified financial services institution, 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.
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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.
Except for the services and facilities provided by the Manager, each Fund
pays all other expenses incurred in its operation. Expenses for which each Fund
is responsible includes taxes (if any); brokerage commissions on portfolio
transactions (if any); expenses of issuance and redemption of shares; charges
of transfer agents, custodians, and dividend disbursing agents; costs of
preparing and distributing proxy material, costs of printing and engraving
stock certificates; auditing and legal expenses; certain expenses of
registering and qualifying shares for sale; fees of Directors who are not
interested persons (not affiliated) of the Manager; costs of 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, 1999, 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, 1999, and will reimburse the
Funds for all expenses in excess of such limitations. After December 1, 1999,
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 1996 1997 1998
---- ---- ---- ----
Aggressive Growth $2,039,878 $ 2,715,902 $ 2,947,204
Growth $8,232,258 $10,109,782 $11,074,009
Growth & Income $1,761,482 $ 3,379,571 $ 5,971,874
Income Stock $8,097,232 $ 9,671,336 $12,163,664
Income $4,325,452 $ 4,060,489 $ 4,108,452
Short-Term Bond $ 218,705 $ 277,525 $ 369,691
Money Market $4,027,320 $ 4,798,276 $ 5,238,418
Science & Technology -- -- $ 521,514
First Start Growth -- -- $ 207,083
As a result of the Short-Term Bond and Money Market Funds' expenses
exceeding the expense limitations, the Manager did not receive feels to which
it would have been entitled as follows:
FUND 1996 1997 1998
---- ---- ---- ----
Short-Term Bond $ 145,849 $127,346 $ 90,735
Money Market $1,002,670 $815,135 $756,515
UNDERWRITER
The Company has an agreement with the Manager for exclusive underwriting and
distribution of each Fund's shares on a continuing best efforts basis. This
agreement provides that the Manager will receive no fee or other compensation
for such distribution services.
TRANSFER AGENT
The Transfer Agent performs transfer agent services for the Company under a
Transfer Agency Agreement. Services include maintenance of shareholder account
records, handling of communications with shareholders, distribution of Fund
dividends, and production of reports with respect to account activity for
shareholders and the Company. For its services under the Transfer Agency
Agreement, each Fund pays the Transfer Agent an annual fixed fee of $23.50 to
$26.00 per account. The fee is subject to change at any time.
17
<PAGE>
The fee to the Transfer Agent includes processing of all transactions and
correspondence. Fees are billed on a monthly basis at the rate of one-twelfth
of the annual fee. In addition, each Fund pays all out-of-pocket expenses of
the Transfer Agent and other expenses which are incurred at the specific
direction of the Company.
GENERAL INFORMATION
CUSTODIAN
State Street Bank and Trust Company, P.O. Box 1713, Boston, MA 02105, is the
Company's Custodian. The Custodian is responsible for, among other things,
safeguarding and controlling the Company's cash and securities, handling the
receipt and delivery of securities, and collecting interest on the Company's
investments.
COUNSEL
Goodwin, Procter & Hoar LLP, Exchange Place, Boston, MA 02109, will review
certain legal matters for the Company in connection with the shares offered by
the Prospectus.
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP, 112 East Pecan, Suite 2400, San Antonio, TX 78205, is
the Company's independent auditor. In this capacity, the firm is responsible
for auditing the annual financial statements of each Fund and reporting
thereon.
CALCULATION OF PERFORMANCE DATA
Information regarding the total return and yield of each Fund is provided under
COULD THE VALUE OF YOUR INVESTMENT IN THE FUND FLUCTUATE? in its Prospectus.
See VALUATION OF SECURITIES herein for a discussion of the manner in which the
Funds' 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 and income other than investment
income, 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 the
Trust'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 July 31, 1998, was 5.27%.
Effective Yield For 7-day Period ended July 31, 1998, was 5.41%.
YIELD - INCOME FUND AND SHORT-TERM BOND FUND
The Funds may advertise performance in terms of a 30-day yield quotation. The
30-day yield quotation is computed by dividing the net investment income per
share earned during the period by the maximum offering price per share on the
last day of the period, according to the following formula:
Yield = 2[((a-b)/(cd)+1)^6 -1]
Where: a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursement)
c = the average daily number of shares outstanding during
the period that were entitled to receive dividends
d = the maximum offering price per share on the last day of
the period
The 30-day yields for the period ended July 31, 1998, for the Income Fund
and Short-Term Bond Fund were 6.31% and 6.06%, respectively.
18
<PAGE>
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 the 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 the Fund are reinvested
at the price stated in the Prospectus on the reinvestment dates during the
period, and includes all recurring fees that are charged to all shareholder
accounts.
Average Annual Total Returns
For Periods Ended July 31, 1998
1 5 10 FROM
FUND YEAR YEARS YEARS INCEPTION*
---- ---- ----- ----- ----------
Aggressive Growth 3.91% 17.52% 13.19% --
Growth (4.91)% 14.96% 14.23% --
Growth & Income 4.99% 17.72% -- 16.93%
Income Stock 13.28% 15.09% 14.57% --
Income 9.72% 7.02% 9.90% --
Short-Term Bond 5.91% 5.99% -- 5.97%
Science & Technology 11.70% -- -- 11.70%
First Start Growth 22.70% -- -- 22.70%
- --------------
* 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. Science & Technology and First Start Growth Funds commenced operations
on August 1, 1997.
APPENDIX A - LONG-TERM AND SHORT-TERM DEBT RATINGS
1. LONG-TERM DEBT RATINGS:
MOODY'S INVESTOR SERVICES, INC.
Aaa Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred
to as "gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position
of such issues.
Aa Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high-grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater amplitude or there
may be other elements present which make the long-term risks appear
somewhat larger than in Aaa securities.
A Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper-medium-grade obligations. Factors giving
security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in
the future.
Baa Bonds which are rated Baa are considered as medium-grade obligations
(i.e., they are neither highly protected nor poorly secured). Interest
payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics
as well.
Ba Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate, and thereby not
well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class.
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<PAGE>
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.
NOTE: MOODY'S APPLIES NUMERICAL MODIFIERS 1, 2, AND 3 IN EACH GENERIC RATING
CLASSIFICATION. THE MODIFIER 1 INDICATES THAT THE OBLIGATION RANKS IN THE
HIGHER END OF ITS GENERIC RATING CATEGORY, THE MODIFIER 2 INDICATES A MID-RANGE
RANKING, AND THE MODIFIER 3 INDICATES A RANKING IN THE LOWER END OF THAT
GENERIC RATING CATEGORY.
STANDARD & POOR'S RATINGS GROUP
AAA An obligation rated "AAA" has the highest rating assigned by Standard &
Poor's. The obligor's capacity to meet its financial commitment on the
obligation is extremely strong.
AA An obligation rated "AA" differs from the highest rated issues only in
small degree. The obligor's capacity to meet its financial commitment on
the obligation is VERY STRONG.
A An obligation rated "A" is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than
obligations in higher rated categories. However, the obligor's capacity
to meet its financial commitment on the obligation is still STRONG.
BBB An obligation rated "BBB" exhibits adequate capacity to pay interest and
repay principal. However, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity of the
obligor to meet its financial commitment on the obligation.
Obligations rated "BB," "B," "CCC," "CC," and "C" are regarded as having
significant speculative characteristics. "BB" indicates the least degree
of speculation and "C" the highest. While such obligations will likely
have some quality and protective characteristics, these may be outweighed
by large uncertainties or major exposures to adverse conditions.
BB An obligation rated "BB" is LESS VULNERABLE to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which
could lead to the obligor's inadequate capacity to meet its financial
commitment on the obligation.
B An obligation rated "B" is MORE VULNERABLE to nonpayment than obligations
rated "BB," but the obligor currently has the capacity to meet its
financial commitment on the obligation. Adverse business, financial, or
economic conditions will likely impair the obligor's capacity or
willingness to meet its financial commitment on the obligation.
CCC An obligation rated "CCC" is CURRENTLY VULNERABLE to nonpayment, and is
dependent upon favorable business, financial, and economic conditions for
the obligor to meet its financial commitment on the obligation. In the
event of adverse business, financial, or economic conditions, the obligor
is not likely to have the capacity to meet its financial commitment on
the obligation.
CC An obligation rated "C" is CURRENTLY HIGHLY VULNERABLE to nonpayment.
C The "C" rating may be used to cover a situation where a bankruptcy
petition has been filed or similar action has been taken, but payments on
this obligation are being continued.
D An obligation rated "D" is in payment default. The "D" rating category is
used when payments on an obligation are not made on the date due even if
the applicable grace period has not expired, unless Standard & Poor's
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 or
the taking of a similar action if payments on an obligation are
jeopardized.
PLUS (+) OR MINUS (-): THE RATINGS FROM "AA" TO "CCC" MAY BE MODIFIED BY THE
ADDITION OF A PLUS OR MINUS SIGN TO SHOW RELATIVE STANDING WITHIN THE MAJOR
RATING CATEGORIES.
FITCH IBCA, INC.
AAA Highest credit quality. "AAA" ratings denote the lowest expectation of
credit risk. They are assigned only in case of exceptionally strong
capacity for timely payment of financial commitments. This capacity is
highly unlikely to be adversely affected by foreseeable events.
AA Very high credit quality. "AA" ratings denote a very low expectation of
credit risk. They indicate very strong capacity for timely payment of
financial commitments. This capacity is not significantly vulnerable to
foreseeable events.
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<PAGE>
A High credit quality. "A" ratings denote a low expectation of credit risk.
The capacity for timely payment of financial commitments is considered
strong. This capacity may, nevertheless, be more vulnerable to changes in
circumstances or in economic conditions than is the case for higher
ratings.
BBB Good credit quality. "BBB" ratings indicate that there is currently a low
expectation of credit risk. The capacity for timely payment of financial
commitments is considered adequate, but adverse changes in circumstances
and in economic conditions are more likely to impair this capacity. This
is the lowest investment-grade category.
PLUS (+) MINUS(-) SIGNS ARE USED WITH A RATING SYMBOL TO INDICATE THE RELATIVE
POSITION OF A CREDIT WITHIN THE RATING CATEGORY. PLUS AND MINUS SIGNS, HOWEVER,
ARE NOT USED IN THE AAA CATEGORY.
DUFF & PHELPS, INC.
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:
* Leading market positions in well-established industries.
* High rates of return on funds employed.
* Conservative capitalization structure with moderate reliance on debt
and ample asset protection.
* Broad margins in earnings coverage of fixed financial charges and
high internal cash generation.
* Well-established access to a range of financial markets and assured
sources of alternate liquidity.
Prime-2 Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This will
normally be evidenced by many of the characteristics cited above but
to a lesser degree. Earnings trends and coverage ratios, while sound,
may be more subject to variation. Capitalization characteristics,
while still appropriate, may be more affected by external conditions.
Ample alternate liquidity is maintained.
Prime-3 Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of senior short-term obligations. The effect of
industry characteristics and market compositions may be more
pronounced. Variability in earnings and profitability may result in
changes in the level of debt protection measurements and may require
relatively high financial leverage. Adequate alternate liquidity is
maintained.
MOODY'S MUNICIPAL
MIG 1/VMIG 1 This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity support
or demonstrated broadbased access to the market for refinancing.
MIG 2/VMIG 2 This designation denotes high quality. Margins of protection
are ample although not so large as in the preceding group.
MIG 3/VMIG 3 This designation denotes favorable quality. All security
elements are accounted for but there is lacking the undeniable
strength of the preceding grades. Liquidity and cash flow
protection may be narrow and market access for refinancing is
likely to be less well established.
MIG 4/VMIG 4 This designation denotes adequate quality. Protection commonly
regarded as required of an investment security is present and
although not distinctly or predominantly speculative, there is
specific risk.
S&P 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 issued designated A-1.
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<PAGE>
A-3 Issues carrying this designation have adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher
designations.
S&P 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 IBCA, INC.
F1 Highest credit quality. Indicates the strongest capacity for timely
payment of financial commitments; may have an added "+" to denote any
exceptionally strong credit feature.
F2 Good credit quality. A satisfactory capacity for timely payment of
financial commitments, but the margin of safety is not as great as in the
case of the higher ratings.
F3 Fair credit quality. The capacity for timely payment of financial
commitments is adequate; however, near-term adverse changes could result
in a reduction to non-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.
APPENDIX B - COMPARISON OF PORTFOLIO PERFORMANCE
Occasionally, we may make comparisons in advertising and sales literature
between each Fund contained in this SAI and other Funds in the USAA Family of
Funds. These comparisons may include such topics as risk and reward, investment
objectives, investment strategies, and performance.
Fund performance also may be compared to the performance of broad groups of
mutual funds with similar investment goals or unmanaged indexes of comparable
securities. Evaluations of Fund performance made by independent sources may
also be used in advertisements concerning the Fund, including reprints of, or
selections from, editorials or articles about the Fund. Each Fund or its
performance may also be compared to products and services not constituting
securities subject to registration under the 1933 Act such as, but not limited
to, certificates of deposit and money market accounts. Sources for performance
information and articles about each Fund may include but are 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.
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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'S MONEY FUND REPORT, a weekly publication of IBC Financial Data, 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 "IBC's Taxable First Tier Fund Average."
IBC'S MONEYLETTER, a biweekly newsletter which covers financial news and from
time to time rates specific mutual funds.
IBC'S MONEY MARKET INSIGHT, a monthly money market industry analysis prepared
by IBC Financial Data, 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 EQUITY FUND PERFORMANCE ANALYSIS, a weekly
and monthly publication of industry-wide mutual fund performance averages by
type of fund.
LIPPER ANALYTICAL SERVICES, INC.'S FIXED INCOME FUND PERFORMANCE ANALYSIS, a
monthly publication of industry-wide mutual fund performance 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.
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.
23
<PAGE>
SAN FRANCISCO CHRONICLE, a newspaper which may cover financial news.
SMART MONEY, a monthly magazine featuring news and articles on investing and
mutual funds.
USA TODAY, a newspaper which may cover financial news.
U.S. NEWS AND WORLD REPORT, a national business weekly that periodically
reports mutual fund performance data.
WALL STREET JOURNAL, a Dow Jones and Company, Inc. newspaper which covers
financial news.
WASHINGTON POST, a newspaper which may cover financial news.
WEISENBERGER MUTUAL FUNDS INVESTMENT REPORT, a monthly newsletter that reports
on both specific mutual fund companies and the mutual fund industry as a whole.
WORTH, a magazine which covers financial and investment subjects including
mutual funds.
YOUR MONEY, a monthly magazine directed toward the novice investor.
In addition to the sources above, performance of our Funds may also be
tracked by Lipper Analytical Services, Inc. and Morningstar, Inc. A Fund will
be compared to Lipper's or Morningstar's appropriate fund category according to
its objective and portfolio holdings. Footnotes in advertisements and other
sales literature will include the time period applicable for any rankings 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 Schabaker
Investment Management and Investment Company Data, Inc. These are services that
collect and compile data on mutual fund companies.
24
<PAGE>
APPENDIX C - DOLLAR-COST AVERAGING
Dollar-cost averaging is a systematic investing method which can be used by
investors as a disciplined technique for investing. A fixed amount of money is
invested in a security (such as a stock or mutual fund) on a regular basis over
a period of time, regardless of whether securities markets are moving up or
down.
This practice reduces average share costs to the investor who acquires
more shares in periods of lower securities prices and fewer shares in periods
of higher prices.
While dollar-cost averaging does not assure a profit or protect against
loss in declining markets, this investment strategy is an effective way to help
calm the effect of fluctuations in the financial markets. Systematic investing
involves continuous investment in securities regardless of fluctuating price
levels of such securities. Investors should consider their financial ability to
continue purchases through periods of low and high price levels.
As the following chart illustrates, dollar-cost averaging tends to keep
the overall cost of shares lower. This example is for illustration only, and
different trends would result in different average costs.
HOW DOLLAR-COST AVERAGING WORKS
$100 Invested Regularly for 5 Periods
Market Trend
--------------------------------------------------------------------
Down Up Mixed
------------------- --------------------- -----------------------
Share Shares Share Shares Share Shares
Investment Price Purchased Price Purchased Price Purchased
------------------- --------------------- -----------------------
$100 10 10 6 16.67 10 10
100 9 11.1 7 14.29 9 11.1
100 8 12.5 7 14.29 8 12.5
100 8 12.5 9 11.1 9 11.1
100 6 16.67 10 10 10 10
- ---- -- ----- -- ----- -- -----
$500 ***41 62.77 ***39 66.35 ***46 54.7
*Avg. Cost: $7.97 *Avg. Cost: $7.54 *Avg. Cost: $9.14
----- ----- -----
**Avg. Price: $8.20 **Avg. Price: $7.80 **Avg. Price: $9.20
----- ----- -----
* Average Cost is the total amount invested divided by number of
shares purchased.
** Average Price is the sum of the prices paid divided by number
of purchases.
*** Cumulative total of share prices used to compute average prices.
25
<PAGE>
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26
<PAGE>
[THIS PAGE LEFT BLANK INTENTIONALLY]
27
<PAGE>
06143-1298
<PAGE>
USAA MUTUAL FUND, INC.
PART C. OTHER INFORMATION
-----------------
Item 23. 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 (9)
(aa) Articles Supplementary dated November 12, 1997 (10)
2 Bylaws, as amended March 12, 1996 (4)
3 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 (9)
(j) First Start Growth Fund (9)
4 (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-1
<PAGE>
EXHIBIT NO. EXHIBITS
- ----------- --------
(g) Letter Agreement to the Advisory Agreement dated August 1, 1997
adding the Science & Technology Fund and First Start Growth Fund
(9)
5 (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 (9)
6 Not Applicable
7 (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 (9)
8 (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 13, 1998 (10)
(j) Master Revolving Credit Facility Agreement with NationsBank of
Texas dated January 14, 1998 (10)
(k) Letter Agreement to Transfer Agency Agreement dated August 1, 1997
adding Science & Technology Fund and First Start Growth Fund (9)
C-2
<PAGE>
EXHIBIT NO. EXHIBITS
- ----------- --------
(l) Transfer Agency Agreement Fee Schedule for Science & Technology
Fund (9)
(m) Transfer Agency Agreement Fee Schedule for First Start Growth Fund
(9)
9 (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 and Consent of Counsel with respect to the S&P 500 Index
Fund (11)
(c) Opinion of Counsel with respect to the Aggressive Growth Fund (6)
(d) Consent of Counsel with respect to 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 (filed herewith)
(e) Opinion of Counsel with respect to the Science & Technology Fund
and First Start Growth Fund (8)
10 Independent Accountants' Consent (filed herewith)
11 Omitted financial statements - Not Applicable
12 SUBSCRIPTIONS AND INVESTMENT LETTERS
(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 (9)
13 12b-1 Plans - Not Applicable
14 FINANCIAL DATA SCHEDULES
(a) Growth Fund (filed herewith)
(b) Aggressive Growth Fund (filed herewith)
(c) Income Fund (filed herewith)
(d) Money Market Fund (filed herewith)
(e) Income Stock Fund (filed herewith)
(f) Growth & Income Fund (filed herewith)
(g) Short-Term Bond Fund (filed herewith)
(h) First Start Growth Fund (filed herewith)
(i) Science & Technology Fund (filed herewith)
15 Plan Adopting Multiple Classes of Shares - Not Applicable
16 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 dated March 24, 1997 (7)
(e) Power of Attorney for Robert L. Mason dated March 24, 1997 (7)
C-3
<PAGE>
- ------------------
(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.
(9) Previously filed with Post-Effective Amendment No. 46 of the Registrant
(No. 2-49560) filed with the Securities and Exchange Commission on
September 30, 1997.
(10) Previously filed with Post-Effective Amendment No. 47 of the Registrant
(No. 2-49560) filed with the Securities and Exchange Commission on
February 26, 1998.
(11) Previously filed with Post-Effective Amendment No. 48 of the Registrant
(No. 2-49560) filed with the Securities and Exchange Commission on
February 27, 1998.
C-4
<PAGE>
Item 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH FUND
-------------------------------------------------------
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 25. INDEMNIFICATION
---------------
Protection for the liability of the adviser and underwriter and for
the officers and directors of the Registrant is provided by two
methods:
(a) THE DIRECTOR AND OFFICER LIABILITY POLICY. This policy covers all
losses incurred by the Registrant, its adviser and its underwriter
from any claim made against those entities or persons during the
policy period by any shareholder or former shareholder of the Fund
by reason of any alleged negligent act, error or omission committed
in connection with the administration of the investments of said
Registrant or in connection with the sale or redemption of shares
issued by said Registrant.
(b) STATUTORY INDEMNIFICATION PROVISIONS. Under Section 2-418 of the
Maryland General Corporation Law, the Registrant is authorized to
indemnify any past or present director, officer, agent or employee
against judgments, penalties, fines, settlements and reasonable
expenses actually incurred by him in connection with any proceeding
in which he is a party by reason of having served as a director,
officer, agent or employee, if he acted in good faith and
reasonably believed that, (i) in the case of conduct in his
official capacity with the Registrant, that his conduct was in the
best interests of the Registrant, or (ii) in all other cases, that
his conduct was at least not opposed to the best interests of the
Registrant. In the case of any criminal proceeding, said director,
officer, agent or employee must in addition have had no reasonable
cause to believe that his conduct was unlawful. In the case of a
proceeding by or in the right of the Registrant, indemnification
may only be made against reasonable expenses and may not be made in
respect of any proceeding in which the director, officer, agent or
employee shall have been adjudged to be liable to the Registrant.
The termination of any proceeding by judgment, order, settlement,
conviction, or upon a plea of nolo contendere or its equivalent
creates a rebuttable presumption that the director, officer, agent
or employee did not meet the requisite standard of conduct for
indemnification. No indemnification may be made in respect of any
proceeding charging improper personal benefit to the director,
officer, agent or employee whether or not involving action in such
person's official capacity, if such person was adjudged to be
liable on the basis that improper personal benefit was received. If
such director, officer, agent or employee is successful, on the
merits or otherwise, in defense of any such proceeding against him,
he shall be indemnified against the reasonable expenses incurred by
him (unless such indemnification is limited by the Registrant's
charter, which it is not). Additionally, a court of appropriate
jurisdiction may order indemnification in certain circumstances
even if the appropriate standard of conduct set forth above was not
met.
Indemnification may not be made unless authorized in the specific
case after determination that the applicable standard of conduct
has been met. Such determination shall be made by either: (i) the
board of directors by either (x) a majority vote of a quorum
consisting of
C-5
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 26. BUSINESS AND OTHER CONNECTIONS OF THE 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 27. 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 Road 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 Road 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 Road Fixed Income Investments, Director
San Antonio, TX 78288 and Director
John J. Dallahan Senior Vice President, None
9800 Fredericksburg Road Investment Services
San Antonio, TX 78288
Carl W. Shirley Senior Vice President, None
9800 Fredericksburg Road Insurance Company Portfolios
San Antonio, TX 78288
Michael D. Wagner Vice President, Secretary Secretary
9800 Fredericksburg Road and Counsel
San Antonio, TX 78288
Sherron A. Kirk Vice President and Treasurer
9800 Fredericksburg Road Senior Financial Officer
San Antonio, TX 78288
Alex M. Ciccone Vice President, Assistant
9800 Fredericksburg Road Compliance Secretary
San Antonio, TX 78288
(c) Not Applicable
C-7
<PAGE>
Item 28. 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 29. MANAGEMENT SERVICES
-------------------
Not Applicable
Item 30. UNDERTAKINGS
------------
None
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act and the Investment
Company Act, 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
8th day of September 1998.
USAA MUTUAL FUND, INC.
/s/ MICHAEL J. C. ROTH
----------------------
Michael J.C. Roth
President
Pursuant to the requirements of the Securities Act, this amendment to
its Registration Statement has been signed below by the following persons in
the capacities and on the date(s) indicated.
(Signature) (Title) (Date)
(Not Available) Chairman of the
- -------------------------- Board of Directors
Robert G. Davis
/s/ MICHAEL J. C. ROTH Vice Chairman of the Board September 8, 1998
- -------------------------- of Directors and President
Michael J.C. Roth (Principal Executive Officer)
/s/ SHERRON A. KIRK Treasurer (Principal September 8, 1998
- -------------------------- Financial and
Sherron A. Kirk Accounting Officer)
/s/ JOHN W. SAUNDERS, JR. Director September 8, 1998
- --------------------------
John W. Saunders, Jr.
/s/ ROBERT L. MASON Director September 9, 1998
- --------------------------
Robert L. Mason
/s/ HOWARD L. FREEMAN, JR. Director September 9, 1998
- --------------------------
Howard L. Freeman, Jr.
/s/ RICHARD A. ZUCKER Director September 9, 1998
- --------------------------
Richard A. Zucker
/s/ BARBARA B. DREEBEN Director September 9, 1998
- --------------------------
Barbara B. Dreeben
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<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 (9)
(aa) Articles Supplementary dated November 12, 1997 (10)
2 Voting trust agreement - Not Applicable
3 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 (9)
(j) First Start Growth Fund (9)
4 (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 Science & Technology Fund
and First Start Growth Fund (9)
C-10
<PAGE>
EXHIBIT ITEM PAGE NO. *
- ------- ---- ----------
5 (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 (9)
6 Not Applicable
7 (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 (9)
8 (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 13, 1998 (10)
(j) Master Revolving Credit Facility Agreement with
NationsBank of Texas dated January 14, 1998 (10)
(k) Letter Agreement to Transfer Agency Agreement dated
August 1, 1997 adding Science & Technology Fund
and First Start Growth Fund (9)
(l) Transfer Agency Agreement Fee Schedule for Science &
Technology Fund (9)
(m) Transfer Agency Agreement Fee Schedule for First Start
Growth Fund (9)
C-11
EXHIBIT ITEM PAGE NO. *
- ------- ---- ----------
9 (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 and Consent of Counsel with respect to the
S&P 500 Index Fund (11)
(c) Opinion of Counsel with respect to the Aggressive
Growth Fund (6)
(d) Consent of Counsel with respect to 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 (filed herewith) 251
(e) Opinion of Counsel with respect to the Science & Technology
Fund and First Start Growth Fund (8)
10 Independent Accountants' Consent (filed herewith) 253
11 Omitted financial statements - Not Applicable
12 SUBSCRIPTIONS AND INVESTMENT LETTERS
(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 (9)
13 12b-1 Plans - Not Applicable
14 FINANCIAL DATA SCHEDULES
(a) Growth Fund (filed herewith) 255
(b) Aggressive Growth Fund (filed herewith) 257
(c) Income Fund (filed herewith) 259
(d) Money Market Fund (filed herewith) 261
(e) Income Stock Fund (filed herewith) 263
(f) Growth & Income Fund (filed herewith) 265
(g) Short-Term Bond Fund (filed herewith) 267
(h) First Start Growth Fund (filed herewith) 269
(i) Science & Technology Fund (filed herewith) 271
15 Plan Adopting Multiple Classes of Shares - Not Applicable
16 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, 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 dated March 24, 1997 (7)
(e) Power of Attorney for Robert L. Mason dated March 24, 1997 (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.
C-12
<PAGE>
(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.
(9) Previously filed with Post-Effective Amendment No. 46 of the Registrant
(No. 2-49560) filed with the Securities and Exchange Commission on
September 30, 1997.
(10) Previously filed with Post-Effective Amendment No. 47 of the Registrant
(No. 2-49560) filed with the Securities and Exchange Commission on
February 26, 1998.
(11) Previously filed with Post-Effective Amendment No. 48 of the Registrant
(No. 2-49560) filed with the Securities and Exchange Commission on
February 27, 1998.
- -------------------
* Refers to sequentially numbered pages
C-13
<PAGE>
GOODWIN, PROCTER & HOAR LLP
COUNSELLORS AT LAW
EXCHANGE PLACE
BOSTON, MASSACHUSETTS 02109-2881
TELEPHONE (617) 570-1000
TELECOPIER (617) 523-1231
September 28, 1998
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. 49
(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 interests 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 Amendment No. 39 to the
Registration Statement, (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 and (iii) our opinion with respect to the
legality of the shares of the Registrant representing interests in the Science
& Technology Fund and First Start Growth Fund series of the Registrant, which
opinion was filed with Post-Effective Amendment No. 45 to the Registration
Statement.
We also hereby consent to the reference to this firm in the Statement
of Additional Information under the heading "General Information--Counsel"
which forms a part of the Amendment and to the filing of this consent as an
exhibit to the Amendment.
Very truly yours,
/S/ GOODWIN, PROCTER & HOAR LLP
-------------------------------
GOODWIN, PROCTER & HOAR LLP
DOCSC\673025.1
Exhibit 10
The Shareholders and Board of Directors
USAA Mutual Fund, Inc.:
We consent to the use of our reports dated September 4, 1998, incorporated
herein by reference and to the references to our firm under the headings
"Financial Highlights" in the prospectuses and "Independent Auditors" in the
statement of additional information.
/S/ KPMG PEAT MARWICK LLP
-------------------------
KPMG Peat Marwick LLP
San Antonio, Texas
September 30, 1998
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