USAA S&P 500
INDEX FUND
Prospectus
May 1, 1998
The Fund is a no-load mutual fund offered by USAA Investment Management
Company. USAA will seek to provide investment results that, before expenses,
correspond to the total return of common stocks publicly traded in the United
States, as represented by the Standard & Poor's 500 Composite Stock Price Index
(S&P 500 or Index).
THE FUND SEEKS TO ACHIEVE ITS OBJECTIVE BY INVESTING ALL OF ITS INVESTABLE
ASSETS IN THE EQUITY 500 INDEX PORTFOLIO (PORTFOLIO), WHICH IS A SEPARATE
MUTUAL FUND ADVISED BY BANKERS TRUST COMPANY WITH AN IDENTICAL INVESTMENT
OBJECTIVE. THE INVESTMENT PERFORMANCE OF THE FUND WILL CORRESPOND DIRECTLY TO
THE INVESTMENT PERFORMANCE OF THE PORTFOLIO.
SHARES OF THIS FUND ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF, OR GUARANTEED BY,
THE USAA FEDERAL SAVINGS BANK, ARE NOT INSURED BY THE FDIC OR ANY OTHER
GOVERNMENT AGENCY, ARE SUBJECT TO INVESTMENT RISKS, AND MAY LOSE VALUE.
AS WITH OTHER MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR
DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION (SEC) NOR HAS THE SEC
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
TABLE OF CONTENTS
Who Manages the Fund?................ 2
What is the Investment Objective?.... 2
What is the S&P 500 Index?........... 2
Is This Fund for You?................ 2
How Do You Buy?...................... 3
Fees and Expenses.................... 3
Financial Highlights................. 4
Performance Information.............. 4
Will the Value of Your
Investment Fluctuate?.............. 5
A Word About Risk.................... 6
Fund Investments..................... 7
Fund and Portfolio
Management......................... 12
Using Mutual Funds in an
Investment Program................. 15
How to Invest........................ 16
Important Information About
Purchases and Redemption........... 19
Exchanges............................ 20
Shareholder Information.............. 20
Description of Shares................ 22
Appendix A........................... 24
Appendix B........................... 26
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THIS PROSPECTUS CONTAINS INFORMATION YOU SHOULD KNOW BEFORE YOU INVEST IN THE
FUND. PLEASE READ IT AND KEEP IT FOR FUTURE REFERENCE.
WHO MANAGES THE FUND?
USAA Investment Management Company manages the Fund. For easier reading, USAA
Investment Management Company will be referred to as "we" throughout the
Prospectus.
WHAT IS THE INVESTMENT OBJECTIVE?
The Fund's investment objective is to seek to provide investment results that,
before expenses, correspond to the total return (i.e., the combination of
capital changes and income) of common stocks publicly traded in the United
States as represented by the S&P 500 (1). See FUND INVESTMENTS on page 7 for
more information.
WHAT IS THE S&P 500 INDEX?
The S&P 500 Index is a well-known stock market index that includes common
stocks of 500 companies from several industrial sectors representing a
significant portion of the market value of all common stocks publicly traded in
the United States, most of which are listed on the New York Stock Exchange. See
ADDITIONAL INFORMATION ON THE S&P 500 INDEX on page 11.
IS THIS FUND FOR YOU?
This Fund might be appropriate as part of your investment portfolio if . . .
o You are looking for a convenient and cost-efficient means of investing in a
portfolio that generally reflects the performance of the stock market.
o You can afford to ride out both favorable and unfavorable changes in the
stock market.
o You are willing to accept moderate risk.
This Fund MAY NOT be appropriate as part of your investment portfolio if . . .
o You need steady income.
o You are unwilling to take greater risk for long-term goals.
o You are unable or reluctant to invest for a period of five years or more.
o You need an investment that provides tax-free income.
If you feel this Fund is not the one for you, refer to APPENDIX B on page 26
for a complete list of the USAA Family of No-Load Mutual Funds.
- ------------------
1 "Standard & Poor's (R)," "S&P (R)," "Standard & Poor's 500," "S&P 500 (R),"
and "500" are trademarks of The McGraw-Hill Companies, Inc. and have been
licensed for use by Bankers Trust Company.
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HOW DO YOU BUY?
You may make your initial investment directly by mail, in person or, in certain
instances, by telephone. The minimum initial investment is $3,000 [$2,000 for
IRAs] and can be made by check or by wire. There is more information about how
to purchase Fund shares on page 16.
FEES AND EXPENSES
This summary shows what it will cost you directly or indirectly to invest in
the Fund. The Board of Directors of USAA Mutual Fund, Inc., of which the Fund
is a series, believes that the aggregate per share expenses of the Fund and the
Equity 500 Index Portfolio (Portfolio) will be less than or approximately equal
to the expenses which the Fund would incur if the investable assets (Assets) of
the Fund were invested directly in the types of securities being held by the
Portfolio.
Shareholder Transaction Expenses -- Fees You Pay Directly
There are no fees charged to your account when you buy or sell Fund shares.
However, if you sell shares and request your money by wire transfer, you will
pay a $10 fee. (Your bank may also charge a fee for receiving wires.)
Annual Fund Operating Expenses -- Fees You Pay Indirectly
Fund expenses come out of the Fund's assets and are reflected in the Fund's
share price and dividends. "Other Expenses" include expenses such as custodian,
administration, and legal fees. The figures below are based upon the actual
expenditures of the Fund and Portfolio combined during the past fiscal year
ended December 31, 1997, as adjusted to reflect changes in the underlying
contracts for services, and are calculated as a percentage of average net
assets (ANA).
Investment Advisory Fees .075% 12B-1 FEES -
12b-1 Fees None SOME MUTUAL FUNDS
Other Expenses .105% CHARGE THESE FEES TO
---- PAY FOR ADVERTISING
Total Operating Expenses .18% AND OTHER COSTS OF
==== SELLING FUND SHARES.
We are contractually entitled to receive fees from the Fund only to the extent
that the aggregate annual operating expenses of the Fund and the Portfolio do
not exceed .18% of the Fund's ANA.
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USAA Shareholder Account Services, the Fund's transfer agent, assesses a $10
annual account maintenance fee to allocate part of the fixed costs of
maintaining shareholder accounts equally to all accounts. We will waive this
fee if you maintain an account balance of $10,000 or more. The fee is deducted
from your dividends paid at a rate of $2.50 per quarter. See SHAREHOLDER
INFORMATION on page 20 for further information.
Example of Effect of Fund Operating Expenses
You would pay the following expenses on a $1,000 investment in the Fund,
assuming (1) 5% annual return and (2) redemption at the end of the periods
shown.
1 year $ 2
3 years 6
5 years 10
10 years 23
THIS EXAMPLE IS NOT A REPRESENTATION OF PAST OR FUTURE EXPENSES AND ACTUAL
EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
FINANCIAL HIGHLIGHTS
Please read the Fund's Annual Report furnished with this Prospectus or
previously mailed to you. The Annual Report contains the Fund's financial
statements, including financial highlights audited by Coopers & Lybrand L.L.P.,
which are legally a part of this Prospectus. The Annual Report includes a
message from the President, a listing of the Portfolio's investments, and
additional performance information that you may wish to review.
PERFORMANCE INFORMATION
[TELEPHONE GRAPHIC]
TouchLINE (R)
1-800-531-8777
PRESS
1
THEN
1
THEN
3 4 #
NEWSPAPER SYMBOL
S&PIdx
TICKER SYMBOL
USSPX
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 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 34# when asked for a 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 "S&PIdx." If you prefer to obtain this information from an on-line
computer service, you can do so by using the ticker symbol "USSPX."
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You may see the Fund's total return quoted in advertisements and reports. All
mutual funds must use the same formula to calculate total return. Total return
measures the price change in a share assuming the reinvestment of all dividend
income and capital gain distributions. You may also see a comparison of the
Fund's performance to that of other mutual funds with similar investment
objectives and to stock or relevant indexes, such as the S&P 500.
For the following periods ended March 31, 1998, the Fund's average annual total
returns have been:
1 Year 47.85%
Since Inception on May 1, 1996 34.46%
EXCLUDES $10 ACCOUNT MAINTENANCE FEE, WHICH IS WAIVED FOR ACCOUNTS OF $10,000
OR MORE.
Figures on page 6 are different because they are for periods which ended
December 31, 1997.
WILL THE VALUE OF YOUR INVESTMENT FLUCTUATE?
Yes, it will. The Portfolio invests in a portfolio of securities that is
representative of the stock market as a whole. The value of your investment
will fluctuate with the changing market value of the investments in the
Portfolio. You may have a gain or loss when you sell your shares.
Because the Fund has only been operating since May 1996, the Fund's volatility
may best be illustrated through the use of the following bar chart, which shows
the performance of the S&P 500 Index itself, and not the Fund, for the past ten
years. Keep in mind that the performance of the S&P 500 Index is a hypothetical
number which does not take into account brokerage commissions and other costs
of investing, unlike the Portfolio, which must bear these costs. Under the bar
chart is a table that shows how the Fund's average annual returns for the
one-year period and life of the Fund compare to those of the S&P 500 Index
itself. The bar chart should not be considered as a representation of the
Fund's past or future performance, and the table should not be considered any
indication of future performance.
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[BAR CHART]
STANDARD & POOR'S COMPOSITE PRICE INDEX*
CALENDAR TOTAL RETURN
YEAR PERCENTAGE
1988 16.56
1989 31.62
1990 -3.10
1991 30.40
1992 7.61
1993 10.04
1994 1.32
1995 37.54
1996 22.94
1997 33.35
*CHART REFLECTS PERFORMANCE OF THE S&P 500 ITSELF, AND NOT THE FUND OR
PORTFOLIO. SOURCE: BLOOMBERG. TOTAL RETURNS FOR THE S&P 500 INCLUDE THE CHANGE
IN PRICE OF S&P 500 STOCKS AND ASSUME REINVESTMENT OF ALL DIVIDENDS PAID BY S&P
500 STOCKS.
==========================================================================
Since Fund's
Average Annual Total Returns Past Inception on
(for the periods ending December 31, 1997) 1 Year May 1, 1996
- --------------------------------------------------------------------------
S&P 500 Index Fund** 33.03% 29.70%
- --------------------------------------------------------------------------
S&P 500 Index 33.35% 29.24%
==========================================================================
**EXCLUDES $10 ACCOUNT MAINTENANCE FEE, WHICH IS WAIVED FOR ACCOUNTS OF $10,000
OR MORE.
A WORD ABOUT RISK
Portions of this Prospectus describe the risks you will face as an investor in
the Fund. Keep in mind that generally investments with a higher potential
reward also have a higher risk of losing money. The reverse is also generally
true: the lower the risk, the lower the potential reward. However, as you
consider an investment in the Fund, you should also take into account your
tolerance for the daily fluctuations of the financial markets and whether you
can afford to leave your money in this investment for long periods of time to
ride out down periods.
[CAUTION LIGHT GRAPHIC]
Look for this symbol throughout the Prospectus. We use it to mark detailed
information about the main risks that you will face as a Fund shareholder.
6
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FUND INVESTMENTS
Investment Policies and Risks
Q What is the Fund's investment policy?
A Unlike other mutual funds which directly acquire and manage their own
portfolio securities, the Fund seeks to achieve its investment objective by
investing all of its Assets in the Equity 500 Index Portfolio (Portfolio),
a separate registered investment company with the same investment objective
as the Fund. Therefore, your interest in the Portfolio's securities is
indirect, and the investment characteristics of the Fund will correspond
directly to those of the Portfolio. This type of arrangement is commonly
referred to as a master-feeder structure.
HOW A MASTER-
FEEDER STRUCTURE
OPERATES--
YOU BUY SHARES
IN THE FUND
[DOWN ARROW]
THE FUND
INVESTS IN
THE PORTFOLIO
[DOWN ARROW]
THE PORTFOLIO
INVESTS IN
S&P 500
STOCKS AND
OTHER SECURITIES
Q How do funds in a master-feeder structure operate?
A The Portfolio is considered a master fund, and the Fund is considered a
feeder fund. In addition to selling a beneficial interest to the Fund, the
Portfolio may sell beneficial interests to other feeder funds, typically
mutual funds or institutional investors. All feeder funds will invest in
the Portfolio under the same terms and conditions and will pay a
proportionate share of the Portfolio's expenses. However, each feeder fund
investing in the Portfolio may have different sales commissions and
operating expenses. Therefore, investors in different feeder funds may
experience different returns.
[CAUTION LIGHT GRAPHIC]
MASTER-FEEDER STRUCTURE RISK. Smaller feeder funds investing in the Portfolio
may be materially affected by the actions of larger feeder funds investing in
the Portfolio. For example, if a large feeder fund withdraws from the
Portfolio, the remaining funds may experience higher pro rata operating
expenses, thereby producing lower returns (however, this possibility exists as
well for traditionally-structured funds which have large institutional
investors). Additionally, the Portfolio may become less diverse, resulting in
increased portfolio risk. Also, feeder funds with a greater pro rata ownership
in the Portfolio could have effective voting control of the operations of the
Portfolio.
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Q How is the Portfolio managed?
A The Portfolio is not managed according to traditional methods of "active"
investment management, which involve the buying and selling of securities
based upon economic, financial, and market analyses and investment
judgment. Instead, the Portfolio utilizes a "passive" or "indexing"
investment approach in an attempt to mirror, before expenses, the
performance of the S&P 500.
Q What is the Portfolio's investment policy?
A Under normal conditions, the Portfolio will invest at least 80% of its
assets in common stocks of companies which compose the S&P 500. In seeking
to mirror the performance of the S&P 500, Bankers Trust, the Portfolio's
investment adviser, will attempt over time to allocate the Portfolio's
investments among common stocks in approximately the same weightings as the
S&P 500, beginning with the heaviest-weighted stocks that make up a larger
portion of the Index's value. Over the long term, Bankers Trust seeks a
correlation between the performance of the Portfolio, before expenses, and
that of the S&P 500 of 0.98 or better. A figure of 1.00 would indicate
perfect correlation. In the unlikely event that the targeted correlation is
not achieved, the Portfolio's Board of Trustees will consider alternative
structures.
Q How will Bankers Trust attempt to achieve the Portfolio's objective?
A Bankers Trust utilizes a two-stage sampling approach in seeking to achieve
its objective.
o Stage One - encompasses large capitalization stocks to maintain the
stock holdings at or near their benchmark weights. Large cap stocks are
defined as those securities which represent 0.10% or more of the Index.
o Stage Two - analyzes and selects smaller stocks using risk
characteristics and industry weights in order to match the sector and
risk characteristics of the smaller companies in the S&P 500.
This approach helps to maximize portfolio liquidity while minimizing costs.
Bankers Trust generally will seek to match the composition of the S&P 500,
but usually will not invest the Portfolio's stock portfolio to mirror the
Index exactly.
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Because of the difficulty and expense of executing relatively small stock
transactions, the Portfolio may not always be invested in the less heavily
weighted S&P 500 stocks, and may at times have its portfolio weighted
differently from the S&P 500, particularly if the Portfolio has a low level
of assets. When the Portfolio's size is greater, Bankers Trust expects to
purchase more of the stocks in the S&P 500 to match the relative weighting
of the S&P 500 more closely, and anticipates that the Portfolio will be
able to mirror, before expenses, the performance of the S&P 500 with little
variance. Since the Portfolio seeks to track the S&P 500, Bankers Trust
generally will not attempt to judge the merits of any particular stock as
an investment. In addition, the Portfolio may omit or remove any S&P 500
stock from the Portfolio if, following objective criteria, Bankers Trust
judges the stock to be insufficiently liquid or believes the merit of the
investment has been substantially impaired by extraordinary events or
financial conditions.
Bankers Trust will not purchase the stock of Bankers Trust New York
Corporation, which is included in the Index, and instead will overweight
its holdings of companies engaged in similar businesses.
Q Will the Portfolio purchase other types of securities?
A Under normal conditions, Bankers Trust will attempt to invest as much of
the Portfolio's assets as is practical in common stocks included in the S&P
500. However, the Portfolio may maintain up to 20% of its assets in
short-term debt instruments hedged with stock index futures and options to
meet redemption requests or to facilitate the investment in common stocks.
For a description of the futures and options the Portfolio may use and some
of their associated risks, see APPENDIX A on page 24.
Q When would the Portfolio invest in short-term debt instruments?
A In light of its objective and long-term investment perspective, the
Portfolio intends to stay invested in the securities described above to the
extent practical. However, to meet anticipated redemptions and expenses or
for day-to-day operating purposes, the Portfolio's assets may be invested
in short-term debt instruments with
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remaining maturities of 397 days or less. These short-term instruments will
consist of the following:
o short-term obligations of the U.S. Government, its agencies,
instrumentalities, authorities, or political subdivisions;
o other short-term debt securities rated Aa or higher by Moody's
Investors Service, Inc. (Moody's) or AA or higher by Standard & Poor's
Ratings Group (S&P) or, if unrated, of comparable quality in the
opinion of Bankers Trust;
o commercial paper;
o bank obligations, including negotiable certificates of deposit, time
deposits, and bankers' acceptances; and
o repurchase agreements.
At the time the Portfolio invests in commercial paper, bank obligations, or
repurchase agreements, the issuer or the issuer's parent must have
outstanding debt rated Aa or higher by Moody's or AA or higher by S&P or
outstanding commercial paper or bank obligations rated Prime-1 by Moody's
or A-1 by S&P. If no such ratings are available, the instrument must be of
comparable quality in the opinion of Bankers Trust.
[CAUTION LIGHT GRAPHIC]
CASH FLOW RISK. The ability of the Fund and the Portfolio to meet their
investment objective depends to some extent on the cash flow experienced by the
Fund and by the other investors in the Portfolio, since purchases and
redemptions by shareholders of the Fund will generally require the Portfolio to
purchase or sell securities. Bankers Trust will make investment changes to
accommodate cash flow in an attempt to maintain the similarity of the Portfolio
to the S&P 500.
When the Portfolio has cash from new purchases into the Portfolio or holds a
portion of its assets in short-term instruments, it may enter into stock index
futures or options to attempt to increase its exposure to the stock market.
Strategies the Portfolio could use to accomplish this include purchasing
futures contracts, writing put options, and purchasing call options. When the
Portfolio wishes to sell securities, because of shareholder redemptions or
otherwise, it may use stock index futures or options thereon to hedge against
market risk until the sale can be completed. These strategies could include
selling and buying futures contracts, writing call options, and purchasing put
options.
[CAUTION LIGHT GRAPHIC]
INVESTMENTS IN OPTIONS AND FUTURES. Bankers Trust will choose among futures and
options strategies based on its judgment of how best to meet the Portfolio's
goals. In selecting these derivative instruments, Bankers Trust will assess
such factors as current and anticipated stock prices, relative liquidity and
price levels in the options and futures markets compared to the securities
markets, and the Portfolio's cash flow and cash management needs.
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If Bankers Trust judges these factors incorrectly, or if price changes in the
Portfolio's futures and options positions are not well correlated with those of
its other investments, the Portfolio could be hindered in the pursuit of its
objective and could suffer losses. The Portfolio could also be exposed to risk
if it could not close out its futures or options positions because of an
illiquid secondary market.
Q Could the Fund withdraw its interest in the Portfolio?
A Yes, the Fund may withdraw its investment from the Portfolio at any time,
if the Board of Directors determines that it is in the best interest of the
shareholders of the Fund to do so. Certain changes in the Portfolio's
investment objective, policies, or restrictions may require the Fund to
withdraw its interest in the Portfolio. Upon any such withdrawal, we would
become responsible for directly managing the Assets of the Fund. In
addition, the Board of Directors may consider other actions that might be
taken, including investing all of the Fund's Assets in another pooled
investment entity having the same investment objective as the Fund. Any
such withdrawal, however, could result in a distribution "in kind" of
portfolio securities (as opposed to a cash distribution from the
Portfolio). If securities are distributed, the Fund generally would incur
brokerage, tax, or other charges in converting the securities to cash.
Additional Information on the S&P 500 Index
MARKET
CAPITALIZATION
EQUALS
# OF SHARES
OUTSTANDING
MULTIPLIED BY
THE STOCK'S
CURRENT PRICE
Stocks in the S&P 500 are weighted according to their market capitalization
(I.E., the number of shares outstanding multiplied by the stock's current
price). Bankers Trust believes that the performance of the S&P 500 is
representative of the performance of publicly traded common stocks in general.
The composition of the S&P 500 is determined by S&P and is based on such
factors as the market capitalization and trading activity of each stock and its
adequacy as a representation of stocks in a particular industry group and may
be changed from time to time.
The Fund and the Portfolio are not sponsored, endorsed, sold, or promoted by
S&P. S&P makes no representation or warranty, express or implied, to the owners
of the Fund or the Portfolio or any member of the public regarding the
advisability of investing in securities generally or in the Fund and the
Portfolio particularly or the ability of the S&P 500 to track general stock
market performance. S&P does not guarantee the accuracy and/or the completeness
of the S&P 500 or any data included therein.
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S&P makes no warranty, express or implied, as to the results to be obtained by
the Fund or the Portfolio, owners of the Fund or the Portfolio, or any other
person or entity from the use of the S&P 500 or any data included therein. S&P
makes no express or implied warranties and hereby expressly disclaims all such
warranties of merchantability or fitness for a particular purpose or use with
respect to the S&P 500 or any data included therein.
Investment Restrictions
The following restrictions may only be changed with shareholder approval:
o The Portfolio may not invest more than 25% of its total assets in one
industry.
o The Portfolio may not invest more than 5% of its total assets in any one
issuer or own more than 10% of the outstanding voting securities of any one
issuer. This limitation does not apply to U.S. Government securities, and
only applies to 75% of the Portfolio's total assets.
o The Portfolio may borrow only for temporary or emergency purposes in an
amount not exceeding 33 1/3% of its total assets.
You will find a complete listing of the Fund's and Portfolio's precise
investment restrictions in the Fund's Statement of Additional Information.
FUND AND PORTFOLIO MANAGEMENT
The Board of Directors of USAA Mutual Fund, Inc. (Company), of which the Fund
is a series, supervises the business affairs of the Company, while the business
affairs of the Portfolio are subject to the supervision of its Board of
Trustees. No Director of the Company also serves as a Trustee of the Portfolio.
USAA Investment Management Company
The Company has retained us, USAA Investment Management Company, to serve as
the manager, investment adviser, 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 $38 billion in total assets under management. Our mailing
address is 9800 Fredericksburg Road, San Antonio, TX 78288.
We provide certain management services to the Fund. We are responsible for
monitoring the services provided to the Portfolio by Bankers Trust, subject to
the authority of and supervision by the Company's Board of Directors. We
receive no fee for providing these monitoring services. However, in the event
the Company's Board of Directors determines it is in the best interests of the
Fund's shareholders to withdraw its investment in the Portfolio, we would be
responsible for directly managing the assets of the Fund. In such event, the
Fund would pay us an annual fee of one-tenth of one percent (.10%)
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of average net assets, accrued daily and paid monthly. 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.
Bankers Trust Company
At the present time, the Company seeks to achieve the Fund's investment
objective by investing all the Fund's Assets in the Portfolio. The Portfolio
has retained the services of Bankers Trust as investment adviser. Bankers
Trust, a New York banking corporation with principal offices at 130 Liberty
Street, New York, New York 10006, is a wholly owned subsidiary of Bankers Trust
New York Corporation. Bankers Trust conducts a variety of general banking and
trust activities and is a major wholesale supplier of financial services to the
international and domestic institutional markets. Investment management is a
core business of Bankers Trust with approximately $300 billion in assets under
management globally as of December 31, 1997. Of that total, approximately $148
billion are in U.S. equity index assets.
Under its Investment Advisory Agreement, Bankers Trust receives a fee from the
Portfolio, computed daily and paid monthly, at the annual rate of .075% of the
average daily net assets of the Portfolio.
Bankers Trust has been advised by its counsel that, in counsel's opinion,
Bankers Trust currently may perform the services for the Company and the
Portfolio described in this Prospectus and the Statement of Additional
Information without violation of the Glass-Steagall Act or other applicable
banking laws or regulations.
Portfolio Turnover
The frequency of portfolio transactions - the Portfolio's turnover rate - will
vary from year to year depending on market conditions and the Portfolio's cash
flows. The Portfolio's annual turnover rate is not expected to exceed 100%. The
Portfolio's turnover rates for the years ended December 31, 1997, and 1996 were
19% and 15%, respectively.
Portfolio Transactions
Bankers Trust, subject to the supervision and direction of the Portfolio's
Board of Trustees, manages the Portfolio according to the Portfolio's
investment objectives and stated investment policies, makes investment
decisions for the Portfolio, places orders to purchase and sell securities and
other financial instruments on behalf of the Portfolio, and employs
professional investment managers and securities analysts who provide
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research services to the Portfolio. Bankers Trust may utilize the expertise of
any of its worldwide subsidiaries and affiliates to assist in its role as
investment adviser. All orders for investment transactions on behalf of the
Portfolio are placed by Bankers Trust with broker-dealers and other financial
intermediaries that it selects, including those affiliated with Bankers Trust.
A Bankers Trust affiliate will be used in connection with a purchase or sale of
an investment for the Portfolio only if Bankers Trust believes that the
affiliate's charge for the transaction does not exceed usual and customary
levels. The Portfolio will not invest in obligations for which Bankers Trust or
any of its affiliates is the ultimate obligor or accepting bank. The Portfolio
may, however, invest in the obligations of correspondents and customers of
Bankers Trust.
Portfolio Manager
Frank Salerno, Managing Director of Bankers Trust, is responsible for the
day-to-day management of the Portfolio. Mr. Salerno has been employed at
Bankers Trust since 1981 and has managed the Portfolio's assets since the
Portfolio commenced operations.
Administrator
Under the Administration Agreement with the Fund, we calculate the net asset
value of the Fund and generally assist the Company's Board of Directors in all
aspects of the administration and operation of the Fund. The Administration
Agreement provides for the Fund to pay us a fee, computed daily and paid
monthly, at an annual rate equal to the lesser of (1) .06% of the average daily
net assets of the Fund or (2) the amount that brings the total Fund and
Portfolio annual operating expenses as a percentage of the Fund's average net
assets up to .18%. We may also delegate one or more of our responsibilities to
others, at our expense.
Under an Administration and Services Agreement with the Portfolio, Bankers
Trust calculates the value of the assets of the Portfolio and generally assists
the Portfolio's Board of Trustees in all aspects of the administration and
operation of the Portfolio. The Administration and Services Agreement provides
for the Portfolio to pay Bankers Trust a fee, computed daily and paid monthly,
at an annual rate equal to the lesser of (1) .005% of the Portfolio's average
daily net assets or (2) the amount that brings the total Portfolio annual
operating expenses as a percentage of the Portfolio's average net assets up to
.08%. Bankers Trust may also delegate one or more of its responsibilities to
others, at Bankers Trust's expense. See ADMINISTRATOR in the Statement of
Additional Information for further information.
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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. An investment
adviser 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 S&P 500 Index 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 under
asset allocation on page 26. These unique mutual funds provide a professionally
managed diversified investment portfolio within a mutual fund. They are
designed for the individual who prefers to delegate the asset allocation
process to an investment manager and are structured to achieve diversification
across a number of investment categories.
15
<PAGE>
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.
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 as
described below. The Fund's NAV is determined at the close of the regular
trading session (generally 4:00 p.m. Eastern Time) of the New York Stock
Exchange (NYSE) each day the NYSE is open. If we receive your request prior to
that time, your purchase price will be the NAV per share determined for that
day. If we receive your request after the NAV per share is calculated, the
purchase will be effective on the next business day. If you plan to purchase
Fund shares with a foreign check, we suggest you convert your foreign check to
U.S. dollars prior to investment in the Fund to avoid a potential delay in the
effective date of your purchase of up to four to six weeks. Furthermore, a bank
charge may be assessed in the clearing process, which will be deducted from the
amount of the purchase.
MINIMUM INVESTMENTS
INITIAL PURCHASE
[MONEY GRAPHIC]
o $3,000 [$2,000 for IRAs]
ADDITIONAL PURCHASES
o $50. Employees of USAA and its affiliated companies may open an account
through payroll deduction for as little as $25 per pay period with a $3,000
initial investment.
16
<PAGE>
HOW TO PURCHASE
MAIL
[ENVELOPE GRAPHIC]
o To open an account, send your application and check to:
USAA Investment Management Company
9800 Fredericksburg Road
San Antonio, TX 78288
o 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
[PEOPLE GRAPHIC]
o 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
BANK WIRE
[ENVELOPE WIRE GRAPHIC]
o Instruct your bank (which may charge a fee for the service) to wire the
specified amount to the Fund as follows:
State Street Bank and Trust Company
Boston, MA 02101
ABA#011000028
Attn: USAA S&P 500 Index Fund
USAA Account Number: 69384998
Shareholder(s) Name(s)____________________________
Shareholder(s) Account Number_____________________
ELECTRONIC FUNDS TRANSFER
[CALENDAR GRAPHIC]
o 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]
o If you have an existing USAA 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.
17
<PAGE>
Redemption of Shares
You may redeem Fund shares by any of the methods described below on any day the
NAV per share is calculated. Redemptions are effective on the day instructions
are received in a manner as described below. However, if instructions are
received after the NAV per share calculation (generally 4:00 p.m. Eastern
Time), redemption will be effective on the next business day.
Within seven days after the effective date of redemption, we will send you your
money. Payment for redemption of shares purchased by EFT or check is sent after
the EFT or check has cleared, which could take up to 15 days from the purchase
date. If you are considering redeeming shares soon after purchase, you should
purchase by bank wire or certified check to avoid delay.
In addition, the Company may elect to suspend the redemption of shares or
postpone the date of payment in limited circumstances.
HOW TO REDEEM
WRITTEN, FAX, TELEGRAPH, OR TELEPHONE
[FAX MACHINE GRAPHIC]
o Send your written instructions to:
USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, TX 78288
o Send a signed fax to 1-800-292-8177, or send a telegram to USAA Shareholder
Account Services.
o Call toll free 1-800-531-8448, in San Antonio, 456-7202.
Telephone redemption privileges are automatically established when you complete
your application. The Fund will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine; and if it does not, it may
be liable for any losses due to unauthorized or fraudulent instructions. Before
any discussion regarding your account, we obtain the following information: (1)
USAA number or account number, (2) the name(s) on the account registration, and
(3) social security number or tax identification number for the account
registration. In addition, we record all telephone communications with you and
send confirmations of account transactions to the address of record. Redemption
by telephone, fax, or telegram is not available for shares represented by stock
certificates.
18
<PAGE>
IMPORTANT INFORMATION ABOUT PURCHASES AND REDEMPTIONS
Investor's Guide to USAA Mutual Fund Services
[BOOK 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.
Company Rights
The Company reserves the right to:
o reject purchase or exchange orders when in the best interest of the
Company;
o limit or discontinue the offering of shares of any portfolio of the Company
without notice to the shareholders;
o 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;
o 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;
o redeem an account with less than 10 shares, with certain limitations.
19
<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. The Fund's transfer agent will
simultaneously process exchange redemptions and purchases at the share prices
next determined after the exchange order is received. 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.
The Fund has undertaken certain procedures regarding telephone transactions as
described on page 18.
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
NAV
EQUALS
TOTAL ASSETS
MINUS
LIABILITIES
DIVIDED BY
# OF SHARES OUTSTANDING
Share Price Calculation
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 Funds 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. The NAV
per share is calculated by adding the value of the Funds assets (i.e., the
value of its investment in the Portfolio and other assets), deducting
liabilities, and dividing by the number of shares outstanding. The Portfolios
securities and other assets are valued primarily on the basis of market
quotations or, if quotations are not readily available, by a method which the
Portfolios Board of Trustees believes accurately reflects fair value.
Dividends and Distributions
The Fund pays net investment income dividends quarterly. Any net capital gains
generally will be distributed at least annually. The Fund will make
20
<PAGE>
additional payments to shareholders, if necessary, to avoid the imposition of
any federal income or excise tax.
All income dividends and capital gain distributions are automatically
reinvested, unless we receive different instructions from you. The share price
will be the NAV of the Fund shares computed on the ex-dividend date. Any income
dividends or capital gain distributions paid by the Fund will reduce the NAV
per share by the amount of the dividend or distribution. These dividends and
distributions are subject to taxes.
If your account balance is less than $10,000, the Transfer Agent will
automatically deduct a $10 annual account maintenance fee from the dividend
income paid to your account. The $10 account maintenance fee is deducted at a
rate of $2.50 per quarter from the dividend. If the dividend to be paid to an
account is less than the fee to be deducted, a sufficient number of shares may
be redeemed from an account to make up the difference. The annual account
maintenance fee may be changed upon at least 30 days notice to you.
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 regulations that will likely be adopted to implement the
Act may affect the status and treatment of certain distributions shareholders
receive from the Fund. We urge you to consult your own tax adviser about the
status of distributions from the Fund in your own state and locality.
FUND - The Fund intends to qualify as a regulated investment company (RIC)
under Subchapter M of the Internal Revenue Code of 1986, as amended (the Code).
As a RIC, the Fund will not be subject to federal income tax on its net
investment income and net capital gains distributed to shareholders. Net
capital gains are those gains in excess of capital losses.
In order to qualify as a RIC, the Fund must satisfy certain requirements
relating to the sources and distribution of its income and the diversification
of its assets. In satisfying these requirements, the Fund will treat itself as
owning its proportionate share of the Portfolios assets and is entitled to the
income of the Portfolio properly attributable to such share. As a partnership
under the Code, the Portfolio does not pay federal income or excise taxes.
21
<PAGE>
SHAREHOLDER - Dividends from taxable net investment income and distributions
of net short-term capital gains are taxable to shareholders as ordinary income,
whether received in cash or reinvested in additional shares. A portion of these
dividends may qualify for the 70% dividends received deduction available to
corporations.
Regardless of the length of time you have held the Fund shares, distributions
of net long-term capital gains are taxable as long-term capital gains whether
received in cash or reinvested in additional shares. These distributions may be
taxable at different rates depending on the length of time the Fund held the
applicable asset.
Redemptions and exchanges are subject to income tax based on the difference
between the cost of shares when purchased and the price received upon
redemption or exchange.
WITHHOLDING - Federal law requires the Fund to withhold and remit to the U.S.
Treasury a portion of the income dividends and capital gain distributions and
proceeds of redemptions paid to any non-corporate shareholder who:
o fails to furnish the Fund with a correct tax identification number,
o underreports dividend or interest income, or
o 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 Funds 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 concerning the tax status
of dividends and distributions for federal income tax purposes annually.
DESCRIPTION OF SHARES
The Fund is a series of USAA Mutual Fund, Inc. (Company) and is diversified.
The Company is an open-end management investment company incorporated under the
laws of the State of Maryland. The Company is authorized to issue shares of
common stock of separate series, each of which is commonly referred to as a
mutual fund. There are ten mutual funds in the Company, including this Fund.
The Company does not hold annual or regular meetings of shareholders and holds
special meetings only as required by the Investment Company Act of 1940. The
Directors may fill vacancies on the Board or appoint new Directors if the
result is that at least two-thirds of the Directors have still been elected by
shareholders. Shareholders have one vote per share (with proportionate voting
for fractional shares) regardless of the relative net asset value of the
shares.
22
<PAGE>
If a matter affects an individual fund in the Company, there will be a
separate vote of that specific funds shareholders. Shareholders collectively
holding at least 10% of the outstanding shares of the Company may request a
shareholder meeting at any time for the purpose of voting to remove one or
more of the Directors. The Company will assist in communicating to other
shareholders about the meeting.
Except as permitted by the Securities and Exchange Commission, whenever the
Fund is requested to vote on matters pertaining to the Portfolio, the Fund will
hold a meeting of its shareholders and will cast all of its votes in the same
proportion as the votes of its shareholders. The shareholders who do not vote
will have their votes cast by the Directors or officers of the Company in the
same proportion as the Funds shareholders who do, in fact, vote.
The Portfolio, in which all the Assets of the Fund will be invested, is
organized as a trust under the laws of the State of New York. The Portfolios
Declaration of Trust provides that the Fund and other entities investing in the
Portfolio (E.G., other investment companies, insurance company separate
accounts, and common and commingled trust funds) will each be liable for all
obligations of the Portfolio. However, the risk of the Fund incurring financial
loss on account of such liability is limited to circumstances in which both
inadequate insurance exists and the Portfolio itself was unable to meet its
obligations. Accordingly, the Company's Directors believe that neither the Fund
nor you will be adversely affected by reason of the Funds investing in the
Portfolio.
23
<PAGE>
APPENDIX A
THE FOLLOWING ARE DESCRIPTIONS OF CERTAIN TYPES OF SECURITIES IN WHICH THE
PORTFOLIO'S ASSETS MAY BE INVESTED:
REPURCHASE AGREEMENTS
In a repurchase agreement the Portfolio buys a security and simultaneously
agrees to sell it back at a higher price. In the event of the bankruptcy of the
other party to a repurchase agreement, the Portfolio could experience delays in
recovering its cash. To the extent that, in the meantime, the value of the
securities repurchased had decreased, the Portfolio could experience a loss. In
all cases, Bankers Trust must find the creditworthiness of the other party to
the transaction satisfactory.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES
The Portfolio may purchase securities on a when-issued or delayed delivery
basis. Delivery of and payment for these securities take place after the date
of the purchase commitment, normally within 45 days. The value of these
securities is subject to market fluctuation during this period and no income
accrues to the Portfolio until settlement takes place. The Portfolio segregates
with the Custodian liquid securities in an amount at least equal to these
commitments. When entering into a when-issued or delayed delivery transaction,
the Portfolio will rely on the other party to consummate the transaction; if
the other party fails to do so, the Portfolio may be disadvantaged.
OPTIONS ON STOCK INDICES
The Portfolio may purchase and write put and call options on stock indices
listed on stock exchanges. A stock index fluctuates with changes in the market
values of the stocks included in the index.
Options on stock indices are generally similar to options on stock except that
the delivery requirements are different. Instead of giving the right to take or
make delivery of stock at a specified price, an option on a stock index gives
the holder the right to receive a cash "exercise settlement amount" equal to
(a) the amount, if any, by which the fixed exercise price of the option exceeds
(in the case of a put) or is less than (in the case of a call) the closing
value of the underlying index on the date of exercise, multiplied by (b) a
fixed "index multiplier." Receipt of this cash amount will depend upon the
closing level of the stock index upon which the option is based being greater
than, in the case of a call, or less than, in the case of a put, the exercise
price of the option. The amount of cash received will be equal to such
difference between the closing price of the index and the exercise price of the
option expressed in dollars times a specified multiple. The writer of the
option is obligated, in return for the premium received, to make delivery of
this amount. The writer may offset its position in stock index options prior to
expiration by entering into a closing transaction on an exchange or the option
may expire unexercised.
[CAUTION LIGHT GRAPHIC]
Because the value of an index option depends upon movements in the level of the
index rather than the price of a particular stock, whether the Portfolio will
realize a gain or loss from the purchase or writing of options on an index
depends upon movements in the level of stock prices in the stock market
generally or, in the case of certain indices, in an industry or market segment.
Accordingly, the Portfolio's successful use of options on stock indices will be
subject to Bankers Trust's ability
24
<PAGE>
to predict correctly movements in the direction of the stock market generally
or of a particular industry. This requires different skills and techniques than
predicting changes in the price of individual stocks.
FUTURES CONTRACTS ON STOCK INDICES
The Portfolio may enter into contracts providing for the making and acceptance
of a cash settlement based upon changes in the value of an index of securities
(Futures Contracts). This investment technique is designed only to hedge
against anticipated future changes in general market prices which otherwise
might either adversely affect the value of securities held by the Portfolio or
adversely affect the prices of securities which are intended to be purchased at
a later date for the Portfolio. A Futures Contract may also be entered into to
close out or offset an existing futures position.
In general, each transaction in Futures Contracts involves the establishment of
a position which will move in a direction opposite to that of the investment
being hedged. If these hedging transactions are successful, the futures
positions taken for the Portfolio will rise in value by an amount which
approximately offsets the decline in value of the portion of the Portfolio's
investments that are being hedged. Should general market prices move in an
unexpected manner, the full anticipated benefits of Futures Contracts may not
be achieved or a loss may be realized.
[CAUTION LIGHT GRAPHIC]
Although Futures Contracts would be entered into for cash management purposes
only, such transactions do involve certain risks. These risks could include a
lack of correlation between the Futures Contracts and the equity market being
hedged, a potential lack of liquidity in the secondary market and incorrect
assessments of market trends which may result in poorer overall performance
than if a Futures Contract had not been entered into.
Brokerage costs will be incurred and "initial margin" will be required to be
posted and maintained as a good-faith deposit against performance of
obligations under Futures Contracts written for the Portfolio. The Portfolio
may not purchase or sell a Futures Contract or options thereon if immediately
thereafter its margin deposits on its outstanding Futures Contracts and its
premium paid on outstanding options thereon would exceed 5% of the market value
of the Portfolio's total assets.
OPTIONS ON FUTURES CONTRACTS
The Portfolio may invest in options on such Futures Contracts for similar
purposes.
ASSET COVERAGE
The Portfolio will cover transactions in futures and related options, as well
as when-issued and delayed-delivery as required under applicable
interpretations of the Securities and Exchange Commission, either by owning the
underlying securities or segregating with the Portfolio's Custodian liquid
securities in an amount at all times equal to or exceeding the Portfolio's
commitment with respect to these instruments or contracts.
ILLIQUID SECURITIES
The Portfolio may not invest more than 15% of the market value of the
Portfolio's net assets in securities which are illiquid. Illiquid securities
are those securities that cannot be disposed of in the ordinary course of
business in seven days or less at approximately the value at which the
Portfolio has valued the securities.
25
<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.
26
<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),
dated May 1, 1998, or the Fund's Annual Report for the year ended December 31,
1997. The SAI and the financial statements contained with the Fund's Annual
Report have been filed with the SEC and are legally a part of the Prospectus.
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
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
<PAGE>
USAA USAA STATEMENT OF
EAGLE MUTUAL ADDITIONAL INFORMATION
LOGO FUND, INC. May 1, 1998
_______________________________________________________________________________
USAA MUTUAL FUND, INC.
S&P 500 Index Fund
USAA MUTUAL FUND, INC. (the Company) is a registered investment company
offering shares of ten no-load mutual funds, one of which is described in this
Statement of Additional Information (SAI): the S&P 500 Index Fund. The Fund is
classified as diversified.
The Fund's investment objective is to seek to provide investment results
that, before expenses, correspond to the total return of common stocks publicly
traded in the United States, as represented by the Standard & Poor's 500
Composite Stock Price Index (S&P 500 or Index). As described in the Prospectus,
the Company seeks to achieve the investment objective of the Fund by investing
all the investable assets of the Fund in an open-end management investment
company having the same investment objective as the Fund. The investment
company is the Equity 500 Index Portfolio (the Portfolio) advised by Bankers
Trust Company (Bankers Trust).
Since the investment characteristics of the Fund will correspond directly
to those of the Portfolio in which the Fund invests all of its investable
assets, the following includes a discussion of the various investments of and
techniques employed by the Portfolio.
You may obtain a free copy of the Prospectus dated May 1, 1998, for the
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 Fund.
This SAI is not a Prospectus and contains information in addition to and more
detailed than that set forth in the Fund's Prospectus. It is intended to
provide you with additional information regarding the activities and operations
of the Company and the Fund and should be read in conjunction with the Fund's
Prospectus.
_______________________________________________________________________________
TABLE OF CONTENTS
PAGE
2 Valuation of Securities
2 Conditions of Purchase and Redemption
2 Additional Information Regarding Redemption of Shares
3 Investment Plans
4 Investment Policies
7 Investment Restrictions
10 Portfolio Transactions and Brokerage Commissions
11 Further Description of Shares
12 Tax Considerations
13 Directors and Officers of the Company
15 Trustees and Officers of the Portfolio
16 Investment Adviser
17 Administrator
18 General Information
19 Calculation of Performance Data
19 Appendix A - Comparison of Fund Performance
21 Appendix B - Dollar-Cost Averaging
<PAGE>
VALUATION OF SECURITIES
Shares of the Fund are offered on a continuing best efforts basis through USAA
Investment Management Company (IMCO or the Manager). The offering price for
shares of the Fund is equal to the current net asset value (NAV) per share. The
NAV per share of the Fund is calculated by adding the value of the Fund's
assets (i.e., the value of its investments in the Portfolio and other assets),
deducting liabilities, and dividing by the number of shares outstanding.
The Fund's NAV per share is calculated each day, Monday through Friday,
except days on which the New York Stock Exchange (NYSE) is closed. The NYSE is
currently scheduled to be closed on New Year's Day, 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 Portfolio values its equity and debt securities (other than short-term
debt obligations maturing in 60 days or less), including listed securities and
securities for which price quotations are available, on the basis of market
valuations furnished by a pricing service. Short-term debt obligations maturing
in 60 days or less are valued at amortized cost, which approximates market
value. Other assets are valued at fair value using methods determined in good
faith by the Portfolio's Board of Trustees.
Each investor in the Portfolio, including the Fund, may add to or reduce
its investment in the Portfolio on each day that the NYSE is open for business
and New York charter banks are not closed owing to customary or local holidays.
As of the close of the NYSE, currently 4:00 p.m. (Eastern time or earlier if
the NYSE closes earlier) on each such day, the value of each investor's
interest in the Portfolio will be determined by multiplying the net asset value
of the Portfolio by the percentage representing that investor's share of the
aggregate beneficial interests in the Portfolio. Any additions or reductions
which are to be effected on that day will then be effected. The investor's
percentage of the aggregate beneficial interests in the Portfolio will then be
recomputed as the percentage equal to the fraction (1) the numerator of which
is the value of such investor's investment in the Portfolio as of the close of
the NYSE on such day plus or minus, as the case may be, the amount of net
additions to or reductions in the investor's investment in the Portfolio
effected on such day and (2) the denominator of which is the aggregate net
asset value of the Portfolio as of 4:00 p.m. or the close of the NYSE on such
day plus or minus, as the case may be, the amount of net additions to or
reductions in the aggregate investments in the Portfolio by all investors in
the Portfolio. The percentage so determined will then be applied to determine
the value of the investor's interest in the Portfolio as of 4:00 p.m. or the
close of the NYSE on the following day the NYSE is open for trading.
CONDITIONS OF PURCHASE AND REDEMPTION
NONPAYMENT
If any order to purchase shares is canceled 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 may 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 the
Portfolio. Requests for redemption which are subject to any special conditions,
or which specify an effective date other than as provided herein, cannot be
accepted. A gain or loss for tax purposes may be realized on the sale of
shares, depending upon the price when redeemed.
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The Portfolio reserves the right, if conditions exist which make cash
payments undesirable, to honor any request for redemption or repurchase order
by making payment in whole or in part in readily marketable securities chosen
by the Portfolio and valued as they are for purposes of computing the
Portfolio's NAV (a redemption in kind). If payment is made to the Fund in
securities, the Fund may incur transaction expenses in converting these
securities into cash. The Portfolio has elected, however, to be governed by
Rule 18f-1 under the Investment Company Act of 1940, as amended (1940 Act) as a
result of which the Portfolio is obligated to redeem beneficial interests with
respect to any one investor during any 90-day period, solely in cash up to the
lesser of $250,000 or 1% of the NAV of the Portfolio at the beginning of the
period. For purposes of determining compliance with Rule 18f-1, each
shareholder of the Fund redeeming shares of the Fund on a particular day will
be treated as a direct holder in the interest in the Portfolio being redeemed
that day.
In the event the Company withdraws or redeems all of the Fund's interest
in the Portfolio, the Portfolio will effect such redemption in kind and in such
a manner that the securities delivered to the Fund will mirror, as closely as
practicable, the composition of the Portfolio immediately prior to such
redemption.
The Board of Directors may cause the redemption of an account with a
balance of less than 10 shares of the Fund provided (1) the value of the
account has been reduced, for reasons other than market action, below the
minimum initial investment in such Fund at the time of the establishment of the
account, (2) the account has remained below the minimum level for six months,
and (3) 60 days' prior written notice of the proposed redemption has been sent
to 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 Securities and Exchange
Commission (SEC) so that disposal of the Company's investments or determination
of its NAV is not reasonably practicable, or (3) for such other periods as the
SEC by order may permit for protection of the Company's shareholders.
For the mutual protection of the investor and the Fund, the Company may
require a signature guarantee. If required, EACH signature on the account
registration must be guaranteed. Signature guarantees are acceptable from FDIC
member banks, brokers, dealers, municipal securities dealers, municipal
securities brokers, government securities dealers, government securities
brokers, credit unions, national securities exchanges, registered securities
associations, clearing agencies and savings associations. A signature guarantee
for active duty military personnel stationed abroad may be provided by an
officer of the United States Embassy or Consulate, a staff officer of the Judge
Advocate General, or an individual's commanding officer.
INVESTMENT PLANS
The Company makes available the following investment plans to shareholders of
the Fund. At the time you sign up for any of the following investment plans
that utilize the electronic funds transfer service, you will choose the day of
the month (the effective date) on which you would like to regularly purchase
shares. When this day falls on a weekend or holiday, the electronic transfer
will take place on the last business day before the effective date. You may
terminate your participation in a plan at any time. Please call the Manager for
details and necessary forms or applications.
AUTOMATIC PURCHASE OF SHARES
INVESTRONIC (R) - The regular purchase of additional shares through electronic
funds transfer from a checking or savings account. You may invest as little as
$50 per month.
DIRECT PURCHASE SERVICE - The periodic purchase of shares through electronic
funds transfer from an employer (including government allotments and social
security), an income-producing investment, or an account with a participating
financial institution.
AUTOMATIC PURCHASE PLAN - The periodic transfer of funds from a USAA money
market fund to purchase shares in another non-money market USAA mutual fund.
There is a minimum investment required for this program of $5,000 in the money
market fund, with a monthly transaction minimum of $50.
BUY/SELL SERVICE - The intermittent purchase or redemption of shares through
electronic funds transfer to or from a checking or savings account.
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.
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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 B.
SYSTEMATIC WITHDRAWAL PLAN
If a shareholder in a single investment account (accounts in different Funds
cannot be aggregated for this purpose) owns shares having a NAV of $5,000 or
more, the shareholder may request that enough shares to produce a fixed amount
of money be liquidated from the account monthly or quarterly. The amount of
each withdrawal must be at least $50. Using the electronic funds transfer
service, you may choose to have withdrawals electronically deposited at your
bank or other financial institution. You may also elect to have checks mailed
to a designated address.
Such a plan may be initiated by depositing shares worth at least $5,000
with the Transfer Agent and by completing a Systematic Withdrawal Plan
application, which may be requested from the Manager. You may terminate
participation in the plan at any time. There is no charge to you for
withdrawals under the Systematic Withdrawal Plan. The Company will not bear any
expenses in administering the plan beyond the regular transfer agent and
custodian costs of issuing and redeeming shares. The Manager will bear any
additional expenses of administering the plan.
Withdrawals will be made by redeeming full and fractional shares on the
date you select at the time the plan is established. Withdrawal payments made
under this plan may exceed dividends and distributions and, to this extent,
will involve the use of principal and could reduce the dollar value of your
investment and eventually exhaust the account. Reinvesting dividends and
distributions helps replenish the account. Because share values and net
investment income can fluctuate, you should not expect withdrawals to be offset
by rising income or share value gains.
Each redemption of shares may result in a gain or loss, which must be
reported on your income tax return. Therefore, you should keep an accurate
record of any gain or loss on each withdrawal.
TAX-DEFERRED RETIREMENT PLANS
Federal taxes on current income may be deferred if you qualify for certain
types of retirement programs. For your convenience, the Manager makes available
various forms of IRA and 403(b)(7) accounts. The minimum initial investment in
each of these plans is $2,000. 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 Funds described in the Prospectus of each Fund of USAA
Mutual Fund, Inc. and USAA Investment Trust (not available in the Growth and
Tax Strategy Fund).
Retirement plan applications for the IRA and 403(b)(7) programs should be
sent directly to USAA Shareholder Account Services, 9800 Fredericksburg 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 investment objective of the Fund is described in the Fund's Prospectus.
There can, of course, be no assurance that the Fund will achieve its investment
objective.
The Fund seeks to achieve its investment objective by investing all of its
investable assets in the Portfolio. The Company may withdraw the Fund's
investment from the Portfolio at any time if the Board of Directors of the
Company determines that it is in the best interest of the Fund to do so.
Since the investment characteristics of the Fund will correspond directly
to those of the Portfolio, the following is a discussion of the various
investments of and techniques employed by the Portfolio.
CERTIFICATES OF DEPOSIT AND BANKERS' ACCEPTANCES. The Portfolio may invest
in certificates of deposit which are receipts issued by a depository
institution in exchange for the deposit of funds. The issuer agrees to pay the
amount deposited plus interest to the bearer of the receipt on the date
specified on the certificate. The certificate usually can be traded in the
secondary market prior to maturity. Bankers' acceptances typically arise from
short-term credit arrangements designed to enable businesses to obtain funds to
finance commercial transactions. Generally, an acceptance is a time draft drawn
on a bank by an exporter or an importer to obtain a stated amount of funds to
pay for specific merchandise. The draft is then
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"accepted" by a bank that, in effect, unconditionally guarantees to pay the
face value of the instrument on its maturity date. The acceptance may then be
held by the accepting bank as an earning asset or it may be sold in the
secondary market at the going rate of discount for a specific maturity.
Although maturities for acceptances can be as long as 270 days, most
acceptances have maturities of six months or less.
COMMERCIAL PAPER. The Portfolio may invest in commercial paper which
consists of short-term (usually from 1 to 270 days) unsecured promissory notes
issued by corporations in order to finance their current operations. A variable
amount master demand note (which is a type of commercial paper) represents a
direct borrowing arrangement involving periodically fluctuating rates of
interest under a letter agreement between a commercial paper issuer and an
institutional lender pursuant to which the lender may determine to invest
varying amounts.
ILLIQUID SECURITIES. Historically, illiquid securities have included
securities subject to contractual or legal restrictions on resale because they
have not been registered under the Securities Act of 1933, as amended (the 1933
Act), securities which are otherwise not readily marketable and repurchase
agreements having a remaining maturity of longer than seven calendar days.
Securities which have not been registered under the 1933 Act are referred to as
private placements or restricted securities and are purchased directly from the
issuer or in the secondary market. Mutual funds do not typically hold a
significant amount of these restricted or other illiquid securities because of
the potential for delays on resale and uncertainty in valuation. Limitations on
resale may have an adverse effect on the marketability of portfolio securities
and a mutual fund might be unable to dispose of restricted or other illiquid
securities promptly or at reasonable prices and might thereby experience
difficulty satisfying redemptions within seven calendar days. A mutual fund
might also have to register such restricted securities in order to dispose of
them resulting in additional expense and delay. Adverse market conditions could
impede such a public offering of securities.
In recent years, however, a large institutional market has developed for
certain securities that are not registered under the 1933 Act, including
repurchase agreements, commercial paper, foreign securities, municipal
securities, and corporate bonds and notes. Institutional investors depend on an
efficient institutional market in which the unregistered security can be
readily resold or on an issuer's ability to honor a demand for repayment. The
fact that there are contractual or legal restrictions on resale of such
investments to the general public or to certain institutions may not be
indicative of their liquidity.
LENDING OF PORTFOLIO SECURITIES. The Portfolio has the authority to lend
portfolio securities to brokers, dealers and other financial organizations. The
Portfolio will not lend securities to Bankers Trust, Edgewood Services, Inc.
(Edgewood), the Portfolio's Distributor, or their affiliates. By lending its
securities, a Portfolio can increase its income by continuing to receive
interest on the loaned securities as well as by either investing the cash
collateral in short-term securities or obtaining yield in the form of interest
paid by the borrower when U.S. Government obligations are used as collateral.
There may be risks of delay in receiving additional collateral or risks of
delay in recovery of the securities or even loss of rights in the collateral
should the borrower of the securities fail financially. The Portfolio will
adhere to the following conditions whenever its securities are loaned: (1) the
Portfolio must receive at least 100% cash collateral or equivalent securities
from the borrower; (2) the borrower must increase this collateral whenever the
market value of the securities including accrued interest rises above the level
of the collateral; (3) the Portfolio must be able to terminate the loan at any
time; (4) the Portfolio must receive reasonable interest on the loan, as well
as any dividends, interest or other distributions on the loaned securities, and
any increase in market value; (5) the Portfolio may pay only reasonable
custodian fees in connection with the loan; and (6) voting rights on the loaned
securities may pass to the borrower; provided, however, that if a material
event adversely affecting the investment occurs, the Portfolio's Board of
Trustees must terminate the loan and regain the right to vote the securities.
INDEX FUTURES CONTRACTS AND OPTIONS ON INDEX FUTURES CONTRACTS AND SECURITIES
INDICES
FUTURES CONTRACTS. The Portfolio may enter into contracts for the purchase
or sale for future delivery of the Index. U.S. futures contracts have been
designed by exchanges which have been designated "contracts markets" by the
Commodity Futures Trading Commission (CFTC), and must be executed through a
futures commission merchant, or brokerage firm, which is a member of the
relevant contract market. Futures contracts trade on a number of exchange
markets, and, through their clearing corporations, the exchanges guarantee
performance of the contracts as between the clearing members of the exchange.
At the same time a futures contract on the Index is purchased or sold, the
Portfolio must allocate cash or securities as a deposit payment (initial
deposit). It is expected that the initial deposit would be approximately 1 1/2%
to 5% of a contract's face value. Daily thereafter, the futures contract is
valued and the payment of "variation margin" may be required, since each day
the Portfolio would provide or receive cash that reflects any decline or
increase in the contract's value.
Although futures contracts by their terms call for the actual delivery or
acquisition of securities, in most cases the contractual obligation is
fulfilled before the date of the contract without having to make or take
delivery of the securities. The offsetting of a contractual obligation is
accomplished by buying (or selling, as
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the case may be) on a commodities exchange an identical futures contract
calling for delivery in the same month. Such a transaction, which is effected
through a member of an exchange, cancels the obligation to make or take
delivery of the securities. Since all transactions in the futures market are
made, offset or fulfilled through a clearinghouse associated with the exchange
on which the contracts are traded, the Portfolio will incur brokerage fees when
it purchases or sells futures contracts.
The ordinary spreads between prices in the cash and futures market, due to
differences in the nature of those markets, are subject to distortions. First,
all participants in the futures market are subject to initial deposit and
variation margin requirements. Rather than meeting additional variation margin
requirements, investors may close futures contracts through offsetting
transactions which could distort the normal relationship between the cash and
futures markets. Second, the liquidity of the futures market depends on
participants' entering into offsetting transactions rather than making or
taking delivery. To the extent participants decide to make or take delivery,
liquidity in the futures market could be reduced, thus producing distortion.
Third, from the point of view of speculators, the margin deposit requirements
in the futures market are less onerous than margin requirements in the
securities market. Therefore, increased participation by speculators in the
futures market may cause temporary price distortions. Because of the
possibility of distortion, a correct forecast of securities price trends by
Bankers Trust may still not result in a successful transaction.
In addition, futures contracts entail risks. Although Bankers Trust
believes that use of such contracts will benefit the Portfolio, if Bankers
Trust's investment judgment about the general direction of the Index is
incorrect, the Portfolio's overall performance would be poorer than if it had
not entered into any such contract. For example, if the Portfolio has hedged
against the possibility of a decrease in the Index which would adversely affect
the value of securities held in its portfolio and securities prices increase
instead, the Portfolio will lose part or all of the benefit of the increased
value of its securities which it has hedged because it will have offsetting
losses in its futures positions. In addition, in such situations, if the
Portfolio has insufficient cash, it may have to sell securities from its
portfolio to meet daily variation margin requirements. Such sales of securities
may be, but will not necessarily be, at increased prices which reflect the
rising market. The Portfolio may have to sell securities at a time when it may
be disadvantageous to do so.
OPTIONS ON INDEX FUTURES CONTRACTS. The Portfolio may purchase and write
options on futures contracts with respect to the Index. The purchase of a call
option on an index futures contract is similar in some respects to the purchase
of a call option on such an index. Depending on the pricing of the option
compared to either the price of the futures contract upon which it is based or
the price of the underlying securities, it may or may not be less risky than
ownership of the futures contract or underlying securities. As with the
purchase of futures contracts, when the Portfolio is not fully invested it may
purchase a call option on a futures contract to hedge against a market advance.
The writing of a call option on a futures contract with respect to the
Index constitutes a partial hedge against declining prices of the underlying
securities which are deliverable upon exercise of the futures contract. If the
futures price at expiration of the option is below the exercise price, the
Portfolio will retain the full amount of the option premium which provides a
partial hedge against any decline that may have occurred in the Portfolio's
holdings. The writing of a put option on an index futures contract constitutes
a partial hedge against increasing prices of the underlying securities which
are deliverable upon exercise of the futures contract. If the futures price at
expiration of the option is higher than the exercise price, the Portfolio will
retain the full amount of the option premium which provides a partial hedge
against any increase in the price of securities which the Portfolio intends to
purchase. If a put or call option the Portfolio has written is exercised, the
Portfolio will incur a loss which will be reduced by the amount of the premium
it receives. Depending on the degree of correlation between changes in the
value of its portfolio securities and changes in the value of its futures
positions, the Portfolio's losses from existing options on futures may to some
extent be reduced or increased by changes in the value of portfolio securities.
The purchase of a put option on a futures contract with respect to the
Index is similar in some respects to the purchase of protective put options on
the Index. For example, the Portfolio may purchase a put option on an index
futures contract to hedge against the risk of lowering securities values.
The amount of risk the Portfolio assumes when it purchases an option on a
futures contract with respect to the Index is the premium paid for the option
plus related transaction costs. In addition to the correlation risks discussed
above, the purchase of an option also entails the risk that changes in the
value of the underlying futures contract will not be fully reflected in the
value of the option purchased.
The Portfolio's Board of Trustees has adopted the requirement that index
futures contracts and options on index futures contracts be used only for cash
management purposes as a hedge and not for speculation. The Portfolio will not
enter into any futures contracts or options on futures contracts if immediately
thereafter the amount of margin deposits on all the futures contracts of the
Portfolio and premiums paid on outstanding options on futures contracts owned
by the Portfolio would exceed 5% of the market value of the total assets of the
Portfolio.
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OPTIONS ON SECURITIES INDICES. The Portfolio may write (sell) covered call
and put options to a limited extent on the Index (covered options) in an
attempt to increase income. Such options give the holder the right to receive a
cash settlement during the term of the option based upon the difference between
the exercise price and the value of the index. The Portfolio may forego the
benefits of appreciation on the Index or may pay more than the market price of
the Index pursuant to call and put options written by the Portfolio.
By writing a covered call option, the Portfolio foregoes, in exchange for
the premium less the commission (net premium), the opportunity to profit during
the option period from an increase in the market value of the Index above the
exercise price. By writing a covered put option, the Portfolio, in exchange for
the net premium received, accepts the risk of a decline in the market value of
the Index below the exercise price.
The Portfolio may terminate its obligation as the writer of a call or put
option by purchasing an option with the same exercise price and expiration date
as the option previously written.
When the Portfolio writes an option, an amount equal to the net premium
received by the Portfolio is included in the liability section of the
Portfolio's Statement of Assets and Liabilities as a deferred credit. The
amount of the deferred credit will be subsequently marked to market to reflect
the current market value of the option written. The current market value of a
traded option is the last sale price or, in the absence of a sale, the mean
between the closing bid and asked price. If an option expires on its stipulated
expiration date or if the Portfolio enters into a closing purchase transaction,
the Portfolio will realize a gain (or loss if the cost of a closing purchase
transaction exceeds the premium received when the option was sold), and the
deferred credit related to such option will be eliminated. If a call option is
exercised, the Portfolio will realize a gain or loss from the sale of the
underlying security and the proceeds of the sale will be increased by the
premium originally received. The writing of covered call options may be deemed
to involve the pledge of the securities against which the option is being
written. Securities against which call options are written will be segregated
on the books of the custodian for the Portfolio.
The Portfolio may purchase call and put options on the Index. The
Portfolio would normally purchase a call option in anticipation of an increase
in the market value of the Index. The purchase of a call option would entitle
the Portfolio, in exchange for the premium paid, to purchase the underlying
securities at a specified price during the option period. The Portfolio would
ordinarily have a gain if the value of the securities increased above the
exercise price sufficiently to cover the premium and would have a loss if the
value of the securities remained at or below the exercise price during the
option period.
The Portfolio would normally purchase put options in anticipation of a
decline in the market value of the Index (protective puts). The purchase of a
put option would entitle the Portfolio, in exchange for the premium paid, to
sell the underlying securities at a specified price during the option period.
The purchase of protective puts is designed merely to offset or hedge against a
decline in the market value of the Index. The Portfolio would ordinarily
recognize a gain if the value of the Index decreased below the exercise price
sufficiently to cover the premium and would recognize a loss if the value of
the Index remained at or above the exercise price. Gains and losses on the
purchase of protective put options would tend to be offset by countervailing
changes in the value of the Index.
The Portfolio has adopted certain other nonfundamental policies concerning
option transactions which are discussed below. The Portfolio's activities in
index options may also be restricted by the requirements of the Internal
Revenue Code of 1986, as amended (the Code), for qualification as a regulated
investment company.
The hours of trading for options on the Index may not conform to the hours
during which the underlying securities are traded. To the extent that the
option markets close before the markets for the underlying securities,
significant price and rate movements can take place in the underlying
securities markets that cannot be reflected in the option markets. It is
impossible to predict the volume of trading that may exist in such options, and
there can be no assurance that viable exchange markets will develop or
continue.
Because options on securities indices require settlement in cash, Bankers
Trust may be forced to liquidate portfolio securities to meet settlement
obligations.
INVESTMENT RESTRICTIONS
Certain investment restrictions of the Fund and the Portfolio have been adopted
as fundamental policies of the Fund or Portfolio, as the case may be. A
fundamental policy may not be changed without the approval of a majority of the
outstanding voting securities of the Fund or Portfolio, as the case may be.
Majority of the outstanding voting securities under the 1940 Act, and as used
in this SAI and the Prospectus, means, the lesser of (1) 67% or more of the
outstanding voting securities of the Fund or Portfolio, as the case may be,
present at a meeting, if the holders of more than 50% of the outstanding voting
securities of the Fund or Portfolio, as the case may be, are present or
represented by proxy or (2) more than 50% of the outstanding voting securities
of the Fund or Portfolio, as the case may be. Whenever the Company is requested
to vote
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on a fundamental policy of the Portfolio, the Company will hold a meeting of
the Fund's shareholders and will cast its vote as instructed by the Fund's
shareholders. The percentage of the Company's votes representing Fund
shareholders not voting will be voted by the Directors of the Company in the
same proportion as the Fund shareholders who do, in fact, vote.
As a matter of fundamental policy, the Fund may not (except that no investment
restriction of the Fund shall prevent the Fund from investing all of its
investable assets in an open-end investment company with substantially the same
investment objective):
(1) with respect to 75% of its total assets, purchase the securities of any
issuer (except U.S. Government Securities, as such term is defined in the
1940 Act) if, as a result, it would own more than 10% of the outstanding
voting securities of such issuer or it would have more than 5% of the
value of its total assets invested in the securities of such issuer;
(2) borrow money, except for temporary or emergency purposes in an amount not
exceeding 33 1/3% of its total assets (including the amount borrowed)
less liabilities (other than borrowings);
(3) concentrate its investments in any one industry although it may invest up
to 25% of the value of its total assets in any one industry; provided,
this limitation does not apply to securities issued or guaranteed by the
U.S. Government and its agencies or instrumentalities;
(4) issue senior securities, except as permitted under the 1940 Act;
(5) underwrite securities of other issuers, except to the extent that it may
be deemed to act as a statutory underwriter in the distribution of any
restricted securities or not readily marketable securities;
(6) lend any securities or make any loan if, as a result, more than 33 1/3%
of its total assets would be lent to other parties, except that this
limitation does not apply to purchases of debt securities or to
repurchase agreements;
(7) purchase or sell commodities, except that the Fund may invest in
financial futures contracts, options thereon, and similar instruments;
and
(8) purchase or sell real estate unless acquired as a result of ownership of
securities or other instruments, except that the 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.
As a matter of fundamental policy, the Portfolio may not:
(1) borrow money or mortgage or hypothecate assets of the Portfolio, except
that in an amount not to exceed 1/3 of the current value of the
Portfolio's assets, it may borrow money as a temporary measure for
extraordinary or emergency purposes and enter into reverse repurchase
agreements or dollar roll transactions, and except that it may pledge,
mortgage or hypothecate not more than 1/3 of such assets to secure such
borrowings (it is intended that money would be borrowed only from banks
and only either to accommodate requests for the withdrawal of beneficial
interests (redemption of shares) while effecting an orderly liquidation
of portfolio securities or to maintain liquidity in the event of an
unanticipated failure to complete a portfolio security transaction or
other similar situations) or reverse repurchase agreements, provided that
collateral arrangements with respect to options and futures, including
deposits of initial deposit and variation margin, are not considered a
pledge of assets for purposes of this restriction and except that assets
may be pledged to secure letters of credit solely for the purpose of
participating in a captive insurance company sponsored by the Investment
Company Institute; for additional related restrictions, see clause (1)
under the caption "Additional Restrictions" below. (As an operating
policy, the Portfolio may not engage in dollar roll transactions);
(2) underwrite securities issued by other persons except insofar as the
Portfolio may technically be deemed an underwriter under the 1933 Act in
selling a portfolio security;
(3) make loans to other persons except: (a) through the lending of the
Portfolio's portfolio securities and provided that any such loans not
exceed 30% of the Portfolio's net assets (taken at market value); (b)
through the use of repurchase agreements or the purchase of short-term
obligations; or (c) by purchasing a portion of an issue of debt
securities of types distributed publicly or privately;
(4) purchase or sell real estate (including limited partnership interests but
excluding securities secured by real estate or interests therein),
interests in oil, gas or mineral leases, commodities or commodity
contracts (except futures and option contracts) in the ordinary course of
business (except that the Portfolio may hold and sell, for the
Portfolio's portfolio, real estate acquired as a result of the
Portfolio's ownership of securities);
(5) concentrate its investments in any particular industry (excluding U.S.
Government securities), but if it is deemed appropriate for the
achievement of a Portfolio's investment objective, up to 25% of its total
assets may be invested in any one industry; and
(6) issue any senior security (as that term is defined in the 1940 Act) if
such issuance is specifically prohibited by the 1940 Act or the rules and
regulations promulgated thereunder, provided that collateral
8
<PAGE>
arrangements with respect to options and futures, including deposits of
initial deposit and variation margin, are not considered to be the
issuance of a senior security for purposes of this restriction.
ADDITIONAL RESTRICTIONS. In order to comply with certain statutes and
policies, the Fund and the Portfolio will not as a matter of operating policy
(except that no operating policy shall prevent the Fund from investing all of
its investable assets in an open-end investment company with substantially the
same investment objective):
(1) borrow money (including through dollar roll transactions) for any purpose
in excess of 10% of the Fund's (Portfolio's) total assets (taken at
cost), except that the Fund (Portfolio) may borrow for temporary or
emergency purposes up to 1/3 of its total assets;
(2) pledge, mortgage or hypothecate for any purpose in excess of 10% of the
Fund's (Portfolio's) total assets (taken at market value), provided that
collateral arrangements with respect to options and futures, including
deposits of initial deposit and variation margin, and reverse repurchase
agreements are not considered a pledge of assets for purposes of this
restriction;
(3) purchase any security or evidence of interest therein on margin, except
that such short-term credit as may be necessary for the clearance of
purchases and sales of securities may be obtained and except that
deposits of initial deposit and variation margin may be made in
connection with the purchase, ownership, holding or sale of futures;
(4) sell any security which it does not own unless by virtue of its ownership
of other securities it has at the time of sale a right to obtain
securities, without payment of further consideration, equivalent in kind
and amount to the securities sold and provided that if such right is
conditional the sale is made upon the same conditions;
(5) invest for the purpose of exercising control or management;
(6) purchase securities issued by any investment company except by purchase
in the open market where no commission or profit to a sponsor or dealer
results from such purchase other than the customary broker's commission,
or except when such purchase, though not made in the open market, is part
of a plan of merger or consolidation; provided, however, that securities
of any investment company will not be purchased for the Fund (Portfolio)
if such purchase at the time thereof would cause: (a) more than 10% of
the Fund's (Portfolio's) total assets (taken at the greater of cost or
market value) to be invested in the securities of such issuers; (b) more
than 5% of the Fund's (Portfolio's) total assets (taken at the greater of
cost or market value) to be invested in any one investment company; or
(c) more than 3% of the outstanding voting securities of any such issuer
to be held for the Fund (Portfolio); and provided further that, except in
the case of merger or consolidation, the Fund (Portfolio) shall not
invest in any other open-end investment company unless the Fund
(Portfolio), (i) waives the investment advisory fee with respect to
assets invested in other open-end investment companies and (ii) incurs no
sales charge in connection with the investment (as an operating policy,
the Portfolio will not invest in another open-end registered investment
company);
(7) invest more than 15% of the Fund's (Portfolio's) net assets (taken at the
greater of cost or market value) in securities that are illiquid or not
readily marketable not including (a) Rule 144A securities that have been
determined to be liquid by the Board of Directors/Trustees; and (b)
commercial paper that is sold under section 4(2) of the 1933 Act which:
(i) is not traded flat or in default as to interest or principal; and
(ii) is rated in one of the two highest categories by at least two
nationally recognized statistical rating organizations (NRSROs) and the
Fund's (Portfolio's) Board of Directors/Trustees have determined the
commercial paper to be liquid; or (iii) is rated in one of the two
highest categories by one NRSRO and the Fund's (Portfolio's) Board of
Directors/Trustees have determined that the commercial paper is
equivalent quality and is liquid;
(8) invest more than 10% of the Fund's (Portfolio's) total assets (taken at
the greater of cost or market value) in securities that are restricted as
to resale under the 1933 Act (other than Rule 144A securities deemed
liquid by the Fund's (Portfolio's) Board of Directors/Trustees);
(9) no more than 5% of the Fund's (Portfolio's) total assets are invested in
securities issued by issuers which (including predecessors) have been in
operation less than three years;
(10) with respect to 75% of the Fund's (Portfolio's) total assets, purchase
securities of any issuer if such purchase at the time thereof would cause
the Fund (Portfolio) to hold more than 10% of any class of securities of
such issuer, for which purposes all indebtedness of an issuer shall be
deemed a single class and all preferred stock of an issuer shall be
deemed a single class, except that futures or option contracts shall not
be subject to this restriction;
(11) if the Fund (Portfolio) is a diversified fund with respect to 75% of its
assets, invest more than 5% of its total assets in the securities
(excluding U.S. Government securities) of any one issuer;
(12) purchase or retain in the Fund's (Portfolio's) portfolio any securities
issued by an issuer any of whose officers, directors, trustees or
security holders is an officer or Director of the Company (or Trustee of
9
<PAGE>
the Portfolio), or is an officer or partner of the Manager (or Bankers
Trust), if after the purchase of the securities of such issuer for the
Fund (Portfolio) one or more of such persons owns beneficially more than
1/2 of 1% of the shares or securities, or both, all taken at market
value, of such issuer, and such persons owning more than 1/2 of 1% of
such shares or securities together own beneficially more than 5% of such
shares or securities, or both, all taken at market value;
(13) invest more than 5% of the Fund's (Portfolio's) net assets in warrants
(valued at the lower of cost or market), (other than warrants acquired by
the Fund [Portfolio] as part of a unit or attached to securities at the
time of purchase), but not more than 2% of the Fund's (Portfolio's) net
assets may be invested in warrants not listed on the NYSE or the American
Stock Exchange;
(14) make short sales of securities or maintain a short position, unless at
all times when a short position is open it owns an equal amount of such
securities or securities convertible into or exchangeable, without
payment of any further consideration, for securities of the same issue
and equal in amount to, the securities sold short, and unless not more
than 10% of the Fund's (Portfolio's) net assets (taken at market value)
is represented by such securities, or securities convertible into or
exchangeable for such securities, at any one time (the Fund [Portfolio]
has no current intention to engage in short selling);
(15) write puts and calls on securities unless each of the following
conditions are met: (a) the security underlying the put or call is within
the investment policies of the Fund (Portfolio) and the option is issued
by the Options Clearing Corporation, except for put and call options
issued by non-U.S. entities or listed on non-U.S. securities or
commodities exchanges; (b) the aggregate value of the obligations
underlying the puts determined as of the date the options are sold shall
not exceed 50% of the Fund's (Portfolio's) net assets; (c) the securities
subject to the exercise of the call written by the Fund (Portfolio) must
be owned by the Fund (Portfolio) at the time the call is sold and must
continue to be owned by the Fund (Portfolio) until the call has been
exercised, has lapsed, or the Fund (Portfolio) has purchased a closing
call, and such purchase has been confirmed, thereby extinguishing the
Fund's (Portfolio's) obligation to deliver securities pursuant to the
call it has sold; and (d) at the time a put is written, the Fund
(Portfolio) establishes a segregated account with its custodian
consisting of cash or short-term U.S. Government securities equal in
value to the amount the Fund (Portfolio) will be obligated to pay upon
exercise of the put (this account must be maintained until the put is
exercised, has expired, or the Fund (Portfolio) has purchased a closing
put, which is a put of the same series as the one previously written);
and
(16) buy and sell puts and calls on securities, stock index futures or options
on stock index futures, or financial futures or options on financial
futures unless such options are written by other persons and: (a) the
options or futures are offered through the facilities of a national
securities association or are listed on a national securities or
commodities exchange, except for put and call options issued by non-U.S.
entities or listed on non-U.S. securities or commodities exchanges; (b)
the aggregate premiums paid on all such options which are held at any
time do not exceed 20% of the Fund's (Portfolio's) total net assets; and
(c) the aggregate margin deposits required on all such futures or options
thereon held at any time do not exceed 5% of the Fund's (Portfolio's)
total assets.
PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
Bankers Trust is responsible for decisions to buy and sell securities, futures
contracts and options on such securities and futures for the Portfolio, the
selection of brokers, dealers and futures commission merchants to effect
transactions and the negotiation of brokerage commissions, if any. Broker-
dealers may receive brokerage commissions on portfolio transactions, including
options, futures and options on futures transactions and the purchase and sale
of underlying securities upon the exercise of options. Orders may be directed
to any broker-dealer or futures commission merchant, including to the extent
and in the manner permitted by applicable law, Bankers Trust or its
subsidiaries or affiliates. Purchases and sales of certain portfolio securities
on behalf of the Portfolio are frequently placed by Bankers Trust with the
issuer or a primary or secondary market-maker for these securities on a net
basis, without any brokerage commission being paid by the Portfolio. Trading
does, however, involve transaction costs. Transactions with dealers serving as
market-makers reflect the spread between the bid and asked prices. Transaction
costs may also include fees paid to third parties for information as to
potential purchasers or sellers of securities. Purchases of underwritten issues
may be made which will include an underwriting fee paid to the underwriter.
Bankers Trust seeks to evaluate the overall reasonableness of the
brokerage commissions paid (to the extent applicable) in placing orders for the
purchase and sale of securities for the Portfolio taking into account such
factors as price, commission (negotiable in the case of national securities
exchange transactions), if any, size of order, difficulty of execution and
skill required of the executing broker-dealer through familiarity with
commissions charged on comparable transactions, as well as by comparing
commissions paid by the Portfolio to reported commissions paid by others.
Bankers Trust reviews on a routine basis commission rates, execution and
settlement services performed, making internal and external comparisons.
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<PAGE>
Bankers Trust is authorized, consistent with Section 28(e) of the
Securities Exchange Act of 1934, as amended, when placing portfolio
transactions for the Portfolio with a broker to pay a brokerage commission (to
the extent applicable) in excess of that which another broker might have
charged for effecting the same transaction on account of the receipt of
research, market or statistical information. The term "research, market or
statistical information" includes advice as to the value of securities; the
advisability of investing in, purchasing or selling securities; the
availability of securities or purchasers or sellers of securities; and
furnishing analyses and reports concerning issuers, industries, securities,
economic factors and trends, portfolio strategy and the performance of
accounts.
Consistent with the policy stated above, the Rules of Fair Practice of the
National Association of Securities Dealers, Inc. and such other policies as the
Trustees of the Portfolio may determine, Bankers Trust may consider sales of
shares of any investment company that invests in the Portfolio as a factor in
the selection of broker-dealers to execute portfolio transactions. Bankers
Trust will make such allocations if commissions are comparable to those charged
by nonaffiliated, qualified broker-dealers for similar services.
Higher commissions may be paid to firms that provide research services to
the extent permitted by law. Bankers Trust may use this research information in
managing the Portfolio's assets, as well as the assets of other clients.
Except for implementing the policies stated above, there is no intention
to place portfolio transactions with particular brokers or dealers or groups
thereof. In effecting transactions in over-the-counter securities, orders are
placed with the principal market-makers for the security being traded unless,
after exercising care, it appears that more favorable results are available
otherwise.
Although certain research, market and statistical information from brokers
and dealers can be useful to the Portfolio and to Bankers Trust, it is the
opinion of the management of the Portfolio that such information is only
supplementary to Bankers Trust's own research effort, since the information
must still be analyzed, weighed and reviewed by Bankers Trust's staff. Such
information may be useful to Bankers Trust in providing services to clients
other than the Portfolio's, and not all such information is used by Bankers
Trust in connection with the Portfolio. Conversely, such information provided
to Bankers Trust by brokers and dealers through whom other clients of Bankers
Trust effect securities transactions may be useful to Bankers Trust in
providing services to the Portfolio.
In certain instances there may be securities which are suitable for the
Portfolio as well as for one or more of Bankers Trust's other clients.
Investment decisions for the Portfolio and for Bankers Trust's other clients
are made with a view to achieving their respective investment objectives. It
may develop that a particular security is bought or sold for only one client
even though it might be held by, or bought or sold for, other clients.
Likewise, a particular security may be bought for one or more clients when one
or more clients are selling that same security. Some simultaneous transactions
are inevitable when several clients receive investment advice from the same
investment adviser, particularly when the same security is suitable for the
investment objectives of more than one client. When two or more clients are
simultaneously engaged in the purchase or sale of the same security, the
securities are allocated among clients in a manner believed to be equitable to
each. It is recognized that in some cases this system could have a detrimental
effect on the price or volume of the security as far as the Portfolio is
concerned. However, it is believed that the ability of the Portfolio to
participate in volume transactions will produce better executions for the
Portfolio.
For the years ended December 31, 1997, 1996, and 1995, the Portfolio paid
brokerage commissions in the amount of $341,058, $289,791, and $172,924,
respectively.
FURTHER DESCRIPTION OF SHARES
The Company is authorized to issue shares in separate series or Funds. Ten such
Funds have been established, one of which is described in this SAI. Under the
Articles of Incorporation, the Board of Directors is authorized to create new
Funds in addition to those already existing without shareholder approval.
The 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 the Fund, are required to be
segregated on the books of account, and are to be charged with the expenses of
such Fund. Any general expenses of the Company not readily identifiable as
belonging to a particular Fund are allocated on the basis of the Funds'
relative net assets during the fiscal year or in such other manner as the Board
determines to be fair and equitable. Each share of each Fund represents an
equal proportionate interest in that Fund with every other share and is
entitled to such dividends and distributions out of the net income and capital
gains belonging to that Fund when declared by the Board of Directors.
Under the provisions of the Bylaws of the Company, no annual meeting of
shareholders is required. Thus, there will ordinarily be no shareholder meeting
unless required by the 1940 Act. Under certain circumstances, however,
shareholders may apply for shareholder information to obtain signatures to
request a special shareholder meeting. Moreover, pursuant to the Bylaws of the
Company, any Director
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may be removed by the affirmative vote of a majority of the outstanding Company
shares; and holders of 10% or more of the outstanding shares of the Company can
require Directors to call a meeting of shareholders for the purpose of voting
on the removal of one or more Directors. On any matter submitted to the
shareholders, the holder of each Fund share is entitled to one vote per share
(with proportionate voting for fractional shares) regardless of the relative
NAVs of the Funds' shares. However, on matters affecting an individual Fund, a
separate vote of the shareholders of that Fund is required. Shareholders of the
Fund are not entitled to vote on any matter which does not affect that Fund but
which requires a separate vote of another Fund. Shares do not have cumulative
voting rights, which means that holders of more than 50% of the shares voting
for the election of Directors can elect 100% of the Company's Board of
Directors, and the holders of less than 50% of the shares voting for the
election of Directors will not be able to elect any person as a Director.
Shareholders of a particular Fund might have the power to elect all of the
Directors of the Company because that Fund has a majority of the total
outstanding shares of the Company. When issued, each Fund's shares are fully
paid and nonassessable, have no pre-emptive or subscription rights, and are
fully transferable. There are no conversion rights.
TAX CONSIDERATIONS
The Fund intends to qualify as a regulated investment company under Subchapter
M of the Code. Accordingly, the Fund will not be liable for federal income
taxes on its taxable net investment income and net capital gains (capital gains
in excess of capital losses) that are distributed to shareholders, provided
that the Fund distributes at least 90% of its net investment income and net
short-term capital gain for the taxable year.
To qualify as a regulated investment company, the Fund must, among other
things, (1) derive in each taxable year at least 90% of its gross income from
dividends, interest, payments with respect to securities loans, gains from the
sale or other disposition of stock, securities or foreign currencies, or other
income derived with respect to its business of investing in such stock,
securities, or currencies (the 90% test); 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. The
Fund intends to make such distributions as are necessary to avoid imposition of
the excise tax.
Taxable distributions are generally included in a shareholder's gross
income for the taxable year in which they are received. Dividends declared in
October, November, or December and made payable to shareholders of record in
such a month will be deemed to have been received on December 31, if the Fund
pays the dividend during the following January. If a shareholder of the Fund
receives a distribution taxable as long-term capital gain with respect to
shares of the Fund and redeems or exchanges the shares before he or she has
held them for more than six months, any loss on the redemption or exchanges
that is less than or equal to the amount of the distribution will be treated as
long-term capital loss.
The Portfolio is not subject to federal income taxation. Instead, the Fund
and other investors investing in the Portfolio must take into account, in
computing their federal income tax liability, their share of the Portfolio's
income, gains, losses, deductions, credits and tax preference items, without
regard to whether they have received any cash distributions from the Portfolio.
Distributions received by the Fund from the Portfolio generally will not
result in the Fund's recognizing any gain or loss for federal income tax
purposes, except that: (1) gain will be recognized to the extent that any cash
distributed exceeds the Fund's basis in its interest in the Portfolio prior to
the distribution; (2) income or gain may be realized if the distribution is
made in liquidation of the Fund's entire interest in the Portfolio and includes
a disproportionate share of any unrealized receivables held by the Portfolio;
and (3) loss may be recognized if the distribution is made in liquidation of
the Fund's entire interest in the Portfolio and consists solely of cash and/or
unrealized receivables. The Fund's basis in its interest in the Portfolio
generally will equal the amount of cash and the basis of any property which the
Fund invests in the Portfolio, increased by the Fund's share of income from the
Portfolio, and decreased by the amount of any cash distributions and the basis
of any property distributed from the Portfolio.
Any gain or loss realized by a shareholder upon the sale or other
disposition of shares of the Fund, or upon receipt of a distribution in
complete liquidation of the Fund, generally will be a capital gain or loss
which will be long-term or short-term, generally depending upon the
shareholder's holding period for the shares. Any loss realized on a sale or
exchange will be disallowed to the extent the shares disposed of are replaced
(including shares acquired pursuant to a dividend reinvestment plan) within a
period of 61 days
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beginning 30 days before and ending 30 days after disposition of the shares. In
such a case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss. Any loss realized by a shareholder on a disposition of shares
held by the shareholder for six months or less will be treated as a long-term
capital loss to the extent of any distributions of net capital gains received
by the shareholder with respect to such shares.
DIRECTORS AND OFFICERS OF THE COMPANY
The Board of Directors of the Company consists of seven Directors. Set forth
below are the Directors and officers of the Company, their respective offices
and principal occupations during the last five years. Unless otherwise
indicated, the business address of each is 9800 Fredericksburg Road, San
Antonio, TX 78288.
Robert G. Davis 1, 2
Director and Chairman of the Board of Directors
Age: 51
President, Chief Executive Officer, Director, and Vice Chairman of the Board of
Directors of USAA Capital Corporation and several of its subsidiaries and
affiliates (1/97-present); 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. (9/96-1/97); Special Assistant to Chairman, United Services Automobile
Association (USAA) (6/96-12/96); President and Chief Executive Officer, Banc
One Credit Corporation (12/95-6/96); and President and Chief Executive Officer,
Banc One Columbus, (8/91-12/95). Mr. Davis serves as a Trustee and Chairman of
the Boards of Trustees of USAA Investment Trust and USAA State Tax-Free Trust
and as a Director and Chairman of the Boards of Directors of USAA Investment
Management Company (IMCO), USAA Tax Exempt Fund, Inc., USAA Shareholder Account
Services, USAA Federal Savings Bank, and USAA Real Estate Company.
Michael J.C. Roth 1, 2
Director, President, and Vice Chairman of the Board of Directors
Age: 56
Chief Executive Officer, IMCO (10/93-present); President, Director, and Vice
Chairman of the Board of Directors, IMCO (1/90-present). Mr. Roth serves as
President, Trustee, and Vice Chairman of the Boards of Trustees of USAA
Investment Trust and USAA State Tax-Free Trust; as President, Director, and
Vice Chairman of the Boards of Directors of USAA Tax Exempt Fund, Inc. and USAA
Shareholder Account Services; as Director of USAA Life Insurance Company and as
Trustee and Vice Chairman of USAA Life Investment Trust.
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 Trustee and Vice President of USAA Investment Trust and USAA
State Tax-Free Trust, Director and Vice President of USAA Tax Exempt Fund,
Inc., Director of IMCO, as Senior Vice President of USAA Shareholder Account
Services, and as Vice President of USAA Life Investment Trust.
Barbara B. Dreeben 3, 4, 5
200 Patterson #1008
San Antonio, TX 78209
Director
Age: 52
President, Postal Addvantage (7/92-present); Consultant, Nancy Harkins
Stationer (8/91-12/95). Mrs. Dreeben serves as a Trustee of USAA Investment
Trust and USAA State Tax-Free Trust and as a Director of USAA Tax Exempt Fund,
Inc.
Howard L. Freeman, Jr. 2, 3, 4, 5
2710 Hopeton
San Antonio, TX 78230
Director
Age: 62
Retired. Assistant General Manager for Finance, San Antonio City Public Service
Board (1976-1996). Mr. Freeman serves as a Trustee of USAA Investment Trust and
USAA State Tax-Free Trust and as a Director of USAA Tax Exempt Fund, Inc.
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Robert L. Mason, Ph.D. 3, 4, 5
12823 Queens Forest
San Antonio, TX 78230
Director
Age: 51
Manager, Statistical Analysis Section, Southwest Research Institute (8/75-
Present). Dr. Mason serves as a Trustee of USAA Investment Trust and USAA State
Tax-Free Trust and as a Director of USAA Tax Exempt Fund, Inc.
Richard A. Zucker 3, 4, 5
407 Arch Bluff
San Antonio, TX 78216
Director
Age: 54
Vice President, Beldon Roofing and Remodeling (1985-present). Mr. Zucker serves
as a Trustee of USAA Investment Trust and USAA State Tax-Free Trust and as a
Director of USAA Tax Exempt Fund, Inc.
Michael D. Wagner 1
Secretary
Age: 49
Vice President, Corporate Counsel, USAA (1982-present). Mr. Wagner has held
various positions in the legal department of USAA since 1970 and serves as Vice
President, Secretary, and Counsel, IMCO and USAA Shareholder Account Services,
Secretary, USAA Investment Trust, USAA State Tax-Free Trust, and USAA Tax
Exempt Fund, Inc. and as Vice President, Corporate Counsel for various other
USAA subsidiaries and affiliates.
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 USAA Investment Trust, USAA State Tax-Free Trust, and USAA Tax
Exempt Fund, Inc.
Mark S. Howard 1
Assistant Secretary
Age: 34
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 Secretary of USAA Investment Trust,
USAA State Tax-Free Trust, and USAA Tax Exempt Fund, Inc., and as Assistant
Vice President, Securities Counsel for various other USAA subsidiaries and
affiliates.
Sherron A. Kirk 1
Treasurer
Age: 53
Vice President, Controller, IMCO (10/92-present). Mrs. Kirk serves as Treasurer
of USAA Investment Trust, USAA State Tax-Free Trust, and USAA Tax Exempt Fund,
Inc.; and as Vice President, Controller of USAA Shareholder Account Services.
Caryl Swann 1
Assistant Treasurer
Age: 50
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 of USAA Investment Trust, USAA State Tax-Free Trust, and
USAA Tax Exempt Fund, Inc.
- ------------------------
1 Indicates those Directors and officers who are employees of the Manager or
affiliated companies and are considered "interested persons" under the 1940
Act.
2 Member of Executive Committee
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3 Member of Audit Committee
4 Member of Pricing and Investment Committee
5 Member of Corporate Governance Committee
Between the meetings of the Board of Directors and while the Board is not
in session, the Executive Committee of the Board of Directors has all the
powers and may exercise all the duties of the Board of Directors in the
management of the business of the Company which may be delegated to it by the
Board. The Pricing and Investment Committee of the Board of Directors acts upon
various investment-related issues and other matters which have been delegated
to it by the Board. The Audit Committee of the Board of Directors reviews the
financial statements and the auditor's reports and undertakes certain studies
and analyses as directed by the Board. The Corporate Governance Committee of
the Board of Directors maintains oversight of the organization, performance,
and effectiveness of the Board and independent Directors.
In addition to the previously listed Directors and/or officers of the
Company who also serve as Directors and/or officers of the Manager, the
following individuals are Directors and/or executive officers of the Manager:
Harry W. Miller, Senior Vice President, Investments (Equity), Carl W. Shirley,
Senior Vice President, Insurance Company Portfolios; and John J. Dallahan,
Senior Vice President, Investment Services. There are no family relationships
among the Directors, officers, and managerial level employees of the Company or
its Manager.
The following table sets forth information describing the compensation of
the current Directors of the Company for their services as Directors for the
fiscal year ended December 31, 1997.
NAME AGGREGATE TOTAL COMPENSATION
OF COMPENSATION FROM THE USAA
DIRECTOR FROM THE COMPANY FAMILY OF FUNDS (b)
-------- ---------------- -------------------
Barbara B. Dreeben $ 8,523 $ 34,500
Howard L. Freeman, Jr. 8,523 34,500
Robert L. Mason 8,523 34,500
Robert G. Davis None (a) None (a)
Michael J.C. Roth None (a) None (a)
John W. Saunders, Jr. None (a) None (a)
Richard A. Zucker 8,523 34,500
- --------------------
(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 December 31, 1997, 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
within 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 January 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 January 31, 1998, USAA and its affiliates owned 8,510,690 shares
(19%) of the USAA S&P 500 Index Fund.
The Company knows of no other persons who, as of January 31, 1998, held of
record or owned beneficially 5% or more of the voting stock of the Fund's
shares.
TRUSTEES AND OFFICERS OF THE PORTFOLIO
The Trustees and officers of the Portfolio and their principal occupations
during the past five years are set forth below. Their titles may have varied
during that period. Unless otherwise indicated, the address of each Trustee and
officer is Clearing Operations, P.O. Box 897, Pittsburgh, Pennsylvania,
15230-0897.
CHARLES P. BIGGAR (birthdate: October 13, 1930) - Trustee; Retired;
Director of Chase/NBW Bank Advisory Board; Director, Batemen, Eichler, Hill
Richards Inc.; formerly Vice President of International
15
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Business Machines and President of the National Services and the Field
Engineering Divisions of IBM. His address is 12 Hitching Post Lane, Chappaqua,
New York 10514.
S. LELAND DILL (birthdate: March 28, 1930) - Trustee; Retired; Director,
Coutts Group; and Coutts (U.S.A.) International; Coutts Trust Holdings, Ltd;
Director, Zweig Series Trust; formerly Partner of KPMG Peat Marwick; Director,
Vinters International Company, Inc.; General Partner of Pemco (an investment
company registered under the 1940 Act). His address is 5070 North Ocean Drive,
Singer Island, Florida 33404.
PHILIP SAUNDERS, JR. (birthdate: October 11, 1935) - Trustee; Principal,
Philip Saunders Associates (Consulting); former Director of Financial Industry
Consulting, Wolf & Company; President, John Hancock Home Mortgage Corporation;
and Senior Vice President of Treasury and Financial Services, John Hancock
Mutual Life Insurance Company, Inc. His address is 445 Glen Road, Weston,
Massachusetts 02193.
RONALD M. PETNUCH (birthdate: February 27, 1960) - President and
Treasurer; Senior Vice President; Federated Services Company; formerly,
Director of Proprietary Client Services, Federated Administrative Services
(FAS), and Associate Corporate Counsel, Federated Investors (FI).
CHARLES L. DAVIS, JR. (birthdate: March 23, 1960) - Vice President and
Assistant Treasurer; Vice President, FAS.
JAY S. NEUMAN (birthdate: April 22, 1950) - Secretary; Corporate Counsel,
FI.
No person who is an officer or director of Bankers Trust is an officer or
Trustee of the Portfolio. No director, officer or employee of Edgewood or any
of its affiliates will receive any compensation from the Portfolio for serving
as an officer or Trustee of the Portfolio and certain other investment
companies advised by Bankers Trust (the Fund Complex).
The following table reflects fees paid to the Trustees of the Portfolio
for the year ended December 31, 1997.
TRUSTEE COMPENSATION TABLE
AGGREGATE TOTAL COMPENSATION
NAME OF PERSON, COMPENSATION FROM FUND COMPLEX
POSITION FROM PORTFOLIO PAID TO TRUSTEES
-------- -------------- ----------------
Charles P. Biggar $641 $27,500
Trustee
S. Leland Dill $641 $27,500
Trustee
Philip Saunders, Jr. $641 $27,500
Trustee
Bankers Trust reimbursed the Portfolio for a portion of their Trustees
fees for the period above. See INVESTMENT ADVISER and ADMINISTRATOR below.
INVESTMENT ADVISER
As described in the Fund's Prospectus, USAA Investment Management Company is
the Manager and investment adviser, providing the services under the Management
Agreement. The Manager, organized in May 1970, has served as investment adviser
and underwriter for USAA Mutual Fund, Inc. from its inception.
In addition to the services it provides under the Management Agreement,
the Manager advises and manages the investments for USAA and its affiliated
companies as well as those of USAA Investment Trust, USAA Tax Exempt Fund,
Inc., USAA State Tax-Free Trust, and USAA Life Investment Trust. As of the date
of this SAI, total assets under management by the Manager were approximately
$38 billion, of which approximately $24 billion were in mutual fund
portfolios.
Under the Management Agreement, the Manager presently monitors the
services provided by Bankers Trust to the Portfolio. The Manager receives no
fee for providing these monitoring services. In the event the Fund's Board of
Directors determines it is in the best interests of the Fund's shareholders to
withdraw its investment in the Portfolio, the Manager would become responsible
for directly managing the assets of the Fund. In such event, the Fund would pay
the Manager an annual fee of .10% of the Fund's ANA, accrued daily and paid
monthly.
16
<PAGE>
The Management Agreement will remain in effect until April 30, 1999, for
the Fund and will continue in effect from year to year thereafter for the Fund
as long as it is approved at least annually by a vote of the outstanding voting
securities of the Fund (as defined by the 1940 Act) or by the Board of
Directors (on behalf of such Fund) including a majority of the Directors who
are not interested persons of the Manager or (otherwise than as Directors) of
the Company, at a meeting called for the purpose of voting on such approval.
The Management Agreement may be terminated at any time by either the Company or
the Manager on 60 days' written notice. It will automatically terminate in the
event of its assignment (as defined by the 1940 Act).
Under the terms of the Portfolio's investment advisory agreement with
Bankers Trust (the Advisory Agreement), Bankers Trust manages the Portfolio
subject to the supervision and direction of the Board of Trustees of the
Portfolio. Bankers Trust will: (1) act in strict conformity with the
Portfolio's Declaration of Trust, the 1940 Act and the Investment Advisers Act
of 1940, as the same may from time to time be amended; (2) manage the Portfolio
in accordance with the Portfolio's investment objective, restrictions and
policies; (3) make investment decisions for the Portfolio; and (4) place
purchase and sale orders for securities and other financial instruments on
behalf of the Portfolio.
Bankers Trust bears all expenses in connection with the performance of
services under the Advisory Agreement. The Fund and the Portfolio each bear
certain other expenses incurred in its operation, including: taxes, interest,
brokerage fees and commissions, if any; fees of Trustees of the Portfolio or
Directors of the Company who are not officers, directors or employees of
Bankers Trust, Edgewood or any of their affiliates, the Manager or any of their
affiliates; SEC fees and state Blue Sky qualification fees; charges of
custodians and transfer and dividend disbursing agents; certain insurance
premiums; outside auditing and legal expenses; costs of maintenance of
corporate existence; costs attributable to investor services, including,
without limitation, telephone and personnel expenses; costs of preparing and
printing prospectuses and statements of additional information for regulatory
purposes and for distribution to existing shareholders; costs of shareholders'
reports and meetings of shareholders, officers and Trustees of the Portfolio or
Directors of the Company; and any extraordinary expenses.
For the years ended December 31, 1997, 1996, and 1995, Bankers Trust
earned $2,430,147, $1,505,963, and $770,530, respectively, as compensation for
investment advisory services provided to the Portfolio. During the same
periods, Bankers Trust reimbursed $1,739,490, $870,024, and $418,814,
respectively, to the Portfolio to cover advisory and administrative expenses
exceeding expense limitations that were in effect for those periods.
The Fund's Prospectus contains disclosures as to the amount of Bankers
Trust's investment advisory and services fees, including waivers thereof.
Bankers Trust may not recoup any of its waived investment advisory and services
fees. Such waivers by Bankers Trust shall stay in effect for at least 12
months.
Bankers Trust may have deposit, loan and other commercial banking
relationships with the issuers of obligations which may be purchased on behalf
of the Portfolio, including outstanding loans to such issuers which could be
repaid in whole or in part with the proceeds of securities so purchased. Such
affiliates deal, trade and invest for their own accounts in such obligations
and are among the leading dealers of various types of such obligations. Bankers
Trust has informed the Portfolio that, in making its investment decisions, it
does not obtain or use material inside information in its possession or in the
possession of any of its affiliates. In making investment recommendations for
the Portfolio, Bankers Trust will not inquire or take into consideration
whether an issuer of securities proposed for purchase or sale by the Portfolio
is a customer of Bankers Trust, its parent or its subsidiaries or affiliates
and, in dealing with its customers, Bankers Trust, its parent, subsidiaries and
affiliates will not inquire or take into consideration whether securities of
such customers are held by any fund managed by Bankers Trust or such affiliate.
ADMINISTRATOR
Under the terms of the Fund's administration agreement with the Manager, the
Manager is obligated on a continuous basis to provide such administrative
services as the Board of Directors of the Company reasonably deems necessary
for the proper administration of the Fund. The Manager will generally assist in
all aspects of the Fund's operations; supply and maintain office facilities,
statistical and research data, data processing services, clerical, accounting,
bookkeeping and recordkeeping services (including without limitation the
maintenance of such books and records as are required under the 1940 Act and
the rules thereunder, except as maintained by other agents), internal auditing,
executive and administrative services, and stationery and office supplies;
prepare reports to shareholders; prepare and file tax returns; supply financial
information and supporting data for reports to and filings with the SEC and
various state Blue Sky authorities; supply supporting documentation for
meetings of the Board of Directors; provide monitoring reports and assistance
regarding compliance with its Articles of Incorporation, by-laws, investment
objectives and policies and with federal and state securities laws; arrange for
appropriate insurance coverage; calculate net asset values, net income and
realized capital gains or losses; and negotiate arrangements with, and
supervise and coordinate the activities of, agents and others to supply
services.
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<PAGE>
Pursuant to a sub-administration agreement between the Manager, Bankers
Trust and Investors Fiduciary Trust Company (IFTC) (the Sub-Administration
Agreement), IFTC performs such sub-administration duties for the Fund as from
time to time may be agreed upon by the Manager, Bankers Trust and IFTC. The
Sub-Administration Agreement provides that IFTC will receive such compensation
from Bankers Trust as from time to time may be agreed upon by the Manager,
Bankers Trust and IFTC.
Under the administration and services agreement between the Portfolio and
Bankers Trust, Bankers Trust is obligated on a continuous basis to provide such
administrative services as the Board of Trustees of the Portfolio reasonably
deems necessary for the proper administration of the Portfolio. Bankers Trust
will generally assist in all aspects of the Portfolio's operations; supply and
maintain office facilities (which may be in Bankers Trust's own offices),
statistical and research data, data processing services, clerical, accounting,
bookkeeping and recordkeeping services (including without limitation the
maintenance of such books and records as are required under the 1940 Act and
the rules thereunder, except as maintained by other agents), internal auditing,
executive and administrative services, and stationery and office supplies;
prepare reports to investors; prepare and file tax returns; supply financial
information and supporting data for reports to and filings with the SEC and
various state Blue Sky authorities; supply supporting documentation for
meetings of the Board of Trustees; provide monitoring reports and assistance
regarding compliance with its Declaration of Trust, by-laws, investment
objectives and policies and with federal and state securities laws; arrange for
appropriate insurance coverage; calculate net asset values, net income and
realized capital gains or losses; and negotiate arrangements with, and
supervise and coordinate the activities of, agents and others to supply
services.
Pursuant to a sub-administration agreement between Bankers Trust and
Federated Services Company (FSC), FSC performs such sub-administration duties
for the Portfolio as from time to time may be agreed upon by Bankers Trust and
FSC. The Sub-Administration Contract provides that FSC will receive such
compensation as from time to time may be agreed upon by FSC and Bankers Trust.
All such compensation will be paid by Bankers Trust.
For the years ended December 31, 1997, 1996, and 1995, Bankers Trust
earned $1,215,073, $752,981, and $385,265 respectively, in compensation for
administrative and other services provided to the Portfolio.
GENERAL INFORMATION
UNDERWRITER
The Company has an agreement with the Manager for exclusive underwriting and
distribution of the 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.
CUSTODIAN
The Custodian is responsible for, among other things, safeguarding and
controlling the Company's cash and securities, handling the receipt and
delivery of securities, and collecting interest on the Company's investment in
the Portfolio. Bankers Trust serves as custodian for both the Fund and the
Portfolio. As custodian, it holds both the Fund's and the Portfolio's assets.
Bankers Trust will comply with the self-custodian provisions of Rule 17f-2
under the 1940 Act.
COUNSEL
Goodwin, Procter & Hoar LLP, Exchange Place, Boston, MA 02109, will review
certain legal matters for the Company in connection with the shares offered by
the Prospectus. Willkie Farr & Gallagher, One Citicorp Center, 153 East 53rd
Street, New York, New York 10022-4669, serves as counsel to the Portfolio.
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P., 1100 Main Street, Suite 900, Kansas City, Missouri
64105, has been selected as the Independent Accountants for the Fund and the
Portfolio.
FINANCIAL STATEMENTS
The financial statements for the USAA S&P 500 Index Fund and the Equity 500
Index Portfolio, and the Independent Accountants' Reports thereon for the
fiscal year ended December 31, 1997, are included in the Annual Report to
Shareholders of that date and are incorporated herein by reference. The Manager
will deliver a copy of the Fund's Annual Report free of charge with each SAI
requested.
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<PAGE>
CALCULATION OF PERFORMANCE DATA
Information regarding the total return of the Fund is provided under
PERFORMANCE INFORMATION in its Prospectus. See VALUATION OF SECURITIES herein
for a discussion of the manner in which the Fund's price per share is
calculated.
TOTAL RETURN
The Fund may advertise performance in terms of average annual total return for
1-, 5-, and 10-year periods, or for such lesser periods as the Fund has been in
existence. Average annual total return is computed by finding the average
annual compounded rates of return over the periods that would equate the
initial amount invested to the ending redeemable value, according to the
following formula:
P(1 + T)n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made at
the beginning of the 1-, 5-, or 10-year periods at the end of the
year or period
The calculation assumes any charges are deducted from the initial $1,000
payment and assumes all dividends and distributions by such Fund are reinvested
at the price stated in the Prospectus on the reinvestment dates during the
period, and includes all recurring fees that are charged to all shareholder
accounts. For periods after December 31, 1997, performance does not reflect the
annual $10 account maintenance fee, which fee is waived for accounts of $10,000
or more. As of December 31, 1997, the Fund's average account size was
approximately $20,248.
The Fund's total return for the fiscal year ended December 31, 1997 was
33.03%.
APPENDIX A - COMPARISON OF FUND PERFORMANCE
Occasionally, we may make comparisons in advertising and sales literature
between the Fund contained in this SAI and other Funds in the USAA Family of
Funds. These comparisons may include such topics as risk and reward, investment
objectives, investment strategies, and performance.
Fund performance also may be compared to the performance of broad groups
of mutual funds with similar investment goals or unmanaged indices of
comparable securities. Evaluations of Fund performance made by independent
sources may also be used in advertisements concerning the Fund, including
reprints of, or selections from, editorials or articles about the Fund. The
Fund or its performance may also be compared to products and services not
constituting securities subject to registration under the 1933 Act such as, but
not limited to, certificates of deposit and money market accounts. Sources for
performance information and articles about the Fund may include 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.
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.
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<PAGE>
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 MONEYLETTER, a biweekly newsletter which covers financial news and from
time to time rates specific mutual funds.
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 "Donoghue's Taxable First Tier Fund Average."
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 INCOME FUND PERFORMANCE ANALYSIS, a
weekly and monthly publication of industry-wide mutual fund performance
averages by type of fund.
LIPPER ANALYTICAL SERVICES, INC.'S MUTUAL FUND PERFORMANCE ANALYSIS, a monthly
publication of industry-wide mutual fund averages by type of fund.
LOS ANGELES TIMES, a newspaper which may cover financial news.
LOUIS RUKEYSER'S WALL STREET, a publication for investors.
MEDICAL ECONOMICS, a monthly magazine providing information to the medical
profession.
MONEY, a monthly magazine that features the performance of both specific funds
and the mutual fund industry as a whole.
MORNINGSTAR 5 STAR INVESTOR, a monthly newsletter which covers financial news
and rates mutual funds by Morningstar, Inc. (a data service which tracks
open-end mutual funds).
MUTUAL FUND FORECASTER, a monthly newsletter that ranks mutual funds.
MUTUAL FUND INVESTING, a newsletter covering mutual funds.
MUTUAL FUND PERFORMANCE REPORT, a monthly publication of mutual fund
performance and rankings, produced by Morningstar, Inc.
MUTUAL FUNDS MAGAZINE, a monthly publication reporting on mutual fund
investing.
MUTUAL FUND SOURCE BOOK, an annual publication produced by Morningstar, Inc.
which describes and rates mutual funds.
MUTUAL FUND VALUES, a biweekly guidebook to mutual funds produced by
Morningstar, Inc.
NEWSWEEK, a national business weekly.
NEW YORK TIMES, a newspaper which may cover financial news.
NO LOAD FUND INVESTOR, a newsletter covering companies in the mutual fund
industry.
ORLANDO SENTINEL, a newspaper which may cover financial news.
PERSONAL INVESTOR, a monthly magazine which from time to time features mutual
fund companies and the mutual fund industry.
SAN ANTONIO BUSINESS JOURNAL, a weekly newspaper that periodically covers
mutual fund companies as well as financial news.
SAN ANTONIO EXPRESS-NEWS, a newspaper which may cover financial news.
SAN FRANCISCO CHRONICLE, a newspaper which may cover financial news.
SMART MONEY, a monthly magazine featuring news and articles on investing and
mutual funds.
USA TODAY, a newspaper which may cover financial news.
U.S. NEWS AND WORLD REPORT, a national business weekly that periodically
reports mutual fund performance data.
20
<PAGE>
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, Lipper Analytical Services, Inc.'s
tracking results may be used. The Fund will be compared to Lipper's appropriate
fund category according to fund objective and portfolio holdings. The S&P 500
Index Fund will be compared to funds in Lipper's S&P 500 Index Objective
category. Footnotes in advertisements and other marketing literature will
include the time period applicable for any ranking used.
Other sources for total return and other performance data which may be
used by the Fund or by those publications listed previously are Morningstar,
Inc., Schabaker Investment Management, and Investment Company Data, Inc. These
are services that collect and compile data on mutual fund companies.
APPENDIX B - DOLLAR-COST AVERAGING
Dollar-cost averaging is a systematic investing method which can be used by
investors as a disciplined technique for investing. A fixed amount of money is
invested in a security (such as a stock or mutual fund) on a regular basis over
a period of time, regardless of whether securities markets are moving up or
down.
This practice reduces average share costs to the investor who acquires
more shares in periods of lower securities prices and fewer shares in periods
of higher prices.
While dollar-cost averaging does not assure a profit or protect against
loss in declining markets, this investment strategy is an effective way to help
calm the effect of fluctuations in the financial markets. Systematic investing
involves continuous investment in securities regardless of fluctuating price
levels of such securities. Investors should consider their financial ability to
continue purchases through periods of low and high price levels.
As the following chart illustrates, dollar-cost averaging tends to keep
the overall cost of shares lower. This example is for illustration only, and
different trends would result in different average costs.
HOW DOLLAR-COST AVERAGING WORKS
$100 Invested Regularly for 5 Periods
Market Trend
--------------------------------------------------------------------
Down Up Mixed
------------------- --------------------- -----------------------
Share Shares Share Shares Share Shares
Investment Price Purchased Price Purchased Price Purchased
------------------- --------------------- -----------------------
$100 10 10 6 16.67 10 10
100 9 11.1 7 14.29 9 11.1
100 8 12.5 7 14.29 8 12.5
100 8 12.5 9 11.1 9 11.1
100 6 16.67 10 10 10 10
- ---- -- ----- -- ----- -- -----
$500 ***41 62.77 ***39 66.35 ***46 54.7
*Avg. Cost: $7.97 *Avg. Cost: $7.54 *Avg. Cost: $9.14
----- ----- -----
**Avg. Price: $8.20 **Avg. Price: $7.80 **Avg. Price: $9.20
----- ----- -----
* Average Cost is the total amount invested divided by 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.
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