USAA S&P 500
INDEX FUND
Prospectus
May 1, 1999
As with other mutual funds, the Securities and Exchange Commission has not
approved or disapproved of this Fund's shares or determined whether this
prospectus is accurate or complete. Anyone who tells you otherwise is
committing a crime.
TABLE OF CONTENTS
What is the Funds Investment Objective and Main Strategy? .................. 2
What is the S&P 500 Index? ................................................. 2
Main Risks of Investing in This Fund ....................................... 2
Is This Fund for You? ...................................................... 3
Could the Value of Your Investment in This Fund Fluctuate? ................. 3
Fees and Expenses .......................................................... 5
Fund Investments ........................................................... 6
Fund and Portfolio Management .............................................. 11
Using Mutual Funds in an Investment Program ................................ 13
How to Invest .............................................................. 14
Important Information About Purchases and Redemptions ...................... 17
Exchanges .................................................................. 18
Shareholder Information .................................................... 18
Financial Highlights ....................................................... 21
Appendix A ................................................................. 22
Appendix B ................................................................. 24
<PAGE>
USAA Investment Management Company manages this Fund. For easier reading, USAA
Investment Management Company will be referred to as "we" or "us" throughout
the Prospectus.
WHAT IS THE FUND'S INVESTMENT OBJECTIVE AND MAIN STRATEGY?
The Fund seeks to match, as closely as possible (before the deduction of
expenses), the performance of the S&P 500 Index 1, which emphasizes stocks of
large U.S. companies. 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 (Bankers Trust) with
an identical investment objective. To track the S&P 500 Index as closely as
possible, Bankers Trust attempts to keep the Portfolio fully invested in
stocks. The Portfolio invests in stocks of companies included in the S&P 500
Index that Bankers Trust believes are representative of the entire S&P 500
Index. The investment performance of the Fund will correspond directly to the
investment performance of the Portfolio.
The Funds Board of Directors may change the Funds investment objective without
shareholder approval.
In view of the risks inherent in all investments in securities, there is no
assurance that the Funds objective will be achieved. See FUND INVESTMENTS on
page 6 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 stocks publicly traded in the
United States. Most of these stocks are listed on the New York Stock Exchange.
See ADDITIONAL INFORMATION ON THE S&P 500 INDEX on page 10.
MAIN RISKS OF INVESTING IN THIS FUND
The primary risks of investing in this Fund are market risk and cash flow risk.
* MARKET RISK involves the possibility that the Funds investments in stocks
will decline in a down stock market, reducing the value of the company's
stock, regardless of the success or failure of the company's operations.
____________________
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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* CASH FLOW RISK involves the risk that substantial changes in purchases
and redemptions in the Portfolio adversely affect the ability to match the
performance of the S&P 500 Index.
As with other mutual funds, losing money is also a risk of investing in this
Fund.
As you consider an investment in this Fund, you should also take into account
your tolerance for the daily fluctuations of the financial markets and whether
you can afford to leave your money in the investment for long periods of time
to ride out down periods.
An investment in this Fund is not a deposit of USAA Federal Savings Bank,
Bankers Trust Company, or any other bank, and is not insured or guaranteed by
the Federal Deposit Insurance Corporation or any other government agency.
[CAUTION LIGHT GRAPHIC]
Look for this symbol throughout the Prospectus. We use it to mark more detailed
information about the main risks you will face as a Fund shareholder.
IS THIS FUND FOR YOU?
This Fund might be appropriate as part of your investment portfolio if . . .
* You are looking for a convenient and cost-efficient means of investing in
a portfolio that generally reflects the performance of the stock market.
* You are looking for some dividend income.
* You are willing to accept moderate risk.
This Fund MAY NOT be appropriate as part of your investment portfolio if . . .
* You need steady income and stability of principal.
* You are unwilling to take greater risk for long-term goals.
* You are unable or reluctant to invest for a period of five years or more.
* You need an investment that provides tax-free income.
The Fund by itself does not constitute a balanced investment program.
Diversifying your investments may improve your long-run investment return and
lower the volatility of your overall investment portfolio.
COULD THE VALUE OF YOUR INVESTMENT IN THIS FUND FLUCTUATE?
Yes, it could. Bankers Trust attempts to keep the Portfolio fully invested in
stocks that are representative of the S&P 500 Index as a whole. Therefore, the
value of your investment in this Fund will fluctuate with the changing market
value of the investments in the Portfolio.
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The bar chart shown below illustrates the Funds volatility and performance from
year to year over the life of the Fund.
TOTAL RETURN
All mutual funds must use the same formula to calculate total return.
[SIDE BAR]
TOTAL RETURN MEASURES THE PRICE CHANGE IN A SHARE ASSUMING THE REINVESTMENT OF
ALL DIVIDEND INCOME AND CAPITAL GAIN DISTRIBUTIONS.
[BAR CHART]
CALENDAR TOTAL
YEAR RETURN
1997 33.03%
1998 28.62%
*Fund began operations on May 1, 1996.
THE FUNDS TOTAL RETURN FOR THE THREE-MONTH PERIOD ENDED MARCH 31, 1999,
WAS 4.84%.
During the periods shown in the bar chart, the highest total return for a
quarter was 21.33% (quarter ending December 31, 1998) and the lowest total
return for a quarter was -9.03% (quarter ending September 30, 1998).
The table below shows how the Funds average annual returns for the one-year
period as well as the life of the Fund compared to those of the S&P 500 Index
itself. Unlike an index, the Fund has operating expenses. Therefore, while the
Fund attempts to track the S&P 500 Index as closely as possible, it will not
match exactly the performance of the Index. Keep in mind, the S&P 500 Index is
a model, not an actual portfolio. It is a passive measure of U.S. stock market
returns. It does not factor in the costs of buying, selling, and holding stocks
- -- costs which are reflected in the Funds results. Also, remember, historical
performance does not necessarily indicate what will happen in the future.
===============================================================================
Average Annual Total Returns Since Fund's
(for the periods ending Past Inception on
December 31, 1998) 1 Year May 1, 1996
===============================================================================
S&P 500 Index Fund* 28.62% 29.67%
- -------------------------------------------------------------------------------
S&P 500 Index 28.60% 29.00%
===============================================================================
*EXCLUDES $10 ACCOUNT MAINTENANCE FEE, WHICH IS WAIVED FOR ACCOUNTS OF $10,000
OR MORE.
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[TELEPHONE GRAPHIC]
TouchLine sm
1-800-531-8777
PRESS
1
THEN
1
THEN
3 4 #
Please consider performance information in light of the Fund's investment
objective and policies and market conditions during the reported time periods.
The value of your shares may go up or down. For the most current price and
return information for this Fund, you may call USAA TouchLine sm 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 the Fund Code.
NEWSPAPER SYMBOL
S&PIdx
TICKER SYMBOL
USSPX
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."
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 or sales loads charged to your account when you buy or sell
Fund shares. However, if you sell shares and request your money by wire
transfer, there is a $10 fee. (Your bank may also charge a fee for receiving
wires.)
Annual Account Maintenance Fee
(for accounts under $10,000) $10
Annual Fund Operating Expenses -- Fees You Pay Indirectly
Fund expenses come out of the Funds assets and are reflected in the Funds share
price and dividends. "Other Expenses" include expenses such as custodian,
administration, and legal fees. The figures below are based upon the actual
expenses of the Fund and Portfolio combined during the past fiscal year ended
December 31, 1998, as adjusted to reflect changes in the underlying contracts
for services, and are calculated as a percentage of average net assets (ANA).
[SIDE BAR]
12B-1 FEES -- SOME MUTUAL FUNDS CHARGE THESE FEES TO PAY FOR ADVERTISING AND
OTHER COSTS OF SELLING FUND SHARES.
Investment Advisory Fees .08%
Distribution (12b-1) Fees None
Other Expenses .10%
----
Total Annual Operating Expenses .18%
====
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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 Funds ANA.
USAA Shareholder Account Services, the Funds transfer agent, assesses a $10
annual account maintenance fee to allocate part of the fixed costs of
maintaining shareholder accounts. We deduct $2.50 per quarter from your
dividends to pay the annual fee. We will waive this fee if you maintain an
account balance of $10,000 or more. See SHAREHOLDER INFORMATION on page 18 for
further information.
Example of Effect of Fund's Operating Expenses
This example provides you a comparison of investing in this Fund with the cost
of investing in other mutual funds. Although your actual costs may be higher or
lower, you would pay the following expenses on a $10,000 investment, assuming
(1)5% annual return, (2)the Fund's operating expenses remain the same, and (3)
you redeem all of your shares at the end of the periods shown. The example
excludes the $10 account maintenance fee.
1 year $18
3 years 58
5 years 101
10 years 230
FUND INVESTMENTS
Principal Investment Strategies and Risks
[SIDE BAR]
HOW A MASTER-
FEEDER STRUCTURE
OPERATES -
YOU BUY SHARES
IN THE FUND
THE FUND
INVESTS IN
THE PORTFOLIO
THE PORTFOLIO
INVESTS IN
S&P 500
STOCKS AND
OTHER SECURITIES
Q What is the Funds principal investment strategy?
A Unlike other mutual funds that 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
Portfolios 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.
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<PAGE>
Q How do funds in a master-feeder structure operate?
A The Portfolio is considered a master fund. The Fund is considered a
feeder fund and invests all of its Assets in the Portfolio. The
Portfolio may also accept investments from 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 bear the
Portfolios expenses in proportion to their assets. However, each feeder
fund can set its own transaction minimums, fund-specific expenses, and
other conditions. Therefore, investors in different feeder funds may
experience different returns.
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
Fund's shareholders 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 would then consider whether to
invest in a different master portfolio, or take other action.
[CAUTION LIGHT GRAPHIC]
MASTER-FEEDER STRUCTURE RISK. Actions of larger feeder funds may materially
affect smaller feeder funds investing in the Portfolio. For example, if a large
feeder fund withdraws from the Portfolio, the remaining funds may experience
proportionately higher operating expenses resulting in 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.
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 match, as closely as
possible, the performance of the S&P 500 Index. This is done by holding
either all, or a representative
7
<PAGE>
sample, of the securities in the index. An index is a group of
securities whose overall performance is used as a standard to measure
investment performance.
Q As an investor, what are the benefits of using a "passive" or "indexing"
approach?
A Indexing appeals to many investors for the following reasons:
* provides simplicity because it is a straightforward market-matching
strategy;
* generally provides diversification by investing in a wide variety of
companies and industries;
* tends to have lower costs because index funds do not have many of the
expenses of actively managed funds such as research; and
* usually has relatively low trading activity; therefore, brokerage
commissions tend to be lower.
Q What is the Portfolio's investment policy?
A Under normal conditions, the Portfolio will invest at least 80% of its
assets in stocks of companies included in the S&P 500 Index, except
Bankers Trust Corporation. In seeking to mirror the performance of the
S&P 500 Index, Bankers Trust, the Portfolio's investment adviser,
attempts to allocate the Portfolio's investments among stocks in
approximately the same weightings as the S&P 500 Index, beginning with
the stocks that make up the larger portion of the Index's value. Bankers
Trust may exclude or may remove any S&P stock from the Portfolio, if
Bankers Trust believes that the stock is illiquid or has impaired
financial conditions due to extraordinary events. Over the long term,
Bankers Trust seeks a correlation between the performance of the
Portfolio, before expenses, and that of the S&P 500 Index of 0.98 or
better. A figure of 1.00 would indicate perfect correlation, meaning
that the Portfolio always moves up in value when the Index rises and
down in value when the Index declines. In the unlikely event that the
targeted correlation is not achieved, the Portfolios Board of Trustees
will consider alternative structures.
[CAUTION LIGHT GRAPHIC]
MARKET RISK. Because this Fund invests in stocks, it is subject to stock market
risk. Stock prices in general may decline over short or even extended periods,
regardless of the success or failure of a company's operations. Stock markets
tend to run in cycles, with periods when stock prices
8
<PAGE>
generally go up, known as "bull" markets, and periods when stock prices
generally go down, referred to as "bear" markets. Stocks tend to go up and down
more than bonds.
Q How will Bankers Trust invest to mirror the performance of the S&P 500
Index?
A The Portfolio cannot as a practical matter hold every one of the 500
stocks in the S&P 500 Index. Because it would be very expensive to buy
and sell all of the stocks in the S&P 500 Index, Bankers Trust uses a
"sampling" technique.
* First -- the Portfolio buys the stocks that make up the larger
portions of the Index's value in roughly the same proportion as the
Index.
* Second -- smaller stocks are analyzed and selected. In choosing
smaller stocks, the Portfolio tries to match the industry and risk
characteristics of all of the small companies in the S&P 500 Index
without buying all of those stocks.
* Third -- the Portfolio may invest in S&P 500 Index futures contracts
and similar instruments.
This approach allows the Portfolio to maintain sufficient cash to meet
redemption requests while minimizing costs.
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 stocks included in the S&P 500
Index. However, the Portfolio may hold up to 20% of its assets in
short-term debt securities, money market instruments and stock index
futures and options.
For a description of the futures and options the Portfolio may use and
some of their associated risks, see APPENDIX A on page 22.
[CAUTION LIGHT GRAPHIC]
CASH FLOW RISK. The ability of the Fund and the Portfolio to meet their
investment objectives depends to some extent on the cash flow in and out of the
Fund and other investors in the Portfolio. When a shareholder buys or sells the
Fund's shares, the Portfolio generally has to buy or sell stocks in its
portfolio. Changes in the Fund's cash flow affect how closely the Portfolio
mirrors the S&P 500 Index.
9
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INVESTMENTS IN OPTIONS AND FUTURES. The Portfolio may invest, to a limited
extent, in stock index futures or options. The Portfolio will not use these
derivative instruments for speculative purposes or as leveraged investments
that magnify the gains or losses of an investment. Bankers Trust invests in
stock index futures and options to keep cash on hand to meet shareholder
redemptions or other needs while simulating full investments in stocks. These
investments tend to reduce the Portfolios transaction cost or add value when
these instruments are favorably priced. Risks associated with investments in
futures and options include the risk that the futures or options contract will
not fully offset the underlying position and investments in futures and options
used for risk management may not have the intended effects and may result in
losses or missed opportunities.
[SIDE BAR]
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS ARE USED AS A LOW COST
METHOD OF GAINING EXPOSURE TO A PARTICULAR SECURITIES MARKET WITHOUT INVESTING
DIRECTLY IN THOSE SECURITIES
If the Portfolio invests in futures contracts and options on futures contracts
for non-hedging purposes, the margin and premiums required to make those
investments will not exceed 5% of the Fund's net asset value after taking into
account unrealized profits and losses on the contracts. Futures contracts and
options on futures contracts used for non-hedging purposes involve greater
risks than stock investments.
Additional Information on the S&P 500 Index
[SIDE BAR]
MARKET
CAPITALIZATION
EQUALS
# OF SHARES
OUTSTANDING
MULTIPLIED BY
THE STOCK'S
CURRENT PRICE
Stocks in the S&P 500 Index are weighted according to their market
capitalization. Bankers Trust believes that the performance of the S&P 500
Index is representative of the performance of publicly traded common stocks in
general. S&P determines the composition of the S&P 500 Index 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. The
composition may change 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 Index to track general
stock market performance. S&P does not guarantee the accuracy and/or the
completeness of the S&P 500 Index or any data included therein.
S&P makes no warranty, express or implied, as to the results to be obtained by
the Fund or the Portfolio, owners of the Fund or the Portfolio, or any other
person or entity from the use of the S&P 500 Index 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 Index or any data included therein.
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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 $40 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 an event, the
Fund would pay us an annual fee of one-tenth of one percent (.10%) 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 Company, with headquarters at 130
Liberty Street, New York, New York 10006, as investment adviser.
Bankers Trust is a worldwide merchant bank dedicated to servicing the needs of
corporations, governments, financial institutions, and private clients.
Investment management is a core business of Bankers Trust with assets under its
global management totaling $338 billion as of December 31, 1998. Of that total,
approximately $156 billion are in U.S. assets.
Bankers Trust is a wholly owned subsidiary of Bankers Trust Corporation.
Bankers Trust Corporation has entered into an Agreement and Plan of
11
<PAGE>
Merger with Deutsche Bank AG, dated as of November 30, 1998, under which
Bankers Trust Corporation would merge with and into a subsidiary of Deutsche
Bank AG. Deutsche Bank AG is a major global banking institution that is engaged
in a wide range of financial services, including investment management, mutual
funds, retail and commercial banking, investment banking, and insurance. The
transaction is contingent upon various regulatory approvals, and continuation
of the Portfolio's advisory relationship with Bankers Trust thereafter is
subject to the approval of the Portfolio's Board of Trustees and the
Portfolio's shareholders. If the transaction is approved and completed,
Deutsche Bank AG, as Bankers Trusts new parent company, will control its
operations as Investment Adviser. Bankers Trust believes that, under this new
arrangement, the services provided to the Fund will be maintained at their
current level.
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.
Portfolio Turnover
The annual portfolio turnover rate measures the frequency that the Portfolio
sells and replaces the value of its securities for a given period. We do not
expect the Fund to have a high portfolio turnover rate.
Portfolio Manager
Frank Salerno, Managing Director of Bankers Trust, is responsible for the
day-to-day management of the Portfolio and has managed the Portfolio since its
inception in 1992. Mr. Salerno has 16 years investment experience and has
worked for Bankers Trust for 18 years. He holds an MBA from New York University
and a BS from Syracuse University.
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
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<PAGE>
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.
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.
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III. USAA's Family of Funds
We offer you another alternative with our asset strategy funds listed in
APPENDIX B under asset allocation on page 24. These unique mutual funds provide
a professionally managed, diversified investment portfolio within a mutual
fund. Designed for the individual who prefers to delegate the asset allocation
process to an investment manager, their structure achieves diversification
across a number of investment categories.
Whether you prefer to create your own mix of mutual funds or use a USAA Asset
Strategy Fund, the USAA Family of Funds provides a broad range of choices
covering just about any investors investment objectives. Our member
service representatives stand ready to assist you with your choices and to help
you craft a portfolio to meet your needs. Refer to APPENDIX B on page 24 for a
complete list of the USAA Family of No-Load Mutual Funds.
HOW TO INVEST
Purchase of Shares
OPENING AN ACCOUNT
You may open an account and make an investment as described below by mail, in
person, bank wire, electronic funds transfer (EFT), or phone. A complete,
signed application is required to open your initial account. However, after you
open your initial account with us, you will not need to fill out another
application to open another Fund unless the registration is different.
TAX ID NUMBER
Each shareholder named on the account must provide a social security number or
tax identification number to avoid possible withholding requirements.
EFFECTIVE DATE
When you make a purchase, your purchase price will be the net asset value (NAV)
per share next determined after we receive your request in proper form. The
Fund's NAV is determined at the close of the regular trading session (generally
4:00 p.m. Eastern Time) of the New York Stock Exchange (NYSE) each day the NYSE
is open. If we receive your request and payment prior to that time, your
purchase price will be the NAV per share determined for that day. If we receive
your request or payment after the NAV per share is calculated, the purchase
will be effective on the next business day.
If you plan to purchase Fund shares with a foreign check, we suggest you
convert your foreign check to U.S. dollars prior to investment in the Fund.
This will avoid a potential delay in the effective date of your purchase of up
to four to six weeks. Furthermore, a bank charge may be assessed in the
clearing process, which will be deducted from the amount of the purchase.
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MINIMUM INVESTMENTS
INITIAL PURCHASE
[MONEY GRAPHIC]
* $3,000 [$2,000 for IRAs]
ADDITIONAL PURCHASES
* $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.
HOW TO PURCHASE
MAIL
[ENVELOPE GRAPHIC]
* To open an account, send your application and check to:
USAA Investment Management Company
9800 Fredericksburg Road
San Antonio, TX 78288
* To add to your account, send your check and the "Invest by Mail" stub that
accompanies your Fund's transaction confirmation to the Transfer Agent:
USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, TX 78288
IN PERSON
[HANDSHAKE GRAPHIC]
* To open an account, bring your application and check to:
USAA Investment Management Company
USAA Federal Savings Bank
10750 Robert F. McDermott Freeway
San Antonio, TX 78288
BANK WIRE
[WIREGRAPHIC]
* To open or add to your account, instruct your bank (which may charge a fee
for the service) to wire the specified amount to the Fund as follows:
State Street Bank and Trust Company
Boston, MA 02101
ABA#011000028
Attn: USAA S&P 500 Index Fund
USAA Account Number: 69384998
Shareholder(s) Name(s)____________________________________________
Shareholder(s) Mutual Fund Account Number_________________________
15
<PAGE>
ELECTRONIC FUNDS TRANSFER
[CALENDAR GRAPHIC]
* Additional purchases on a regular basis can be deducted from a bank
account, paycheck, income-producing investment, or USAA money market fund
account. Sign up for these services when opening an account or call
1-800-531-8448 to add these services.
PHONE 1-800-531-8448
[TELEPHONE GRAPHIC]
* If you have an existing USAA mutual fund account and would like to open a
new account or exchange to another USAA Fund, call for instructions. To
open an account by phone, the new account must have the same registration
as your existing account.
Redemption of Shares
You may redeem Fund shares by any of the methods described below on any day the
NAV per share is calculated. Redemptions are effective on the day instructions
are received in a manner as described below. However, if instructions are
received after the NAV per share calculation (generally 4:00 p.m. Eastern
Time), redemption will be effective on the next business day.
We will send you your money within seven days after the effective date of
redemption. Payment for redemption of shares purchased by EFT or check is sent
after the EFT or check has cleared, which could take up to 15 days from the
purchase date. If you are considering redeeming shares soon after purchase, you
should purchase by bank wire or certified check to avoid delay. For federal
income tax purposes, a redemption is a taxable event; and as such, you may
realize a capital gain or loss. Such capital gains or losses are based on the
difference between your cost basis in the shares and the price received upon
redemption.
In addition, the Company may elect to suspend the redemption of shares or
postpone the date of payment in limited circumstances.
HOW TO REDEEM
WRITTEN, FAX, TELEGRAM, OR TELEPHONE
[FAX MACHINE GRAPHIC]
* Send your written instructions to:
USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, TX 78288
* Send a signed fax to 1-800-292-8177, or send a telegram to USAA
Shareholder Account Services.
* Call toll free 1-800-531-8448, in San Antonio, 456-7202.
Telephone redemption privileges are automatically established when you complete
your application. The Fund will employ reasonable procedures to
16
<PAGE>
confirm that instructions communicated by telephone are genuine; and if it does
not, it may be liable for any losses due to unauthorized or fraudulent
instructions. Before any discussion regarding your account, the following
information is obtained: (1) USAA number and/or account number, (2) the name(s)
on the account registration, and (3) social security/tax identification number
or date of birth of the registered account owner(s) for the account
registration. Additionally, all telephone communications with you are recorded
and confirmations of account transactions are sent to the address of record. If
you were issued stock certificates for your shares, redemption by telephone,
fax, or telegram is not available.
IMPORTANT INFORMATION ABOUT PURCHASES AND REDEMPTIONS
[INVESTOR'S GUIDE GRAPHIC]
Investor's Guide to USAA Mutual Fund Services
Upon your initial investment with us, you will receive the INVESTOR'S GUIDE to
help you get the most out of your USAA mutual fund account and to assist 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:
* reject purchase or exchange orders when in the best interest of the
Company;
* limit or discontinue the offering of shares of any portfolio of the
Company without notice to the shareholders;
* impose a redemption charge of up to 1% of the net asset value of shares
redeemed if circumstances indicate a charge is necessary for the
protection of remaining investors (for example, if excessive market-timing
share activity unfairly burdens long-term investors); however, this 1%
charge will not be imposed upon shareholders unless authorized by the
Board of Directors and the required notice has been given to shareholders;
* require a signature guarantee for transactions or changes in account
information in those instances where the appropriateness of a signature
authorization is in question. The Statement of Additional Information
contains information on acceptable guarantors;
* redeem an account with less than 10 shares, with certain limitations.
17
<PAGE>
EXCHANGES
Exchange Privilege
The exchange privilege is automatic when you complete your application. You may
exchange shares among Funds in the USAA Family of Funds, provided you do not
hold these shares in stock certificate form and the shares to be acquired are
offered in your state of residence. After we receive the exchange orders, the
Fund's transfer agent will simultaneously process exchange redemptions and
purchases at the share prices next determined. The investment minimums
applicable to share purchases also apply to exchanges. For federal income tax
purposes, an exchange between Funds is a taxable event; and as such, you may
realize a capital gain or loss. Such capital gains or losses are based on the
difference between your cost basis in the shares and the price received upon
exchange.
The Fund has undertaken certain procedures regarding telephone transactions as
described on page 16.
Exchange Limitations, Excessive Trading
To minimize Fund costs and to protect the Funds and their shareholders from
unfair expense burdens, the Funds restrict excessive exchanges. The limit on
exchanges out of any Fund in the USAA Family of Funds for each account is six
per calendar year (except there is no limitation on exchanges out of the Tax
Exempt Short-Term Fund, Short-Term Bond Fund, or any of the money market funds
in the USAA Family of Funds).
SHAREHOLDER INFORMATION
Share Price Calculation
NAV PER SHARE
EQUALS
TOTAL ASSETS
MINUS
LIABILITIES
DIVIDED BY
# OF SHARES
OUTSTANDING
The price at which you purchase and redeem Fund shares is equal to the net
asset value (NAV) per share determined on the effective date of the purchase or
redemption. You may buy and sell Fund shares at the NAV per share without a
sales charge. The 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
Portfolio's securities and other assets are valued primarily on the basis of
market quotations or, if quotations are not readily available, by a method that
the Portfolio's 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 additional
payments to shareholders, if necessary, to avoid the imposition of any federal
income or excise tax.
18
<PAGE>
We will automatically reinvest all income dividends and capital gain
distributions in the Fund unless you instruct us differently. 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. You should consider
carefully the effects of purchasing shares of the Fund shortly before any
dividend or distribution. Although in effect this would be a return of capital,
some or all of 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. Any account maintenance
fee deducted from your account will be treated as taxable income even though
not received by you. 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 the technical provisions adopted by the IRS
Restructuring and Reform Act of 1998 may affect the status and treatment of
certain distributions shareholders receive from the Fund. Because each
investor's tax circumstances are unique and because the tax laws are subject to
change, we recommend that you consult your tax advisor about your investment.
SHAREHOLDER -- Dividends from taxable net investment income and distributions
of net short-term capital gains are taxable to you as ordinary income, whether
received in cash or reinvested in additional shares. A portion of these
dividends may qualify for the 70% dividends-received deduction available to
corporations.
19
<PAGE>
Regardless of the length of time you have held the Fund shares, distributions
of net long-term capital gains are taxable as long-term capital gains whether
received in cash or reinvested in additional shares.
WITHHOLDING -- Federal law requires the Fund to withhold and remit to the U.S.
Treasury a portion of the income dividends and capital gain distributions and
proceeds of redemptions paid to any non-corporate shareholder who:
* fails to furnish the Fund with a correct tax identification number,
* underreports dividend or interest income, or
* fails to certify that he or she is not subject to withholding.
To avoid this withholding requirement, you must certify on your application, or
on a separate Form W-9 supplied by the Fund's transfer agent, that your tax
identification number is correct and you are not currently subject to backup
withholding.
REPORTING -- The Fund will report information to you annually concerning the
tax status of dividends and distributions for federal income tax purposes.
Year 2000
Like other organizations around the world, the Fund could be adversely affected
if the computer systems used by the Fund, its service providers, or companies
in which the Fund invests do not properly process and calculate information
that relates to dates beginning on January 1, 2000, and beyond. This situation
may occur because for many years computer programmers used only two digits to
describe years, such as 98 for 1998. A program written in this manner may not
work when it encounters the year 00. To confront this situation, USAA companies
have spent much effort and money; and we expect to have our systems ready for
the Year 2000 by mid-1999. In addition, we are actively assessing the Year 2000
readiness of our service providers, partners, and companies in whose securities
we invest. It is not possible for us to say that you will experience no effect
from this situation, but we can say that we are making a large effort to avoid
any ill effects upon our shareholders.
We do believe you are entitled to know with certainty that we will stand behind
your share balance as of the close of business in 1999. When the market reopens
in 2000, should any computer problem cause a change in the number of shares in
your account, we will return your account to its proper share balance
20
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the Fund's
financial performance since inception. Certain information reflects financial
results for a single Fund share. The total returns in the table represent the
rate that an investor would have earned (or lost) on an investment in the Fund
(assuming reinvestment of all dividends and distributions). This information
has been audited by PricewaterhouseCoopers LLP, whose report, along with the
Fund's financial statements, is included in the Annual Report, which is
available upon request.
Eight Months
Ended
Year Ended December 31, December 31,
-----------------------------------------
1998 1997 1996*
-----------------------------------------
PER SHARE OPERATING PERFORMANCE
Net Asset Value at Beginning of Period $15.16 $11.57 $10.00
----------------------------------------
Income from Investment Operations:
Net Investment Income .21 .21 .12
Net Realized and Unrealized Gain on
Investment and Futures Transactions 4.11 3.59 1.57
----------------------------------------
Total from Investment Operations 4.32 3.80 1.69
Distributions from Net Investment Income (.21) (.21) (.12)
----------------------------------------
Net Asset Value at End of Period $19.27 $15.16 $11.57
========================================
Total Return (%)** 28.62 33.03 16.90
SUPPLEMENTAL DATA AND RATIOS
Net Assets at End of Period (000) $1,855,855 $630,619 $179,073
Ratios to Average Net Assets:
Net Investment Income (%) 1.40 1.64 2.09a
Expenses, including Expenses of the
Equity 500 Index Portfolio (%) .18 .18 .18a
Decrease Reflected in Above Expense
Ratio Due to Absorption of Expenses
by Bankers Trust and the Manager (%) .02 .07 .15a
- --------------
* Fund commenced operations May 1, 1996.
** Assumes reinvestment of all dividend income distributions during the
period; does not reflect $10 annual account maintenance fee.
a Annualized. The ratio is not necessarily indicative of 12 months of
operations.
21
<PAGE>
APPENDIX A
THE FOLLOWING ARE DESCRIPTIONS OF CERTAIN TYPES OF SECURITIES IN WHICH THE
PORTFOLIO'S ASSETS MAY BE INVESTED:
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 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 that 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.
22
<PAGE>
In general, each transaction in Futures Contracts involves the establishment of
a position that 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 that
approximately offsets the decline in value of the portion of the Portfolios
investments which 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 invest up to 15% of the market value of the Portfolio's net
assets in securities that are illiquid. Illiquid securities are those
securities which cannot be disposed of in the ordinary course of business,
seven days or less, at approximately the value at which the Portfolio has
valued the securities.
23
<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 NOT INSURED OR GUARANTEED BY THE
FDIC OR ANY OTHER GOVERNMENT AGENCY. ALTHOUGH THE FUND SEEKS TO PRESERVE THE
VALUE OF YOUR INVESTMENT AT $1 PER SHARE, IT IS POSSIBLE TO LOSE MONEY BY
INVESTING IN THE FUND.
24
<PAGE>
If you would like more information about the Fund, you may call 1-800-531-8181
to request a free copy of the Fund's Statement of Additional Information (SAI),
Annual or Semiannual Report, or to ask other questions about the Fund. The SAI
has been filed with the Securities and Exchange Commission (SEC) and is legally
a part of the Prospectus. In the Fund's Annual Report, you will find a
discussion of the market conditions and investment strategies that
significantly affected the Fund's performance during the last fiscal year.
To view these documents, along with other related documents, you can visit the
SEC's Internet web site (http://www.sec.gov) or the Commission's Public
Reference Room in Washington, D.C. Information on the operation of the public
reference room can be obtained by calling 1-800-SEC-0330. Additionally, copies
of this information can be obtained, for a duplicating fee, by writing the
Public Reference Section of the Commission, Washington, D.C. 20549-6009.
INVESTMENT ADVISER, UNDERWRITER AND DISTRIBUTOR
USAA Investment Management Company
9800 Fredericksburg Road
San Antonio, Texas 78288
-----------------------------------------------
TRANSFER AGENT CUSTODIAN
USAA Shareholder Account Services State Street Bank and Trust Company
9800 Fredericksburg Road P.O. Box 1713
San Antonio, Texas 78288 Boston, Massachusetts 02105
-----------------------------------------------
TELEPHONE ASSISTANCE HOURS
Call toll free - Central Time
Monday - Friday 7:30 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 sm
(from Touchtone phones only)
For account balance, last transaction or fund prices
1-800-531-8777, (in San Antonio) 498-8777
Investment Company Act File No. 811-2429
25
<PAGE>
USAA USAA STATEMENT OF
EAGLE MUTUAL ADDITIONAL INFORMATION
LOGO FUND, INC.
May 1, 1999
- -------------------------------------------------------------------------------
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 seeks to match, as closely as possible
(before the deduction of expenses), the performance of the S&P 500 Index, which
emphasizes stocks of large U.S. companies. 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, 1999, 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.
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, 1998, are included in the accompanying Annual
Report to Shareholders of that date and are incorporated herein by reference.
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
9 Investment Restrictions
12 Portfolio Transactions and Brokerage Commissions
13 Description of Shares
14 Tax Considerations
15 Directors and Officers of the Company
18 Trustees and Officers of the Portfolio
19 Investment Adviser
21 Administrator
21 General Information
22 Calculation of Performance Data
22 Appendix A - Comparison of Fund Performance
25 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
that 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 that 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.
2
<PAGE>
The Portfolio reserves the right, if conditions exist that 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 a non-governmental employer, an income-producing
investment, or an account with a participating financial institution.
DIRECT DEPOSIT PROGRAM - The monthly transfer of certain federal benefits to
directly purchase shares of a USAA mutual fund. Eligible federal benefits
include: Social Security, Supplemental Security Income, Veterans Compensation
and Pension, Civil Service Retirement Annuity, and Civil Service Survivor
Annuity.
GOVERNMENT ALLOTMENT - The transfer of military pay by the U.S. Government
Finance Center for the purchase of USAA mutual fund shares.
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AUTOMATIC PURCHASE PLAN - The periodic transfer of funds from a USAA money
market fund to purchase shares in another non-money market USAA mutual fund.
There is a minimum investment required for this program of $5,000 in the money
market fund, with a monthly transaction minimum of $50.
BUY/SELL SERVICE - The intermittent purchase or redemption of shares through
electronic funds transfer to or from a checking or savings account. You may
initiate a "buy" or "sell" whenever you choose.
DIRECTED DIVIDENDS - If you own shares in more than one of the Funds in the
USAA Family of Funds, you may direct that dividends and/or capital gain
distributions earned in one fund be used to purchase shares automatically in
another fund.
Participation in these automatic purchase plans will permit you to engage
in dollar-cost averaging. For additional information concerning the benefits of
dollar-cost averaging, see APPENDIX B.
SYSTEMATIC WITHDRAWAL PLAN
If you own shares having a NAV of $5,000 or more in a single investment account
(accounts in different Funds cannot be aggregated for this purpose), you may
request that enough shares to produce a fixed amount of money be liquidated
from the account monthly or quarterly. The amount of each withdrawal must be at
least $50. Using the electronic funds transfer service, you may choose to have
withdrawals electronically deposited at your bank or other financial
institution. You may also elect to have checks mailed to a designated address.
This plan may be initiated by depositing shares worth at least $5,000 with
the Transfer Agent and by completing a Systematic Withdrawal Plan application,
which may be requested from the Manager. You may terminate participation in the
plan at any time. You are not charged for withdrawals under the Systematic
Withdrawal Plan. The Company will not bear any expenses in administering the
plan beyond the regular transfer agent and custodian costs of issuing and
redeeming shares. The Manager will bear any additional expenses of
administering the plan.
Withdrawals will be made by redeeming full and fractional shares on the
date you select at the time the plan is established. Withdrawal payments made
under this plan may exceed dividends and distributions and, to this extent,
will involve the use of principal and could reduce the dollar value of your
investment and eventually exhaust the account. Reinvesting dividends and
distributions helps replenish the account. Because share values and net
investment income can fluctuate, you should not expect withdrawals to be offset
by rising income or share value gains.
Each redemption of shares may result in a gain or loss, which must be
reported on your income tax return. Therefore, you should keep an accurate
record of any gain or loss on each withdrawal.
TAX-DEFERRED RETIREMENT PLANS
Federal taxes on current income may be deferred if you qualify for certain
types of retirement programs. For your convenience, the Manager offers
403(b)(7) accounts and various forms of IRAs. 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's investment objective is not a fundamental policy and may
be changed upon notice to, but without the approval of, the Fund's
shareholders. If there is a change in the Fund's investment objective, the
Fund's shareholders should consider whether the Fund remains an appropriate
investment in light of their then-current needs. The
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investment objective of the Portfolio is also not a fundamental policy.
Shareholders of the Funds will receive 30 days' prior written notice with
respect to any change in the investment objective of the Fund or the
corresponding Portfolio.
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.
EQUITY SECURITIES. The Portfolio may invest in equity securities listed on
any domestic or foreign securities exchange or traded in the over-the-counter
market as well as certain restricted or unlisted securities. As used herein,
"equity securities" are defined as common stock, preferred stock, trust or
limited partnership interests, rights and warrants to subscribe to or purchase
such securities, sponsored or unsponsored ADRs, EDRs, GDRs, and convertible
securities, consisting of debt securities or preferred stock that may be
converted into common stock or that carry the right to purchase common stock.
Common stocks, the most familiar type, represent an equity (ownership) interest
in a corporation. They may or may not pay dividends or carry voting rights.
Common stock occupies the most junior position in a company's capital
structure. Although equity securities have a history of long-term growth in
value, their prices fluctuate based on changes in a company's financial
condition and on overall market and economic conditions. Smaller companies are
especially sensitive to these factors.
SHORT-TERM INSTRUMENTS. When the Portfolio experiences large cash inflows
through the sale of securities and desirable equity securities, that are
consistent with the Portfolio's investment objective, which are unavailable in
sufficient quantities or at attractive prices, the Portfolio may hold
short-term investments (or shares of money market mutual funds) for a limited
time pending availability of such equity securities. Short-term instruments
consist of foreign and domestic: (i) short-term obligations of sovereign
governments, their agencies, instrumentalities, authorities or political
subdivisions; (ii) other short-term debt securities rated AA or higher by
("S&P") or Aa or higher by Moody's Investors Service, Inc. ("Moody's") or, if
unrated, of comparable quality in the opinion of Bankers Trust; (iii)
commercial paper; (iv) bank obligations, including negotiable certificates of
deposit, time deposits and banker's acceptances; and (v) repurchase agreements.
At the time the Portfolio invests in commercial paper, bank obligations or
repurchase agreements, the issuer or the issuer's parent must have outstanding
debt rated AA or higher by S&P or Aa or higher by Moody's or outstanding
commercial paper or bank obligations rated A-1 by S&P or Prime-1 by Moody's;
or, if no such ratings are available, the instrument must be of comparable
quality in the opinion of Bankers Trust.
CERTIFICATES OF DEPOSIT AND BANKERS' ACCEPTANCES. Certificates of deposit
are receipts issued by a depository institution in exchange for the deposit of
funds. The issuer agrees to pay the amount deposited plus interest to the
bearer of the receipt on the date specified on the certificate. The certificate
usually can be traded in the secondary market prior to maturity. Bankers'
acceptances typically arise from short-term credit arrangements designed to
enable businesses to obtain funds to finance commercial transactions.
Generally, an acceptance is a time draft drawn on a bank by an exporter or an
importer to obtain a stated amount of funds to pay for specific merchandise.
The draft is then "accepted" by a bank that, in effect, unconditionally
guarantees to pay the face value of the instrument on its maturity date. The
acceptance may then be held by the accepting bank as an earning asset or it may
be sold in the secondary market at the going rate of discount for a specific
maturity. Although maturities for acceptances can be as long as 270 days, most
acceptances have maturities of six months or less.
COMMERCIAL PAPER. Commercial paper consists of short-term (usually from 1
to 270 days) unsecured promissory notes issued by corporations in order to
finance their current operations. A variable amount master demand note (which
is a type of commercial paper) represents a direct borrowing arrangement
involving periodically fluctuating rates of interest under a letter agreement
between a commercial paper issuer and an institutional lender pursuant to which
the lender may determine to invest varying amounts.
ILLIQUID SECURITIES. Historically, illiquid securities have included
securities subject to contractual or legal restrictions on resale because they
have not been registered under the Securities Act of 1933, as amended (the 1933
Act), securities that are otherwise not readily marketable, and repurchase
agreements having a maturity of longer than seven days. Securities that 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
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unable to dispose of restricted or other illiquid securities promptly or at
reasonable prices and might thereby experience difficulty satisfying
redemptions within seven 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.
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.
The Securities and Exchange Commission (the "SEC") has adopted Rule 144A,
which allows a broader institutional trading market for securities otherwise
subject to restriction on their resale to the general public. Rule 144A
establishes a "safe harbor" from the registration requirements of the 1933 Act
of resales of certain securities to qualified institutional buyers. Bankers
Trust anticipates that the market for certain restricted securities such as
institutional commercial paper will expand further as a result of this
regulation and the development of automated systems for the trading, clearance
and settlement of unregistered securities of domestic and foreign issuers, such
as the PORTAL System sponsored by the National Association of Securities
Dealers, Inc.
Rule 144A Securities are securities in the United States that are not
registered for sale under federal securities laws but which can be resold to
institutions under SEC Rule 144A. Provided that a dealer or institutional
trading market in such securities exists, these restricted securities are
treated as exempt from the 15% limit on illiquid securities. Under the
supervision of the Board of Trustees of the Portfolios, Bankers Trust
determines the liquidity of restricted securities and, through reports from
Bankers Trust, the Board will monitor trading activity in restricted
securities. If institutional trading in restricted securities were to decline,
the liquidity of the Portfolio could be adversely affected.
In reaching liquidity decisions, Bankers Trust will consider, among other
things, the following factors: (1) the frequency of trades and quotes for the
security; (2) the number of dealers and other potential purchasers wishing to
purchase or sell the security; (3) dealer undertakings to make a market in the
security; and (4) the nature of the security and of the marketplace trades
(e.g., the time needed to dispose of the security, the method of soliciting
offers and the mechanics of the transfer).
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 can take place a month or more after the date of the
purchase commitment. The purchase price and the interest rate payable, if any,
on the securities are fixed on the purchase commitment date or at the time the
settlement date is fixed. The value of such securities is subject to market
fluctuation and no interest accrues to the Portfolio until settlement takes
place. At the time the Portfolio makes the commitment to purchase securities on
a when-issued or delayed delivery basis, it will record the transaction,
reflect the value each day of such securities in determining its net asset
value and, if applicable, calculate the maturity for the purposes of average
maturity from that date. At the time of settlement, a when-issued security may
be valued at less than the purchase price. To facilitate such acquisitions, the
Portfolio identifies, as part of a segregated account cash or liquid
securities, in an amount at least equal to such commitments. On delivery dates
for such transactions, the Portfolio will meet its obligations from maturities
or sales of the securities held in the segregated account and/or from cash
flow. If the Portfolio chooses to dispose of the right to acquire a when-issued
security prior to its acquisition, it could, as with the disposition of any
other portfolio obligation, incur a gain or loss due to market fluctuation. It
is the current policy of the Portfolio not to enter into when-issued
commitments exceeding in the aggregate 15% of the market value of the
Portfolio's total assets, less liabilities other than the obligations created
by when-issued commitments.
LENDING OF PORTFOLIO SECURITIES. The Portfolio has the authority to lend
up to 30% of the total value of its portfolio securities to brokers, dealers,
and other financial organizations. By lending its securities, the Portfolio may
increase its income by continuing to receive payments in respect of dividends
and 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 a fee
paid by the borrower when irrevocable letters of credit and U.S. Government
obligations are used as collateral. The Portfolio will adhere to the following
conditions whenever its securities are loaned: (1) the Portfolio must receive
at least 100% collateral 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 substitute
payments in respect of all dividends, interest, or other distributions on
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loaned securities; and (5) 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. Cash collateral may be
invested in a money market fund managed by Bankers Trust (or its affiliates)
and Bankers Trust may serve as the Portfolio's lending agent and may share in
revenue received from securities lending transactions as compensation for this
service.
REPURCHASE AGREEMENTS. In a repurchase agreement, the Portfolio buys a
security at one price and simultaneously agrees to sell it back at a higher
price at a future date. In the event of the bankruptcy of the other party to a
repurchase agreement, the Portfolio could experience delays in recovering
either its cash or selling securities subject to the repurchase agreement. To
the extent that, in the meantime, the value of the securities repurchased had
decreased or the value of the securities had increased, the Portfolio could
experience a loss. In all cases, Bankers Trust must find the creditworthiness
of the other party to the transaction satisfactory.
INDEX FUTURES CONTRACTS AND OPTIONS ON INDEX FUTURES CONTRACTS
FUTURES CONTRACTS. Futures contracts are contracts to purchase or sell a
fixed amount of an underlying instrument, commodity, or index at a fixed time
and place in the future. 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 exchanges and clear through their
clearing corporations. The Portfolio may enter into contracts for the purchase
or sale for future delivery of the Index.
At the same time a futures contract on the Index is entered into, the
Portfolio must allocate cash or securities as a deposit payment (initial
margin). Initial margin deposits are set by exchanges and may range between 1%
and 10% 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 (other than those that settle in cash) by their
terms call for the actual delivery or acquisition of the instrument underlying
the contract, in most cases the contractual obligation is fulfilled by offset
before the date of the contract without having to make or take delivery of the
instrument underlying the contract. The offsetting of a contractual obligation
is accomplished by entering into an opposite position in the identical futures
contract on a commodities exchange on which the futures contract was entered
into (or a linked exchange). Such a transaction, which is effected through a
member of an exchange, cancels the obligation to make or take delivery of the
instrument underlying the contract. 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 most
participants' entering into offsetting transactions rather than making or
taking delivery. To the extent that many participants decide to make or take
delivery, liquidity in the futures market could be reduced, thus producing
distortion. Third, from the point of view of speculators, the margin deposit
requirements in the futures market are less onerous than margin requirements in
the securities market. Therefore, increased participation by speculators in the
futures market may cause temporary price distortions. Due to the possibility of
distortion, a correct forecast of securities price trends by Bankers Trust may
still not result in a successful transaction.
In addition, futures contracts entail risks. Although Bankers Trust
believes that use of such contracts will benefit the Portfolio, these
investments in futures may cause the Portfolio to realize gains and losses for
tax purposes that would not otherwise be realized if the Portfolio were to
invest directly in the underlying securities. As a result, this investment
technique may accelerate the timing of receipt of taxable distributions.
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. For example, when the Portfolio is not fully
invested it may purchase a call option on an index futures contract to hedge
against a market advance.
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The writing of a call option on a futures contract with respect to the
Index may constitute a partial hedge against declining prices of the underlying
securities that 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 that provides a
partial hedge against any decline which may have occurred in the Portfolio's
holdings. The writing of a put option on an index futures contract may
constitute 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 the
Index. For example, the Portfolio may purchase a put option on an index futures
contract to hedge against the risk 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 such 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. 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 Portfolio's net asset value, after taking into account unrealized
profits and unrealized losses on any such contracts.
OPTIONS ON SECURITIES INDEXES. 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 forgo 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 forgoes, 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.
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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
index option transactions which are discussed below. The Portfolio's activities
in index options may also be restricted by the requirements of 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.
ASSET COVERAGE. To assure that the Portfolio's use of futures and related
options, as well as when-issued and delayed-delivery securities, are not used
to achieve investment leverage, the Portfolio will cover such transactions, as
required under applicable interpretations of the SEC, either by owning the
underlying securities or by segregating with the Portfolio's Custodian or
futures commission merchant liquid securities in an amount at all times equal
to or exceeding the Portfolio's commitment with respect to these instruments or
contracts.
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 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 or its corporate 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;
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(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 the Portfolio's investment objective, up to 25% of its
total assets may be invested in any one industry; and
(6) issue any senior security (as that term is defined in the 1940 Act) if
such issuance is specifically prohibited by the 1940 Act or the rules and
regulations promulgated thereunder, provided that collateral arrangements
with respect to options and futures, including deposits of initial
deposit and variation margin, are not considered to be the issuance of a
senior security for purposes of this restriction.
(7) with respect to 75% of the Fund's (Portfolio's) total assets, invest more
than 5% of its total assets in the securities of any one issuer
(excluding cash and cash-equivalents, U.S. government securities and the
securities of other investments companies) or own more than 10% of the
voting securities of any issuer.
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;
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(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) 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);
(9) 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 5% 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
(10) 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
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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.
There will be no violation of any investment restrictions or policies
[except with respect to fundamental investment restriction (2) of the Fund and
(1) of the Portfolio above] if that restriction is complied with at the time
the relevant action is taken, notwithstanding a later change in the market
value of an investment, in net or total assets, or in the change of securities
rating of the investment, or any other later change.
PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
Bankers Trust is responsible for decisions to buy and sell securities, futures
contracts and options on such securities and futures for the Portfolio, the
selection of brokers, dealers and futures commission merchants to effect
transactions and the negotiation of brokerage commissions, if any.
Broker-dealers may receive brokerage commissions on portfolio transactions,
including options, futures and options on futures transactions and the purchase
and sale of underlying securities upon the exercise of options. Orders may be
directed to any broker-dealer or futures commission merchant, including to the
extent and in the manner permitted by applicable law, Bankers Trust or its
subsidiaries or affiliates. Purchases and sales of certain portfolio securities
on behalf of the Portfolio are frequently placed by Bankers Trust with the
issuer or a primary or secondary market-maker for these securities on a net
basis, without any brokerage commission being paid by the Portfolio. Trading
does, however, involve transaction costs. Transactions with dealers serving as
market-makers reflect the spread between the bid and asked prices. Transaction
costs may also include fees paid to third parties for information as to
potential purchasers or sellers of securities. Purchases of underwritten issues
may be made which will include an underwriting fee paid to the underwriter.
Bankers Trust seeks to evaluate the overall reasonableness of the
brokerage commissions paid (to the extent applicable) in placing orders for the
purchase and sale of securities for the Portfolio taking into account such
factors as price, commission (negotiable in the case of national securities
exchange transactions), if any, size of order, difficulty of execution and
skill required of the executing broker-dealer through familiarity with
commissions charged on comparable transactions, as well as by comparing
commissions paid by the Portfolio to reported commissions paid by others.
Bankers Trust reviews on a routine basis commission rates, execution and
settlement services performed, making internal and external comparisons.
Bankers Trust is authorized, consistent with Section 28(e) of the
Securities Exchange Act of 1934, as amended, when placing portfolio
transactions for the Portfolio with a broker to pay a brokerage commission (to
the extent applicable) in excess of that which another broker might have
charged for effecting the same transaction on account of the receipt of
research, market or statistical information. The term "research, market or
statistical information" includes advice as to the value of securities; the
advisability of investing in, purchasing or selling securities; the
availability of securities or purchasers or sellers of securities; and
furnishing analyses and reports concerning issuers, industries, securities,
economic factors and trends, portfolio strategy and the performance of
accounts.
Consistent with the policy stated above, the Conduct Rules 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
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<PAGE>
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 that 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, 1998, 1997, and 1996, the Portfolio paid
brokerage commissions in the amount of $534,801, $341,058, and $289,791,
respectively. For the year ended December 31, 1998, the Portfolio paid
affiliated brokerage commissions in the amount of $333.
DESCRIPTION OF SHARES
The Fund is a series of the 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 in separate series or
Funds. There are ten mutual funds in the Company, 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. The Company may fill vacancies on the
Board or appoint new Directors if the result is that at least two-thirds of the
Directors have still been elected by shareholders. Moreover, pursuant to the
Bylaws of the Company, any Director may be removed by the affirmative vote of a
majority of the outstanding Company shares; and holders of 10% or more of the
outstanding shares of theCompany can require Directors to call a meeting of
shareholders for the purpose of voting on the removal of one or more Directors.
The Company will assist in communicating to other shareholders about the
meeting. On any matter submitted to the shareholders, the holder of each Fund
share is entitled to one vote per share (with proportionate voting for
fractional shares) regardless of the relative 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 that 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.
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 Fund's shareholders who do, in fact, vote.
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The Portfolio, in which all the Assets of the Fund will be invested, is
organized as a trust under the laws of the state of New York. The Portfolio's
Declaration of Trust provides that the Fund and other entities investing in the
Portfolio (E.G., other investment companies, insurance company separate
accounts, and common and commingled trust funds) will each be liable for all
obligations of the Portfolio. However, the risk of the Fund incurring financial
loss on account of such liability is limited to circumstances in which both
inadequate insurance exists and the Portfolio itself was unable to meet its
obligations. Accordingly, the Company's Directors believe that neither the Fund
nor you will be adversely affected by reason of the Fund's investing in the
Portfolio.
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 that 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
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shares. Any loss realized on a sale or exchange will be disallowed to the
extent the shares disposed of are replaced (including shares acquired pursuant
to a dividend reinvestment plan) within a period of 61 days beginning 30 days
before and ending 30 days after disposition of the shares. In such a case, the
basis of the shares acquired will be adjusted to reflect the disallowed loss.
Any loss realized by a shareholder on a disposition of shares held by the
shareholder for six months or less will be treated as a long-term capital loss
to the extent of any distributions of net capital gains received by the
shareholder with respect to such shares. Additionally, any account maintenance
fee deducted from a shareholder's account will be treated as taxable income
even though not received by the shareholder.
DIRECTORS AND OFFICERS OF THE COMPANY
The Board of Directors of the Company consists of seven Directors who supervise
the business affairs of the Company. Set forth below are the Directors and
officers of the Company, their respective offices and principal occupations
during the last five years. Unless otherwise indicated, the business address of
each is 9800 Fredericksburg Road, San Antonio, TX 78288.
Robert G. Davis 1, 2
Director and Chairman of the Board of Directors
Age: 52
Deputy Chief Executive Officer for Capital Management of United Services
Automobile Association (USAA) (6/98-present); President, Chief Executive
Officer, Director, and Vice Chairman of the Board of Directors of USAA Capital
Corporation and several of its subsidiaries and affiliates (1/97-present);
President, Chief Executive Officer, Director, and Chairman of the Board of
Directors of USAA Financial Planning Network, Inc. (1/97-present); Executive
Vice President, Chief Operating Officer, Director, and Vice Chairman of the
Board of Directors of USAA Financial Planning Network, Inc. (6/96-12/96);
Special Assistant to Chairman, USAA (6/96-12/96); President and Chief Executive
Officer, Banc One Credit Corporation (12/95-6/96); and President and Chief
Executive Officer, Banc One Columbus, (8/91-12/95). Mr. Davis serves as a
Director/Trustee and Chairman of the Boards of Directors/Trustees of each of
the remaining funds within the USAA Family of Funds; Director and Chairman of
the Boards of Directors of USAA Investment Management Company (IMCO), USAA
Shareholder Account Services, USAA Federal Savings Bank, and USAA Real Estate
Company.
Michael J.C. Roth 1, 2
Director, President, and Vice Chairman of the Board of Directors
Age: 57
Chief Executive Officer, IMCO (10/93-present); President, Director, and Vice
Chairman of the Board of Directors, IMCO (1/90-present). Mr. Roth serves as
President, Director/Trustee, and Vice Chairman of the Boards of
Directors/Trustees of each of the remaining funds within the USAA Family of
Funds and USAA Shareholder Account Services; Director of USAA Life Insurance
Company; Trustee and Vice Chairman of USAA Life Investment Trust.
John W. Saunders, Jr. 1, 2, 4
Director and Vice President
Age: 64
Senior Vice President, Fixed Income Investments, IMCO (10/85-present). Mr.
Saunders serves as Director/Trustee and Vice President of each of the remaining
funds within the USAA Family of Funds; Director of IMCO; Senior Vice President
of USAA Shareholder Account Services; Vice President of USAA Life Investment
Trust.
Barbara B. Dreeben 3, 4, 5
200 Patterson #1008
San Antonio, TX 78209
Director
Age: 53
President, Postal Addvantage (7/92-present); Consultant, Nancy Harkins
Stationer (8/91-12/95). Mrs. Dreeben serves as a Director/Trustee of each of
the remaining funds within the USAA Family of Funds.
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Howard L. Freeman, Jr. 2, 3, 4, 5
2710 Hopeton
San Antonio, TX 78230
Director
Age: 63
Retired. Assistant General Manager for Finance, San Antonio City Public Service
Board (1976-1996). Mr. Freeman serves as a Director/Trustee of each of the
remaining funds within the USAA Family of Funds.
Robert L. Mason, Ph.D. 3, 4, 5
12823 Queens Forest
San Antonio, TX 78230
Director
Age: 52
Staff Analyst, Statistical Analysis Section, Southwest Research Institute
(9/98-present); Manager, Statistical Analysis Section, Southwest Research
Institute (8/75-9/98). Dr. Mason serves as a Director/Trustee of each of the
remaining funds within the USAA Family of Funds.
Richard A. Zucker 3, 4, 5
407 Arch Bluff
San Antonio, TX 78216
Director
Age: 55
Vice President, Beldon Roofing and Remodeling (1985-present). Mr. Zucker serves
as a Director/Trustee of each of the remaining funds within the USAA Family of
Funds.
Michael D. Wagner 1
Secretary
Age: 50
Senior Vice President, CAPCO General Counsel (01/99-present); Vice President,
Corporate Counsel, USAA (1982-01/99). Mr. Wagner has held various positions in
the legal department of USAA since 1970 and serves as Vice President,
Secretary, and Counsel, IMCO and USAA Shareholder Account Services; Secretary,
of each of the remaining funds within the USAA Family of Funds; Vice President,
Corporate Counsel for various other USAA subsidiaries and affiliates.
Alex M. Ciccone 1
Assistant Secretary
Age: 49
Vice President, Compliance, IMCO (12/94-present); Vice President and Chief
Operating Officer, Commonwealth Shareholder Services (6/94-11/94); and Vice
President, Compliance, IMCO (12/91-5/94). Mr. Ciccone serves as Assistant
Secretary of each of the remaining funds within the USAA Family of Funds.
Mark S. Howard 1
Assistant Secretary
Age: 35
Assistant Vice President, Securities Counsel, USAA (2/98-present); Executive
Director, Securities Counsel, USAA (9/96-2/98); Senior Associate Counsel,
Securities Counsel, USAA (5/95-8/96); Attorney, Kirkpatrick & Lockhart LLP
(9/90-4/95). Mr. Howard serves as Assistant Vice President and Assistant
Secretary of IMCO and USAA Shareholder Account Services; Assistant Secretary of
each of the remaining Funds within the USAA Family of Funds; Assistant Vice
President, Securities Counsel, for various other USAA subsidiaries and
affiliates.
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Sherron A. Kirk 1
Treasurer
Age: 54
Vice President, Senior Financial Officer, IMCO (8/98-present); Vice President,
Controller, IMCO (10/92- 8/98). Mrs. Kirk serves as Treasurer of each of the
remaining funds within the USAA Family of Funds; Vice President, Senior
Financial Officer of USAA Shareholder Account Services.
Caryl Swann 1
Assistant Treasurer
Age: 51
Executive Director, Mutual Fund Analysis & Support, IMCO (10/98-present);
Director, Mutual Fund Portfolio Analysis & Support, IMCO (2/98-10/98); Manager,
Mutual Fund Accounting, IMCO (7/92-2/98). Ms. Swann serves as Assistant
Treasurer for each of the remaining funds within the USAA Family of Funds.
- ---------------
1 Indicates those Directors and officers who are employees of the Manager or
affiliated companies and are considered "interested persons" under the 1940
Act.
2 Member of Executive Committee
3 Member of Audit Committee
4 Member of Pricing and Investment Committee
5 Member of Corporate Governance Committee
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 that 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 that 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:
Carl W. Shirley, Senior Vice President, Insurance Company Portfolios; John J.
Dallahan, Senior Vice President, Investment Services; and David G. Peebles,
Senior Vice President, Equity Investments. 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, 1998.
Name Aggregate Total Compensation
of Compensation from the USAA
Director from the Company Family of Funds (b)
-------- ---------------- -------------------
Robert G. Davis None (a) None (a)
Barbara B. Dreeben $ 9,536 $ 36,000
Howard L. Freeman, Jr. $ 9,536 $ 36,000
Robert L. Mason $ 9,536 $ 36,000
Michael J.C. Roth None (a) None (a)
John W. Saunders, Jr. None (a) None (a)
Richard A. Zucker $ 9,536 $ 36,000
- ----------------
(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.
17
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(b) At December 31, 1998, the USAA Family of Funds consisted of four
registered investment companies offering 35 individual funds. Each
Director presently serves as a Director or Trustee of each investment
company in the USAA Family of Funds. In addition, Michael J.C. Roth
presently serves as a Trustee of USAA Life Investment Trust, a registered
investment company advised by IMCO, consisting of seven funds avaialable
to the public only through the purchase of certain variable annuity
contracts and variable life insurance policies offered by USAA Life
Insurance Company. Mr. Roth receives no compensation as Trustee of USAA
Life Investment Trust.
All of the above Directors are also Directors/Trustees of the other funds
in the USAA Family of Funds. No compensation is paid by any fund to any
Director/Trustee who is a director, officer, or employee of IMCO or its
affiliates. No pension or retirement benefits are accrued as part of fund
expenses. The Company reimburses certain expenses of the Directors who are not
affiliated with the investment adviser. As of January 31, 1999, 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, 1999, USAA and its affiliates owned 49,358,672 shares
(41.4%) of the USAA S&P 500 Index Fund.
The Company knows of no other persons who, as of January 31, 1999, 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 birthdates, principal
occupations during the past five years, and addresses are set forth below.
Their titles may have varied during that period. Unless otherwise indicated,
the address of each Trustee and officer is 5800 Corporate Drive, Pittsburgh,
Pennsylvania, 15237-5829.
CHARLES P. BIGGAR (birthdate: October 13, 1930) -- Trustee; Retired;
formerly Vice President of International Business Machines ("IBM") 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; 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.
Unless otherwise specified, each officer listed below holds the same position
with the Trust and the Portfolio.
JOHN Y. KEFFER (birthdate: July 14, 1942) -- President and Chief Executive
Officer; President, Forum Financial Group. His address is 2 Portland Square,
Portland, Maine 04101.
JOSEPH A. FINELLI (birthdate: January 24, 1957) -- Treasurer; Vice
President, BT Alex. Brown Incorporated and Vice President, Investment Company
Capital Corp. (registered investment adviser), September 1995 to present;
formerly, Vice President and Treasurer, The Delaware Group of Funds (registered
investment companies) and Vice President, Delaware Management Company Inc.
(investments), 1980 to August 1995. His address is One South Street, Baltimore,
Maryland 21202.
DANIEL O. HIRSCH (birthdate: March 27, 1954) -- Secretary; Principal, BT
Alex. Brown since July 1998; Assistant General Counsel in the Office of the
General Counsel at the United States Securities and Exchange Commission from
1993 to 1998. His address is 2901 Dorset Avenue, Chevy Chase, Maryland 20815.
Messrs. Keffer, Finelli and Hirsch also hold similar positions for other
investment companies for which ICC Distributors, or an affiliate serves as the
principal underwriter.
18
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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 ICC Distributors
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, 1998.
TRUSTEE COMPENSATION TABLE
Aggregate Total Compensation
Name of Person, Compensation from Fund Complex
Position from Portfolio Paid to Trustees
-------- -------------- ----------------
Charles P. Biggar
Trustee $ 1,148 $36,250
S. Leland Dill
Trustee $ 971 $36,250
Philip Saunders, Jr.
Trustee $ 977 $36,250
Bankers Trust reimbursed the Portfolio for a portion of their Trustees
fees for the period above. Refer to the following sections INVESTMENT ADVISER
and ADMINISTRATOR.
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, a wholly owned subsidiary of United Services Automobile
Association (USAA), a large, diversified financial services institution, was
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
$40 billion, of which approximately $25 billion were in mutual fund portfolios.
Under the Management Agreement, the Manager presently monitors the
services provided by Bankers Trust to the Portfolio. The Manager receives no
fee for providing these monitoring services. In the event the Fund's Board of
Directors determines it is in the best interests of the Fund's shareholders to
withdraw its investment in the Portfolio, the Manager would become responsible
for directly managing the assets of the Fund. In such event, the Fund would pay
the Manager an annual fee of .10% of the Fund's ANA, accrued daily and paid
monthly.
The Management Agreement will remain in effect until June 30, 2000, 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).
Bankers Trust, subject to the supervision and direction of the Board of
Trustees of the Portfolio, manages the Portfolio in accordance with the
Portfolio's investment objective and stated investment policies, makes
investment decisions for the Portfolio, places orders to purchase and sell
securities and other financial instruments on behalf of the Portfolio and
employs professional investment managers and securities analysts who provide
research services to the Portfolio. Bankers Trust may utilize the expertise of
any of its world wide subsidiaries and affiliates to assist it in its role as
investment adviser. All orders for
19
<PAGE>
investment transactions on behalf of the Portfolio are placed by Bankers Trust
with broker-dealers and other financial intermediaries that it selects,
including those affiliated with Bankers Trust. A Bankers Trust affiliate will
be used in connection with a purchase or sale of an investment for the
Portfolio only if Bankers Trust believes that the affiliate's charge for the
transaction does not exceed usual and customary levels. The Portfolio will not
invest in obligations for which Bankers Trust or any of its affiliates is the
ultimate obligor or accepting bank. The Portfolio may, however, invest in the
obligations of correspondents and customers of Bankers Trust.
Under the terms of the Portfolio's investment advisory agreement with
Bankers Trust (the Advisory Agreements), 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, ICC Distributors 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, 1998, 1997, and 1996, Bankers Trust
earned $3,186,503, $2,430,147, and $1,505,963, respectively, as compensation
for investment advisory services provided to the Portfolio. During the same
periods, Bankers Trust reimbursed $799,296, $1,739,490, and $870,024,
respectively, to the Portfolio to cover advisory and administrative expenses
exceeding expense limitations that were in effect for those periods.
Bankers Trust may have deposit, loan, and other commercial banking
relationships with the issuers of obligations that 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.
On March 11, 1999, Bankers Trust announced that it had reached an
agreement with the United States Attorney's Office in the Southern District of
New York to resolve an investigation concerning inappropriate transfers of
unclaimed funds and related recordkeeping problems that occurred between 1994
and early 1996. Pursuant to its agreement with the U.S. Attorney's Office,
Bankers Trust pleaded guilty to misstating entries in the bank's books and
records and agreed to pay a $60 million fine to federal authorities.
Separately, Bankers Trust agreed to pay a $3.5 million fine to the state of New
York. The events leading up to the guilty pleas did not arise out of the
investment advisory or mutual fund management activities of Bankers Trust or
its affiliates.
As a result of the plea, absent an order from the SEC, Bankers Trust would
not be able to continue to provide investment advisory services to the Fund.
The SEC has granted a temporary order to permit Bankers Trust and its
affiliates to continue to provide investment advisory services to registered
investment companies. There is no assurance that the SEC will grant a permanent
order.
20
<PAGE>
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.
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.
For the fiscal years ended December 31, 1998, 1997, and 1996 Bankers Trust
earned $676,625, $1,215,073, and $752,981, respectively, as compensation for
administrative and other services provided to the Portfolio. For the fiscal
year ended December 31, 1998, Bankers Trust waived $139,957 in administrative
fees charged to the Portfolio.
For the fiscal years ended December 31, 1998, and 1997 the Manager earned
$461,363, and $93,126, respectively, as compensation for administrative and
other services provided to the Fund. For the fiscal year ended December 31,
1996, the Manager did not receive any compensation for administrative and other
services and waived $14,175 in administrative fees charged to the Fund.
Effective as of January 1, 1999, the Manager entered into a servicing
agreement with Bankers Trust pursuant to which Bankers Trust has agreed to pay
the Manager a fee for performing the following services: providing marketing
and promotional materials and other information relating to the Portfolio and
the Fund to current and prospective shareholders of the Fund; assisting
shareholders in opening or maintaining accounts with the Fund; and maintaining
and preserving records in connection with providing these services. For these
services, Bankers Trust has agreed to pay the Manager a monthly fee in the
amount of .02 of 1% per annum of the amount by which the average daily net
assets of the Fund invested in the Portfolio exceed $1.75 billion.
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.
21
<PAGE>
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, 787 Seventh Avenue, New York, New
York 10019-6099 serves as counsel to the Portfolio.
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP, 250 West Pratt Street, Baltimore, Maryland 21201
has been selected as the Independent Accountants for the Fund and the
Portfolio.
BANKING REGULATORY MATTERS
Bankers Trust has been advised by its counsel that in its opinion Bankers Trust
may perform the services for the Portfolio contemplated by the Advisory
Agreements and other activities for the Fund and the Portfolio described in the
Prospectus and this SAI without violation of the Glass-Steagall Act or other
applicable banking laws or regulations. However, counsel has pointed out that
future changes in either federal or state statutes and regulations concerning
the permissible activities of banks or trust companies, as well as future
judicial or administrative decisions or interpretations of present and future
statutes and regulations, might prevent Bankers Trust from continuing to
perform those services for the Trust and the Portfolio. State laws on this
issue may differ from the interpretations of relevant federal law and banks and
financial institutions may be required to register as dealers pursuant to state
securities law. If the circumstances described above should change, the Board
of Trustees would review the relationship with Bankers Trust and consider
taking all actions necessary in the circumstances.
CALCULATION OF PERFORMANCE DATA
Information regarding the total return of the Fund is provided under COULD THE
VALUE OF YOUR INVESTMENT IN THIS FUND FLUCTUATE? 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, 1998, 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, 1998, the Fund's average account size was
approximately $28,242.
The Fund's total return for the fiscal year ended December 31, 1998 was
28.62%.
22
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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 that may cover financial and investment news.
AUSTIN AMERICAN-STATESMAN, a newspaper that may cover financial news.
BANK RATE MONITOR, a service that 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 that may cover financial news.
CONSUMER REPORTS, a monthly magazine that from time to time reports on
companies in the mutual fund industry.
DALLAS MORNING NEWS, a newspaper that may cover financial news.
DENVER POST, a newspaper that may quote financial news.
FINANCIAL PLANNING, a monthly magazine that may periodically review mutual fund
companies.
FINANCIAL SERVICES WEEK, a weekly newspaper that covers financial news.
FINANCIAL WORLD, a monthly magazine that periodically features companies in the
mutual fund industry.
FORBES, a national business publication that periodically reports the
performance of companies in the mutual fund industry.
FORTUNE, a national business publication that periodically rates the
performance of a variety of mutual funds.
FUND ACTION, a mutual fund news report.
HOUSTON CHRONICLE, a newspaper that may cover financial news.
HOUSTON POST, a newspaper that may cover financial news.
IBC'S MONEY FUND REPORT, a weekly publication of IBC Financial Data, Inc.,
reporting on the performance of the nation's money market funds, summarizing
money market fund activity, and including certain averages as performance
benchmarks, specifically "IBC's Taxable First Tier Fund Average."
IBC'S MONEY MARKET INSIGHT, a monthly money market industry analysis prepared
by IBC Financial Data, Inc.
IBC'S MONEYLETTER, a biweekly newsletter that covers financial news and from
time to time rates specific mutual funds.
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 that covers financial news.
23
<PAGE>
KIPLINGER'S PERSONAL FINANCE MAGAZINE, a monthly investment advisory
publication that periodically features the performance of a variety of
securities.
LIPPER ANALYTICAL SERVICES, INC.'S EQUITY FUND PERFORMANCE ANALYSIS, a weekly
and monthly publication of industry-wide mutual fund averages by type of fund.
LIPPER ANALYTICAL SERVICES, INC.'S FIXED INCOME FUND PERFORMANCE ANALYSIS, a
monthly publication of industry-wide mutual fund performance averages by type
of fund.
LOS ANGELES TIMES, a newspaper that 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 that 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 that may cover financial news.
NO LOAD FUND INVESTOR, a newsletter covering companies in the mutual fund
industry.
ORLANDO SENTINEL, a newspaper that may cover financial news.
PERSONAL INVESTOR, a monthly magazine that 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 that may cover financial news.
SAN FRANCISCO CHRONICLE, a newspaper that may cover financial news.
SMART MONEY, a monthly magazine featuring news and articles on investing and
mutual funds.
USA TODAY, a newspaper that may cover financial news.
U.S. NEWS AND WORLD REPORT, a national business weekly that periodically
reports mutual fund performance data.
WALL STREET JOURNAL, a Dow Jones and Company, Inc. newspaper that covers
financial news.
WASHINGTON POST, a newspaper that 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 that covers financial and investment subjects including
mutual funds.
YOUR MONEY, a monthly magazine directed toward the novice investor.
In addition to the sources above, performance of the Fund may also be
tracked by Lipper Analytical Services, Inc. and Morningstar, Inc. A Fund will
be compared to Lipper's or Morningstar's appropriate fund category according to
its objective and portfolio holdings. Footnotes in advertisements and other
sales literature will include the time period applicable for any rankings used.
Other sources for total return and other performance data that may be used
by the Fund or by those publications listed previously are Schabaker Investment
Management and Investment Company Data, Inc. These are services that collect
and compile data on mutual fund companies.
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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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28083-0599
