As filed with the Securities and Exchange Commission on October 27, 2000.
1933 Act File No. 2-49560
1940 Act File No. 811-2429
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 X
--
Pre-Effective Amendment
No. Post-Effective Amendment No. 55
--
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 X
--
Amendment No. 43
--
USAA MUTUAL FUND, INC.
______________________________________________________
(Exact Name of Registrant as Specified in Charter)
9800 Fredericksburg Road, San Antonio, TX 78288
______________________________________________________
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code (210) 498-0600
--------------
Michael D. Wagner, Secretary
USAA MUTUAL FUND, INC.
9800 Fredericksburg Road
San Antonio, TX 78288-0227
_____________________________________
(Name and Address of Agent for Service)
Approximate Date of Proposed Public Offering: As soon as practicable after the
effective date of this Registration Statement.
It is proposed that this filing will become effective under Rule 485
____ immediately upon filing pursuant to paragraph (b)
_X__ on October 27, 2000 pursuant to paragraph (b)
____ 60 days after filing pursuant to paragraph (a)(1)
____ on (date) pursuant to paragraph (a)(1)
____ 75 days after filing pursuant to paragraph (a)(2)
____ on (date) pursuant to paragraph (a)(2)
If appropriate, check the following box:
____ This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
Exhibit Index on Pages 137 - 142
Page 1 of 350
<PAGE>
Part A
Prospectuses for the
S&P 500 Index Fund, Extended Market Index Fund,
Nasdaq-100 Index Fund, Global Titans Index Fund,
and Capital Growth Fund
are included herein
Not included in this Post-Effective Amendment
are the Prospectuses for the
Aggressive Growth Fund, Growth Fund, Growth & Income Fund,
Income Stock Fund, Income Fund, Short-Term Bond Fund,
Money Market Fund, Science & Technology Fund,
First Start Growth Fund, Intermediate-Term Bond Fund,
High-Yield Opportunities Fund, and Small Cap Stock Fund
<PAGE>
Part A
The Prospectus for the
S&P 500 Index Fund,
Extended Market Index Fund,
Nasdaq-100 Index Fund, and Global Titans Index Fund
<PAGE>
PROSPECTUS
OCTOBER 27, 2000
USAA INDEX FUNDS
TABLE OF CONTENTS
-----------------------------------------------------------------
Overview of Index Funds 2
-----------------------------------------------------------------
USAA S&P 500 Index Fund 4
-----------------------------------------------------------------
USAA Extended Market Index Fund 8
-----------------------------------------------------------------
USAA Nasdaq-100 Index Fund 12
-----------------------------------------------------------------
USAA Global Titans Index Fund 15
-----------------------------------------------------------------
The Basics of Index Investing 18
-----------------------------------------------------------------
Fund and Portfolio Management 19
-----------------------------------------------------------------
Using Mutual Funds in an Investment Program 22
-----------------------------------------------------------------
How to Invest 22
-----------------------------------------------------------------
How to Redeem 24
-----------------------------------------------------------------
Important Information About Purchases and Redemptions 25
-----------------------------------------------------------------
Exchanges 25
-----------------------------------------------------------------
Shareholder Information 26
-----------------------------------------------------------------
Financial Highlights 29
-----------------------------------------------------------------
Appendix A 30
-----------------------------------------------------------------
Appendix B 32
-----------------------------------------------------------------
Appendix C 33
-----------------------------------------------------------------
AS WITH OTHER MUTUAL FUNDS, THE SECURITIES AND EXCHANGE COMMISSION HAS NOT
APPROVED OR DISAPPROVED OF THESE FUNDS' SHARES OR DETERMINED WHETHER THIS
PROSPECTUS IS ACCURATE OR COMPLETE. ANYONE WHO TELLS YOU OTHERWISE IS
COMMITTING A CRIME.
AN INVESTMENT IN THESE FUNDS IS NOT A DEPOSIT OF USAA FEDERAL SAVINGS
BANK, OR ANY OTHER BANK, AND IS NOT INSURED OR GUARANTEED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY.
USAA INVESTMENT MANAGEMENT COMPANY MANAGES THESE FUNDS. FOR EASIER
READING, USAA INVESTMENT MANAGEMENT COMPANY WILL BE REFERRED TO AS "WE" OR
"US" THROUGHOUT THE PROSPECTUS.
<PAGE>
USAA INDEX FUNDS
-------------------------------------------------------------------------------
USAA INVESTMENT MANAGEMENT COMPANY MANAGES THESE FUNDS. FOR EASIER READING,
USAA INVESTMENT MANAGEMENT COMPANY WILL BE REFERRED TO AS "WE" OR "US"
THROUHGOUT THE PROSPECTUS
OVERVIEW OF INDEX FUNDS
WHAT ARE INDEX FUNDS?
[SIDE BAR]
FUND INCEPTION DATES
S&P 500 Index
MAY 1, 1996
Extended Market Index
Nasdaq-100 Index
Global Titans Index
OCTOBER 27, 2000
Index funds are mutual funds that attempt to mirror the performance of a
specific index. An index is an unmanaged group of securities whose overall
performance is used as a standard to measure investment performance of a
particular market. It is a passive measure of stock market returns. It does not
factor in the costs of buying, selling, and holding stocks, which are reflected
in a fund's results. In this prospectus, we offer you a choice of four index
funds that provide you a convenient and cost-efficient means of investing in a
portfolio that generally reflects the performance of some portion of the stock
market. An index fund has operating expenses and transaction costs while the
market index does not. Keep in mind, the target index is a model, not an actual
portfolio. Therefore, while a fund attempts to track its target index as
closely as possible, it typically will not match the performance of the index
exactly. For additional information on index investing, see THE BASICS OF INDEX
INVESTING on page 18.
The chart below shows the performance of three of the four benchmark indices
relevant to the USAA Index Funds: the S&P 500(R) Index, the Wilshire 4500
Index(R), and the Nasdaq-100 Index(R). The chart shows total returns for each
of the ten years ended December 1999. Performance information for the Dow Jones
Global Titans IndexSM is unavailable. How the indices performed in the past
does not indicate how they will perform in the future. Past performance of an
index should not be viewed as an indication of the Funds' future performance.
For the actual past performance of the USAA S&P 500 Index Fund, see page 5.
[BAR GRAPH]
CALENDAR YEAR TOTAL RETURN
S&P 500 INDEX WILSHIRE 400 INDEX NASDAQ-100 INDEX
1990 -3.11 -13.58 -10.41
1991 30.40 43.45 64.99
1992 7.61 11.87 8.86
1993 10.06 14.57 10.58
1994 1.31 -2.66 1.50
1995 37.53 33.48 42.54
1996 22.95 17.18 42.54
1997 33.35 25.69 20.63
1998 28.03 8.63 85.31
1999 21.03 35.49 101.95
USAA INDEX FUNDS - 2
<PAGE>
A BRIEF DESCRIPTION OF THE BENCHMARKS
THE S&P 500 INDEX(1) is a well-known stock market index that includes common
stock 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 stock are listed on the New York Stock Exchange.
See APPENDIX C on page 33 for ADDITIONAL INFORMATION ON THE S&P 500 INDEX.
THE WILSHIRE 4500 INDEX (2) is a market capitalization-weighted index of
approximately 6,500 U.S. equity securities. The Wilshire 4500 includes all the
stock in the Wilshire 5000 except for stocks included in the S&P 500. See
APPENDIX C on page 33 for ADDITIONAL INFORMATION ON THE WILSHIRE 4500 INDEX.
THE NASDAQ-100 INDEX(3) is a modified capitalization-weighted index composed of
100 of the largest nonfinancial domestic and international companies listed on
The Nasdaq Stock Market(R) based on market capitalization. See APPENDIX C on
page 33 for the ADDITIONAL INFORMATION ON THE NASDAQ-100 INDEX.
THE DOW JONES GLOBAL TITANS INDEX(4) is a market capitalization-weighted index
composed of 50 stocks of the world's largest multinational companies with a
distinct asset class and on national borders to define their territories. See
APPENDIX C on page 33 for ADDITIONAL INFORMATION ON THE DOW JONES GLOBAL TITANS
INDEX.
1 "STANDARD & POOR'S (R)", "S&P(R)", "STANDARD & POOR'S 500," AND "500" ARE
TRADEMARKS OF THE MCGRAW-HILL COMPANIES, INC. AND HAVE BEEN LICENSED FOR USE.
2 "WILSHIRE 4500" IS A TRADEMARK AND "WILSHIRE" IS A SERVICE MARK FOR WILSHIRE
ASSOCIATES INCORPORATED AND HAVE BEEN SUBLICENSED FOR OUR USE.
3 NASDAQ-100(R), NASDAQ-100 INDEX(R), AND NASDAQ(R) ARE TRADE OR SERVICE MARKS
OF THE NASDAQ STOCK MARKET, INC. (WHICH WITH ITS AFFILIATES ARE THE
"CORPORATIONS") AND HAVE BEEN LICENSED FOR OUR USE.
4 "DOW JONES" AND "DOW JONES GLOBAL TITANS INDEX(SM)" ARE SERVICE MARKS OF DOW
JONES & COMPANY, INC. AND HAVE BEEN LICENSED FOR OUR USE.
ARE THESE FUNDS FOR YOU?
THESE FUNDS 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 some portion of the
stock market.
* You are willing to accept a moderate to a very high level of risk.
THESE FUNDS 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 need an investment that provides tax-free income.
The Funds by themselves do 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.
3 - PROSPECTUS
<PAGE>
USAA INDEX FUNDS
-------------------------------------------------------------------------------
USAA S&P 500 INDEX FUND
OBJECTIVE
The Fund seeks to match, before fees and expenses, the performance of the S&P
500 INDEX. The S&P 500 Index emphasizes stocks of large U.S. companies. The
Company's Board of Directors may change the Fund's investment objective without
shareholder approval.
[SIDE BAR]
THE S&P 500 INDEX
THE STOCKS THAT MAKE UP THE INDEX ARE CURRENTLY THE 500 LEADING U.S.
COMPANIES FROM A BROAD RANGE OF INDUSTRIES. EACH STOCK IN THE INDEX
CONTRIBUTES TO THE INDEX IN THE SAME PROPORTION AS THE VALUE OF ITS
SHARES. THE "500" IS ONE OF THE MOST WIDELY USED BENCHMARKS OF U.S. EQUITY
PERFORMANCE.
INVESTMENT STRATEGY
We are the Fund's investment adviser. Unlike other mutual funds that directly
acquire and manage their own portfolio securities, we will attempt to achieve
the objective by investing all of the Fund's investable assets in the Equity
500 Index Portfolio (Equity 500 Portfolio), a separately registered investment
company advised by Bankers Trust Company (Bankers Trust) with a substantially
similar investment objective as the Fund. Therefore, your interest in the
Equity 500 Portfolio's securities is indirect, and the investment
characteristics of the Fund will correspond directly to those of the Equity 500
Portfolio. This type of arrangement is commonly referred to as a master-feeder
structure.
To track the S&P 500 Index as closely as possible, under normal market
conditions, Bankers Trust will invest at least 80% of the Equity 500
Portfolio's assets in stocks of companies included in the S&P 500 Index. In
seeking to mirror the performance of the S&P 500 Index, Bankers Trust attempts
to allocate the Equity 500 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. The investment
performance of the Fund will correspond directly to the investment performance
of the Equity 500 Portfolio. 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.
MAIN RISKS OF INVESTING
MARKET RISK
The Fund is subject to 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 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.
CASH FLOW AND TRACKING ERROR RISKS
While the Fund attempts to match the S&P 500 Index as closely as possible, the
ability of the Fund and the Equity 500 Portfolio to meet its investment
objective depends to some extent on the cash flow in and out of the Fund and
other investors in the Equity 500 Portfolio. The Fund's performance may be
affected by factors such as the size of the Fund's portfolio, transaction
costs, management fees and expenses, and brokerage commissions and fees. When a
shareholder buys or sells shares of the Fund, it may result in the Equity 500
Portfolio having to buy or sell stocks in its portfolio. Changes in the Fund's
cash flow affect how closely the Fund will mirror the Index. Because of the
differences between the Index and the portfolio of the Equity 500 Portfolio,
the Fund in turn may not track the Index perfectly.
MASTER-FEEDER STRUCTURE RISK
As a feeder fund in a master-feeder structure, the S&P 500 Index Fund is
subject to certain risk. Actions of larger feeder funds may materially affect
smaller feeder funds investing in the Equity 500 Portfolio. For example, if a
large feeder fund withdraws from the Equity 500 Portfolio, the remaining funds
may experience proportionately higher operating expenses resulting in lower
returns (however, this possibility exists as well for traditionally structured
funds that have large institutional investors). Additionally, the Equity 500
Portfolio may become less diverse, result-
USAA INDEX FUNDS - 4
<PAGE>
ing in increased portfolio risk. Also, feeder funds with a greater pro rata
ownership in the Equity 500 Portfolio could have effective voting control of
the operations of the Equity 500 Portfolio.
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. As with other mutual funds, losing money is also a
risk of investing in this Fund.
FLUCTUATION OF INVESTMENT VALUE
Bankers Trust attempts to keep the Equity 500 Portfolio fully invested in
securities 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 Fund's portfolio.
With respect to the S&P 500 Index Fund, the following bar chart illustrates the
Fund's volatility and performance from year to year for each full calendar year
since the Fund's inception.
[BAR CHART]
CALENDAR YEAR TOTAL RETURN
1997* 33.03
1998 28.62
1999 20.67
*Fund began operations on May 1, 1996.
[SIDE BAR]
9-MONTH TOTAL RETURN
-1.54% (9/30/00)
BEST QUARTER
21.33% 4TH QTR. 1998
WORST QUARTER
-9.83% 3RD QTR. 1998
TOTAL RETURN MEASURES THE PRICE CHANGE IN A SHARE ASSUMING THE
REINVESTMENT OF ALL DIVIDEND INCOME AND CAPITAL GAIN DISTRIBUTIONS.
The following table shows how the Fund's average annual TOTAL RETURNS for the
one-year period, as well as the life of the Fund, compared to those of the S&P
500 Index itself. Remember, historical performance does not necessarily
indicate what will happen in the future.
-------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
(FOR THE PERIODS ENDING DECEMBER 31, 1999)
PAST SINCE INCEPTION
1 YEAR MAY 1, 1996
-------------------------------------------------------------------------------
S&P 500 Index Fund* 20.67% 27.15%
S&P 500 Index 21.03% 27.33%
-------------------------------------------------------------------------------
* EXCLUDES $10 ACCOUNT MAINTENANCE FEE, WHICH IS WAIVED FOR ACCOUNTS OF $10,000
OR MORE.
FEES AND EXPENSES
This summary shows what it will cost you, directly and indirectly, to invest in
the Fund.
SHAREHOLDER TRANSACTION EXPENSES -- DIRECT COSTS
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 $12 domestic wire fee and a $35 foreign wire fee. (Your
bank may also charge a fee for receiving wires.)
REDEMPTION ANNUAL ACCOUNT
FEE MAINTENANCE FEE
-------------------------------------------------------------------------------
None $10 (for accounts under $10,000)
5 - PROSPECTUS
<PAGE>
USAA INDEX FUNDS
-------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES - INDIRECT COSTS
Fund expenses come out of the Fund's assets and are reflected in the Fund's
share price and dividends. "Other Expenses" include expenses such as custodian,
transfer agency, 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, 1999, as adjusted to reflect changes in the underlying contracts
for services, and are calculated as a percentage of average net assets (ANA).
[SIDE BAR]
12-b FEES
SOME MUTUAL FUNDS CHARGE THESE FEES TO PAY FOR ADVERTISING AND OTHER COSTS
OF SELLING FUND SHARES.
MANAGEMENT DISTRIBUTION OTHER TOTAL ANNUAL
FEES (12b-1) Fees EXPENSES OPERATING EXPENSES
-------------------------------------------------------------------------------
.11% None .07% .18%*
* WE ARE CONTRACTUALLY ENTITLED TO RECEIVE FEES FROM THE FUND ONLY TO THE
EXTENT THAT THE AGGREGATE ANNUAL OPERATING EXPENSES OF THE FUND AND THE
PORTFOLIO DO NOT EXCEED .18% OF THE FUND'S ANA.
USAA SHAREHOLDER ACCOUNT SERVICES, THE FUND'S TRANSFER AGENT, ASSESSES A $10
ANNUAL ACCOUNT MAINTENANCE FEE TO ALLOCATE PART OF THE FIXED COSTS OF
MAINTAINING SHAREHOLDER ACCOUNTS. 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 26
FOR FURTHER INFORMATION.
EXAMPLE OF EFFECT OF FUND'S OPERATING EXPENSES
This example is intended to help you compare the cost 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.
1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------------------------------------------------------------------------------
$18 $58 $101 $230
ADDITIONAL INFORMATION ABOUT FUND INVESTMENTS
Q WILL THE FUND PURCHASE OTHER TYPES OF SECURITIES?
A Under normal market conditions, Bankers Trust will attempt to invest as
much of the Equity 500 Portfolio's assets as is practical in stocks
included in the S&P 500 Index. However, the Equity 500 Portfolio may hold
up to 20% of its assets in short-term debt securities, money market
instruments, stock index futures, and options.
The Equity 500 Portfolio may invest, to a limited extent, in stock index
futures and options. The Equity 500 Portfolio will not use these
derivative instruments for speculative purposes or as leveraged
investments that magnify the gains or losses of an investment. These
investments tend to reduce transaction costs or add value when they 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 that investments in futures and options
used for risk management may not have the intended effects and may result
in losses or missed opportunities.
If the Equity 500 Portfolio invests in FUTURES CONTRACTS AND OPTIONS ON
FUTURES CONTRACTS for nonhedging purposes, the margin and premiums
required to make those investments will not exceed 5% of the Equity 500
Portfolio's assets after taking into account unrealized profits and losses
on the contracts. Futures contracts and options on futures contracts used
for nonhedging purposes involve greater risks than stock investments.
[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.
For a description of the futures and options the Equity 500 Portfolio may use
and some of their associated risks, see APPENDIX A on page 30.
USAA INDEX FUNDS - 6
<PAGE>
Q HOW DO FUNDS IN A MASTER-FEEDER STRUCTURE OPERATE?
[SIDE BAR]
HOW A MASTER-FEEDER
STRUCTURE OPERATES:
YOU BUY SHARES IN THE FUND
[ARROW]
THE FUND INVEST IN THE
PORTOFOLIO
[ARROW]
THE PORTFOLIO INVEST IN
S&P 500 INDEX STOCKS
AND OTHER SECURITIES
A The Equity 500 Portfolio is considered a master fund. The S&P 500 Index
Fund is considered a feeder fund and invests all of its assets in the
Equity 500 Portfolio. The Equity 500 Portfolio may also accept investments
from other feeder funds, typically mutual funds or institutional
investors. All feeder funds will invest in the Equity 500 Portfolio under
the same terms and conditions and will bear the Equity 500 Portfolio's
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 Equity 500 Index Fund may withdraw its investment from the Equity 500
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 Equity 500 Portfolio's investment objective, policies, or restrictions
may require the Fund to withdraw its interest in the Equity 500 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, such as the selection of a sub-adviser. See CHANGE OF
Subadvisers on page 20 for additional information.
PORTFOLIO MANAGER
Bankers Trust, an indirect wholly owned subsidiary of Deutsche Bank AG, 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 $192 billion as of August 30, 2000. Of that total, approximately $156
billion is in U.S. assets.
7 - PROSPECTUS
<PAGE>
USAA INDEX FUNDS
-------------------------------------------------------------------------------
USAA EXTENDED MARKET INDEX FUND
OBJECTIVE
The Fund seeks to match, before fees and expenses, the performance of the U.S.
stocks not included in the S&P 500 Index as represented by the WILSHIRE 4500
INDEX. The Wilshire 4500 Index measures the performance of the equity
securities of all U.S.-headquartered companies with readily available price
data, excluding companies in the S&P 500 Index. The Company's Board of
Directors may change the Fund's investment objective without shareholder
approval.
[SIDE BAR]
THE WILSHIRE 4500 INDEX
THE INDEX WAS CREATED ON DECEMBER 31, 1983. IT MEASURES THE PERFORMANCE OF
ALL SMALL-AND MID-CAP STOCKS REGULARLY TRADED ON THE AMERICAN AND NEW YORK
STOCK EXCHANGES AND THE NASDAQ OVER-THE- COUNTER MARKET. IT IS CON-
STRUCTED USING THE WILSHIRE 5000 SECURITIES WITH THE SECURITIES IN THE
STANDARD & POOR'S 500 INDEX REMOVED.
INVESTMENT STRATEGY
We are the Fund's investment adviser. Unlike other mutual funds that directly
acquire and manage their own portfolio securities, we will attempt to achieve
the objective by investing all of the Fund's investable assets in the Master
Extended Market Index Series of the Quantitative Master Series Trust (Extended
Market Portfolio), which is a separate fund advised by Merrill Lynch
Quantitative Advisers (MLQA), a division of Fund Asset Management, L.P. with a
substantially similar investment objective. Therefore, your interest in the
Extended Market Portfolio's securities is indirect, and the investment
characteristics of the Fund will correspond directly to those of the Extended
Market Portfolio. This type of arrangement is commonly referred to as a
master-feeder structure.
To track the Wilshire 4500 Index as closely as possible, under normal market
conditions, MLQA will invest at least 80% of the Extended Market Portfolio's
assets in stocks of companies that are included in the Wilshire 4500 Index. In
seeking to mirror the performance of the Wilshire 4500 Index, MLQA attempts to
allocate the Extended Market Portfolio's investments among stocks in
approximately the same weightings as the Wilshire 4500 Index, beginning with
the stocks that make up the larger portion of the Index's value. It will not be
MLQA's intent, however, to fully replicate the Wilshire 4500 Index, because the
Index includes more than 6,500 stocks. MLQA may exclude any Wilshire 4500 Index
stock from the Extended Market Portfolio due to that stock's illiquidity, high
transaction costs, or small weighting in the Index.
MAIN RISKS OF INVESTING
MARKET RISK
The Fund is subject to 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 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.
CASH FLOW AND TRACKING ERROR RISKS
While the Fund attempts to match the Wilshire 4500 Index as closely as
possible, the ability of the Extended Market Portfolio to meet its investment
objective depends to some extent on the cash flow in and out of the Fund and
other investors in the Extended Market Portfolio. The Fund's performance may be
affected by factors such as the size of the Fund's portfolio, transaction
costs, management fees and expenses, and brokerage commissions and fees. When a
shareholder buys or sells shares of the Fund, it may result in the Extended
Market Portfolio having to buy or sell stocks in its portfolio. Changes in the
Fund's cash flow affect how closely the Fund will mirror the Wilshire 4500
Index. Because of the differences between the Index and the portfolio of the
Extended Market Portfolio, the Fund in turn may not track the Index perfectly.
Because this Fund selects a representative sample of stocks from the Wilshire
4500 Index as opposed to investing in each stock composing the Index, tracking
error may at times be higher than a fund that invests in each stock of the
Wilshire 4500 Index.
USAA INDEX FUNDS - 8
<PAGE>
MASTER-FEEDER STRUCTURE RISK
As a feeder fund in a master-feeder structure, the Fund is subject to certain
risk. Actions of larger feeder funds may materially affect smaller feeder funds
investing in the Extended Market Portfolio. For example, if a large feeder fund
withdraws from the Extended Market Portfolio, the remaining funds may
experience proportionately higher operating expenses, resulting in lower
returns (however, this possibility exists as well for traditionally structured
funds that have large institutional investors). Additionally, the Extended
Market Portfolio may own fewer stocks composing the Index, resulting in
increased portfolio risk. Also, feeder funds with a greater pro rata ownership
in the Extended Market Portfolio could have effective voting control of the
operations of the Extended Market Portfolio.
SMALL-CAPITALIZATION RISK
Small-cap companies may be more vulnerable than larger companies to adverse
business or economic developments. Small-cap companies may also have limited
product lines, markets, or financial resources. Securities of such companies
may be less liquid and more volatile than securities of larger companies or the
market averages in general and, therefore, may involve greater risk than
investing in securities of larger companies. In addition, small-cap companies
may not be well known to the investing public, may not have institutional
ownership, and may have only cyclical, static, or moderate growth prospects.
Because any investment involves risk, there is no assurance that the Fund's
objective will be achieved. 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. As with other
mutual funds, losing money is also a risk of investing in this Fund.
FLUCTUATION OF INVESTMENT VALUE
MLQA attempts to keep the Extended Market Portfolio fully invested in
securities that are representative of the Wilshire 4500 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 of the Extended
Market Portfolio.
Performance history for the Extended Market Index Fund will be available in the
prospectus after the Fund has been in operation for one full calendar year.
FEES AND EXPENSES
This summary shows what it will cost you, directly and indirectly, to invest in
the Fund.
SHAREHOLDER TRANSACTION EXPENSES - DIRECT COSTS
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 $12 domestic wire fee and a $35 foreign wire fee. (Your
bank may also charge a fee for receiving wires.)
ANNUAL FUND OPERATING EXPENSES - INDIRECT COSTS
Fund expenses come out of the Fund's assets and are reflected in the Fund's
share price and dividends. "Other Expenses" such as custodian, transfer agency,
and legal fees have been estimated for the Fund's first year of operation and
are calculated as a percentage of average net assets (ANA). The figures below
are based upon the Fund and Extended Market Portfolio combined and are
calculated as a percentage of ANA.
[SIDE BAR]
12b-FEES
SOME MUTUAL FUNDS CHARGE FEES TO PAY FOR ADVERTISING AND OTHER COSTS OF
SELLING FUND SHARES.
MANAGEMENT DISTRIBUTION OTHER TOTAL ANNUAL
FEES (12b-1) Fees EXPENSES OPERATING EXPENSES
-------------------------------------------------------------------------------
.39% None 1.06% 1.45%*
* WE HAVE VOLUNTARILY AGREED TO LIMIT THE EXTENDED MARKET INDEX FUND'S TOTAL
ANNUAL OPERATING EXPENSES TO .50% OF ITS ANA AND TO REIMBURSE THE FUND FOR
ALL EXPENSES IN EXCESS OF THAT AMOUNT UNTIL MAY 1, 2001. UP TO OCTOBER 27,
2003,
9 - PROSPECTUS
<PAGE>
USAA INDEX FUNDS
-------------------------------------------------------------------------------
WE MAY RECOVER FROM THE FUND AMOUNTS REIMBURSED, SUBJECT TO CERTAIN
LIMITATIONS. WITH THIS REIMBURSEMENT, THE FUND'S TOTAL ANNUAL OPERATING
EXPENSES WOULD BE AS FOLLOWS:
REIMBURSEMENT FROM ACTUAL FUND
TOTAL ANNUAL USAA INVESTMENT OPERATING EXPENSES
OPERATING EXPENSES MANAGEMENT COMPANY AFTER REIMBURSEMENT
-------------------------------------------------------------------------------
1.45% .95% .50%
EXAMPLE OF EFFECT OF FUND'S OPERATING EXPENSES
This example is intended to help you compare the cost 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
(before any applicable reimbursement) remain the same, and (3) you redeem all
of your shares at the end of the periods shown.
1 YEAR 3 YEARS
-------------------------------------------------------
$148 $423
ADDITIONAL INFORMATION ABOUT FUND INVESTMENTS
Q WILL THE FUND PURCHASE OTHER TYPES OF SECURITIES?
A Under normal market conditions, the Extended Market Portfolio's assets
will be invested, as is practical, in stocks included in the Wilshire 4500
Index. However, the Extended Market Portfolio may hold up to 20% of its
assets in short-term debt securities, money market instruments, stock
index futures, and options in most cases to provide liquidity to pay
redemptions and fees.
The Extended Market Portfolio may invest, to a limited extent, in stock
index futures and options. The Extended Market Portfolio will not use
these derivative instruments for speculative purposes or as leveraged
investments that magnify the gains or losses of an investment. These
investments tend to reduce transaction costs or add value when they 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 that investments in futures and options
used for risk management may not have the intended effects and may result
in losses or missed opportunities.
If the Extended Market Portfolio invests in FUTURES CONTRACTS AND OPTIONS
ON FUTURES CONTRACTS for nonhedging purposes, the margin and premiums
required to make those investments will not exceed 5% of the Extended
Market Portfolio's assets after taking into account unrealized profits and
losses on the contracts. Futures contracts and options on futures
contracts used for nonhedging purposes involve greater risks than stock
investments.
[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.
For a description of the futures and options the Extended Market Portfolio
may use and some of their associated risks, see APPENDIX A on page 30.
USAA INDEX FUNDS - 10
<PAGE>
[SIDE BAR]
HOW A MASTER-FEEDER
STRUCTURE OPERATES:
YOU BUY SHARES IN THE FUND
[ARROW]
THE FUND INVESTS IN THE
PORTFOLIO
[ARROW]
THE PORTFOLIO INVEST IN
WILSHIRE 4500 INDEX STOCKS
AND OTHER SECURITIES
Q HOW DO FUNDS IN A MASTER-FEEDER STRUCTURE OPERATE?
A The Extended Market Portfolio is considered a master fund. The Extended
Market Index Fund is considered a feeder fund and invests all of its
assets in the Extended Market Portfolio. The Extended Market Portfolio may
also accept investments from other feeder funds, typically mutual funds or
institutional investors. All feeder funds will invest in the Extended
Market Portfolio under the same terms and conditions and will bear the
Extended Market Portfolio's 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 Extended Market Index Fund may withdraw its investment from the
Extended Market 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 Extended Market Portfolio's investment objective,
policies, or restrictions may require the Fund to withdraw its interest in
the Extended Market 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, such as the selection of a
subadviser. See CHANGE OF SUBADVISERS on page 20 for additional
information.
PORTFOLIO MANAGER
Merrill Lynch Quantitative Advisers (MLQA) operates as a division of Fund Asset
Management, L.P. (FAM) a wholly owned indirect subsidiary of Merrill Lynch &
Co., Inc. FAM is an affiliate of Merrill Lynch Investment Managers, L.P.
(MLIM), which is a wholly owned subsidiary of Merrill Lynch & Co. MLIM is one
of the world's largest global investment management organizations and had
approximately $571 billion in investment company and other portfolio assets
under management as of September 30, 2000. FAM has both the experience and
expertise to offer a broad range of investment services to many diversified
market segments. FAM's Quantitative Advisers division specializes in managing
index and quantitative portfolios and is headed by a group of professionals who
have been together over 15 years.
11 - PROSPECTUS
<PAGE>
USAA INDEX FUNDS
-------------------------------------------------------------------------------
USAA NASDAQ-100 INDEX FUND
OBJECTIVE
The Fund seeks to match, before fees and expenses, the performance of the
stocks composing the NASDAQ-100 INDEX. The Nasdaq-100 Index represents the
largest nonfinancial stocks traded on The Nasdaq Stock Market. The Company's
Board of Directors may change the Fund's investment objective without
shareholder approval.
[SIDE BAR]
THE NASDAQ-100 INDEX
THE INDIVIDUAL STOCKS THAT MAKE UP THE INDEX HAVE TOTAL MARKET VALUES
RANGING IN SIZE FROM $951.2 MILLION TO $401.1 BILLION AS OF OCTOBER 1,
2000.
INVESTMENT STRATEGY
We are the Fund's investment adviser. We have retained Barclays Global Fund
Advisors (Barclays) to serve as subadviser for the Fund. Barclays is
responsible for investing the Fund's assets. Under normal market conditions,
Barclays attempts to achieve the Fund's objective by investing at least 80% of
the Fund's assets in the stocks of companies composing the Nasdaq-100 Index.
The Nasdaq-100 Index represents the largest and most active nonfinancial
domestic and international companies listed on The Nasdaq Stock Market based on
market capitalization. Eligibility criteria include a minimum average daily
trading volume of 100,000 shares. The security must be of a nonfinancial
company, not currently in bankruptcy, and only one class of the security is
allowed. The security must have "seasoned" on The Nasdaq Stock Market or
another recognized market, meaning that the security has been listed on a
market for at least two years. If a security would otherwise qualify to be in
the top 25% of the issuers included in the Index by market capitalization, then
a one-year "seasoning" criteria would apply. If the security is a foreign
security, the company must have a worldwide market value of at least $10
billion, a U.S. market value of at least $4 billion, and average trading volume
of at least 200,000 shares per day, and be eligible for listed options trading.
Additionally, a security may not be added to the Index if it has entered into
any agreement that would result in it no longer being listed on The Nasdaq
Stock Market within the next six months.
Barclays will normally invest in all the stocks in the Nasdaq-100 Index in
roughly the same proportions as their weightings in the Index. While Barclays
attempts to replicate the Index, there may be times when the Fund and the Index
do not match exactly. At times, Barclays may purchase a stock not included in
the Nasdaq-100 Index when it is believed to be a cost-efficient way of
approximating the Index's performance, for example, in anticipation of a stock
being added to the Index.
MAIN RISKS OF INVESTING
MARKET RISK
The Fund is subject to 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 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.
SECTOR RISK
The returns from a specific type of security may trail returns from other asset
classes or the overall market. For example, the stocks that make up the Index
are currently heavily weighted in the technology sectors. High volatility or
poor performance of the sectors will directly affect the Fund's performance.
Sectors will go through cycles of doing better or worse than stocks or bonds in
general. These periods may last for several years.
CASH FLOW AND TRACKING ERROR RISKS
While the Fund attempts to match the Nasdaq-100 Index as closely as possible,
the ability of the Fund to meet its investment objective depends to some extent
on the cash flow in and out
USAA INDEX FUNDS - 12
<PAGE>
of the Fund. The Fund's performance may be affected by factors such as the size
of the Fund's portfolio, transaction costs, management fees and expenses, and
brokerage commissions and fees. When a shareholder buys or sells shares of the
Fund, the Fund generally has to buy or sell stocks in its portfolio. Changes in
the Fund's cash flow affect how closely the Fund will mirror the Nasdaq-100
Index. Because of the differences between the Index and the Fund's portfolio,
the Fund may not track the Nasdaq-100 Index perfectly.
NONDIVERSIFICATION RISK
The Fund is considered nondiversified, which means that it may invest a greater
percentage of its assets in a single issuer. Because a relatively high
percentage of the Fund's total assets may be invested in the securities of a
single issuer or a limited number of issuers, the securities of the Fund may be
more sensitive to changes in the market value of a single issuer, a limited
number of issuers, or large companies generally. Such a focused investment
strategy may increase the volatility of the Fund's investment results because
this Fund may be more susceptible to risks associated with a single economic,
political, or regulatory event than a diversified fund.
FOREIGN INVESTING RISK
Because the Fund may invest in securities of foreign issuers, it is subject to
the risks of foreign investing. These risks include currency-exchange-rate
fluctuations; increased-price volatility; different accounting, reporting, and
disclosure requirements; and political or social instability.
Because any investment involves risk, there is no assurance that the Fund's
objective will be achieved. 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. As with other
mutual funds, losing money is also a risk of investing in this Fund.
FLUCTUATION OF INVESTMENT VALUE
Barclays attempts to keep the Fund's portfolio fully invested in securities
that are representative of the Nasdaq-100 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 Fund's portfolio.
Performance history for the Nasdaq-100 Index Fund will be available in the
prospectus after the Fund has been in operation for one full calendar year.
FEES AND EXPENSES
This summary shows what it will cost you, directly and indirectly, to invest in
the Fund.
SHAREHOLDER TRANSACTION EXPENSES - DIRECT COSTS
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 $12 domestic wire fee and a $35 foreign wire fee. (Your
bank may also charge a fee for receiving wires.)
ANNUAL FUND OPERATING EXPENSES - INDIRECT COSTS
Fund expenses come out of the Fund's assets and are reflected in the Fund's
share price and dividends. "Other Expenses" such as custodian, transfer agency,
and legal fees have been estimated for the Fund's first year of operation and
are calculated as a percentage of average net assets (ANA).
[SIDE BAR]
12b-FEES
SOME MUTUAL FUNDS CHARGE THESE FEES TO PAY FOR ADVERTISING AND OTHER COSTS
OF SELLING FUND SHARES.
MANAGEMENT DISTRIBUTION OTHER TOTAL ANNUAL
FEES (12b-1) Fees EXPENSES OPERATING EXPENSES
-------------------------------------------------------------------------------
.55% None 1.08% 1.63%*
* WE HAVE VOLUNTARILY AGREED TO LIMIT THE NASDAQ-100 INDEX FUND'S TOTAL ANNUAL
OPERATING EXPENSES TO .85% OF ITS ANA AND TO REIMBURSE THE FUND FOR ALL
EXPENSES IN EXCESS OF THAT AMOUNT UNTIL MAY 1, 2001. UP TO OCTOBER 27, 2003,
WE MAY
13 - PROSPECTUS
<PAGE>
USAA INDEX FUNDS
-------------------------------------------------------------------------------
RECOVER FROM THE FUND AMOUNTS REIMBURSED, SUBJECT TO CERTAIN LIMITATIONS.
WITH THIS REIMBURSEMENT, THE FUND'S TOTAL ANNUAL OPERATING EXPENSES WOULD
BE AS FOLLOWS:
REIMBURSEMENT FROM ACTUAL FUND
TOTAL ANNUAL USAA INVESTMENT OPERATING EXPENSES
OPERATING EXPENSES MANAGEMENT COMPANY AFTER REIMBURSEMENT
-------------------------------------------------------------------------------
1.63% .78% .85%
EXAMPLE OF EFFECT OF FUND'S OPERATING EXPENSES
This example is intended to help you compare the cost 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
(before any applicable reimbursement) remain the same, and (3) you redeem all
of your shares at the end of the periods shown.
1 YEAR 3 YEARS
---------------------------------------------------
$166 $479
ADDITIONAL INFORMATION ABOUT FUND INVESTMENTS
Q WILL THE FUND PURCHASE OTHER TYPES OF SECURITIES?
A Under normal market conditions, the Fund's assets will be invested, as is
practical, in stocks included in the Nasdaq-100 Index. However, the Fund
may hold up to 20% of its assets in short-term debt securities, money
market instruments, stock index futures, and options in most cases to
provide liquidity to pay redemptions and fees.
The Fund may invest, to a limited extent, in stock index futures and
options. The Fund will not use these derivative instruments for
speculative purposes or as leveraged investments that magnify the gains or
losses of an investment. These investments tend to reduce transaction
costs or add value when they 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 that
investments in futures and options used for risk management may not have
the intended effects and may result in losses or missed opportunities.
If the Fund invests in FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
for nonhedging purposes, the margin and premiums required to make those
investments will not exceed 5% of the Fund's assets after taking into
account unrealized profits and losses on the contracts. Futures contracts
and options on futures contracts used for nonhedging purposes involve
greater risks than stock investments.
[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.
For a description of the futures and options the Fund may use and some of their
associated risks, see APPENDIX A on page 30.
PORTFOLIO MANAGER
Barclays is a direct subsidiary of Barclays Global Investors, N.A. (which, in
turn, is an indirect subsidiary of Barclays Bank PLC). Barclays has provided
asset management, administration, and advisory services for over 25 years. As
of June 30, 2000, Barclays Global Investors and its affiliates, including
Barclays, provided investment advisory services for over $833 billion of
assets.
USAA INDEX FUNDS - 14
<PAGE>
-------------------------------------------------------------------------------
USAA GLOBAL TITANS INDEX FUND
OBJECTIVE
The Fund seeks to match, before fees and expenses, the performance of the
stocks composing the DOW JONES GLOBAL TITANS INDEX. The Dow Jones Global Titans
Index currently consists of the 50 largest multinational companies in the
world. Each of these companies currently has a MARKET CAPITALIZATION of at
least $20 billion. The Company's Board of Directors may change the Fund's
investment objective without shareholder approval.
[SIDE BAR]
THE DOW JONES GLOBAL TITANS INDEX
THE INDEX BEGAN TO BE CALCULATED IN JULY 1999 AND CONSISTS OF SECURITIES
OF COMPANIES THAT ARE SELECTED BASED ON A GLOBAL OR MULTINATIONAL
STANDARD. THEREFORE, THESE COMPANIES MAY BE HEADQUARTERED ANYWHERE IN THE
WORLD, ARE MARKET AND INDUSTRY LEADERS ON A GLOBAL LEVEL, AND HAVE
INTERNATIONAL EXPOSURE EITHER FROM SELLING PRODUCTS OUTSIDE THEIR HOME
MARKETS OR PROVIDING SERVICES TO OVERSEAS CLIENTS.
MARKET CAPITALIZATION (MARKET CAP)
IS THE TOTAL MARKET VALUE OF A COMPANY'S OUTSTANDING SHARES OF COMMON
STOCK.
INVESTMENT STRATEGY
We are the Fund's investment adviser. We have retained Barclays Global Fund
Advisors (Barclays) to serve as subadviser for the Fund. Barclays is
responsible for investing the Fund's assets. Under normal market conditions,
Barclays will attempt to achieve the Fund's objective by investing at least 80%
of the Fund's assets in the stocks of companies composing the Dow Jones Global
Titans Index.
The Dow Jones Global Titans Index consists of securities of the 50 largest
multinational companies in the world. The size of the companies is measured by
assets, book value, sales/revenue, net profit, and foreign sales rankings. Any
domestic-focused companies without multinational operations are ineligible for
the Index, no matter how large or successful within domestic markets.
It is the intention of Dow Jones that the major characteristics of the Index
be: market leadership; multinational exposure; global diversification (at both
a regional/country and industry/sector level); high liquidity; low turnover;
and sufficient market coverage.
Barclays may invest the Fund's assets in foreign securities to the extent such
securities are included in the Index. Currently, foreign securities make up
just under 40% of the Index's components and one-third of its market value. The
Index currently includes companies from the United States, Switzerland, the
United Kingdom, Germany, Netherlands, Japan, France, and Finland and may
include companies from other countries in the future.
MAIN RISKS OF INVESTING
MARKET RISK
The Fund is subject to 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 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.
CASH FLOW AND TRACKING ERROR RISKS
While the Fund attempts to match the Dow Jones Global Titans Index as closely
as possible, the ability of the Fund to meet its investment objective depends
to some extent on the cash flow in and out of the Fund. The Fund's performance
may be affected by factors such as the size of the Fund's portfolio,
transaction costs, management fees and expenses, and brokerage commissions and
fees. When a shareholder buys or sells shares of the Fund, the Fund generally
has to buy or sell stocks in its portfolio. Changes in the Fund's cash flow
affect how closely the Fund will mirror the Dow Jones Global Titans Index.
Because of the differences between the Index and the Fund's portfolio, the Fund
may not track the Dow Jones Global Titans Index perfectly.
NONDIVERSIFICATION RISK
The Fund is considered nondiversified, which means that the Fund may invest a
greater percentage of its assets in a single issuer. Because a relatively high
percentage of the Fund's total assets may be invested in the securities of a
single issuer or a limited number of issuers, the securities of the Fund may be
more sensitive to changes in the market value of a single issuer, a limited
number of issuers, or large companies generally. Such a focused investment
strategy may increase
15 - PROSPECTUS
<PAGE>
USAA INDEX FUNDS
-------------------------------------------------------------------------------
the volatility of the Fund's investment results because it may be more
susceptible to risks associated with a single economic, political, or
regulatory event than a diversified fund.
FOREIGN INVESTING RISK
Because the Fund may invest in foreign securities, it is subject to the risks
of foreign investing. These risks include currency-exchange-rate fluctuations;
foreign-market illiquidity; increased- price volatility; exchange-control
regulations; foreign-ownership limits; political instability; different
accounting, reporting, and disclosure requirements; difficulties in obtaining
legal judgments; and foreign withholding taxes.
Because any investment involves risk, there is no assurance that the Fund's
objective will be achieved. 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. As with other
mutual funds, losing money is also a risk of investing in this Fund.
FLUCTUATION OF INVESTMENT VALUE
Barclays attempts to keep the Fund's portfolio fully invested in securities
that are representative of the Dow Jones Global Titans 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 Fund's portfolio.
Performance history for the Global Titans Index Fund will be available in the
prospectus after the Fund has been in operation for one full calendar year.
FEES AND EXPENSES
This summary shows what it will cost you, directly and indirectly, to invest in
the Fund.
SHAREHOLDER TRANSACTION EXPENSES -- DIRECT COSTS
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 $12 domestic wire fee and a $35 foreign wire fee. (Your
bank may also charge a fee for receiving wires.)
ANNUAL FUND OPERATION EXPENSES -- INDIRECT COSTS
Fund expenses come out of the Fund's assets and are reflected in the Fund's
share price and dividends. "Other Expenses" such as custodian, transfer agency,
and legal fees have been estimated for the Fund's first year of operation and
are calculated as a percentage of average net assets (ANA).
[SIDE BAR]
12b-FEES
SOME MUTUAL FUNDS CHARGE THESE FEES TO PAY FOR ADVERTISING AND OTHER COSTS
OF SELLING FUND SHARES.
MANAGEMENT DISTRIBUTION OTHER TOTAL ANNUAL
FEES (12b-1) Fees EXPENSES OPERATING EXPENSES
-------------------------------------------------------------------------------
.60% None 2.21% 2.81%*
* WE HAVE VOLUNTARILY AGREED TO LIMIT THE GLOBAL TITANS INDEX FUND'S TOTAL
ANNUAL OPERATING EXPENSES TO .85% OF ITS ANA AND TO REIMBURSE THE FUND FOR
ALL EXPENSES IN EXCESS OF THAT AMOUNT UNTIL MAY 1, 2001. UP TO OCTOBER 27,
2003, WE MAY RECOVER FROM THE FUND AMOUNTS REIMBURSED, SUBJECT TO CERTAIN
LIMITATIONS. WITH THIS REIMBURSEMENT, THE FUND'S TOTAL ANNUAL OPERATING
EXPENSES WOULD BE AS FOLLOWS:
REIMBURSEMENT FROM ACTUAL FUND
TOTAL ANNUAL USAA INVESTMENT OPERATING EXPENSES
OPERATING EXPENSES MANAGEMENT COMPANY AFTER REIMBURSEMENT
-------------------------------------------------------------------------------
2.81% 1.96% .85%
EXAMPLE OF EFFECT OF FUND'S OPERATING EXPENSES
This example is intended to help you compare the cost 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
(before any applicable reimbursement) remain the same, and (3) you redeem all
of your shares at the end of the periods shown.
1 YEAR 3 YEARS
---------------------------------------------------
$284 $786
USAA INDEX FUNDS - 16
<PAGE>
ADDITIONAL INFORMATION ABOUT FUND INVESTMENTS
Q WILL THE FUND PURCHASE OTHER TYPES OF SECURITIES?
A Under normal market conditions, the Fund's assets will be invested, as is
practical, in stocks included in the Dow Jones Global Titans Index.
However, the Fund may hold up to 20% of its assets in short-term debt
securities, money market instruments, stock index futures, and options in
most cases to provide liquidity to pay redemptions and fees.
The Fund may invest, to a limited extent, in stock index futures and
options. The Fund will not use these derivative instruments for
speculative purposes or as leveraged investments that magnify the gains or
losses of an investment. These investments tend to reduce transaction
costs or add value when they 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 that
investments in futures and options used for risk management may not have
the intended effects and may result in losses or missed opportunities.
If the Fund invests in FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
for nonhedging purposes, the margin and premiums required to make those
investments will not exceed 5% of the Fund's assets after taking into
account unrealized profits and losses on the contracts. Futures contracts
and options on futures contracts used for nonhedging purposes involve
greater risks than stock investments.
[SIDE BAR]
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS ARE USED AS A LOW-COST
METHOD OF GAINING EXPOSURE TO PARTICULAR SECURITIES MARKET WITHOUT
INVESTING DIRECTLY IN THOSE SECURITIES.
For a description of the futures and options the Fund may use and some of
their associated risks, see APPENDIX A on page 30.
PORTFOLIO MANAGER
Barclays is a direct subsidiary of Barclays Global Investors, N.A. (which, in
turn, is an indirect subsidiary of Barclays Bank PLC). Barclays has provided
asset management, administration, and advisory services for over 25 years. As
of June 30, 2000, Barclays Global Investors and its affiliates, including
Barclays, provided investment advisory services for over $833 billion of
assets.
17 -PROSPECTUS
<PAGE>
USAA INDEX FUNDS
-------------------------------------------------------------------------------
THE BASICS OF INDEX INVESTING
Q HOW ARE THE FUNDS' PORTFOLIOS MANAGED?
A The Funds are 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 Funds utilize a "passive" or "indexing" investment
approach in an attempt to match, as closely as possible, the performance
of a particular index.
Generally, this is done by one of two methods. Some index funds hold each
stock found in their target index in approximately the same proportions as
represented in the index itself. This method of indexing is called a
"replication" method. For example, if 5% of the Nasdaq-100 Index were made
up of the stock of a specific company, a fund tracking that Index (such as
the Nasdaq-100 Index Fund) would invest approximately 5% of its assets in
that company. The Nasdaq-100 Index Fund and the Global Titans Index Fund
are generally managed under this approach.
The second method of indexing is referred to as a "sampling" method.
Because it would be very expensive to buy and hold all of the stocks held
in a particular index (such as the Wilshire 4500 Index, which includes
more than 6,500 stocks) many index funds select a representative sample of
stocks from the targeted index that will resemble the full index in terms
of industry weightings, market capitalization, price/earnings ratios,
dividend yield, and other characteristics. For example, if 10% of the
Wilshire 4500 Index were made up of technology stocks, the Extended Market
Portfolio would invest approximately 10% of its assets in some, but not
all, of the technology stocks included in the Index. The Extended Market
Portfolio and the Equity 500 Portfolio are managed in this way.
Q AS AN INVESTOR, WHAT ARE THE BENEFITS OF USING A PASSIVE, OR INDEXING,
APPROACH?
A Indexing appeals to many investors because it:
* 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 HOW CLOSELY WILL THE FUNDS MATCH THEIR RESPECTIVE INDICES?
A In seeking to mirror the performance of their particular index, Bankers
Trust, MLQA, and Barclays will attempt to allocate the investments of the
Equity 500 Portfolio, the Extended Market Portfolio, the Nasdaq-100 Index
Fund, and the Global Titans Index Fund among stocks in approximately the
same weightings as the indices themselves, beginning with the stocks that
make up the larger portion of the particular index's value.
Over the long term, Bankers Trust and MLQA will seek a correlation between
the performance of the Equity 500 Portfolio and the Extended Market
Portfolio, respectively, and Barclays will seek a correlation between the
performance of the Nasdaq-100 Index Fund and the Global Titans Index Fund,
before expenses, and that of the particular index of 0.95 or better. A
figure of 1.00 would indicate perfect correlation, meaning that the Equity
500 Portfolio, the Extended Market Portfolio, the Nasdaq-100 Index Fund,
and the Global Titans Index Fund always move up in value when their
respective index rises and down in value when their respective index
declines. In the unlikely event that the targeted correlation is not
achieved, alternative structures may be considered.
USAA INDEX FUNDS - 18
<PAGE>
FUND AND PORTFOLIO MANAGEMENT
The Board of Directors of USAA Mutual Fund, Inc. (Company), of which these
Funds are series, supervises the business affairs of the Company, while the
business affairs of the Equity 500 Portfolio and the Extended Market Portfolio
are subject to the supervision of their respective Boards of Trustees. No
director of the Company also serves as a trustee of the Equity 500 Portfolio or
the Extended Market Portfolio.
MANAGEMENT AND ADVISORY SERVICES
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. Our mailing address is 9800
Fredericksburg Road, San Antonio, Texas 78288.
[SIDE BAR]
TOTAL ASSETS UNDER MANAGEMENT BY
USAA INVESTMENT MANAGEMENT COMPANY
APPROMIMATELY $42 BILLION
With respect to the S&P 500 INDEX FUND, we provide certain management services
to the Fund pursuant to a Management Agreement. We are responsible for
monitoring the services provided to the Equity 500 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
interest of the Fund's shareholders to withdraw its investment in the Equity
500 Portfolio, we would be responsible for directly managing the assets of the
Fund. In such event, the Fund would pay us an annual fee of one-tenth of one
percent (.10%) 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.
With respect to the EXTENDED MARKET INDEX FUND, we provide certain management
services to the Fund pursuant to a Management Agreement. We are responsible for
monitoring the services provided to the Extended Market Portfolio by MLQA,
subject to the authority of and supervision by the Company's Board of
Directors. We receive no fee for providing these monitoring services.
Investment of the Fund's assets in the Extended Market Portfolio is not a
funda- mental policy of the Fund and a shareholder vote is not required for the
Fund to withdraw its investment. However, in the event the Company's Board of
Directors determines it is in the best interest of the Fund's shareholders to
withdraw its investment in the Extended Market Portfolio, we would be
responsible for directly managing the assets of the Fund. In such event, the
Fund would pay us an annual fee of three-tenths of one percent (.30%) 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.
With respect to the NASDAQ-100 INDEX FUND and the GLOBAL TITANS INDEX FUND, we
provide management services to the Funds pursuant to an Advisory Agreement. We
are responsible for managing the business affairs of the Funds, subject to the
authority of and supervision by the Company's Board of Directors. For our
services, the Funds pay us an annual fee. The fee for the Nasdaq-100 Index Fund
is computed at one-fifth of one percent (.20%) of average net assets. The fee
for the Global Titans Index Fund is computed at one-fourth of one percent
(.25%) of average net assets. We also provide services related to selling the
Fund's shares and receive no compensation for those services.
We have agreed, through May 1, 2001, to waive our annual management fee to the
extent that total expenses of the Funds' average annual net assets exceed .50%,
.85%, and .85% of the Extended Market Index Fund, the Nasdaq-100 Index Fund,
and the Global Titans Index Fund, respectively. Under these agreements, these
Funds are required to pay us back the amount waived in subsequent years through
October 27, 2003, but only if the additional payments do not cause the Funds'
total expenses to exceed .50%, .85%, and .85%, respectively, of each Fund's
average annual net assets.
19 - PROSPECTUS
<PAGE>
USAA INDEX FUNDS
-------------------------------------------------------------------------------
BANKERS TRUST
At the present time, the Company seeks to achieve the S&P 500 Index Fund's
investment objective by investing all the Fund's assets in the Equity 500
Portfolio. The Equity 500 Portfolio has retained the services of Bankers Trust
Company, with headquarters at 130 Liberty Street, New York, New York 10006 as
investment adviser.
Under its Investment Advisory Agreement, Bankers Trust receives a fee from the
Equity 500 Portfolio, computed daily and paid monthly, at the annual rate of
.05% of the average daily net assets of the Equity 500 Portfolio.
MERRILL LYNCH QUANTITATIVE ADVISERS
At the present time, the Company seeks to achieve the Extended Market Index
Fund's investment objective by investing all of the Fund's assets in the
Extended Market Portfolio. The Extended Market Portfolio has retained the
services of Merrill Lynch Quantitative Advisers (MLQA), a division of Fund
Asset Management, L.P., located at World Financial Center, 225 Liberty Street,
New York, New York 10281-6100 as investment adviser.
Under its Amended and Restated Management Agreement, MLQA receives a fee from
the Extended Market Portfolio, computed daily and paid monthly, at the annual
rate of .01% of average daily net assets of the Extended Market Portfolio.
BARCLAYS
We have entered into a subadvisory agreement (Subadvisory Agreement) with
Barclays Global Fund Advisors (Barclays), located at 45 Fremont Street, San
Francisco, California 94105 to delegate the day-to-day discretionary management
of the assets of the Nasdaq-100 Index Fund and the Global Titans Index Fund.
Under the Subadvisory Agreement, Barclays manages the assets of the Funds,
subject to the general supervision of the Company's Board of Directors and us,
in accordance with the Funds' investment objectives, policies, and
restrictions.
Barclays is compensated by us out of the amounts we receive from the Funds. We
may terminate the Subadvisory Agreement upon 60 days' notice.
CHANGE OF SUBADVISERS
We plan to apply for an exemptive order from the Securities and Exchange
Commission (SEC) that would permit us, with the approval of the Company's Board
of Directors, to retain a different subadviser for either the Nasdaq-100 Index
Fund or the Global Titans Index Fund or to withdraw the S&P 500 Index Fund's
interest from the Equity 500 Portfolio or the Extended Market Index Fund's
interest from the Extended Market Portfolio and retain a subadviser to manage
the S&P 500 Index Fund or the Extended Market Index Fund outside of a
master-feeder structure, without submitting the respective investment
Subadvisory Agreements to a vote of the Fund's shareholders. We would notify
shareholders in the event of any change in the identity of the subadviser of a
Fund. Until or unless this exemptive order is granted, if a duly appointed
subadviser is terminated or otherwise ceases to advise either the Nasdaq-100
Index Fund or the Global Titans Index Fund, or if the S&P 500 Index Fund or the
Extended Market Index Fund is to be managed separately by a subadviser rather
than within a master-feeder structure, the Company would be required to submit
the investment Subadvisory Agreement with the new subadviser to the Fund's
shareholders for approval. However, there is no guarantee that the SEC will
grant such exemptive order.
PORTFOLIO TURNOVER
Generally, a passively managed fund sells securities only to respond to
redemption requests or to adjust the number of shares held to reflect a change
in the Portfolios' or Funds' target index. We do not expect any of the Funds to
have a high portfolio turnover rate.
[SIDE BAR]
ANNUAL PORTFOLIO TURNOVER RATE MEASURES THE FREQUENCY THAT EACH PORTFOLIO
OR FUND SELLS AND REPLACES THE VALUE OF ITS SECURITIES FOR A GIVEN PERIOD.
USAA INDEX FUNDS - 20
<PAGE>
ADMINISTRATIVE AND SUBADMINISTRATIVE SERVICES
USAA INVESTMENT MANAGEMENT COMPANY
Under an Administration Agreement with the S&P 500 INDEX 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 Agreement with the EXTENDED MARKET INDEX FUND, we
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 .38%. Up to .10% of this fee shall be paid to MLQA for
subadministrative services provided on our behalf. We may also delegate one or
more of our responsibilities to others at our expense.
Under an Administration Agreement with the NASDAQ-100 INDEX FUND and the GLOBAL
TITANS INDEX FUND, we generally assist the Company's Board of Directors in all
aspects of the administration and operation of the Funds. The Administration
Agreement provides for each Fund to pay us a fee, computed daily and paid
monthly, at an annual rate equal to .35%. We may also delegate one or more of
our responsibilities to others at our expense.
BANKERS TRUST
Under an Administration and Services Agreement with the Equity 500 Portfolio,
Bankers Trust calculates the value of the assets of the Equity 500 Portfolio
and generally assists the Equity 500 Portfolio's Board of Trustees in all
aspects of the administration and operation of the Equity 500 Portfolio.
Bankers Trust does not charge a fee to the Equity 500 Portfolio for services
provided under this agreement. Bankers Trust may delegate one or more of its
responsibilities to others at Bankers Trust's expense.
MERRILL LYNCH QUANTITATIVE ADVISERS
Under an Administration and Services Agreement with the Extended Market
Portfolio, MLQA calculates the value of the assets of the Extended Market
Portfolio and generally assists the Extended Market Portfolio's Board of
Trustees in all aspects of the administration and operation of the Extended
Market Portfolio. MLQA does not charge a fee to the Extended Market Portfolio
for services provided under this agreement. MLQA may delegate one or more of
its responsibilities to others at MLQA's expense.
21 - PROSPECTUS
<PAGE>
USAA INDEX FUNDS
-------------------------------------------------------------------------------
USING MUTUAL FUNDS
IN AN INVESTMENT PROGRAM
THE IDEA BEHIND MUTUAL FUNDS
Mutual funds provide advantages like professional management and
diversification to all investors. Regardless of whether you are just starting
out or have invested for years, your investment, large or small, buys you 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 the wealthiest people.
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 one of the USAA Index Funds 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.
USAA'S FAMILY OF FUNDS
We offer you another alternative with our asset strategy funds listed in
APPENDIX B under asset allocation on page 32. These unique mutual funds provide
a professionally managed, diversified investment portfolio within a mutual
fund. Designed for the individual who prefers to delegate the asset allocation
process to an investment manager, their structure achieves diversification
across a number of investment categories.
Whether you prefer to create your own mix of mutual funds or use a USAA asset
strategy fund, the USAA family of funds provides a broad range of choices
covering just about any investor's investment objectives. Our 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 32 for a
complete list of the USAA family of no-load mutual funds.
HOW TO INVEST
OPENING AN ACCOUNT
You may open an account and make an investment as described below by mail, in
person, bank wire, phone, or on the Internet. 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 invest in
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 tax withholding requirements set
forth by the IRS.
USAA INDEX FUNDS - 22
<PAGE>
EFFECTIVE DATE
When you make a purchase, your purchase price will be the net asset value (NAV)
per share next determined after we receive your request in proper form. A
fund's NAV is determined at the close of the regular trading session (generally
4 p.m. Eastern Time) of the New York Stock Exchange (NYSE) each day it 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 four- to six-week delay in the effective date of
your purchase. Furthermore, a bank charge may be assessed in the clearing
process and will be deducted from the amount of the purchase.
MINIMUM INVESTMENTS
INITIAL PURCHASE
* $3,000 ($2,000 for IRAs)
ADDITIONAL MINIMUM PURCHASES
* $50 per transaction, per account. Employees of USAA and its affiliated
companies may add to an account through payroll deduction for as little as
$25 per pay period with a $3,000 initial investment.
HOW TO PURCHASE BY...
MAIL
* To open an account, send your application and check to:
USAA Investment Management Company
9800 Fredericksburg Road
San Antonio, TX 78288 (FOR OVERNIGHT MAIL, USE ZIP CODE 78240)
* To add to your account, send your check and the deposit stub that
accompanies your Fund's transaction confirmation to the transfer agent:
USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, TX 78288
IN PERSON
* To open an account, bring your application and check to our San Antonio
investment sales and service office at:
USAA Federal Savings Bank
10750 Robert F. McDermott Freeway
San Antonio, TX 78288
BANK WIRE
* 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 Fund Name
USAA Account Number: 69384998
Shareholder(s) Name(s) _____________________________
Shareholder(s) Mutual Fund Account No._______________
23 - PROSPECTUS
<PAGE>
USAA INDEX FUNDS
-------------------------------------------------------------------------------
ELECTRONIC FUNDS TRANSFER (EFT)
* 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 (IN SAN ANTONIO, 456-7202)
* 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.
USAA TOUCHLINE(R) 1-800-531-8777 (IN SAN ANTONIO, 498-8777)
* In addition to obtaining account balance information, last transactions,
current fund prices, and return information for your Fund, you can use
USAA TouchLine(R) from any touch-tone phone to access your Fund account to
make selected purchases, exchange to another USAA Fund, or make
redemptions. This service is available with an Electronic Services
Agreement (ESA) and EFT Buy/Sell authorization on file.
INTERNET ACCESS - USAA.COM
* You can use your personal computer to perform certain mutual fund
transactions by accessing our Web site. To establish access to your
account, you will need to call 1-800-461-3507 to obtain a registration
number and personal identification number (PIN). Once you have established
Internet access to your account, you will be able to open a new mutual
fund account within an existing registration, exchange to another USAA
Fund, make redemptions, review account activity, check balances, and more.
To place orders by Internet, an ESA and EFT Buy/Sell authorization must be
on file.
HOW TO REDEEM
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 p.m. Eastern Time),
your 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; 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 originally purchased and the
price of the shares 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 BY...
MAIL, IN PERSON, FAX, TELEGRAM, TELEPHONE, TOUCHLINE(R), OR INTERNET
* Send your written instructions to:
USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, TX 78288 (FOR OVERNIGHT MAIL, USE ZIP CODE 78240)
* Visit a member service representative at our San Antonio investment sales
and service office at USAA Federal Savings Bank.
* Send a signed fax to 1-800-292-8177, or send a telegram to USAA
Shareholder Account Services.
USAA INDEX FUNDS - 24
<PAGE>
* Call toll free 1-800-531-8448 (in San Antonio, 456-7202) to speak with a
member service representative.
* Call toll free 1-800-531-8777 (in San Antonio, 498-8777) to access our
24-hour USAA TouchLine(R) service.
* Access our Internet Web site at usaa.com.
Telephone redemption privileges are automatically established when you complete
your application. The Fund will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine; 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,
telegram, or Internet is not available until these certificates are deposited.
IMPORTANT INFORMATION
ABOUT PURCHASES AND REDEMPTIONS
INVESTOR'S GUIDE TO USAA MUTUAL FUND SERVICES
Upon your initial investment with us, you will receive the INVESTOR'S GUIDE to
help you get the most out of your USAA mutual fund account and to 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 ten shares, with certain limitations
EXCHANGES
EXCHANGE PRIVILEGE
The exchange privilege is automatic when you complete your application. You may
exchange shares among Funds in the USAA family of funds, provided you do not
hold these shares in stock certificate form and the shares to be acquired are
offered in your state of residence.
25 - PROSPECTUS
<PAGE>
USAA INDEX FUNDS
-------------------------------------------------------------------------------
Exchanges made through USAA TouchLine(R) and the Internet require an ESA and
EFT Buy/Sell authorization on file. After we receive the exchange orders, the
Funds' 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; 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 originally purchased and the
price of the shares received upon exchange.
The Funds have undertaken certain procedures regarding telephone transactions
as described on page 25.
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). However, each Fund reserves the right to reject a
shareholder's purchase or exchange orders into a Fund at any time when in the
best interest of the Fund. In addition, each Fund reserves the right to
terminate or change the terms of an exchange offer.
SHAREHOLDER INFORMATION
CURRENT FUND PRICE AND TOTAL RETURN
[SIDE BAR]
FUND NUMBER
S&P 500 INDES 34
EXTENDED MARKET INDEX 73
NASDAQ-100 INDEX 74
GLOBAL TITANS INDEX 75
TICKER SYMBOL
A FUND WILL RECEIVE ITS TICKER SYMBOL WHEN IT ACQUIRES $25 MILLION IN
ASSETS OR 1,000 SHAREHOLDERS.
TICKER SYMBOL
S&P 500 INDEX FUND
USSPX
NEWSPAPER SYMBOL
S&P 500 INDEX FUND
S&Pldx
For the most current price and total return information for these Funds, you
may call USAA TouchLine(R) at 1-800-531-8777. Press 1 for the Mutual Fund Menu,
TICKER SYMBOL
A FUND WILL RECEIVE ITS TICKER SYMBOL WHEN IT ACQUIRES $25 MILLION IN
ASSETS OR 1,000 SHAREHOLDERS.
TICKER SYMBOL
S&P 500 INDEX FUND
USSPX
NEWSPAPER SYMBOL
S&P 500 INDEX FUND
S&Pldx
press 1 again for prices and returns. Then, press the FUND NUMBER of the fund
you would like to receive information on followed by the pound sign (#) when
asked for a fund code.
Additionally, you may find the most current price of your Fund's shares in the
business section of your newspaper in the mutual fund section under the heading
"USAA Group" and the appropriate symbol. If you prefer to obtain this
information from an online computer service, you can do so by using its TICKER
SYMBOL.
You may also access this information through our usaa.com Internet Web site
once your account has been established. You must remember that historical
performance does not necessarily indicate what will happen in the future.
You may see the Funds' total returns quoted in advertisements and reports. All
mutual funds must use the same formula to calculate total return. You may also
see a comparison of the Funds' performance to that of other mutual funds with
similar investment objectives and to stock or relevant indices.
SHARE PRICE CALCULATION
[SIDE BAR]
NAV PER SHARE
EQUALS
TOTAL ASSETS
MINUS
LIABLITIES
DIVIDED BY
NUMBER 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. Each Fund's NAV per share is calculated at the close of the
regular trading session of the NYSE, which is usually 4 p.m. Eastern Time.
With respect to the S&P 500 Index Fund, the Equity 500 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 Equity 500
Portfolio's Board of Trustees believes accurately reflects fair value.
USAA INDEX FUNDS - 26
<PAGE>
The Extended Market Index Fund's investment in the Extended Market Portfolio is
valued at the NAV of the Extended Market Portfolio's shares held by the Fund,
which is calculated on the same day and time as the Fund. The assets of the
Extended Market Portfolio are valued generally by using available market
quotations or at fair value as determined in good faith by the Extended Market
Portfolio's Board of Trustees.
The portfolio securities of the Nasdaq-100 Index Fund and the Global Titans
Index Fund, except as otherwise noted, traded primarily on a domestic
securities exchange are valued at the last sales price on that exchange.
Portfolio securities traded primarily on foreign securities exchanges are
valued at the last quoted sales price, or the most recently determined closing
price calculated according to local market convention, available at the time
the Fund is valued. If no sale is reported, the average of the bid and asked
prices is generally used.
Securities trading in various foreign markets may take place on days when the
NYSE is closed. Further, when the NYSE is open, the foreign markets may be
closed. The calculation of a Fund's NAV may not take place at the same time the
prices of certain securities held by the Fund are determined. As a result, the
NAV of a Fund's shares may change on days when the shareholders will not be
able to purchase or redeem shares. In most cases, events affecting the values
of portfolio securities that occur between the time their prices are determined
and the close of normal trading on the NYSE on a day each Fund's NAV is
calculated will not be reflected in the Fund's NAV. If, however, we determine
that a particular event would materially affect a Fund's NAV, then we, under
the general supervision of the Company's Board of Directors, will use all
relevant, available information to determine a fair value for the affected
portfolio securities.
Over-the-counter securities are generally priced at the last sales price or, if
not available, at the average of the bid and asked prices.
Debt securities purchased with maturities of 60 days or less are stated at
amortized cost, which approximates market value. Other debt securities are
valued each business day at their current market value as determined by a
pricing service approved by the Company's Board of Directors. Securities that
cannot be valued by these methods, and all other assets, are valued in good
faith at fair value using methods we have determined under the general
supervision of the Company's Board of Directors.
For additional information on how securities are valued, see VALUATION OF
SECURITIES in the Funds' statement of additional information.
DIVIDENDS AND DISTRIBUTIONS
Each Fund pays net investment income dividends at least annually. Any net
capital gains generally will be distributed at least annually. The Funds will
make additional payments to shareholders, if necessary, to avoid the imposition
of any federal income or excise tax.
We will automatically reinvest all INCOME DIVIDENDS and CAPITAL GAIN
DISTRIBUTIONS in your 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 on the ex-dividend
date. You should consider carefully the effects of purchasing shares of a Fund
shortly before any dividend or distribution. Some or all of these dividends and
distributions are subject to taxes.
[SIDE BAR]
INCOME DIVIDENDS
PAYMENTS TO SHAREHOLDERS OF INCOME FROM INTEREST OR
DIVIDENDS GENERATED BY THE FUND'S INVESTMENTS.
CAPITAL GAIN DISTRIBUTIONS
PAYMENT TO FUND SHAREHOLDERS OF GAINS REALIZED ON
SECURITIES THAT THE FUND HAS SOLD AT A PROFIT, MINUS ANY REALIZED LOSSES.
With respect to the S&P 500 Index Fund, 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
27 - PROSPECTUS
<PAGE>
USAA INDEX FUNDS
-------------------------------------------------------------------------------
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 adviser 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.
[SIDE BAR]
SHORT-TERM CAPITAL GAINS
ARE TAXED AS ORDINARY INCOME FOR ALL TAX BRACKETS.
LONG-TERM CAPITAL GAINS
ARE TAXED AS 10% FOR THOSE INDIVIDUALS IN THE 15% TAX BACKET
AND AT 20% FOR THOSE INDIVIDUALS IN THE 28% TAX BACKET AND ABOVE.
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 a 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 Funds will report information to you annually concerning the tax status of
dividends and distributions for federal income tax purposes.
FUTURE SHAREHOLDER MAILINGS
Through our ongoing efforts to help reduce Fund expenses, each household will
receive a single copy of these Funds' most recent financial reports and
prospectus even if you or a family member own more than one account in the
Funds. For many of you, this eliminates duplicate copies and saves paper and
postage costs to the Funds. However, if you would like to receive individual
copies, please call us and we will begin your individual delivery within 30
days of your request.
USAA INDEX PROSPECTUS - 28
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand a Fund's
financial performance over a five-year period or 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).
No information is presented for the Extended Market Index Fund, the Nasdaq-100
Index Fund, or the Global Titans Index Fund because these Funds were not in
existence as of December 31, 1999.
The information relating to the S&P 500 Index Fund from the Fund's inception
through December 31, 1999, has been audited by PricewaterhouseCoopers LLP,
whose report, along with the Fund's financial statements, are included in the
annual report, which is available upon request.
S&P 500 INDEX FUND
(Unaudited)
Six months Eight months
ended ended
June 30, Year ended December 31, December 31
---------------------------------------------------------
2000 1999 1998 1997 1996*
---------------------------------------------------------
PER SHARE OPERATING
PERFORMANCE
Net asset value at
beginning of period $ 22.92 $ 19.27 $ 15.16 $ 11.57 $ 10.00
Income from investment
operations:
Net investment income .12 .25 .21 .21 .12
Net realized and
unrealized gain on
investments and
futures transactions (.25) 3.71 4.11 3.59 1.57
Total from investment
operations (.13) 3.96 4.32 3.80 1.69
Distributions from:
Net investment
income (.11) (.26) (.21) (.21) (.12)
Realized capital
gains (.01) (.05) -- -- --
---------------------------------------------------------
Total distributions (.12) (.31) (.21) (.21) (.12)
---------------------------------------------------------
Net asset value at end
of period $ 22.67 $ 22.92 $ 19.27 $ 15.16 $ 11.57
=========================================================
Total return (%)** (.57) 20.67 28.62 33.03 16.90
SUPPLEMENTAL DATA AND
RATIOS:
Net assets at end of
period (000) $ 3,402,072 $ 3,196,483 $ 1,855,855 $ 630,619 $ 179,073
Ratios to average net
assets:
Net investment
income (%) 1.06a 1.25 1.40 1.64 2.09a
Expenses after
waivers, including
expenses of the
Equity 500 Index
Portfolio (%) .18a .18b .18b .18 .18a
Expenses before
waivers, including
expenses of Equity
500 Index
Portfolio (%) .18a .18 .20 .25 .33a
Decrease reflected
in above expense
ratio due to
absorption of
expenses by
Bankers Trust
and the Manager (%) -- -- .02 .07 .15a
a Annualized. The ratio is not necessarily indicative of 12 months of
operations.
b Effective May 6, 1998, the manager is 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 0.18% of the Fund's
average net assets.
* Fund commenced operations May 1, 1996.
** Assumes reinvestment of all dividend income and capital gain distributions
during the period; does not reflect $10 annual account maintenance fee.
29 - PROSPECTUS
<PAGE>
APPENDIX A
THE FOLLOWING ARE DESCRIPTIONS OF CERTAIN TYPES OF SECURITIES IN
WHICH THE ASSETS OF THE EXTENDED MARKET AND THE EQUITY 500 PORTFOLIOS
(PORTFOLIOS) AND THE NASDAQ-100 INDEX AND GLOBAL TITANS INDEX FUNDS
(FUNDS) MAY BE INVESTED:
OPTIONS ON STOCK INDICES
The Portfolios and the Funds 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 stocks 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.
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 Portfolios or
the Funds 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 Portfolios' or the Funds' successful use of options
on stock indices will be subject to Bankers Trust's, MLQA's, and Barclays'
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 Portfolios and the Funds 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
Portfolios or Funds or adversely affect the prices of securities which are
intended to be purchased at a later date for the Portfolios or Funds. A Futures
Contract may also be entered into to close out or offset an existing futures
position. In general, each transaction in Futures Contracts involves the
establishment of a position 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 Portfolios or the Funds will rise in value by
an amount that approximately offsets the decline in value of the portion of the
Portfolios' or the Funds' investments that are being hedged. Should general
market prices move in an unexpected manner, the full anticipated benefits of
Futures Contracts may not be achieved or a loss may be realized.
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 or 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 Portfolios or the Funds.
The Portfolios or the Funds may not purchase or sell a Futures Contract or
options thereon if immediately thereafter their margin deposits on its
outstanding Futures Contracts and their premium paid on outstanding options
thereon would exceed 5% of the market value of the Portfolios' or the Funds'
total assets.
USAA INDEX FUNDS - 30
<PAGE>
OPTIONS ON FUTURES CONTRACTS
The Portfolios and the Funds may invest in options on such Futures Contracts
for similar purposes.
ASSET COVERAGE
The Portfolios and the Funds 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 Portfolios' or the
Funds' custodian liquid securities in an amount at all times equal to or
exceeding the Portfolios' or the Funds' commitment with respect to these
instruments or contracts.
ILLIQUID SECURITIES
The Portfolios and the Funds may invest up to 15% of the market value of their
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 same value at which the Portfolios and
the Funds have valued the securities.
FORWARD CURRENCY CONTRACTS
The Nasdaq-100 Index Fund and the Global Titans Index Fund may hold securities
denominated in foreign currencies. As a result, the value of the securities
will be affected by changes in the exchange rate between the dollar and foreign
currencies. In managing currency exposure, we may enter into forward currency
contracts. A forward currency contract involves an agreement to purchase or
sell a specified currency at a specified future date or over a specified time
period at a price set at the time of the contract. We only enter into forward
currency contracts when a Fund enters into a contract for the purchase or sale
of a security denominated in a foreign currency and desires to "lock in" the
U.S. dollar price of that security until settlement.
AMERICAN DEPOSITARY RECEIPTS (ADRS)
The Nasdaq-100 Index Fund and the Global Titans Index Fund may invest in ADRs,
which are foreign shares held by a U.S. bank that issues a receipt evidencing
ownership. Dividends are paid in U.S. dollars.
31 - PROSPECTUS
<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, subject to the limitations described earlier. For more complete
information about the mutual funds managed and distributed by USAA Investment
Management Company, including charges and operating expenses, call us for a
prospectus. Read it carefully before you invest. Mutual fund operating expenses
apply and continue throughout the life of the Fund.
FUND TYPE/NAME RISK
===============================================
CAPITAL APPRECIATION
-----------------------------------------------
Aggressive Growth Very high
Capital Growth Very high
Emerging Markets Very high
First Start Growth Moderate to high
Gold Very high
Growth Moderate to high
Growth & Income Moderate
International Moderate to high
Science & Technology Very high
Small Cap Stock Very high
World Growth Moderate to high
-----------------------------------------------
ASSET ALLOCATION
-----------------------------------------------
Balanced Strategy Moderate
Cornerstone Strategy Moderate
Growth and Tax Strategy Moderate
Growth Strategy Moderate to high
Income Strategy Low to moderate
-----------------------------------------------
INCOME - TAXABLE
-----------------------------------------------
GNMA Low to moderate
High-Yield Opportunities High
Income Moderate
Income Stock Moderate
Intermediate-Term Bond Low to moderate
Short-Term Bond Low
-----------------------------------------------
INCOME - TAX EXEMPT
-----------------------------------------------
Long-Term Moderate
Intermediate-Term Low to moderate
Short-Term Low
State Bond/Income Moderate
-----------------------------------------------
INDEXES
-----------------------------------------------
Extended Market Index High
Global Titans Index Moderate to high
Nasdaq-100 Index Very High
S&P 500 Index Moderate
-----------------------------------------------
MONEY MARKET
-----------------------------------------------
Money Market Low
Tax Exempt Money Market Low
Treasury Money Market Trust Low
State Money Market Low
===============================================
FOREIGN INVESTING IS SUBJECT TO ADDITIONAL RISKS, SUCH AS CURRENCY
FLUCTUATIONS, MARKET ILLIQUIDITY, AND POLITICAL INSTABILITY.
SOME INCOME MAY BE SUBJECT TO STATE OR LOCAL TAXES.
CALIFORNIA, FLORIDA, NEW YORK, AND VIRGINIA FUNDS ARE OFFERED ONLY TO RESIDENTS
OF THOSE STATES.
THE SCIENCE & TECHNOLOGY FUND MAY BE MORE VOLATILE THAN A FUND THAT DIVERSIFIES
ACROSS MANY INDUSTRIES.
"WILSHIRE 4500" IS A TRADEMARK AND "WILSHIRE" IS A SERVICE MARK OF WILSHIRE
ASSOCIATES INCORPORATED AND HAVE BEEN SUBLICENSED FOR OUR USE. THE USAA
EXTENDED MARKET INDEX FUND IS NOT SPONSORED, SOLD, OR PROMOTED BY WILSHIRE
ASSOCIATES INCORPORATED OR ANY OF ITS SUBSIDIARIES OR AFFILIATES, AND MAKES NO
REPRESENTATION REGARDING THE ADVISABILITY OF INVESTING IN THE FUND.
"DOW JONES" AND "DOW JONES GLOBAL TITANS INDEXSM" ARE SERVICE MARKS OF DOW
JONES & COMPANY, INC. AND HAVE BEEN LICENSED FOR OUR USE. THE USAA GLOBAL
TITANS INDEX FUND IS NOT SPONSORED, SOLD, OR PROMOTED BY DOW JONES AND DOW
JONES MAKES NO REPRESENTATION REGARDING THE ADVISABILITY OF INVESTING IN THE
FUND.
NASDAQ-100(R), NASDAQ-100 INDEX(R), AND NASDAQ(R) ARE TRADE OR SERVICE MARKS OF
THE NASDAQ STOCK MARKET, INC. (WHICH WITH ITS AFFILIATES ARE THE
"CORPORATIONS") AND HAVE BEEN LICENSED FOR OUR USE. THE USAA NASDAQ-100 INDEX
FUND IS NOT SPONSORED, SOLD, OR PROMOTED BY THE CORPORATIONS AND THE
CORPORATIONS MAKE NO REPRESENTATION REGARDING THE ADVISABILITY OF INVESTING IN
THE FUND. THE CORPORATIONS MAKE NO WARRANTIES AND BEAR NO LIABILITY WITH
RESPECT TO THE FUND.
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.
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.
USAA INDEX FUNDS - 32
<PAGE>
APPENDIX C
ADDITIONAL INFORMATION ON THE S&P 500 INDEX
Stocks in the S&P 500 Index are weighted according to their market
capitalization. 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.
ADDITIONAL INFORMATION ON THE WILSHIRE 4500 INDEX
"Wilshire 4500" is a trademark and "Wilshire" is a service mark of Wilshire
Associates Incorporated and have been sublicensed for use by USAA Mutual Fund,
Inc. from Fund Asset Management, L.P. (FAM).
The USAA Extended Market Index Fund and the Master Extended Market Index Series
of the Quantitative Master Series Trust are not sponsored, endorsed, sold, or
promoted by Wilshire. Wilshire 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 Wilshire 4500 Index to
track general stock market performance. Wilshire's only relationship to the
Licensee is the licensing of certain trademarks and trade names of Wilshire and
the use of the Wilshire Indices. The Wilshire 4500 Index is composed and
calculated without regard to the Licensee or the Fund. Wilshire has no
obligation to take the needs of the Licensee or the owners of the Fund into
consideration in determining, composing, or calculating the Wilshire 4500
Index. Wilshire does not guarantee the accuracy and/or the completeness of the
Wilshire 4500 Index or any data included therein, and Wilshire shall have no
liability for any errors, omissions, or interruptions therein. Wilshire makes
no warranty, express or implied, as to results to be obtained by Licensee,
owners of the Fund, or any other person or entity from the use of the Wilshire
4500 Index or any data included therein. Wilshire makes no express or implied
warranties, and expressly disclaims all warranties of merchantability or
fitness for a particular purpose or use with respect to the Wilshire 4500 Index
or any data included therein. Without limiting any of the foregoing, in no
event shall Wilshire have any liability for any special, punitive, indirect, or
consequential damages (including lost profits), even if notified of the
possibility of such damages.
ADDITIONAL INFORMATION ON THE NASDAQ-100 INDEX
The Nasdaq-100 Index Fund is not sponsored, endorsed, sold or promoted by The
Nasdaq Stock Market, Inc. (including its affiliates) (Nasdaq, with its
affiliates, are referred to as the Corporations). The Corporations have not
passed on the legality or suitability of, or the accuracy or adequacy of
descriptions and disclosures relating to, the Product(s). The Corporations make
no representation or warranty, express or implied to the owners of the
Product(s) or any member of the public regarding the advisability of investing
in securities generally or in the Product(s) particularly, or the ability of
the Nasdaq-100 Index(R) to track general stock market performance. The
Corporations' onlY relationship to USAA Mutual Fund, Inc. (Licensee) is in the
licensing of the Nasdaq-100(R), Nasdaq-100 Index(R), and Nasdaq(R) trademarks
or service marks, certain trade names of the Corporations and the Use of the
Nasdaq-100 Index(R) which is determined, composed and calculated by Nasdaq
without regard tO Licensee or the Fund. Nasdaq has no obligation to take the
needs of the Licensee or the owners of the Fund into consideration in
determining, composing or calculating the Nasdaq-100 Index(R). ThE Corporations
are not responsible for and have not participated in the determination of the
timing of, prices at, or quantities of the Fund to be issued or in the
determination or calculation of the equation by which the Fund is to be
converted into cash. The Corporations have no liability in connection with the
administration, marketing or trading of the Fund.
THE CORPORATIONS DO NOT GUARANTEE THE ACCURACY AND/OR UNINTERRUPTED CALCULATION
OF THE NASDAQ-100 INDEX(R) OR ANY DATA INCLUDED THEREIN. THE CORPORATIONS MAKE
NO WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY LICENSEE,
OWNERS OF THE FUND, OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE
NASDAQ-100 INDEX(R) OR ANY DATA INCLUDED THEREIN. THE CORPORATIONS MAKE NO
EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIM ALL WARRANTIES OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO THE
NASDAQ-100 INDEX(R) OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE
FOREGOING, IN NO EVENT SHALL
33 - PROSPECTUS
<PAGE>
THE CORPORATIONS HAVE ANY LIABILITY FOR ANY LOST PROFITS OR SPECIAL,
INCIDENTAL, PUNITIVE, INDIRECT, OR CONSEQUENTIAL DAMAGES, EVEN IF NOTIFIED OF
THE POSSIBILITY OF SUCH DAMAGES.
ADDITIONAL INFORMATION ON THE DOW JONES GLOBAL TITANS INDEX
The USAA Global Titans Index Fund is not sponsored, endorsed, sold, or promoted
by Dow Jones. Dow Jones makes no representation or warranty, express or
implied, to the owners of the Fund or any member of the public regarding the
advisability of investing in securities generally or in the Fund particularly.
Dow Jones' only relationship to USAA Mutual Fund, Inc. (Licensee) is the
licensing of certain trademarks, trade names and service marks of Dow Jones and
of the Dow Jones Global Titans IndexSM, which is determined, composed and
calculated by Dow Jones without regard to the Licensee or the Fund. Dow Jones
has no obligation to take the needs of the Licensee or the owners of the Fund
into consideration in determining, composing or calculating the Dow Jones
Global Titans IndexSM. Dow Jones is not responsible for and has not
participated in the determination of the timing of, prices at, or quantities of
the Fund to be issued or in the determination or calculation of the equation by
which the Fund is to be converted into cash. Dow Jones has no obligation or
liability in connection with the administration, marketing or trading of the
Fund.
DOW JONES DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE DOW
JONES GLOBAL TITANS INDEXSM OR ANY DATA INCLUDED THEREIN AND DOW JONES SHALL
HAVE NO LIABILITY FOR ANY ERRORS, OMISSIONS, OR INTERRUPTIONS THEREIN. DOW
JONES MAKES NO WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY
THE LICENSEE, OWNERS OF THE FUND, OR ANY OTHER PERSON OR ENTITY FROM THE USE OF
THE DOW JONES GLOBAL TITANS INDEXSM OR ANY DATA INCLUDED THEREIN. DOW JONES
MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS ALL WARRANTIES,
OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO
THE DOW JONES GLOBAL TITANS INDEXSM OR ANY DATA INCLUDED THEREIN. WITHOUT
LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL DOW JONES HAVE ANY LIABILITY
FOR ANY LOST PROFITS OR INDIRECT, PUNITIVE, SPECIAL, OR CONSEQUENTIAL DAMAGES
OR LOSSES, EVEN IF NOTIFIED OF THE POSSIBILITY THEREOF. THERE ARE NO THIRD
PARTY BENEFICIARIES OF ANY AGREEMENTS OR ARRANGEMENTS BETWEEN DOW JONES AND THE
LICENSEE.
USAA INDEX FUNDS - 34
<PAGE>
NOTES
35 - PROSPECTUS
<PAGE>
If you would like more information about these Funds, you may call
1-800-531-8181 to request a free copy of the Funds' statement of additional
information (SAI) or to ask other questions about the Funds. The SAI has been
filed with the Securities and Exchange Commission (SEC) and is legally a part
of this prospectus. Additionally, you may request a free copy of the S&P 500
Index Fund's annual or semiannual report, in which 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 (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 1-202-942-8090. Additionally, copies of this
information can be obtained, after payment of a duplicating fee, by electronic
request at the following e-mail address: [email protected] or by writing the
Public Reference Section of the Commission, Washington, D.C. 20549-0102.
-------------------------------------------------------------------------------
INVESTMENT ADVISER, UNDERWRITER, AND DISTRIBUTOR
USAA Investment Management Company
9800 Fredericksburg Road
San Antonio, Texas 78288
-------------------------------------------------------------------------------
TRANSFER AGENT
USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, Texas 78288
-------------------------------------------------------------------------------
CUSTODIANS
S&P 500 INDEX FUND EXTENDED MARKET INDEX FUND NASDAQ-100 INDEX FUND AND
Bankers Trust Company Chase Manhattan Bank GLOBAL TITANS INDEX FUND
Four Albany Street 4 Chase MetroTech State Street Bank and
New York, New York 10006 18th Floor Trust Company
Brooklyn, New York 11245 P.O. Box 1713
Boston, Massachusetts 02105
-------------------------------------------------------------------------------
TELEPHONE ASSISTANCE HOURS
Call toll free - Central Time
Monday - Friday 6 a.m. to 10 p.m.
Saturday 8:30 a.m. to 5 p.m.
Sunday 11:30 a.m. to 8 p.m.
-------------------------------------------------------------------------------
FOR ADDITIONAL INFORMATION ON MUTUAL FUNDS
1-800-531-8181 (in San Antonio, 456-7200)
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 USAA TOUCHLINE(R)
(from touch-tone phones only)
For account balance, last transaction, fund prices,
or to exchange/redeem fund shares
1-800-531-8777 (in San Antonio, 498-8777)
-------------------------------------------------------------------------------
INTERNET ACCESS
usaa.com
INVESTMENT COMPANY ACT FILE NO. 811-2429
<PAGE>
Part A
The Prospectus for the
Capital Growth Fund
<PAGE>
PROSPECTUS
OCTOBER 27, 2000
USAA Capital Growth Fund
TABLE OF CONTENTS
-----------------------------------------------------------------
What Is the Fund's Investment
Objective and Main Strategy? 2
-----------------------------------------------------------------
What Are the Main Risks of Investing in This Fund? 2
-----------------------------------------------------------------
Is This Fund for You? 2
-----------------------------------------------------------------
Could the Value of Your Investment
in This Fund Fluctuate? 3
-----------------------------------------------------------------
Fees and Expenses 3
-----------------------------------------------------------------
Fund Investments 4
-----------------------------------------------------------------
Fund Management 5
-----------------------------------------------------------------
Using Mutual Funds in an Investment Program 7
-----------------------------------------------------------------
How to Invest 7
-----------------------------------------------------------------
How to Redeem 9
-----------------------------------------------------------------
Important Information About Purchases and Redemptions 10
-----------------------------------------------------------------
Exchanges 11
-----------------------------------------------------------------
Shareholder Information 11
-----------------------------------------------------------------
Appendix A 14
-----------------------------------------------------------------
Appendix B 15
-----------------------------------------------------------------
AS WITH OTHER MUTUAL FUNDS, THE SECURITIES AND EXCHANGE COMMISSION HAS NOT
APPROVED OR DISAPPROVED OF THIS FUNDS SHARES OR DETERMINED WHETHER THIS
PROSPECTUS IS ACCURATE OR COMPLETE. ANYONE WHO TELLS YOU OTHERWISE IS
COMMITTING A CRIME.
AN INVESTMENT IN THIS FUND IS NOT A DEPOSIT OF USAA FEDERAL SAVINGS BANK, OR
ANY OTHER BANK, AND IS NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY.
<PAGE>
USAA CAPITAL GROWTH FUND
-------------------------------------------------------------------------------
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?
[SIDE BAR]
FUND INCEPTION
DATE October 27, 2000
The Fund's investment objective is capital appreciation. We will attempt to
achieve this objective by investing the Fund's assets primarily in equity
securities of companies with the prospect of rapidly growing earnings. This may
include the securities of large-, mid-, and small-capitalization companies.
The Fund's Board of Directors may change the Fund's investment objective
without share-holder approval.
Because any investment involves risk, there is no assurance that the Fund's
objective will be achieved. See FUND INVESTMENTS on page 4 for more
information.
WHAT ARE THE MAIN RISKS OF INVESTING IN THIS FUND?
[SIDE BAR]
MARKET CAPITALIZATION (MARKET CAP) IS THE TOTAL MARKET VALUE OF A COMPANY'S
OUTSTANDING SHARES OF COMMON STOCK.
The primary risks of investing in this Fund are market risk, the risk of
investing in companies with small MARKET CAPITALIZATIONS, and the risks of
foreign investing.
* MARKET RISK involves the possibility that the value of the Fund's
investments in equity securities will decline in a down stock market,
regardless of the success or failure of any one company's operations.
* SMALL-CAP COMPANY RISK involves the greater risk of investing in
smaller, less well-known companies, as opposed to investing in
established companies with proven track records.
* FOREIGN INVESTING RISKS involve the possibility that the value of the
Fund's investments in foreign securities will decrease because of
currency-exchange-rate fluctuations, increased-price volatility,
uncertain political conditions, and other factors.
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.
Look for this symbol ! throughout the prospectus. We use it to mark more
detailed information about the 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 willing to accept very high risk for long-term goals.
* You are looking for a long-term investment.
* You are willing to give up current income for long-term growth.
THIS FUND MAY NOT BE APPROPRIATE AS PART OF YOUR INVESTMENT PORTFOLIO IF...
* You are unwilling to take greater risk for long-term goals.
* You need an investment that provides steady income.
* You need an investment that provides tax-efficient income.
USAA CAPITAL GROWTH FUND - 2
<PAGE>
This 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. In fact, the value of your investment in this Fund will
fluctuate with the changing market values of the investments in the Fund. While
the portfolio will be broadly diversified, we expect the Fund to be
significantly more volatile than the average equity mutual fund due to the
Fund's investments in smaller, less well-known companies.
Performance history for this Fund will be available in the prospectus after the
Fund has been in operation for one full calendar year.
CURRENT PRICE AND TOTAL RETURN INFORMATION
For the most current price and return information for this Fund, you may call
USAA TouchLine(R) at 1-800-531-8777. Press 1 for the Mutual Fund Menu, press 1
again for prices and returns. Then, press 72# when asked for the FUND NUMBER.
You may also access this information through our usaa.com Internet Web site
once your account has been established. You must remember that historical
performance does not necessarily indicate what will happen in the future.
[SIDE BAR]
FUND NUMBER
Capital Growth 72
You may see the Fund's total return quoted in advertisements and reports. All
mutual funds must use the same formula to calculate total return. Total return
measures the price change in a share assuming the reinvestment of all dividend
income and capital gain distributions. You may also see a comparison of the
Fund's performance to that of other mutual funds with similar objectives and to
stock or relevant indexes.
Additionally, you may find the most current price of your Fund's shares in the
business section of your newspaper in the mutual fund section under the heading
"USAA Group" and the appropriate symbol. If you prefer to obtain this
information from an online computer service, you can do so by using its TICKER
SYMBOL.
[SIDE BAR]
TICKER SYMBOL A fund will receive its ticker symbol when it acquires $25
million in assets or 1,000 shareholders.
FEES AND EXPENSES
This summary shows what it will cost you, directly and indirectly, to invest in
the Fund.
SHAREHOLDER TRANSACTION EXPENSES - DIRECT COSTS
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 $12 domestic wire fee and a $35 foreign wire fee.
(Your bank may also charge a fee for receiving wires.)
ANNUAL FUND OPERATING EXPENSES - INDIRECT COSTS
Fund expenses come out of the Fund's assets and are reflected in the Fund's
share price and dividends. "Other Expenses" such as custodian, transfer agency,
and legal fees have been estimated for the Fund's first year of operation and
are calculated as a percentage of average net assets.
Management Distribution Other Total Annual
Fees (12b-1) Fees Expenses Operating Expenses
-----------------------------------------------------------------
.85% None .54% 1.39%
[SIDE BAR]
12b-1 FEES -- SOME MUTUAL FUNDS CHARGE THESE FEES TO PAY FOR ADVERTISING AND
OTHER COSTS OF SELLING FUND SHARES.
3 - PROSPECTUS
<PAGE>
USAA CAPITAL GROWTH FUND
-------------------------------------------------------------------------------
EXAMPLE OF EFFECT OF FUND'S OPERATING EXPENSES
This example is intended to help you compare the cost 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.
1 Year 3 Years
-----------------------------------
$142 $440
FUND INVESTMENTS
PRINCIPAL INVESTMENT STRATEGIES AND RISKS
Q WHAT IS THE FUND'S PRINCIPAL INVESTMENT STRATEGY?
A The Fund's principal strategy is the investment of its assets primarily in
equity securities of companies with the prospect of rapidly growing
earnings. These investments will tend to be made in smaller,
less-recognized companies, but may include larger, more widely recognized
companies as well. We use the term "equity securities" to include common
stocks, securities convertible into common stocks, and securities that
carry the right to buy common stocks.
As a temporary defensive measure because of market, economic, political,
or other conditions, we may invest up to 100% of the Fund's assets in
investment-grade, short-term debt instruments. This may result in the Fund
not achieving its investment objective during the time it is in this
temporary defensive posture.
We generally will not trade the Fund's securities for short-term profits;
however, if circumstances warrant, we may need to actively and frequently
trade Fund securities to achieve the Fund's principal investment strategy.
The Fund's portfolio turnover rate will vary from year to year depending
on market conditions. A high turnover rate increases transaction costs and
may increase taxable capital gains; therefore, we will carefully weigh the
anticipated benefits of trading.
[EXCLAMATION POINT]
MARKET RISK. Because this Fund invests in equity securities, it is
subject to stock market risk. Stock prices in general may decline over
short or even extended periods, regardless of the success or failure of
a company's operations. Stock markets tend to run in cycles, with
periods when stock prices generally go up, known as "bull" markets, and
periods when stock prices generally go down, referred to as "bear"
markets. Equity securities tend to go up and down more than bonds.
[EXCLAMATION POINT]
SMALL-CAP COMPANY RISK. Small-cap companies may be more vulnerable than
larger companies to adverse business or economic developments. Small-cap
companies may also have limited product lines, markets, or financial
resources. Securities of such companies may be less liquid and more
volatile than securities of larger companies or the market averages in
general and, therefore, may involve greater risk than investing in the
securities of larger companies. In addition, small-cap companies may not
be well known to the investing public, may not have institutional
ownership, and may have only cyclical, static, or moderate growth
prospects.
Q MAY THE FUND'S ASSETS BE INVESTED IN FOREIGN SECURITIES?
A Yes. While most of the Fund's assets will be invested in U.S. securities,
we may also invest up to 30% of the Fund's total assets in foreign
securities purchased in either foreign or
USAA CAPITAL GROWTH FUND - 4
<PAGE>
U.S. markets. These foreign holdings may include securities issued in
emerging markets as well as securities issued in established markets.
[EXCLAMATION POINT]
FOREIGN INVESTING RISKS. Investing in foreign securities poses unique
risks: currency-exchange-rate fluctuations; foreign-market illiquidity;
increased-price volatility; exchange-control regulations;
foreign-ownership limits; different accounting, reporting, and
disclosure requirements; difficulties in obtaining legal judgments; and
foreign withholding taxes. Two forms of foreign investing risk are
emerging markets risk and political risk.
* EMERGING MARKETS RISK. Investments in countries that are in the early
stages of their industrial development involve exposure to economic
structures that are generally less diverse and mature than in the United
States and to political systems which may be less stable.
* POLITICAL RISK. Political risk includes a greater potential for coups
d'etat, revolts, and expropriation by governmental organizations.
Q HOW ARE THE DECISIONS TO BUY AND SELL SECURITIES MADE?
A We invest in companies that have rapid sales and earnings growth
potential. These companies tend to be in the small- and mid-capitalization
categories, but we will also invest in large-capitalization companies
where appropriate. We seek companies that are well positioned to take
advantage of emerging, long-term social and economic trends and have ample
financial resources to sustain their growth. We frequently invest through
initial public offerings of companies meeting these criteria. We may
reduce or sell the Fund's investments in companies if their stock prices
appreciate excessively in relation to fundamental prospects. Companies
will also be sold if they fail to realize their growth potential or if
there are more attractive opportunities elsewhere.
For additional information about other securities in which we may invest the
Fund's assets, see APPENDIX A on page 14.
FUND MANAGEMENT
USAA Investment Management Company serves as the manager and distributor of
this Fund. We are an affiliate of United Services Automobile Association
(USAA), a large, diversified financial services institution. Our mailing
address is 9800 Fredericksburg Road, San Antonio, Texas 78288.
[SIDE BAR]
TOTAL ASSETS UNDER MANAGEMENT BY
USAA INVESTMENT MANAGEMENT COMPANY
APPROMIMATELY $42 BILLION
We provide management services to the Fund pursuant to an Advisory Agreement.
We are responsible for managing the Fund's portfolio (including placement of
brokerage orders) and its business affairs, subject to the authority of and
supervision by the Fund's Board of Directors. For our services, the Fund pays
us an annual fee. The fee is computed at eighty-five one hundredths of one
percent (.85%) of average net assets. We also provide services related to
selling the Fund's shares and receive no compensation for those services.
PORTFOLIO MANAGERS
Eric M. Efron and John K. Cabell, Jr., assistant vice presidents of Equity
Investments, have managed the Fund since its inception in October 2000.
Mr. Efron has 25 years investment management experience and has worked for us
for eight years. He earned the Chartered Financial Analyst designation in 1983
and is a member of the Association for Investment Management and Research and
the San Antonio Financial Analysts Society, Inc. He holds an MBA from New York
University, an MA from the University of Michigan, and a BA from Oberlin
College, Ohio.
5 - PROSPECTUS
<PAGE>
USAA CAPITAL GROWTH FUND
-------------------------------------------------------------------------------
Mr. Cabell has 22 years investment management experience and has worked for us
for 11 years. He earned the Chartered Financial Analyst designation in 1982 and
is a member of the Association for Investment Management and Research and the
San Antonio Financial Analysts Society, Inc. He holds an MA and a BS from the
University of Alabama.
The following table sets forth the performance data for the period from July 1,
1990 to June 30, 2000, of the Aggressive Growth Fund, a mutual fund managed by
USAA Investment Management Company, and the performance data for the period
from July 1, 1997 to June 30, 2000, of the Life Aggressive Growth Fund, an
underlying mutual fund managed by USAA Investment Management Company and made
available only through the purchase of certain variable annuity contracts and
variable life insurance policies. Each of these mutual funds have investment
objectives, policies, strategies, and risks substantially similar to those of
the Capital Growth Fund. This data is being provided to illustrate the past
performance of USAA Investment Management Company in managing a substantially
similar fund as the Capital Growth Fund. Investors should not consider this
performance data as an indication of past or future performance of the Capital
Growth Fund.
The results presented may not necessarily be the same as the returns
experienced by any particular investor in the Aggressive Growth Fund or Life
Aggressive Growth Fund. Any differences may be a result of the timing of
investments and redemptions. In addition, the effect of taxes on any investor
will depend on such person's tax situation.
PRIOR PERFORMANCE OF THE AGGRESSIVE GROWTH FUND AND LIFE AGGRESSIVE GROWTH FUND
------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
(FOR THE PERIODS ENDING JUNE 30, 2000)
Past Past Past
1 year* 5 years* 10 Years*
-----------------------------------------------------------------------
Aggressive Growth Fund** 65.09% 31.63% 20.94%
Life Aggressive Growth Fund** 61.78% N/A N/A
Russell 2000 Index*** 14.32% 14.27% 13.57%
S&P 500 Index*** 7.24% 23.80% 17.79%
-----------------------------------------------------------------------
* THE CURRENT PORTFOLIO MANAGERS FOR THE AGGRESSIVE GROWTH FUND BEGAN
MANAGING THE FUND ON MARCH 1, 1995, AND THE LIFE AGGRESSIVE GROWTH FUND ON
MAY 1, 1997.
** AVERAGE ANNUAL TOTAL RETURN REFLECTS CHANGES IN SHARE PRICES AND
REINVESTMENT OF DIVIDENDS AND DISTRIBUTIONS AND IS NET OF FUND OPERATING
EXPENSES. DURING THE PERIOD JULY 1, 1990 TO JUNE 30, 2000, THE OPERATING
EXPENSE RATIO OF THE AGGRESSIVE GROWTH FUND RANGED FROM .71% TO .94% OF
THE AGGRESSIVE GROWTH FUND'S AVERAGE DAILY NET ASSETS. DURING THE PERIOD
JULY 1, 1997 TO JUNE 30, 2000, THE OPERATING EXPENSE RATIO OF THE LIFE
AGGRESSIVE GROWTH FUND WAS .70% OF THE LIFE AGGRESSIVE GROWTH FUND'S
AVERAGE DAILY NET ASSETS. THE OPERATING EXPENSES OF THE CAPITAL GROWTH
FUND ARE EXPECTED TO BE HIGHER THAN THE HISTORICAL OPERATING EXPENSES OF
THE AGGRESSIVE GROWTH FUND OR THE LIFE AGGRESSIVE GROWTH FUND, WHICH WOULD
NEGATIVELY AFFECT PERFORMANCE.
*** THE RUSSELL 2000 INDEX IS AN INDEX THAT CONSISTS OF THE 2000 SMALLEST
COMPANIES IN THE RUSSELL 3000(R) INDEX, A WIDELY RECOGNIZED SMALL CAP
INDEX. THE S&P 500 INDEX IS A BROAD-BASED COMPOSITE, UNMANAGED INDEX THAT
REPRESENTS THE WEIGHTED AVERAGE PERFORMANCE OF A GROUP OF 500 WIDELY HELD,
PUBLICLY TRADED STOCKS.
Historical performance is not indicative of future performance. THE
AGGRESSIVE GROWTH FUND AND THE LIFE AGGRESSIVE GROWTH FUND ARE SEPARATE
FUNDS AND HISTORICAL PERFORMANCE DOES NOT NECESSARILY INDICATE THE
POTENTIAL PERFORMANCE OF THE CAPITAL GROWTH FUND OR THE RETURNS THAT WOULD
BE EXPERIENCED BY AN INVESTOR IN THE CAPITAL GROWTH FUND. SHARE PRICES AND
INVESTMENT RETURNS WILL FLUCTUATE REFLECTING MARKET CONDITIONS, AS WELL AS
CHANGES IN COMPANY-SPECIFIC FUNDAMENTALS OF PORTFOLIO SECURITIES. FOR
EXAMPLE, THE AGGRESSIVE GROWTH FUND AND THE LIFE AGGRESSIVE GROWTH FUND
BENEFITED FROM THE EXTREMELY FAVORABLE DOMESTIC EQUITY MARKET FOR
SMALL-CAP STOCKS AND IPOS THAT EXISTED DURING THE PERIOD FROM JULY 1998
THROUGH MARCH 2000. THESE FAVORABLE MARKETS MAY NOT CONTINUE IN FUTURE
PERIODS.
USAA CAPITAL GROWTH FUND - 6
<PAGE>
USING MUTUAL FUNDS IN AN INVESTMENT PROGRAM
THE IDEA BEHIND MUTUAL FUNDS
Mutual funds provide advantages like professional management and
diversification to all investors. Regardless of whether you are just starting
out or have invested for years, your investment, large or small, buys you 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 the wealthiest people.
USING FUNDS IN AN INVESTMENT PROGRAM
In choosing a mutual fund as an investment vehicle, you are giving up some
investment decisions, but must still make others. The decisions you don't have
to make are those involved with choosing individual securities. We will perform
that function. In addition, we will arrange for the safekeeping of securities,
auditing the annual financial statements, and daily valuation of the Fund, as
well as other functions.
You, however, retain at least part of the responsibility for an equally
important decision. This decision involves determining a portfolio of mutual
funds that balances your investment goals with your tolerance for risk. It is
likely that this decision may include the use of more than one fund of the USAA
family of funds.
For example, assume you wish to invest in a widely diversified, common-stock
portfolio. You could combine an investment in the USAA Capital Growth Fund with
investments in other mutual funds that invest in stocks of large and small
companies and high-dividend stocks. This is just one way you could combine
funds to fit your own risk and reward goals.
USAA'S FAMILY OF FUNDS
We offer you another alternative with our asset strategy funds listed in
APPENDIX B under asset allocation on page 15. These unique mutual funds provide
a professionally managed, diversified investment portfolio within a mutual
fund. Designed for the individual who prefers to delegate the asset allocation
process to an investment manager, their structure achieves diversification
across a number of investment categories.
Whether you prefer to create your own mix of mutual funds or use a USAA asset
strategy fund, the USAA family of funds provides a broad range of choices
covering just about any investor's investment objectives. Our 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 15 for a
complete list of the USAA family of no-load mutual funds.
HOW TO INVEST
OPENING AN ACCOUNT
You may open an account and make an investment as described below by mail, in
person, bank wire, phone, or on the Internet. 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 invest in
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 tax withholding requirements set
forth by the IRS.
7 - PROSPECTUS
<PAGE>
USAA CAPITAL GROWTH FUND
-------------------------------------------------------------------------------
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 p.m. Eastern Time) of the New York Stock Exchange (NYSE) each day it 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 four- to six-week delay in the effective date of
your purchase. Furthermore, a bank charge may be assessed in the clearing
process and will be deducted from the amount of the purchase.
MINIMUM INVESTMENTS
INITIAL PURCHASE
* $3,000 [$500 for Uniform Gifts/Transfers to Minors Act (UGMA/UTMA)
accounts and $250 for IRAs] or no initial investment if you elect to have
monthly electronic investments of at least $50 per transaction, per
account. We may periodically offer programs that reduce the minimum
amounts for monthly electronic investments. Employees of USAA and its
affiliated companies may open an account through payroll deduction for as
little as $25 per pay period with no initial investment.
ADDITIONAL MINIMUM PURCHASES
* $50 per transaction, per account.
HOW TO PURCHASE BY...
MAIL
* To open an account, send your application and check to:
USAA Investment Management Company
9800 Fredericksburg Road
San Antonio, TX 78288 (FOR OVERNIGHT MAIL, USE ZIP CODE 78240)
* To add to your account, send your check and the deposit stub that
accompanies your Fund's transaction confirmation to the transfer agent:
USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, TX 78288
IN PERSON
* To open an account, bring your application and check to our San Antonio
investment sales and service office at:
USAA Federal Savings Bank
10750 Robert F. McDermott Freeway
San Antonio, TX 78288
BANK WIRE
* 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 Capital Growth Fund
USAA Account Number: 69384998
Shareholder(s) Name(s) ______________________________
Shareholder(s) Mutual Fund Account No._______________
USAA INDEX FUNDS - 8
<PAGE>
ELECTRONIC FUNDS TRANSFER (EFT)
* 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 (IN SAN ANTONIO, 456-7202)
* 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.
USAA TOUCHLINE(R) 1-800-531-8777 (IN SAN ANTONIO, 498-8777)
* In addition to obtaining account balance information, last transactions,
current fund prices, and return information for your Fund, you can use
USAA TouchLine(R) from any touch-tone phone to access your Fund account to
make selected purchases, exchange to another USAA Fund, or make
redemptions. This service is available with an Electronic Services
Agreement (ESA) and EFT Buy/Sell authorization on file.
INTERNET ACCESS - USAA.COM
* You can use your personal computer to perform certain mutual fund
transactions by accessing our Web site. To establish access to your
account, you will need to call 1-800-461-3507 to obtain a registration
number and personal identification number (PIN). Once you have established
Internet access to your account, you will be able to open a new mutual
fund account within an existing registration, exchange to another USAA
Fund, make redemptions, review account activity, check balances, and more.
To place orders by Internet, an ESA and EFT Buy/Sell authorization must be
on file.
HOW TO REDEEM
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 p.m. Eastern Time),
your 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; 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 originally purchased and the
price of the shares received upon redemption.
In addition, the Fund may elect to suspend the redemption of shares or postpone
the date of payment in limited circumstances.
HOW TO REDEEM BY...
MAIL, IN PERSON, FAX, TELEGRAM, TELEPHONE, TOUCHLINE(R), OR INTERNET
* Send your written instructions to:
USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, TX 78288 (FOR OVERNIGHT MAIL, USE ZIP CODE 78240)
* Visit a member service representative at our San Antonio investment sales
and service office at USAA Federal Savings Bank.
* Send a signed fax to 1-800-292-8177, or send a telegram to USAA
Shareholder Account Services.
9 - PROSPECTUS
<PAGE>
USAA CAPITAL GROWTH FUND
-------------------------------------------------------------------------------
* Call toll free 1-800-531-8448 (in San Antonio, 456-7202) to speak with a
member service representative.
* Call toll free 1-800-531-8777 (in San Antonio, 498-8777) to access our
24-hour USAA TouchLine(R) service.
* Access our Internet Web site at usaa.com.
Telephone redemption privileges are automatically established when you complete
your application. The Fund will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine; 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,
telegram, or Internet is not available until these certificates are deposited.
IMPORTANT INFORMATION ABOUT PURCHASES AND REDEMPTIONS
INVESTOR'S GUIDE TO USAA MUTUAL FUND SERVICES
Upon your initial investment with us, you will receive the INVESTOR'S GUIDE to
help you get the most out of your USAA mutual fund account and to 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.
ACCOUNT BALANCE
USAA Shareholder Account Services (SAS), the Fund's transfer agent, may assess
annually a small balance account fee of $12 to each shareholder account with a
balance of less than $2,000 at the time of assessment. The fee will reduce
total transfer agency fees paid by the Fund to SAS. Accounts exempt from the
fee include: (1) any account regularly purchasing additional shares each month
through an automatic investment plan; (2) any account registered under the
Uniform Gifts/Transfers to Minors Act (UGMA/UTMA); (3) all (non-IRA) money
market fund accounts; (4) any account whose registered owner has an aggregate
balance of $50,000 or more invested in USAA mutual funds; and (5) all IRA
accounts (for the first year the account is open).
FUND RIGHTS
The Fund reserves the right to:
* reject purchase or exchange orders when in the best interest of the Fund
* limit or discontinue the offering of shares of any portfolio of the Fund
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
USAA INDEX FUNDS - 10
<PAGE>
* 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 ten shares, with certain limitations
EXCHANGES
EXCHANGE PRIVILEGE
The exchange privilege is automatic when you complete your application. You may
exchange shares among Funds in the USAA family of funds, provided you do not
hold these shares in stock certificate form and the shares to be acquired are
offered in your state of residence. Exchanges made through USAA TouchLine(R)
and the Internet require an ESA and EFT Buy/Sell authorization on file. 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;
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 originally
purchased and the price of the shares received upon exchange.
The Funds have undertaken certain procedures regarding telephone transactions
as described on page 10.
EXCHANGE LIMITATIONS, EXCESSIVE TRADING
To minimize Fund costs and to protect the Funds and their shareholders from
unfair expense burdens, the Funds restrict excessive exchanges. The limit on
exchanges out of any Fund in the USAA family of funds for each account is six
per calendar year (except 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). However, each Fund reserves the right to reject a
shareholder's purchase or exchange orders into a Fund at any time when in the
best interest of the Fund. In addition, each Fund reserves the right to
terminate or change the terms of an exchange offer.
SHAREHOLDER INFORMATION
SHARE PRICE CALCULATION
The price at which you purchase and redeem Fund shares is equal to the NET
ASSET VALUE (NAV) PER SHARE determined on the effective date of the purchase or
redemption. You may buy and sell Fund shares at the NAV per share without a
sales charge. The Fund's NAV per share is calculated at the close of the
regular trading session of the NYSE, which is usually 4 p.m. Eastern Time.
[SIDE BAR]
NAV PER SHARE
EQUALS
TOTAL ASSETS
MINUS
LIABILITIES
DIVIDED BY
# OF SHARES
OUTSTANDING
Portfolio securities, except as otherwise noted, traded primarily on a domestic
securities exchange are valued at the last sales price on that exchange.
Portfolio securities traded primarily on foreign securities exchanges are
valued at the last quoted sales price, or the most recently determined closing
price calculated according to local market convention, available at the time
the Fund is valued. If no sale is reported, the average of the bid and asked
prices is generally used.
Securities trading in various foreign markets may take place on days when the
NYSE is closed. Further, when the NYSE is open, the foreign markets may be
closed. The calculation of the Fund's NAV may not take place at the same time
the prices of certain securities held by the Fund are determined. As a result,
the NAV of the Fund's shares may change on days when the shareholders will not
be able to purchase or redeem shares. In most cases, events affecting the
values of portfolio securities that occur between the time their prices are
determined and the
11 - PROSPECTUS
<PAGE>
USAA CAPITAL GROWTH FUND
-------------------------------------------------------------------------------
close of normal trading on the NYSE on a day the Fund's NAV is calculated will
not be reflected in the Fund's NAV. If, however, we determine that a particular
event would materially affect the Fund's NAV, then we, under the general
supervision of the Fund's Board of Directors, will use all relevant, available
information to determine a fair value for the affected portfolio securities.
Over-the-counter securities are generally priced at the last sales price or, if
not available, at the average of the bid and asked prices.
Debt securities purchased with maturities of 60 days or less are stated at
amortized cost, which approximates market value. Other debt securities are
valued each business day at their current market value as determined by a
pricing service approved by the Fund's Board of Directors. Securities that
cannot be valued by these methods, and all other assets, are valued in good
faith at fair value using methods we have determined under the general
supervision of the Fund's Board of Directors.
For additional information on how securities are valued, see VALUATION OF
SECURITIES in the Fund's statement of additional information.
DIVIDENDS AND DISTRIBUTIONS
The Fund pays net investment income dividends annually. Any net capital gain
distribution usually occurs annually within 61 days of the July 31 fiscal year
end, which would be somewhere around the end of September. The Fund will make
additional payments to shareholders, if necessary, to avoid the imposition of
any federal income or excise tax.
[SIDE BAR]
INCOME DIVIDENDS
PAYMENT TO SHAREHOLDERS OF INCOME FROM
INTEREST OR DIVIDENDS GENERATED BY THE FUND'S INVESTMENTS.
CAPITAL GAIN DISTRIBUTIONS
PAYMENT TO FUND SHAREHOLDERS OF GAINS REALIZED ON
SECURITIES THAT THE FUND HAS SOLD AT A PROFIT, MINUS ANY REALIZED LOSSES.
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 on the ex-dividend
date. You should consider carefully the effects of purchasing shares of the
Fund shortly before any dividend or distribution. Some or all of these
dividends and distributions are subject to taxes.
We will invest any dividend or distribution payment returned to us in your
account at the then-current NAV per share. Dividend and distribution checks
become void six months from the date on the check. The amount of the voided
check will be invested in your account at the then-current NAV per share.
FEDERAL TAXES
This tax information is quite general and refers to the federal income tax
provisions in effect as of the date of this prospectus. Note that the Taxpayer
Relief Act of 1997 and the technical provisions adopted by the IRS
Restructuring and Reform Act of 1998 may affect the status and treatment of
certain distributions shareholders receive from the Fund. Because each
investor's tax circumstances are unique and because the tax laws are subject to
change, we recommend that you consult your tax adviser 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.
[SIDE BAR]
SHORT-TERM CAPITAL GAINS
ARE TAXED AS ORDINARY INCOME FOR ALL TAX BRACKETS.
[SIDE BAR]
LONG-TERM CAPITAL GAINS
ARE TAXED AT 10% FOR THOSE INDIVIDUALS IN THE 15% TAX BRACKET
AND AT 20% FOR THOSE INDIVIDUALS IN THE 28% TAX BRACKET AND ABOVE.
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.
USAA CAPITAL GROWTH FUND - 12
<PAGE>
WITHHOLDING
Federal law requires the Fund to withhold and remit to the U.S. Treasury a
portion of the income dividends and capital gain distributions and proceeds of
redemptions paid to any non-corporate shareholder who:
* fails to furnish the Fund with a correct tax identification number
* underreports dividend or interest income or
* fails to certify that he or she is not subject to withholding
To avoid this withholding requirement, you must certify, on your application or
on a separate Form W-9 supplied by the Fund's transfer agent, that your tax
identification number is correct and you are not currently subject to backup
withholding.
REPORTING
The Fund will report information to you annually concerning the tax status of
dividends and distributions for federal income tax purposes.
FUTURE SHAREHOLDER MAILINGS
Through our ongoing efforts to help reduce Fund expenses, each household will
receive a single copy of the Fund's most recent financial reports and
prospectus even if you or a family member own more than one account in the
Fund. For many of you, this eliminates duplicate copies and saves paper and
postage costs to the Fund. However, if you would like to receive individual
copies, please call us and we will begin your individual delivery within 30
days of your request.
13 - PROSPECTUS
<PAGE>
APPENDIX A
THE FOLLOWING ARE DESCRIPTIONS OF CERTAIN TYPES OF
SECURITIES IN WHICH THE ASSETS OF THE CAPITAL GROWTH FUND MAY BE INVESTED:
CONVERTIBLE SECURITIES
We may invest the Funds assets in convertible securities, which are bonds,
preferred stocks, and other securities that pay interest or dividends and offer
the buyer the ability to convert the security into common stock. The value of
convertible securities depends partially on interest rate changes and the
credit quality of the issuer. Because a convertible security affords an
investor the opportunity, through its conversion feature, to participate in the
capital appreciation of the underlying common stock, the value of convertible
securities also depends on the price of the underlying common stock.
FORWARD CURRENCY CONTRACTS
We may hold securities denominated in foreign currencies. As a result, the
value of the securities will be affected by changes in the exchange rate
between the dollar and foreign currencies. In managing currency exposure, we
may enter into forward currency contracts. A forward currency contract involves
an agreement to purchase or sell a specified currency at a specified future
date or over a specified time period at a price set at the time of the
contract. We only enter into forward currency contracts when the Fund enters
into a contract for the purchase or sale of a security denominated in a foreign
currency and desires to lock in the U.S. dollar price of that security until
settlement.
ILLIQUID SECURITIES
We may invest up to 15% of the Funds 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
same value at which the Fund has valued the securities.
MONEY MARKET INSTRUMENTS
We may hold a certain portion of the Funds assets in investment-grade, U.S.
dollar-denominated debt securities that have remaining maturities of one year
or less. Such securities may include U.S. government obligations, commercial
paper and other short-term corporate obligations, repurchase agreements
collateralized with U.S. government securities, certificates of deposit,
bankers acceptances, and other financial institution obligations. These
securities may carry fixed or variable interest rates.
AMERICAN DEPOSITARY RECEIPTS (ADRS)
We may invest the Funds assets in ADRs, which are foreign shares held by a U.S.
bank that issues a receipt evidencing ownership. Dividends are paid in U.S.
dollars.
GLOBAL DEPOSITARY RECEIPTS (GDRS)
We may invest the Funds assets in GDRs, which are foreign shares held by a U.S.
or foreign bank that issues a receipt evidencing ownership. Dividends are paid
in U.S. dollars.
USAA CAPITAL GROWTH FUND - 14
<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, subject to the limitations described earlier. For more complete
information about the mutual funds managed and distributed by USAA Investment
Management Company, including charges and operating expenses, call us for a
prospectus. Read it carefully before you invest. Mutual fund operating expenses
apply and continue throughout the life of the Fund.
FUND TYPE/NAME RISK
===============================================
CAPITAL APPRECIATION
-----------------------------------------------
Aggressive Growth Very high
Capital Growth Very high
Emerging Markets Very high
First Start Growth Moderate to high
Gold Very high
Growth Moderate to high
Growth & Income Moderate
International Moderate to high
Science & Technology Very high
Small Cap Stock Very high
World Growth Moderate to high
-----------------------------------------------
ASSET ALLOCATION
-----------------------------------------------
Balanced Strategy Moderate
Cornerstone Strategy Moderate
Growth and Tax Strategy Moderate
Growth Strategy Moderate to high
Income Strategy Low to moderate
-----------------------------------------------
INCOME - TAXABLE
-----------------------------------------------
GNMA Low to moderate
High-Yield Opportunities High
Income Moderate
Income Stock Moderate
Intermediate-Term Bond Low to moderate
Short-Term Bond Low
-----------------------------------------------
INCOME - TAX EXEMPT
-----------------------------------------------
Long-Term Moderate
Intermediate-Term Low to moderate
Short-Term Low
State Bond/Income Moderate
-----------------------------------------------
INDEXES
-----------------------------------------------
Extended Market Index High
Global Titans Index Moderate to high
Nasdaq-100 Index Very High
S&P 500 Index Moderate
-----------------------------------------------
MONEY MARKET
-----------------------------------------------
Money Market Low
Tax Exempt Money Market Low
Treasury Money Market Trust Low
State Money Market Low
===============================================
FOREIGN INVESTING IS SUBJECT TO ADDITIONAL RISKS, SUCH AS CURRENCY
FLUCTUATIONS, MARKET ILLIQUIDITY, AND POLITICAL INSTABILITY.
SOME INCOME MAY BE SUBJECT TO STATE OR LOCAL TAXES.
CALIFORNIA, FLORIDA, NEW YORK, AND VIRGINIA FUNDS ARE OFFERED ONLY TO RESIDENTS
OF THOSE STATES.
THE SCIENCE & TECHNOLOGY FUND MAY BE MORE VOLATILE THAN A FUND THAT DIVERSIFIES
ACROSS MANY INDUSTRIES.
"WILSHIRE 4500" IS A TRADEMARK AND "WILSHIRE" IS A SERVICE MARK OF WILSHIRE
ASSOCIATES INCORPORATED AND HAVE BEEN SUBLICENSED FOR OUR USE. THE USAA
EXTENDED MARKET INDEX FUND IS NOT SPONSORED, SOLD, OR PROMOTED BY WILSHIRE
ASSOCIATES INCORPORATED OR ANY OF ITS SUBSIDIARIES OR AFFILIATES, AND MAKES NO
REPRESENTATION REGARDING THE ADVISABILITY OF INVESTING IN THE FUND.
"DOW JONES" AND "DOW JONES GLOBAL TITANS INDEXSM" ARE SERVICE MARKS OF DOW
JONES & COMPANY, INC. AND HAVE BEEN LICENSED FOR OUR USE. THE USAA GLOBAL
TITANS INDEX FUND IS NOT SPONSORED, SOLD, OR PROMOTED BY DOW JONES AND DOW
JONES MAKES NO REPRESENTATION REGARDING THE ADVISABILITY OF INVESTING IN THE
FUND.
NASDAQ-100(R), NASDAQ-100 INDEX(R), AND NASDAQ(R) ARE TRADE OR SERVICE MARKS OF
THE NASDAQ STOCK MARKET, INC. (WHICH WITH ITS AFFILIATES ARE THE
"CORPORATIONS") AND HAVE BEEN LICENSED FOR OUR USE. THE USAA NASDAQ-100 INDEX
FUND IS NOT SPONSORED, SOLD, OR PROMOTED BY THE CORPORATIONS AND THE
CORPORATIONS MAKE NO REPRESENTATION REGARDING THE ADVISABILITY OF INVESTING IN
THE FUND. THE CORPORATIONS MAKE NO WARRANTIES AND BEAR NO LIABILITY WITH
RESPECT TO THE FUND.
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.
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.
13 - PROSPECTUS
<PAGE>
If you would like more information about these Funds, you may call
1-800-531-8181 to request a free copy of the Funds' statement of additional
information (SAI) or to ask other questions about the Funds. The SAI has been
filed with the Securities and Exchange Commission (SEC) and is legally a part
of this prospectus. Additionally, you may request a free copy of the S&P 500
Index Fund's annual or semiannual report, in which 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 (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 1-202-942-8090. Additionally, copies of this
information can be obtained, after payment of a duplicating fee, by electronic
request at the following e-mail address: [email protected] or by writing the
Public Reference Section of the Commission, Washington, D.C. 20549-0102.
-------------------------------------------------------------------------------
INVESTMENT ADVISER, UNDERWRITER, AND DISTRIBUTOR
USAA Investment Management Company
9800 Fredericksburg Road
San Antonio, Texas 78288
-------------------------------------------------------------------------------
TRANSFER AGENT
USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, Texas 78288
-------------------------------------------------------------------------------
CUSTODIANS
State Street Bank and Trust Company
P.O. Box 1713
Boston, Massachusetts 02105
-------------------------------------------------------------------------------
TELEPHONE ASSISTANCE HOURS
Call toll free - Central Time
Monday - Friday 6 a.m. to 10 p.m.
Saturday 8:30 a.m. to 5 p.m.
Sunday 11:30 a.m. to 8 p.m.
-------------------------------------------------------------------------------
FOR ADDITIONAL INFORMATION ON MUTUAL FUNDS
1-800-531-8181 (in San Antonio, 456-7200)
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 USAA TOUCHLINE(R)
(from touch-tone phones only)
For account balance, last transaction, fund prices,
or to exchange/redeem fund shares
1-800-531-8777 (in San Antonio, 498-8777)
-------------------------------------------------------------------------------
INTERNET ACCESS
usaa.com
INVESTMENT COMPANY ACT FILE NO. 811-2429
<PAGE>
Part B
Statements of Additional Information for the
S&P 500 Index Fund, Extended Market Index Fund,
Nasdaq-100 Index Fund, Global Titans Index Fund,
and Capital Growth Fund
are included herein
Not included in this Post-Effective Amendment
are the Statements of Additional Information for the
Aggressive Growth Fund, Growth Fund, Growth & Income Fund,
Income Stock Fund, Income Fund, Short-Term Bond Fund,
Money Market Fund, Science & Technology Fund, First Start Growth Fund,
Intermediate-Term Bond Fund, High-Yield Opportunities Fund,
and Small Cap Stock Fund
<PAGE>
Part B
Statement of Additional Information
For the S&P 500 Index Fund,
the Extended Market Index Fund,
the Nasdaq-100 Index Fund, and
the Global Titans Index Fund
<PAGE>
[USAA] USAA STATEMENT OF
[EAGLE] MUTUAL ADDITIONAL INFORMATION
[LOGO] FUND, INC. OCTOBER 27, 2000
-------------------------------------------------------------------------------
USAA MUTUAL FUND, INC.
(S&P 500 INDEX FUND, EXTENDED MARKET INDEX FUND,
NASDAQ-100 INDEX FUND, AND GLOBAL TITANS INDEX FUND)
USAA MUTUAL FUND, INC. (the Company) is a registered investment company
offering shares of seventeen no-load mutual funds, four of which are described
in this statement of additional information (SAI): the S&P 500 Index Fund, the
Extended Market Index Fund, the Nasdaq-100 Index Fund, and the Global Titans
Index Fund (collectively, the Funds). The Funds are classified as diversified,
except the Nasdaq-100 Index Fund and the Global Titans Index Fund, which are
classified as nondiversified.
With respect to the S&P 500 Index Fund, the Fund's investment objective
seeks to match, before fees and expenses), the performance of the S&P 500
Index. The S&P 500 Index 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 a substantially similar
investment objective as the Fund. The investment company is the Equity 500
Index Portfolio (the Equity 500 Portfolio) advised by Bankers Trust Company
(Bankers Trust).
With respect to the Extended Market Index Fund, the Fund seeks to match
the performance of the U.S. stocks not included in the S&P 500 Index as
represented by the Wilshire 4500 Index. The Wilshire 4500 Index measures the
performance of the equity securities of all U.S.-headquartered companies with
readily available price data, excluding companies in the S&P 500 Index. As
described in the prospectus, the Company seeks to achieve this objective by
investing all of the Fund's investable assets in an open-end management
investment company having a substantially similar investment objective as the
Fund. The investment company is the Master Extended Market Index (Extended
Market Portfolio), a series of the Quantitative Master Series Trust (Trust),
advised by Merrill Lynch Quantitative Advisers, a division of Fund Asset
Management, L.P. (MLQA).
You may obtain a free copy of the prospectus dated October 27, 2000, for
the Funds by writing to USAA Mutual Fund, Inc., 9800 Fredericksburg Road, San
Antonio, TX 78288, or by calling toll free 1-800-531-8181. The prospectus
provides the basic information you should know before investing in the Funds.
This SAI is not a prospectus and contains information in addition to and more
detailed than that set forth in the Funds' prospectus. It is intended to
provide you with additional information regarding the activities and operations
of the Company and the Funds and should be read in conjunction with the Funds'
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, 1999, 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
3 Conditions of Purchase and Redemption
3 Additional Information Regarding Redemption of Shares
4 Investment Plans
5 Investment Policies
17 Investment Restrictions
22 Portfolio Transactions and Brokerage Commissions
24 Description of Shares
25 Tax Considerations
26 Directors and Officers of the Company
29 Trustees and Officers of the Equity 500 Portfolio
31 Trustees and Officers of the Extended Market Portfolio
35 Investment Adviser
37 Administrator
38 General Information
39 Calculation of Performance Data
40 Appendix A - Comparison of Fund Performance
42 Appendix B - Short-Term Debt Ratings
43 Appendix C - Dollar-Cost Averaging
<PAGE>
VALUATION OF SECURITIES
Shares of each Fund are offered on a continuing, best-efforts basis through
USAA Investment Management Company (IMCO or the Manager). The offering price
for shares of each Fund is equal to the current net asset value (NAV) per
share. The NAV per share of each Fund is calculated by adding the value of all
its portfolio securities and other assets, deducting liabilities, and dividing
by the number of shares outstanding.
A Fund's NAV per share is calculated each day, Monday through Friday,
except days on which the New York Stock Exchange (NYSE) is closed. The NYSE is
currently scheduled to be closed on New Year's Day, Martin Luther King, Jr.
Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving, and Christmas, and on the preceding Friday or subsequent Monday
when one of these holidays falls on a Saturday or Sunday, respectively.
With respect to the S&P 500 Index Fund and Extended Market Index Fund, the
Equity 500 Portfolio and the Extended Market Portfolio value their 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 Board of Trustees of
the Equity 500 Portfolio and the Board of Trustees of the Extended Market
Portfolio.
Each investor in the Equity 500 Portfolio or the Extended Market
Portfolio, including the S&P 500 Index Fund or the Extended Market Index Fund,
may add to or reduce its investment in the Equity 500 Portfolio or the Extended
Market 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 p.m. (Eastern time or earlier if the NYSE closes
earlier) on each such day, the value of each investor's interest in the Equity
500 Portfolio or the Extended Market Portfolio will be determined by
multiplying the net asset value of the Equity 500 Portfolio or the Extended
Market Portfolio by the percentage representing that investor's share of the
aggregate beneficial interests in the Equity 500 Portfolio or the Extended
Market 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 Equity 500 Portfolio or the Extended Market
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 Equity
500 Portfolio or the Extended Market 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 Equity 500 Portfolio or the
Extended Market Portfolio effected on such day and (2) the denominator of which
is the aggregate net asset value of the Equity 500 Portfolio or the Extended
Market Portfolio as of 4 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 Equity 500 Portfolio or the Extended Market
Portfolio by all investors in the Equity 500 Portfolio or the Extended Market
Portfolio. The percentage so determined will then be applied to determine the
value of the investor's interest in the Equity 500 Portfolio or the Extended
Market Portfolio as of 4 p.m. or the close of the NYSE on the following day the
NYSE is open for trading.
The value of the securities of the Nasdaq-100 Index and Global Titans
Index Funds are determined by one or more of the following methods:
(1) Portfolio securities, except as otherwise noted, traded primarily on a
domestic securities exchange are valued at the last sales price on that
exchange. Portfolio securities traded primarily on foreign securities
exchanges are generally valued at the closing values of such securities on
the exchange where primarily traded. If no sale is reported, the average
of the bid and asked prices is generally used depending upon local custom
or regulation.
(2) Over-the-counter securities are priced at the last sales price or, if not
available, at the average of the bid and asked prices at the time trading
closes on the NYSE.
(3) Debt securities purchased with maturities of 60 days or less are stated at
amortized cost, which approximates market value. Repurchase agreements are
valued at cost.
(4) Other debt securities may be valued each business day by a pricing service
(the Service) approved by the Board of Directors. The Service uses the
mean between quoted bid and asked prices or the last sales price to price
securities when, in the Service's judgment, these prices are readily
available and are representative of the securities' market values. For
many securities, such prices are not readily available. The Service
generally prices those securities based on methods which include
consideration of yields or prices of securities of comparable quality,
coupon, maturity and type, indications as to values from dealers in
securities, and general market conditions.
(5) Securities that cannot be valued by the methods set forth above, and all
other assets, are valued in good faith at fair value using methods
determined by the Manager under the general supervision of the Board of
Directors.
Securities trading in various foreign markets may take place on days when
the NYSE is closed. Further, when the NYSE is open, the foreign markets may be
closed. Therefore, the calculation of a Fund's NAV may not take place at the
2
<PAGE>
same time the prices of certain securities held by a Fund are determined. In
most cases, events affecting the values of portfolio securities that occur
between the time their prices are determined and the close of normal trading on
the NYSE on a day a Fund's NAV is calculated will not be reflected in a Fund's
NAV. If, however, the Manager determines that a particular event would
materially affect a Fund's NAV, then the Manager, under the general supervision
of the Board of Directors, will use all relevant, available information to
determine a fair value for the affected portfolio securities.
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 $25 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 each
Fund's portfolio, the Equity 500 Portfolio and the Extended Market 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.
The Equity 500 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 Equity 500 Portfolio and valued as they are for purposes of
computing the Equity 500 Portfolio's NAV (a redemption in kind). If payment is
made to the S&P 500 Index Fund in securities, the S&P 500 Index Fund may incur
transaction expenses in converting these securities into cash. The Equity 500
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
Equity 500 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 net asset value of the Equity 500 Portfolio at the
beginning of the period. For purposes of determining compliance with Rule
18f-1, each shareholder of the S&P 500 Index Fund redeeming shares of the Fund
on a particular day will be treated as a direct holder in the interest in the
Equity 500 Portfolio being redeemed that day.
In the event the Company withdraws or redeems all of the S&P 500 Index
Fund's interest in the Equity 500 Portfolio, the Equity 500 Portfolio will
effect such redemption in kind and in such a manner that the securities
delivered to the S&P 500 Index 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 ten shares of the Funds 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.
3
<PAGE>
For the mutual protection of the investor and the Funds, the Company may
require a signature guarantee. If required, EACH signature on the account
registration must be guaranteed. Signature guarantees are acceptable from FDIC
member banks, brokers, dealers, municipal securities dealers, municipal
securities brokers, government securities dealers, government securities
brokers, credit unions, national securities exchanges, registered securities
associations, clearing agencies, and savings associations. A signature
guarantee for active duty military personnel stationed abroad may be provided
by an officer of the United States Embassy or Consulate, a staff officer of the
Judge Advocate General, or an individual's commanding officer.
INVESTMENT PLANS
The Company makes available the following investment plans to shareholders of
the Funds. At the time you sign up for any of the following investment plans
that utilize the electronic funds transfer service, you will choose the day of
the month (the effective date) on which you would like to regularly purchase
shares. When this day falls on a weekend or holiday, the electronic transfer
will take place on the last business day before the effective date. You may
terminate your participation in a plan at any time. Please call the Manager for
details and necessary forms or applications.
AUTOMATIC PURCHASE OF SHARES
INVESTRONIC(R) - The regular purchase of additional shares through electronic
funds transfer from a checking or savings account. You may invest as little as
$50 per month.
DIRECT PURCHASE SERVICE - The periodic purchase of shares through electronic
funds transfer from a non-governmental employer, an income-producing
investment, or an account with a participating financial institution.
DIRECT DEPOSIT PROGRAM - The monthly transfer of certain federal benefits to
directly purchase shares of a USAA mutual fund. Eligible federal benefits
include: Social Security, Supplemental Security Income, Veterans Compensation
and Pension, Civil Service Retirement Annuity, and Civil Service Survivor
Annuity.
GOVERNMENT ALLOTMENT - The transfer of military pay by the U.S. Government
Finance Center for the purchase of USAA mutual fund shares.
AUTOMATIC PURCHASE PLAN - The periodic transfer of funds from a USAA money
market fund to purchase shares in another non-money market USAA mutual fund.
There is a minimum investment required for this program of $5,000 in the money
market fund, with a monthly transaction minimum of $50.
BUY/SELL SERVICE - The intermittent purchase or redemption of shares through
electronic funds transfer to or from a checking or savings account. You may
initiate a "buy" or "sell" whenever you choose.
DIRECTED DIVIDENDS - If you own shares in more than one of the Funds in the
USAA family of funds, you may direct that dividends and/or capital gain
distributions earned in one fund be used to purchase shares automatically in
another fund.
Participation in these automatic purchase plans will permit you to engage
in dollar-cost averaging. For additional information concerning the benefits of
dollar-cost averaging, see APPENDIX C.
SYSTEMATIC WITHDRAWAL PLAN
If you own shares having a net asset value 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.
4
<PAGE>
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 objectives of the Funds are described in the Funds' prospectus.
There can, of course, be no assurance that each Fund will achieve its
investment objective. Each 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 a 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 investment objective of
the Equity 500 Portfolio and the Extended Market 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
Funds or the corresponding Equity 500 Portfolio or the Extended Market
Portfolio.
S&P 500 INDEX FUND
The S&P 500 Index Fund seeks to achieve its investment objective by investing
all of its investable assets in the Equity 500 Portfolio. The Company may
withdraw the Fund's investment from the Equity 500 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 S&P 500 Index Fund will
correspond directly to those of the Equity 500 Portfolio, the following is a
discussion of the various investments of and techniques employed by the
Portfolio.
EQUITY SECURITIES. The Equity 500 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 Equity 500 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 (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. 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
5
<PAGE>
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 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 Equity 500 Portfolio, 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 Equity 500 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 Equity 500 Portfolio until
settlement takes place. At the time the Equity 500 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 Equity 500 Portfolio identifies, as part of a
segregated account cash or liquid
6
<PAGE>
securities, in an amount at least equal to such commitments. On delivery dates
for such transactions, the Equity 500 Portfolio will meet its obligations from
maturities or sales of the securities held in the segregated account and/or
from cash flow. If the Equity 500 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 Equity 500 Portfolio not to
enter into when-issued commitments exceeding in the aggregate 15% of the market
value of the Equity 500 Portfolio's total assets, less liabilities other than
the obligations created by when-issued commitments.
LENDING OF PORTFOLIO SECURITIES. The Equity 500 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 Equity 500 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
Equity 500 Portfolio will adhere to the following conditions whenever its
securities are loaned: (1) the Equity 500 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 Equity 500 Portfolio must be able to
terminate the loan at any time; (4) the Equity 500 Portfolio must substitute
payments in respect of all dividends, interest, or other distributions on
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 Equity 500 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 Equity 500 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 Equity 500
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 Equity 500 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 Equity 500 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 Equity 500 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
Equity 500 Portfolio must allocate cash or securities as a deposit payment
(initial margin). 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 Equity 500 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.
7
<PAGE>
In addition, futures contracts entail risks. Although Bankers Trust
believes that use of such contracts will benefit the Equity 500 Portfolio,
these investments in futures may cause the Equity 500 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 Equity 500 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 Equity
500 Portfolio is not fully invested it may purchase a call option on an index
futures contract to hedge against a market advance.
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
Equity 500 Portfolio will retain the full amount of the option premium that
provides a partial hedge against any decline which may have occurred in the
Equity 500 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 Equity 500 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 Equity 500 Portfolio has written is exercised, the Equity 500 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 Equity 500 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 Equity 500 Portfolio may purchase a put option on an
index futures contract to hedge against the risk lowering securities values.
The amount of risk the Equity 500 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 Equity 500 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 Equity 500 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 Equity 500
Portfolio and premiums paid on outstanding options on futures contracts owned
by the Equity 500 Portfolio would exceed 5% of the Equity 500 Portfolio's net
asset value, after taking into account unrealized profits and unrealized losses
on any such contracts.
OPTIONS ON SECURITIES INDEXES. The Equity 500 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 Equity
500 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 Equity 500 Portfolio.
By writing a covered call option, the Equity 500 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 Equity 500
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 Equity 500 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 Equity 500 Portfolio writes an option, an amount equal to the net
premium received by the Equity 500 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 Equity 500 Portfolio enters into a closing
purchase transaction, the Equity 500 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 Equity 500 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 Equity 500 Portfolio.
8
<PAGE>
The Equity 500 Portfolio may purchase call and put options on the Index.
The Equity 500 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 Equity 500 Portfolio, in exchange for the premium paid, to
purchase the underlying securities at a specified price during the option
period. The Equity 500 Portfolio would ordinarily have a gain if the value of
the securities increased above the exercise price sufficiently to cover the
premium and would have a loss if the value of the securities remained at or
below the exercise price during the option period.
The Equity 500 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 Equity 500 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 Equity 500 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 Equity 500 Portfolio has adopted certain other nonfundamental policies
concerning index option transactions which are discussed below. The Equity 500
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 Equity 500 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.
EXTENDED MARKET INDEX FUND
The Extended Market Index Fund seeks to achieve its investment objective by
investing all of its investable assets in the Extended Market Portfolio. The
Company may withdraw the Fund's investment from the Extended Market 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 Extended Market Index Fund
will correspond directly to those of the Extended Market Portfolio, the
following is a discussion of the various investments of and techniques employed
by the Extended Market Portfolio.
EQUITY SECURITIES. The Extended Market Portfolio may invest in equity
securities listed on any domestic 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, 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 Extended Market Portfolio experiences
large cash inflows through the sale of securities and desirable equity
securities that are consistent with the Extended Market Portfolio's investment
objective, are unavailable in sufficient quantities or at attractive prices,
the Extended Market 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 (Moody's) or, if unrated, of comparable quality in the
opinion of the Extended Market Portfolio's adviser, MLQA; (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 Extended Market 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
9
<PAGE>
obligations rated A-1 by S&P or Prime-1 by Moody's. If no such ratings are
available, the instrument must be of comparable quality in the opinion of MLQA.
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 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. MLQA
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 Extended Market Portfolio, MLQA
determines the liquidity of restricted securities and, through reports from
MLQA, the Board will monitor trading activity in restricted securities. If
institutional trading in restricted securities were to decline, the liquidity
of the Extended Market Portfolio could be adversely affected.
In reaching liquidity decisions, MLQA 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 Extended Market 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 Extended Market Portfolio
until settlement takes place. At the time the Extended
10
<PAGE>
Market 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 Extended
Market 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 Extended Market Portfolio will meet its obligations
from maturities or sales of the securities held in the segregated account
and/or from cash flow. If the Extended Market 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 Extended Market
Portfolio not to enter into when-issued commitments exceeding in the aggregate
15% of the market value of the Extended Market Portfolio's total assets, less
liabilities other than the obligations created by when-issued commitments.
LENDING OF PORTFOLIO SECURITIES. The Extended Market 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 Extended Market 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
Extended Market Portfolio will adhere to the following conditions whenever its
securities are loaned: (1) the Extended Market 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 Extended Market
Portfolio must be able to terminate the loan at any time; (4) the Extended
Market Portfolio must substitute payments in respect of all dividends,
interest, or other distributions on 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 Extended Market
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 MLQA (or its affiliates) and MLQA may serve as the Extended Market
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 Extended Market
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 Extended Market 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 Extended Market Portfolio could experience a loss. In all cases,
MLQA 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 Extended Market 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
Extended Market Portfolio must allocate cash or securities as a deposit payment
(initial margin). Daily thereafter, the futures contract is valued and the
payment of "variation margin" may be required, since each day the Extended
Market 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 Extended Market 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,
11
<PAGE>
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 MLQA may still not result in a
successful transaction.
In addition, futures contracts entail risks. Although MLQA believes that
use of such contracts will benefit the Extended Market Portfolio, these
investments in futures may cause the Extended Market Portfolio to realize gains
and losses for tax purposes that would not otherwise be realized if the
Extended Market 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 Extended Market 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 Extended Market Portfolio is not fully invested it may purchase a call
option on an index futures contract to hedge against a market advance.
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
Extended Market Portfolio will retain the full amount of the option premium
that provides a partial hedge against any decline which may have occurred in
the Extended Market 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 Extended Market 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 Extended Market Portfolio intends to purchase. If
a put or call option the Extended Market Portfolio has written is exercised,
the Extended Market 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 Extended Market 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 Extended Market Portfolio may purchase a put option on
an index futures contract to hedge against the risk lowering securities values.
The amount of risk the Extended Market 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 Extended Market 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 Extended Market 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 Extended Market Portfolio and premiums paid on outstanding
options on futures contracts owned by the Extended Market Portfolio would
exceed 5% of the Extended Market Portfolio's net asset value, after taking into
account unrealized profits and unrealized losses on any such contracts.
OPTIONS ON SECURITIES INDEXES. The Extended Market 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 Extended
Market 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 Extended Market Portfolio.
By writing a covered call option, the Extended Market 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 Extended Market 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 Extended Market 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 Extended Market Portfolio writes an option, an amount equal to
the net premium received by the Extended Market Portfolio is included in the
liability section of the Extended Market 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
12
<PAGE>
mean between the closing bid and asked price. If an option expires on its
stipulated expiration date or if the Extended Market Portfolio enters into a
closing purchase transaction, the Extended Market 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 Extended Market
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 Extended Market Portfolio.
The Extended Market Portfolio may purchase call and put options on the
Index. The Extended Market 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 Extended Market Portfolio, in exchange for the
premium paid, to purchase the underlying securities at a specified price during
the option period. The Extended Market Portfolio would ordinarily have a gain
if the value of the securities increased above the exercise price sufficiently
to cover the premium and would have a loss if the value of the securities
remained at or below the exercise price during the option period.
The Extended Market 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 Extended Market 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 Extended Market 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 Extended Market Portfolio has adopted certain other nonfundamental
policies concerning index option transactions which are discussed below. The
Extended Market 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, MLQA may
be forced to liquidate portfolio securities to meet settlement obligations.
ASSET COVERAGE. To assure that the Extended Market 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 Extended Market
Portfolio will cover such transactions, as required under applicable
interpretations of the SEC, either by owning the underlying securities or by
segregating with the Extended Market Portfolio's Custodian or futures
commission merchant liquid securities in an amount at all times equal to or
exceeding the Extended Market Portfolio's commitment with respect to these
instruments or contracts.
NASDAQ-100 INDEX FUND AND THE GLOBAL TITANS INDEX FUND
The following is provided as additional information with respect to the
Nasdaq-100 Index Fund and the Global Titans Index Fund.
BANK OBLIGATIONS. Each Fund may invest in bank obligations, including
certificates of deposit, time deposits, bankers' acceptances and other
short-term obligations of domestic banks, foreign subsidiaries of domestic
banks, foreign branches of domestic banks, and domestic and foreign branches of
foreign banks, domestic savings and loan associations and other banking
institutions.
Certificates of deposit are negotiable certificates evidencing the
obligation of a bank to repay funds deposited with it for a specified period of
time. Time deposits are non-negotiable deposits maintained in a banking
institution for a specified period of time at a stated interest rate. Time
deposits, which may be held by the Funds, will not benefit from insurance from
the Bank Insurance Fund or the Savings Association Insurance Fund administered
by the Federal Deposit Insurance Corporation. Bankers' acceptances are credit
instruments evidencing the obligation of a bank to pay a draft drawn on it by a
customer. These instruments reflect the obligation both of the bank and of the
drawer to pay the face amount of the instrument upon maturity. The other
short-term obligations may include uninsured, direct obligations, bearing
fixed, floating- or variable-interest rates.
COMMERCIAL PAPER AND SHORT-TERM CORPORATE DEBT INSTRUMENTS. Each Fund may
invest in commercial paper (including variable amount master demand notes),
which consists of short-term, unsecured promissory notes issued by corporations
to finance short-term credit needs. Commercial paper is usually sold on a
discount basis and has a maturity
13
<PAGE>
at the time of issuance not exceeding nine months. Variable amount master
demand notes are demand obligations that permit the investment of fluctuating
amounts at varying market rates of interest pursuant to arrangements between
the issuer and a commercial bank acting as agent for the payee of such notes
whereby both parties have the right to vary the amount of the outstanding
indebtedness on the notes. The investment adviser to the Funds monitors on an
ongoing basis the ability of an issuer of a demand instrument to pay principal
and interest on demand.
Each Fund also may invest in non-convertible corporate debt securities
(e.g., bonds and debentures) with not more than one year remaining to maturity
at the date of settlement. The Funds will invest only in such corporate bonds
and debentures that are rated at the time of purchase at least "Aa" by Moody's
or "AA" by S&P. Subsequent to its purchase by the Funds, an issue of securities
may cease to be rated or its rating may be reduced below the minimum rating
required for purchase by the Funds. The investment adviser to the Funds will
consider such an event in determining whether the Funds should continue to hold
the obligation. To the extent the Funds continue to hold such obligations, it
may be subject to additional risk of default.
To the extent the ratings given by Moody's or S&P may change as a result
of changes in such organizations or their rating systems, the Funds will
attempt to use comparable ratings as standards for investments in accordance
with the investment policies contained in their prospectus and in this SAI. The
ratings of Moody's and S&P and other nationally recognized statistical rating
organizations are more fully described in the attached Appendix.
FLOATING- AND VARIABLE-RATE OBLIGATIONS. The Funds may purchase debt
instruments with interest rates that are periodically adjusted at specified
intervals or whenever a benchmark rate or index changes. These adjustments
generally limit the increase or decrease in the amount of interest received on
the debt instruments. Floating- and variable-rate instruments are subject to
interest-rate risk and credit risk.
FUTURES CONTRACTS AND OPTIONS TRANSACTIONS. The Funds may use futures as a
substitute for a comparable market position in the underlying securities.
Although the Funds intend to purchase or sell futures contracts only if
there is an active market for such contracts, no assurance can be given that a
liquid market will exist for any particular contract at any particular time.
Many futures exchanges and boards of trade limit the amount of fluctuation
permitted in futures contract prices during a single trading day. Once the
daily limit has been reached in a particular contract, no trades may be made
that day at a price beyond that limit or trading may be suspended for specified
periods during the trading day. Futures contract prices could move to the limit
for several consecutive trading days with little or no trading, thereby
preventing prompt liquidation of futures positions and potentially subjecting
each Fund to substantial losses. If it is not possible, or if the Funds
determine not to close a futures position in anticipation of adverse price
movements, the Funds will be required to make daily cash payments on variation
margin.
Each Fund may invest in stock index futures and options on stock index
futures as a substitute for a comparable market position in the underlying
securities. Futures and options on the Dow Jones Global Titans Index are not
currently available and may not be liquid if they become available. A stock
index future obligates the seller to deliver (and the purchaser to take),
effectively, an amount of cash equal to a specific dollar amount times the
difference between the value of a specific stock index on or before the close
of the last trading day of the contract and the price at which the agreement is
made. No physical delivery of the underlying stocks in the index is made. With
respect to stock indices that are permitted investments, each Fund intends to
purchase and sell futures contracts on the stock index for which it can obtain
the best price with consideration also given to liquidity. There can be no
assurance that a liquid market will exist at the time when the Fund seeks to
close out a futures contract or a futures option position. Lack of a liquid
market may prevent liquidation of an unfavorable position.
Each Fund's futures transactions must constitute permissible transactions
pursuant to regulations promulgated by the Commodity Futures Trading Commission
(CFTC). In addition, each Fund may not engage in futures transactions if the
sum of the amount of initial margin deposits and premiums paid for unexpired
options on futures contracts, other than those contracts entered into for bona
fide hedging purposes, would exceed 5% of the liquidation value of the Fund's
assets, after taking into account unrealized profits and unrealized losses on
such contracts; provided, however, that in the case of an option on a futures
contract that is in-the-money at the time of purchase, the in-the-money amount
may be excluded in calculating the 5% liquidation limit. Pursuant to
regulations or published positions of the SEC, the Funds may be required to
segregate liquid portfolio securities, including cash, in connection with its
futures transactions in an amount generally equal to the entire value of the
underlying security.
FUTURE DEVELOPMENTS. Each Fund may take advantage of opportunities in the
area of options and futures contracts and options on futures contracts and any
other derivative investments that are not presently contemplated for use by the
Fund or which are not currently available but may be developed, to the extent
such opportunities are both consistent with each Fund's investment objective
and legally permissible for the Funds. Before entering into such transactions
or making any such investment, each Fund will provide any appropriate
additional disclosure in its prospectus.
14
<PAGE>
FORWARD COMMITMENTS, WHEN-ISSUED PURCHASES, AND DELAYED-DELIVERY
TRANSACTIONS. Each Fund may purchase or sell securities on a when-issued or
delayed-delivery basis and make contracts to purchase or sell securities for a
fixed price at a future date beyond customary settlement time. Securities
purchased or sold on a when-issued, delayed-delivery, or forward commitment
basis involve a risk of loss if the value of the security to be purchased
declines, or the value of the security to be sold increases, before the
settlement date. Although each Fund will generally purchase securities with the
intention of acquiring them, the Funds may dispose of securities purchased on a
when-issued, delayed-delivery or a forward commitment basis before settlement
when deemed appropriate.
Certain of the securities in which the Funds may invest will be purchased
on a when-issued basis, in which case delivery and payment normally take place
within 45 days after the date of the commitment to purchase. The Funds only
will make commitments to purchase securities on a when-issued basis with the
intention of actually acquiring the securities, but may sell them before the
settlement date if it is deemed advisable. When-issued securities are subject
to market fluctuation, and no income accrues to the purchaser during the period
prior to issuance. The purchase price and the interest rate that will be
received on debt securities are fixed at the time the purchaser enters into the
commitment.
Purchasing a security on a when-issued basis can involve a risk that the
market price at the time of delivery may be lower than the agreed-upon purchase
price, in which case there could be an unrealized loss at the time of delivery.
The Funds currently do not intend on investing more than 5% of their assets in
when-issued securities during the coming year. Each Fund will establish a
segregated account in which it will maintain cash or liquid securities in an
amount at least equal in value to the Fund's commitments to purchase
when-issued securities. If the value of these assets declines, each Fund will
place additional liquid assets in the account on a daily basis so that the
value of the assets in the account is equal to the amount of such commitments.
INVESTMENT COMPANY SECURITIES. Each Fund may invest in securities issued
by other open-end management investment companies that principally invest in
securities of the type in which the Funds invest. Under the 1940 Act, a Fund's
investment in such securities currently is limited, subject to certain
exceptions, to (i) 3% of the total voting stock of any one investment company,
(ii) 5% of the Fund's total assets with respect to any one investment company
and (iii) 10% of the Fund's total assets in the aggregate. Investments in the
securities of other investment companies generally will involve duplication of
advisory fees and certain other expenses. Each Fund may also purchase shares of
exchange-listed closed-end funds.
ILLIQUID SECURITIES. To the extent that such investments are consistent
with its investment objective, each Fund may invest up to 15% of the value of
its net assets in securities as to which a liquid trading market does not
exist. Such securities may include securities that are not readily marketable,
such as privately issued securities and other securities that are subject to
legal or contractual restrictions on resale, floating- and variable-rate demand
obligations as to which the Funds cannot exercise a demand feature on not more
than seven days' notice and as to which there is no secondary market and
repurchase agreements providing for settlement more than seven days after
notice.
LETTERS OF CREDIT. Certain of the debt obligations (including municipal
securities, certificates of participation, commercial paper, and other
short-term obligations) that each Fund may purchase may be backed by an
unconditional and irrevocable letter of credit of a bank, savings and loan
association, or insurance company which assumes the obligation for payment of
principal and interest in the event of default by the issuer. Only banks,
savings and loan associations, and insurance companies which, in the opinion of
the investment advisor are of comparable quality to issuers of other permitted
investments of the Funds, may be used for letter of credit-backed investments.
LOANS OF PORTFOLIO SECURITIES. Each Fund may lend securities from its
portfolios to brokers, dealers, and financial institutions (but not
individuals) in order to increase the return on its portfolio. The value of the
loaned securities may not exceed one-third of each Fund's total assets and
loans of portfolio securities are fully collateralized based on values that are
marked-to-market daily. The Funds will not enter into any portfolio security
lending arrangement having a duration of longer than one year. The principal
risk of portfolio lending is potential default or insolvency of the borrower.
In either of these cases, the Funds could experience delays in recovering
securities or collateral or could lose all or part of the value of the loaned
securities. The Funds may pay reasonable administrative and custodial fees in
connection with loans of portfolio securities and may pay a portion of the
interest or fee earned thereunto the borrower or a placing broker.
In determining whether to lend a security to a particular broker, dealer
or financial institution, the Funds' investment advisor considers all relevant
facts and circumstances, including the size, creditworthiness, and reputation
of the broker, dealer, or financial institution. Any loans of portfolio
securities are fully collateralized and marked to market daily. The Funds will
not enter into any portfolio security lending arrangement having a duration of
longer than one year. Any securities that the Funds may receive as collateral
will not become part of that Fund's investment portfolio at the time of the
loan and, in the event of a default by the borrower, the Funds will, if
permitted by law, dispose of such collateral except for such part thereof that
is a security in which the Funds are permitted to invest. During the time
securities are on loan, the borrower will pay the Funds any accrued income on
those securities, and the Funds may invest the cash collateral and earn income
or receive an agreed upon fee from a borrower that has delivered
cash-equivalent collateral.
15
<PAGE>
OBLIGATIONS OF FOREIGN GOVERNMENTS, BANKS, AND CORPORATIONS. Each Fund may
invest in U.S. dollar-denominated short-term obligations issued or guaranteed
by one or more foreign governments or any of their political subdivisions,
agencies or instrumentalities that are determined by its investment adviser to
be of comparable quality to the other obligations in which each Fund may
invest. To the extent that such investments are consistent with their
investment objectives, the Funds may also invest in debt obligations of
supranational entities. Supranational entities include international
organizations designated or supported by governmental entities to promote
economic reconstruction or development and international banking institutions
and related government agencies. Examples include the International Bank for
Reconstruction and Development (the World Bank), the European Coal and Steel
Community, the Asian Development Bank, and the InterAmerican Development Bank.
The percentage of each Fund's assets invested in obligations of foreign
governments and supranational entities will vary depending on the relative
yields of such securities, the economic and financial markets of the countries
in which the investments are made, and the interest rate climate of such
countries. Each Fund may also invest a portion of its total assets in
high-quality, short-term (one year or less) debt obligations of foreign
branches of U.S. banks or U.S. branches of foreign banks that are denominated
in and pay interest in U.S. dollars.
REPURCHASE AGREEMENTS. Each Fund may enter into a repurchase agreement
wherein the seller of a security to the Fund agrees to repurchase that security
from the Fund at a mutually-agreed upon time and price. The period of maturity
is usually quite short, often overnight or a few days, although it may extend
over a number of months. Each Fund may enter into repurchase agreements only
with respect to securities that could otherwise be purchased by the Funds,
including government securities and mortgage-related securities, regardless of
their remaining maturities, and requires that additional securities be
deposited with the custodian if the value of the securities purchased should
decrease below the repurchase price.
Each Fund may incur a loss on a repurchase transaction if the seller
defaults and the value of the underlying collateral declines or is otherwise
limited or if receipt of the security or collateral is delayed. Each Fund's
custodian has custody of, and holds in a segregated account, securities
acquired as collateral by the Fund under a repurchase agreement. Repurchase
agreements are considered loans by the Funds. All repurchase transactions must
be collateralized.
In an attempt to reduce the risk of incurring a loss on a repurchase
agreement, each Fund limits investments in repurchase agreements to selected
creditworthy securities dealers or domestic banks or other recognized financial
institutions. The Funds' advisor monitors on an ongoing basis the value of the
collateral to assure that it always equals or exceeds the repurchase price.
SHORT-TERM INSTRUMENTS AND TEMPORARY INVESTMENTS. Each Fund may invest in
high-quality money market instruments on an ongoing basis to provide liquidity
or for temporary purposes when there is an unexpected level of shareholder
purchases or redemptions. The instruments in which the Funds may invest
include: (i) short-term obligations issued or guaranteed by the U.S.
government, its agencies or instrumentalities (including government-sponsored
enterprises); (ii) negotiable certificates of deposit (CDs), bankers'
acceptances, fixed time deposits and other obligations of domestic banks
(including foreign branches) that have more than $1 billion in total assets at
the time of investment and that are members of the Federal Reserve System or
are examined by the Comptroller of the Currency or whose deposits are insured
by the FDIC; (iii) commercial paper rated at the date of purchase "Prime-1" by
Moody's or "A-1+" or "A-1" by S&P, or, if unrated, of comparable quality as
determined by Fund's investment advisor; (iv) non-convertible corporate debt
securities (e.g., bonds and debentures) with remaining maturities at the date
of purchase of not more than one year that are rated at least "Aa" by Moody's
or "AA" by S&P; (v) repurchase agreements; and (vi) short-term, U.S.
dollar-denominated obligations of foreign banks (including U.S. branches) that,
at the time of investment have more than $10 billion, or the equivalent in
other currencies, in total assets and in the opinion of the Funds' investment
advisor are of comparable quality to obligations of U.S. banks, which may be
purchased by the Funds.
U.S. GOVERNMENT OBLIGATIONS. Each Fund may invest in various types of U.S.
government obligations. U.S. government obligations include securities issued
or guaranteed as to principal and interest by the U.S. government and supported
by the full faith and credit of the U.S. Treasury. U.S. government obligations
differ mainly in the length of their maturity. Treasury bills, the most
frequently issued marketable government securities, have a maturity of up to
one year and are issued on a discount basis. U.S. government obligations also
include securities issued or guaranteed by federal agencies or
instrumentalities, including government-sponsored enterprises. Some obligations
of such agencies or instrumentalities of the U.S. government are supported by
the full faith and credit of the United States or U.S. Treasury guarantees.
Other obligations of such agencies or instrumentalities of the U.S. government
are supported by the right of the issuer or guarantor to borrow from the U.S.
Treasury. Others are supported by the discretionary authority of the U.S.
government to purchase certain obligations of the agency or instrumentality or
only by the credit of the agency or instrumentality issuing the obligation.
In the case of obligations not backed by the full faith and credit of the
United States, the investor must look principally to the agency or
16
<PAGE>
instrumentality issuing or guaranteeing the obligation for ultimate repayment,
which agency or instrumentality may be privately owned. There can be no
assurance that the U.S. government would provide financial support to its
agencies or instrumentalities (including government-sponsored enterprises)
where it is not obligated to do so. In addition, U.S. government obligations
are subject to fluctuations in market value due to fluctuations in market
interest rates. As a general matter, the value of debt instruments, including
U.S. government obligations, declines when market interest rates increase and
rises when market interest rates decrease. Certain types of U.S. government
obligations are subject to fluctuations in yield or value due to their
structure or contract terms.
WARRANTS. To the extent that such investments are consistent with its
investment objective, each Fund may invest up to 5% of its net assets in
warrants. Warrants represent rights to purchase securities at a specific price
valid for a specific period of time. The prices of warrants do not necessarily
correlate with the prices of the underlying securities. Each Fund may only
purchase warrants on securities in which the Fund may invest directly.
SECURITIES RELATED BUSINESSES. The 1940 Act limits the ability of each
Fund to invest in securities issued by companies deriving more than 15% of
their gross revenues from securities related activities (financial companies).
If the Dow Jones Global Titans Index provides a higher concentration in one or
more financial companies, the Global Titans Index Fund may experience increased
tracking error due to the limitations on investments in such companies.
INVESTMENT RESTRICTIONS
Certain investment restrictions of the Funds and Portfolios have been adopted
as fundamental policies of the Funds or Portfolios, 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 Funds or Portfolios, 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 Funds or Portfolios, as the case may be,
present at a meeting, if the holders of more than 50% of the outstanding voting
securities of the Funds or Portfolios, as the case may be, are present or
represented by proxy or (2) more than 50% of the outstanding voting securities
of the Funds or Portfolios, as the case may be.
S&P 500 INDEX FUND
With respect to the S&P 500 Index Fund, whenever the Company is requested to
vote on a fundamental policy of the Equity 500 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 S&P 500 Index 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;
(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 Equity 500 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 net assets, it may borrow money as a temporary measure for
extraordinary or
17
<PAGE>
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 S&P 500 Index Fund and the Equity 500 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 5% of the Fund's (Portfolio's) total assets (taken at
market), except that the Fund (Portfolio) may borrow for temporary or
emergency purposes up to 1/3 of its net assets;
(2) pledge, mortgage, or hypothecate for any purpose in excess of 10% of the
Fund's (Portfolio's) total assets (taken at market value), provided that
collateral arrangements with respect to options and futures, including
deposits of initial deposit and variation margin, and reverse repurchase
agreements are not considered a pledge of assets for purposes of this
restriction;
(3) purchase any security or evidence of interest therein on margin, except
that such short-term credit as may be necessary for the clearance of
purchases and sales of securities may be obtained and except that
deposits of initial deposit and variation margin may be made in
connection with the purchase, ownership, holding or sale of futures;
(4) sell any security which it does not own unless by virtue of its ownership
of other securities it has at the time of sale a right to obtain
securities, without payment of further consideration, equivalent in kind
and amount to the securities sold and provided that if such right is
conditional the sale is made upon the same conditions;
(5) invest for the purpose of exercising control or management;
(6) purchase securities issued by any investment company except by purchase
in the open market where no commission or profit to a sponsor or dealer
results from such purchase other than the customary broker's commission,
or except when such purchase, though not made in the open market, is part
of a plan of merger or consolidation; provided, however, that securities
of any investment company will not be purchased for the Fund (Portfolio)
if such purchase at the time thereof would cause: (a) more than 10% of
the Fund's (Portfolio's) total assets (taken at the greater of cost or
market value) to be invested in the securities of such issuers; (b) more
than 5% of the Fund's (Portfolio's) total assets
18
<PAGE>
(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 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.
EXTENDED MARKET INDEX FUND
With respect to the Extended Market Index Fund, whenever the Company is
requested to vote on a fundamental policy of the Extended Market 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 Extended Market Index 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) 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);
19
<PAGE>
(2) concentrate its investments (i.e. hold 25% or more of its total assets in
the stocks of a particular industry or group of related industries),
provided, however, that (i) this limitation does not apply to securities
issued or guaranteed by the U.S. government or its agencies or
instrumentalities (or repurchase agreements thereto); and provided
further that (ii) each Fund will concentrate to approximately the same
extent that its underlying index concentrates in the stocks of such
particular industry or group of industries;
(3) issue senior securities, except as permitted under the 1940 Act;
(4) 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;
(5) 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;
(6) purchase or sell commodities, except that the Fund may invest in
financial futures contracts, options thereon, and similar instruments;
and
(7) purchase or sell real estate, 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.
In addition, although the Fund is classified as a non-diversified fund
under the 1940 Act and is not subject to the diversification requirements of
the 1940 Act, the Fund is required to comply with certain requirements under
the Internal Revenue Code of 1986, as amended (the Code). To ensure that the
Fund satisfies these requirements, the Declaration of Trust requires that the
Extended Market Portfolio be managed in compliance with the Code requirements
as though such requirements were applicable to the Extended Market Portfolio.
These requirements include limiting its investments so that at the close of
each quarter of the taxable year (i) not more than 25% of the market value of
the Fund's total assets are invested in the securities of a single issuer, or
any two or more issuers which are controlled by the Fund and engaged in the
same, similar, or related businesses, and (ii) with respect to 50% of the
market value of its total assets, not more than 5% of the market value of its
total assets are invested in securities of a single issuer, and the Fund does
not own more than 10% of the outstanding voting securities of a single issuer.
The U.S. government, its agencies and instrumentalities are not included within
the definition of "issuer" for purposes of the diversification requirements of
the Code. These requirements will be satisfied at the Extended Market Portfolio
level and not at the level of the Fund based upon a ruling received from the
Internal Revenue Services (IRS), which entitles the Fund to "look through" the
shares of the Extended Market Portfolio of the underlying investments of the
Extended Market Portfolio for purposes of these diversification requirements.
As a matter of fundamental policy, the Extended Market Portfolio may not:
(1) Invest more than 25% of its total assets, taken at market value, in the
securities of issuers in any particular industry (excluding the U.S.
government and its agencies and instrumentalities); provided, that in
replicating the weighting of a particular industry in its target index.
The Extended Market Portfolio may invest more than 25% of its total
assets in securities of issuers in that industry;
(2) make investments for the purpose of exercising control or management;
(3) purchase or sell real estate, except that, to the extent permitted by
law, the Portfolio may invest in securities directly or indirectly
secured by real estate or interests therein or issued by companies which
invest in real estate or interests therein;
(4) make loans to other persons, except that the acquisition of bonds,
debentures, or other corporate debt securities and investment in
government obligations, commercial paper, pass-through instruments,
certificates of deposit, banker's acceptances, repurchase agreements, or
any similar instruments shall not be deemed to be the making of a loan,
and except further that the Portfolio may lend its portfolio securities,
provided that the lending of portfolio securities may be made only in
accordance with applicable law and the guidelines set forth in the Fund's
Registration Statement, as it maybe amended from time to time;
(5) issuer senior securities to the extent such issuance would violate
applicable law;
(6) borrow money, except that (i) the Portfolio may borrow from banks (as
defined in the 1940 Act) in amounts up to 33 1/3% of its total assets
(including the amount borrowed), (ii) the Portfolio may borrow up to an
additional 5% of its total assets for temporary purposes, (iii) the
Portfolio may obtain such short-term credit as may be necessary for the
clearance of purchases and sales of portfolio securities, and (iv) the
Portfolio may purchase securities on margin to the extent permitted by
applicable law. The Portfolio may not pledge its assets other than to
secure such borrowings or, to the extent permitted by the Portfolio's
investment policies as set forth in its Registration Statement, as it may
be amended from time to time, in connection with hedging transactions,
short sales, when issued and forward commitment transactions, and similar
investment strategies;
20
<PAGE>
(7) underwrite securities of other issuers, except insofar as the Portfolio
technically may be deemed an underwriter under the Securities Act in
selling portfolio securities;
(8) purchase or sell commodities or contracts on commodities, except to the
extent that the Portfolio may do so in accordance with applicable law and
the Fund's Registration Statement, as it may be amended from time to
time, and without registering as a commodity pool operator under the
Commodity Exchange Act.
ADDITIONAL RESTRICTIONS
In addition, the Fund has adopted nonfundamental restrictions that may be
changed by the Board of Directors without shareholder approval. Like the
fundamental restrictions, none of the nonfundamental restrictions, including
but not limited to restrictions (a) below, shall prevent the Fund from
investing all of its assets in shares of another registered investment company
with the same investment objective (in a master/feeder structure). Under the
nonfundamental restrictions, the Fund may not:
(a) Purchase securities of other investment companies, except to the extent
such purchases are permitted by applicable law. As a matter of policy,
however, the Fund will not purchase shares of any registered open-end
investment company or registered unit investment trust, in reliance on
Section 12(d)(1)(F) or (G) (the "fund of funds" provisions) of the 1940
Act, at any time the Fund's shares are owned by another investment
company that is part of the same group of investment companies as the
Fund.
(b) Make short sales of securities or maintain a short position, except to
the extent permitted by applicable law and otherwise permitted by the
Fund's Registration Statement.
(c) Invest in securities that cannot be readily resold because of legal or
contractual restrictions or that cannot otherwise be marketed, redeemed,
or put to the issuer of a third party, if at the time of acquisition more
than 15% of its net assets would be invested in such securities. This
restriction shall not apply to securities that mature within seven days
or securities that the Board of Directors have otherwise determined to be
liquid pursuant to applicable law. Securities purchased in accordance
with Rule 144A under the Securities Act (which are restricted securities
that can be resold to qualified institutional buyers, but not to the
general public) and determined to be liquid by the Board of Directors are
not subject to the limitations set forth in this investment restriction.
(d) Make any additional investments if the amount of its borrowings exceeds
5% of its total assets. Borrowings do not include the use of investment
techniques that may be deemed to create leverage, including, but not
limited to, such techniques as when-issued securities, options, and
futures.
(e) Make investments for the purpose of exercising control or management.
(f) The Fund may not pledge its assets other than to secure permitted
borrowings or, to the extent permitted by the Fund's investment policies
as set forth in its Registration Statement, as it may be amended from
time to time, in connection with hedging transactions, short sales, when
issued and forward commitment transactions, and similar investment
strategies.
If a percentage restriction on the investment or use of assets set forth
above is adhered to at the time a transaction is effected, later changes in
percentages resulting from changing values will not be considered a violation.
The securities held in the Extended Market Portfolio generally may not be
purchased from, sold, or loaned to the Manager or its affiliates or any of
their directors, officers, or employees, acting as principal, unless pursuant
to a rule or exemptive order under the 1940 Act.
NASDAQ-100 INDEX FUND AND GLOBAL TITANS INDEX FUND
As a matter of fundamental policy, the Nasdaq-100 Index Fund and Global Titans
Index Fund may not:
(1) 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);
(2) concentrate its investments (i.e. hold 25% or more of its total assets in
the stocks of a particular industry or group of related industries),
provided, however, that (i) this limitation does not apply to securities
issued or guaranteed by the U.S. government or its agencies or
instrumentalities (or repurchase agreements thereto); and provided
further that (ii) each Fund will concentrate to approximately the same
extent that its underlying index concentrates in the stocks of such
particular industry or group of industries;
(3) issue senior securities, except as permitted under the 1940 Act;
(4) 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;
(5) 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;
21
<PAGE>
(6) purchase or sell commodities, except that the Fund may invest in
financial futures contracts, options thereon, and similar instruments;
and
(7) purchase or sell real estate, 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.
ADDITIONAL RESTRICTION
The following restriction is not considered to be a fundamental policy of the
Funds. The Board of Directors may change this additional restriction without
notice to or approval by the shareholders.
Each Fund may not purchase any security while borrowings representing more
than 5% of the Fund's total assets are outstanding.
PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
S&P 500 INDEX FUND
With respect to the S&P 500 Index Fund, Bankers Trust is responsible for
decisions to buy and sell securities, futures contracts and options on such
securities and futures for the Equity 500 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 Equity 500 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 Equity 500 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 Equity 500 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 Equity 500 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 Equity 500 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 Equity 500 Portfolio may determine, Bankers Trust may consider sales of
shares of any investment company that invests in the Equity 500 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 Equity 500 Portfolio that such information is
only supplementary to Bankers Trust's own research effort, since the
information must still be analyzed, weighed and reviewed by Bankers Trust's
staff. Such information may be useful to Bankers Trust in providing services to
clients other than the Equity Portfolio's, and not all such information is used
by Bankers Trust in connection with the Equity 500 Portfolio.
22
<PAGE>
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 Equity 500 Portfolio.
In certain instances there may be securities that are suitable for the
Equity 500 Portfolio as well as for one or more of Bankers Trust's other
clients. Investment decisions for the Equity 500 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 Equity 500 Portfolio is concerned. However, it is believed that
the ability of the Equity 500 Portfolio to participate in volume transactions
will produce better executions for the Equity 500 Portfolio.
For the years ended December 31, 1999, 1998, and 1997, the Portfolio paid
brokerage commissions in the amount of $678,820, $534,801, and $341,058,
respectively. For the year ended December 31, 1999 and 1997, the Portfolio paid
no affiliated brokerage commissions. For year ended 1998, the Portfolio paid
affiliated brokerage commissions in the amount of $333. This represents 0.06%
of the Fund's aggregate brokerage commissions and 0% of the Fund's aggregate
dollar amount of transactions involving the payment of commissions during the
fiscal year.
EXTENDED MARKET INDEX FUND
With respect to the Extended Market Index Fund, MLQA is responsible for
decisions to buy and sell securities, futures contracts and options on such
securities and futures for the Extended Market 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, to MLQA or its subsidiaries or
affiliates. Purchases and sales of certain portfolio securities on behalf of
the Extended Market Portfolio are frequently placed by MLQA 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 Extended Market 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.
MLQA 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 Extended Market 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 Extended Market Portfolio to reported commissions paid
by others. MLQA reviews on a routine basis commission rates, execution and
settlement services performed, making internal and external comparisons.
NASDAQ-100 INDEX FUND AND THE GLOBAL TITANS INDEX FUND
With respect to the Nasdaq-100 Index Fund and the Global Titans Index Fund, the
Funds will have no obligation to deal with any particular broker or group of
brokers in the execution of portfolio transactions. Pursuant to the Subadvisory
Agreement and subject to policies established by the Funds' Board of Directors,
Barclays, as subadvisor, has the authority to make the Funds' investment
portfolio decisions and the placing of portfolio transactions. In placing
orders, it is the policy of the Funds to obtain the best results taking into
account the broker/dealer's general execution and operational facilities, the
type of transaction involved and other factors such as the broker/dealer's risk
in positioning the securities involved. While Barclays generally seeks
reasonably competitive spreads or commissions, the Funds will not necessarily
be paying the lowest spread or commission available. Purchase and sale orders
of the securities held by the Funds may be combined with those of other
accounts that Barclays manages, and for which they have brokerage placement
authority, in the interest of seeking the most favorable overall net results.
When Barclays determines that a particular security should be bought or sold
for the Funds and other accounts managed by Barclays, Barclays undertakes to
allocate those transactions among the participants equitably.
Under the 1940 Act, persons affiliated with the Funds, Barclays and their
affiliates are prohibited from dealing with the Funds as a principal in the
purchase and sale of securities unless an exemptive order allowing such
transactions is obtained from the SEC or an exemption is otherwise available.
The Funds may purchase portfolio securities in underwritten offerings and may
purchase securities directly from the issuer. Purchases and sales of equity
securities on a securities exchange are effected through brokers who charge a
negotiated commission for their services. Orders may be directed to
23
<PAGE>
any broker including, to the extent and in the manner permitted by applicable
law, affiliates of Barclays or Barclays Global Investors, N.A. In the
over-the-counter market, securities are generally traded on a "net" basis with
dealers acting as principal for their own accounts without a stated commission,
although the price of the security usually includes a profit to the dealer. In
underwritten offerings, securities are purchased at a fixed price that includes
an amount of compensation to the underwriter, generally referred to as the
underwriter's concession or discount. In placing orders for portfolio
securities of the Fund, Barclays is required to give primary consideration to
obtaining the most favorable price and efficient execution. This means that
Barclays seeks to execute each transaction at a price and commission, if any,
that provide the most favorable total cost or proceeds reasonably attainable
under the circumstances. While Barclays generally seeks reasonably competitive
spreads or commissions, the Fund will not necessarily be paying the lowest
spread or commission available. In executing portfolio transactions and
selecting brokers or dealers, Barclays seeks to obtain the best overall terms
available for the Fund. In assessing the best overall terms available for any
transaction, Barclays considers factors deemed relevant, including the breadth
of the market in the security, the price of the security, the financial
condition and execution capability of the broker or dealer, and the
reasonableness of the commission, if any, both for the specific transaction and
on a continuing basis. Rates are established pursuant to negotiations with the
broker based on the quality and quantity of execution services provided by the
broker in the light of generally prevailing rates. The allocation of orders
among brokers and the commission rates paid are reviewed periodically by the
Funds' Board. Certain of the brokers or dealers with whom the Funds may
transact business offer commission rebates to the Funds. Barclays considers
such rebates in assessing the best overall terms available for any transaction.
The overall reasonableness of brokerage commissions paid is evaluated by
Barclays based upon its knowledge of available information as to the general
level of commission paid by other institutional investors for comparable
services.
DESCRIPTION OF SHARES
Each Fund is a series of the Company and is diversified, except for the
Nasdaq-100 Index Fund and the Global Titans Index Fund, which are
nondiversified. The Company is an open-end management investment company
incorporated under the laws of the state of Maryland on October 14, 1980. The
Company is authorized to issue shares in separate series or Funds. There are
seventeen mutual funds in the Company, four of which are described in this SAI.
Under the Articles of Incorporation, the Board of Directors is authorized to
create new Funds in addition to those already existing without shareholder
approval.
Each Fund's assets and all income, earnings, profits, and proceeds
thereof, subject only to the rights of creditors, are specifically allocated to
such Fund. They constitute the underlying assets of 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 the Company can require Directors to call a meeting of
shareholders for the purpose of voting on the removal of one or more Directors.
The Company will assist in communicating to other shareholders about the
meeting. On any matter submitted to the shareholders, the holder of each Fund
share is entitled to one vote per share (with proportionate voting for
fractional shares) regardless of the relative 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 SEC, whenever the S&P 500 Index Fund or the
Extended Market Index Fund is requested to vote on matters pertaining to the
Equity 500 Portfolio or the Extended Market Portfolio, respectively, 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.
The Equity 500 Portfolio, in which all the Assets of the S&P 500 Index
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 S&P 500 Index
Fund and
24
<PAGE>
other entities investing in the Equity 500 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 Equity 500 Portfolio.
However, the risk of the S&P 500 Index Fund incurring financial loss on account
of such liability is limited to circumstances in which both inadequate
insurance exists and the Equity 500 Portfolio itself was unable to meet its
obligations. Accordingly, the Company's Directors believe that neither the S&P
500 Index Fund nor you will be adversely affected by reason of the Fund's
investing in the Equity 500 Portfolio.
The Extended Market Portfolio, in which all the Assets of the Extended
Market 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
Extended market Index 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 Extended
Market Portfolio. However, the risk of the Extended Market Index Fund incurring
financial loss on account of such liability is limited to circumstances in
which both inadequate insurance exists and the Extended Market Portfolio itself
was unable to meet its obligations. Accordingly, the Company's Directors
believe that neither the Extended Market Index Fund nor you will be adversely
affected by reason of the Fund's investing in the Extended Market 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
Each Fund intends to qualify as a regulated investment company under Subchapter
M of the Code. Accordingly, each Fund will not be liable for federal income
taxes on its taxable net investment income and net capital gains (capital gains
in excess of capital losses) that are distributed to shareholders, provided
that each Fund distributes at least 90% of its net investment income and net
short-term capital gain for the taxable year.
To qualify as a regulated investment company, each Fund must, among other
things, (1) derive in each taxable year at least 90% of its gross income from
dividends, interest, payments with respect to securities loans, gains from the
sale or other disposition of stock, securities or foreign currencies, or other
income derived with respect to its business of investing in such stock,
securities, or currencies (the 90% test); and (2) satisfy certain
diversification requirements, at the close of each quarter of the Fund's
taxable year.
The Code imposes a nondeductible 4% excise tax on a regulated investment
company that fails to distribute during each calendar year an amount at least
equal to the sum of (1) 98% of its taxable net investment income for the
calendar year, (2) 98% of its capital gain net income for the twelve-month
period ending on October 31, and (3) any prior amounts not distributed. 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 a 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.
With respect to the Equity 500 Portfolio and the Extended Market
Portfolio, the Portfolios are not subject to federal income taxation. Instead,
the Funds and other investors investing in the Equity 500 Portfolio and the
Extended Market Portfolio must take into account, in computing their federal
income tax liability, their share of the Equity 500 Portfolio's and the
Extended Market Portfolio's income, gains, losses, deductions, credits and tax
preference items, without regard to whether they have received any cash
distributions from the Equity 500 Portfolio and the Extended Market Portfolio.
Distributions received by the S&P 500 Index Fund or the Extended Market
Index Fund from the Equity 500 Portfolio or the Extended Market Portfolio
generally will not result in either 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 each Fund's basis in its interest in
the Equity 500 Portfolio or the Extended Market Portfolio prior to the
distribution; (2) income or gain may be realized if the distribution is made in
liquidation of each Fund's entire interest in the Equity 500 Portfolio or the
Extended Market Portfolio and includes a disproportionate share of any
unrealized receivables held by the Equity 500 Portfolio or the Extended Market
Portfolio; and (3) loss may be recognized if the distribution is made in
liquidation of each Fund's entire interest in the Equity 500 Portfolio or the
Extended Market Portfolio and consists solely of cash and/or unrealized
receivables. Each Fund's basis in its interest in the Equity 500 Portfolio and
the Extended Market Portfolio generally will equal the amount of cash and the
basis of any property that the Funds invest in the Equity 500 Portfolio or the
Extended Market Portfolio, increased by the Funds' share of income from the
Equity 500 Portfolio or the Extended Market Portfolio,
25
<PAGE>
and decreased by the amount of any cash distributions and the basis of any
property distributed from the Equity 500 Portfolio or the Extended Market
Portfolio.
Any gain or loss realized by a shareholder upon the sale or other
disposition of shares of a Fund, or upon receipt of a distribution in complete
liquidation of the Fund, generally will be a capital gain or loss which will be
long-term or short-term, generally depending upon the shareholder's holding
period for the shares. Any loss realized on a sale or exchange will be
disallowed to the extent the shares disposed of are replaced (including shares
acquired pursuant to a dividend reinvestment plan) within a period of 61 days
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 eight 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: 53
President and Chief Executive Officer of United Services Automobile Association
(USAA) (4/00-present); President and Chief Operating Officer of USAA
(6/99-4/00); Director of USAA (2/99-present); Deputy Chief Executive Officer
for Capital Management of USAA (6/98-5/99); 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; and Director and Chairman
of the Boards of Directors of USAA Investment Management Company (IMCO), USAA
Federal Savings Bank, and USAA Real Estate Company.
Michael J. C. Roth 1, 2, 4
Director, President, and Vice Chairman of the Board of Directors
Age: 59
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; and Trustee and Vice Chairman of USAA Life Investment Trust.
David G. Peebles 1
Director and Vice President
Age: 60
Senior Vice President, Equity Investments, IMCO (11/98-present); Vice
President, Equity Investments, IMCO (2/88-11/98). Mr. Peebles 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; and Vice President of USAA Life Investment Trust.
Barbara B. Dreeben 3, 4, 5
200 Patterson #1008
San Antonio, TX 78209
Director
Age: 55
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.
26
<PAGE>
Robert L. Mason, Ph.D. 3, 4, 5
12823 Queens Forest
San Antonio, TX 78230
Director
Age: 54
Staff Analyst, 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.
Michael F. Reimherr 3, 4, 5
128 East Arrowhead
San Antonio, Texas 78228
Director
Age: 55
President of Reimherr Business Consulting (5/95-present). Mr. Reimherr serves
as a Director/Trustee of each of the remaining funds within the USAA family of
funds.
Richard A. Zucker 2, 3, 4, 5
407 Arch Bluff
San Antonio, TX 78216
Director
Age: 57
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.
Laura T. Starks, Ph.D. 3, 4, 5
5405 Ridge Oak Drive
Austin, TX 78731-5405
Director
Age: 50
Charles E and Sarah M Seay Regents Chair Professor of Finance, University of
Texas at Austin (9/96-present); Sarah Meadows Seay Regents, Professor of
Finance, University of Texas of Austin (9/94-9/96). Dr. Starks serves as a
Director/Trustee of each of the remaining funds within the USAA family of
funds.
Kenneth E. Willmann 1
Vice President
Age: 54
Senior Vice President, Fixed Income Investments, IMCO (12/99-present); Vice
President, Mutual Fund Portfolios, IMCO (09/94-12/99). Mr. Willmann serves as
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,
and Vice President of USAA Life Investment Trust.
Michael D. Wagner 1
Secretary
Age: 52
Senior Vice President, USAA Capital Corporation (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; and Vice President, Corporate Counsel for various other USAA
subsidiaries and affiliates.
Mark S. Howard 1
Assistant Secretary
Age: 37
Vice President, Securities Counsel & Compliance, IMCO (7/00-present); Assistant
Vice President, Securities Counsel, USAA (2/98-7/00); Executive Director,
Securities Counsel, USAA (9/96-2/98); Senior Associate Counsel, Securities
Counsel, USAA (5/95-8/96). Mr. Howard serves as Assistant Secretary for IMCO,
USAA Shareholder Account Services,
27
<PAGE>
USAA Financial Planning Network, Inc., each of the remaining funds within the
USAA family of funds, and for USAA Life Investment Trust.
Sherron A. Kirk 1
Treasurer
Age: 55
Senior Vice President, Senior Financial Officer, IMCO (1/00-present); Vice
President, Senior Financial Officer, IMCO (8/98-1/00); Vice President,
Controller, IMCO (10/92-8/98). Ms. Kirk serves as Treasurer of each of the
remaining funds within the USAA family of funds and Senior Vice President,
Senior Financial Officer of USAA Shareholder Account Services.
Roberto Galindo, Jr. 1
Assistant Treasurer
Age: 39
Executive Director, Mutual Fund Analysis & Support, IMCO (6/00-present);
Director, Mutual Fund Analysis, IMCO(9/99-6/00); Vice President, Portfolio
Administration, Founders Asset Management LLC (7/98-8/99); Assistant Vice
President, Director of Fund & Private Client Accounting, Founders Asset
Management LLC (7/93-7/98). Mr. Galindo 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 which may be delegated to it by the
Board. The Pricing and Investment Committee of the Board of Directors acts upon
various investment-related issues and other matters 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 executive officers of the Manager: Christopher W.
Claus, Senior Vice President, Investment Sales and Service; and Samuel J.
Borowski, Senior Vice President, Investment Operations. 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, 1999.
Name Aggregate Total Compensation
of Compensation from the USAA
Director From the company Familty of Funds(b)
----------- ------------------- -------------------
Robert G. Davis None (a) None (a)
Barbara B. Dreeben $ 9,417 $ 34,500
Howard L. Freeman, Jr. (c) $ 9,417 $ 34,500
Robert L. Mason $ 9,417 $ 34,500
Michael J. C. Roth None (a) None (a)
John W. Saunders, Jr. (c) None (a) None (a)
Richard A. Zucker $ 9,417 $ 34,500
---------------------------------
(a) Robert G. Davis, Michael J. C. Roth, and John W. Saunders, Jr. are
affiliated with the Company's investment adviser, IMCO, and, accordingly,
receive no remuneration from the Company or any other Fund of the USAA
family of funds.
(b) At December 31, 1999, the USAA family of funds consisted of four
registered investment companies offering 38 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 available
to the public only through the
28
<PAGE>
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.
(c) Effective December 31, 1999, John W. Saunders, Jr. and Howard L. Freeman,
Jr. retired from the Board of Directors.
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 July 31, 2000, 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 September 30, 2000, USAA and its affiliates owned (including related
employee benefit plans) 4,649,251.838 shares (1%) of the USAA S&P 500 Index
Fund.
The Company knows of no other persons who, as of September 30, 2000, held
of record or owned beneficially 5% or more of the voting stock of the S&P 500
Index Fund's shares.
TRUSTEES AND OFFICERS OF THE EQUITY 500 PORTFOLIO
The Trustees and officers of the Equity 500 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.
CHARLES P. BIGGAR (birth date: October 13, 1930) -- Trustee of the
Portfolio; Trustee of each of the other investment companies in the BT Fund
Complex1; Retired; former Vice President, International Business Machines
("IBM") and President, National Services and the Field Engineering Divisions of
IBM. His address is 12 Hitching Post Lane, Chappaqua, New York 10514.
S. LELAND DILL (birth date: March 28, 1930)-- Trustee of the Portfolio;
Trustee of each of the other investment companies in the BT Fund Complex;
Retired; Director, Coutts (U.S.A.) International; Trustee, Phoenix-Zweig Trust2
and Phoenix-Euclid Market Neutral Fund2; former Partner, KPMG Peat Marwick;
Director, Vintners International Company Inc.; Director, Coutts Trust Holdings
Ltd., Director, Coutts Group; General Partner, Pemco2. His address is 5070
North Ocean Drive, Singer Island, Florida 33404.
MARTIN J. GRUBER (birth date: July 15, 1937) -- Trustee of the Portfolio;
Trustee of each of the other investment companies in the BT Fund Complex;
Nomura Professor of Finance, Leonard N. Stern School of Business, New York
University (since 1964); Trustee, TIAA2; Trustee, SG Cowen Mutual Funds2;
Trustee, Japan Equity Fund2; Trustee, Taiwan Equity Fund2. His address is 229
South Irving Street, Ridgewood, New Jersey 07450.
RICHARD HALE* (birth date: July 17, 1945) -- President and Trustee of the
Portfolio; Trustee of each of the other investment companies in the BT Fund
Complex; Managing Director, Deutsche Asset Management; Director, Flag Investors
Funds2; Managing Director, Deutsche Banc Alex. Brown Incorporated; Director and
President, Investment Company Capital Corp. His address is 205 Woodbrook Lane,
Baltimore, Maryland 21212.
RICHARD J. HERRING (birth date: February 18, 1946) -- Trustee of the
Portfolio; Trustee of each of the other investment companies in the BT Fund
Complex; Jacob Safra Professor of International Banking, Professor of Finance
and Vice Dean, The Wharton School, University of Pennsylvania (since 1972). His
address is 325 South Roberts Road, Bryn Mawr, Pennsylvania 19010.
BRUCE E. LANGTON (birth date: May 10, 1931) -- Trustee of the Portfolio;
Trustee of each of the other investment companies in the BT Fund Complex;
Retired; Trustee, Allmerica Financial Mutual Funds (1992-present); Member,
Pension and Thrift Plans and Investment Committee, Unilever U.S. Corporation
(1989 to present)3; Director, TWA Pilots Directed Account Plan and 401(k) Plan
(1988 to present)2. His address is 99 Jordan Lane, Stamford, Connecticut 06903.
PHILIP SAUNDERS, JR. (birth date: October 11, 1935) -- Trustee of the
Portfolio; Trustee of each of the other investment companies in the BT Fund
Complex; Principal, Philip Saunders Associates (Economic and Financial
Consulting); former Director, Financial Industry Consulting, Wolf & Company;
President, John Hancock Home Mortgage Corporation; Senior Vice President of
Treasury and Financial Services, John Hancock Mutual Life Insurance Company,
Inc. His address is 445 Glen Road, Weston, Massachusetts 02193.
HARRY VAN BENSCHOTEN (birth date: February 18, 1928) -- Trustee of the
Portfolio; Trustee of each of the other investment companies in the BT Fund
Complex; Retired; Director, Canada Life Insurance Corporation of New York. His
address is 6581 Ridgewood Drive, Naples, Florida 34108.
29
<PAGE>
The Board has an Audit Committee that meets with the Trust's independent
accountants to review the financial statements of the Trust, the adequacy of
internal controls and the accounting procedures and policies of the Trust. Each
member of the Board except Mr. Hale also is a member of the Audit Committee.
----------------------
* "Interested Person" within the meaning of Section 2(a)(19) of the Act. Mr.
Hale is a Managing Director of Deutsche Asset Management, the U.S. asset
management unit of Deutsche Bank and its affiliates.
OFFICERS OF THE TRUST AND THE PORTFOLIO
DANIEL O. HIRSCH (birth date: March 27, 1954)-- Secretary of the Trust;
Director, Deutsche Banc Alex. Brown Incorporated and Investment Company Capital
Corp. since July 1998; Assistant General Counsel, Office of the General
Counsel, United States Securities and Exchange Commission from 1993 to 1998.
His address is One South Street, Baltimore, Maryland 21202.
CHARLES A. RIZZO (birth date: August 5, 1958) Treasurer of the Trust;
Vice President and Department Head, Deutsche Asset Management since 1998;
Senior Manager, PricewaterhouseCoopers LLP from 1993 to 1998. His address is
One South Street, Baltimore, Maryland 21202.
Messrs. Hirsch and Rizzo also hold similar positions for other investment
companies for which ICC Distributors, or an affiliate serves as the principal
underwriter.
No person who is an officer or director of Bankers Trust Company is an officer
or Trustee of the Trust. No director, officer or employee of ICC Distributors,
Inc., or any of its affiliates will receive any compensation from the Trust for
serving as an officer or Trustee of the Trust.
-----------------------
1 The "BT Fund Complex" consists of BT Investment Funds, BT Institutional
Funds, BT Pyramid Mutual Funds, BT Advisor Funds, Cash Management
Portfolio, Intermediate Tax Free Portfolio, Tax Free Money Portfolio, NY
Tax Free Money Portfolio, Treasury Money Portfolio, International Equity
Portfolio, Equity 500 Index Portfolio, Capital Appreciation Portfolio,
Asset Management Portfolio and BT Investment Portfolios.
2 An investment company registered under the Investment Company Act of 1940,
as amended (the "Act").
3 A publicly held company with securities registered pursuant to Section 12
of the Securities Exchange Act of 1934, as amended.
4 Underwriter/distributor for the Trust.
The following table reflects fees paid to the Trustees of the Equity 500
Portfolio for the year ended December 31, 1999.
TRUSTEE COMPENSATION TABLE
Aggregate Total Compensation
Name of Person, Compensation from Fund Complex
Position From Portfolio Paid to Trusteees
--------------- -------------- ------------------
Charles P. Biggar $ 1,235 $ 43,750
S. Leland Dill $ 1,074 $ 43,750
Martin J. Gruber $ 212 $ 45,000
Richard Hale - -
Richard J. Herring $ 189 $ 43,750
Bruce E. Langton $ 212 $ 43,750
Philip Saunders, Jr. $ 1,108 $ 45,000
Harry Van Benschoten $ 212 $ 45,000
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.
30
<PAGE>
TRUSTEES AND OFFICERS OF THE EXTENDED MARKET PORTFOLIO
The Trustees and officers of the Extended Market Portfolio and their ages,
principal occupations during the past five years, and addresses are set forth
below. Their titles may have varied during that period.
Terry K. Glenn 1, 2
P.O. Box 9011
Princeton, New Jersey 08543-9011
President and Trustee
Age: 60
Executive Vice President of Merrill Lynch Investment Manager, L.P., (MLIM) and
Fund Asset Management, L.P., (FAM) (which terms as used herein include their
corporate predecessors) since 1983; Executive Vice President and Director of
Princeton Services, Inc. (Princeton Services) since 1993; President of FAM
Distributors, Inc. since 1986 and Director thereof since 1991; President of
Princeton Administrators, L.P. since 1988.
M. Colyer Crum 2, 3
104 Westcliff Road
Weston, Massachusetts 02493
Trustee
Age: 68
James R. Williston Professor of Investment Management Emeritus, Harvard
Business School since 1996; James R. Williston Professor of Investment, Harvard
Business School from 1971 to 1996; Director of Cambridge Bancorp.
Laurie Simon Hodrick 2, 3
809 Uris Hall
3022 Broadway
New York, New York 10027
Trustee
Age: 37
Professor of Finance and Economics, Graduate School of Business, Columbia
University since 1998; Associate Professor of Finance and Economics, Graduate
School of Business, Columbia University from 1996 to 1998; Associate Professor
of Finance, J.L. Kellogg Graduate School of Management, Northwestern University
from 1992 to 1996.
Jack B. Sunderland 2, 3
P. O. Box 7
West Cornwall, Connecticut 06796
Trustee
Age: 72
President and Director of American Independent Oil Company, Inc. (an energy
company) since 1987; Member of Council on Foreign Relations since 1971.
Stephen B. Swensrud 2, 3
24 Federal Street
Suite 400
Boston, Massachusetts 02110
Trustee
Age: 67
Chairman of Fernwood Advisors (investment adviser) since 1996; Principal of
Fernwood Associates (financial consultants) since 1975; Chairman of R.P.P.
Corporation (manufacturing) since 1978; Director of International Mobile
Communications, Inc. (telecommunications) since 1998.
31
<PAGE>
J. Thomas Touchton 2, 3
The Witt-Touchton Company
One Tampa City Center
201 North Franklin Street, Suite 3405
Tampa, Florida 33602
Trustee
Age: 61
Managing Partner of The Witt-Touchton Company and its predecessor, The Witt Co.
(a private investment partnership) since 1972; Trustee Emeritus of Washington
and Lee University; Director of TECO Energy, Inc. (an electric utility holding
company).
Fred G. Weiss 2, 3
16450 Maddalena Place
Delray Beach, Florida 33446
Trustee
Age: 58
Director of Watson Pharmaceutical, Inc. (a pharmaceutical company) since 2000;
Director of the Michael J. Fox Foundation for Parkinson's Research; Managing
Director of FGW Associates since 1997; Vice President, Planning, Investment and
Development of Warner Lambert Co. from 1979 to 1997; Director of Laboratories
Phoenix USA, Inc. (a private drug delivery company); and Director of Kann
Institute for Medical Careers, Inc. (a private medical education company).
Arthur Zeikel 1, 2
300 Woodland Avenue
Westfield, New Jersey 07090
Trustee
Age: 68
Chairman of FAM and of MLIM from 1997 to 1999; President of FAM and MLIM from
1977 to 1997; Chairman of Princeton Services from 1997 to 1999, Director
thereof from 1993 to 1999 and President thereof from 1993 to 1997; Executive
Vice President of Merrill Lynch & Co., Inc. (ML&Co.) from 1990 to 1999.
Joseph T. Monagle, Jr. 1, 2
P.O. Box 9011
Princeton, New Jersey 08543-9011
Senior Vice President
Age: 51
Senior Vice President of MLIM and FAM since 1990; Department Head of the Global
Fixed Income Division of MLIM and FAM since 1997; Senior Vice President of
Princeton Services since 1993.
Gregory Mark Maunz 1, 2
P.O. Box 9011
Princeton, New Jersey 08543-9011
Senior Vice President
Age: 47
First Vice President of MLIM and FAM since 1997; Vice President of MLIM and FAM
from 1985 to 1997; Portfolio Manager of MLIM and FAM since 1984.
Jeffrey B. Hewson 1, 2
P.O. Box 9011
Princeton, New Jersey 08543-9011
Vice President
Age: 48
Director (Global Fixed Income) of MLIM and FAM since 1998; Vice President of
MLIM and FAM from 1989 to 1998; Portfolio Manager of MLIM and FAM since 1985.
32
<PAGE>
Eric S. Mitofsky 1, 2
P.O. Box 9011
Princeton, New Jersey 08543-9011
Senior Vice President
Age: 45
First Vice President of MLIM and FAM since 1997; Vice President of MLIM and FAM
from 1992 to 1997.
Christopher G. Ayoub 1, 2
P.O. Box 9011
Princeton, New Jersey 08543-9011
Senior Vice President
Age: 44
First Vice President of MLIM and FAM since 1998; Vice President of MLIM and FAM
from 1985 to 1998.
Richard Vella 1, 2
P.O. Box 9011
Princeton, New Jersey 08543-9011
Senior Vice President
Age: 42
First Vice President of MLIM and FAM since 1999; Managing Director, Global
Index Funds of Bankers Trust from 1997 to 1999; Managing Director,
International Index Funds of Bankers Trust from 1995 to 1999; Vice President,
International Index Funds of Bankers Trust from 1990 to 1995; Assistant Vice
President, International Index Funds of Bankers Trust from 1987 to 1990;
Assistant Treasurer of Bankers Trust from 1985 to 1986.
Frank Salerno 1, 2
P.O. Box 9011
Princeton, New Jersey 08543-9011
Senior Vice President
Age: 40
First Vice President of MLIM and FAM since 1999; Managing Director and Chief
Investment Officer of Structured Investments at Bankers Trust from 1995 to
1999; Managing Director and head of Structured Investments at Bankers Trust
from 1993 to 1995; Domestic Head of Structured Investments at Bankers Trust
from 1991 to 1993; Assistant Vice President of Structured Investments at
Bankers Trust from 1985 to 1991.
Dean D'Onofrio 1, 2
P.O. Box 9011
Princeton, New Jersey 08543-9011
Senior Vice President
Age: 41
Managing Director and Head of Quantitative Advisors since 1999; Managing
Director in Corporate Institutional Client Group from 1997 through 1999;
Managing Director of Bankers Trust Company 1981 to 1996; Analyst of
Quantitative Investments Group of Bankers Trust Company from 1981 to 1982;
Portfolio Manager of Quantitative Investments Group of Bankers Trust Company
from 1983 to 1984; Head of Quantitative Investments Group of Bankers Trust
Company from 1985 to 1989; Head of U.S. Equity Derivatives Marketing Group of
Bankers Trust Company from 1990 to 1993; Head of Hedge Funds and Arbitrage
Trading Group of Bankers Trust Company from 1994 to 1996.
Donald C. Burke 1, 2
P.O. Box 9011
Princeton, New Jersey 08543-9011
Vice President and Treasurer
Age: 40
Senior Vice President and Treasurer of MLIM and FAM since 1999; Senior Vice
President and Treasurer of Princeton Services since 1999; Vice President of
PAMD since 1999; First Vice President of MLIM and FAM from 1997 to 1999;
Director of Taxation of MLAM since 1990; Vice President of MLAM and MLIM
(previously know as Merrill Lynch Asset Management, L.P.) from 1990 to 1997.
33
<PAGE>
Robert C. Doll, Jr. 1, 2
P.O. Box 9011
Princeton, New Jersey 08543-9011
Senior Vice President
Age: 45
First Vice President of MLIM and FAM since 1999; Senior Vice President of
Princeton Services since 1999; Chief Investment Officer of Oppenheimer Funds,
Inc. in 1999 and Executive Vice President thereof from 1991 to 1999.
Ira P. Shapiro 1, 2
P.O. Box 9011
Princeton, New Jersey 08543-9011
Secretary
Age: 37
First Vice President of MLIM and FAM since 1998; Director (Legal Advisory) of
MLIM and FAM from 1997 to 1998; Vice President of MLIM and FAM from 1996 to
1997; Attorney with MLIM and FAM from 1993 to 1997.
Phil Green 1, 2
P.O. Box 9011
Princeton, New Jersey 08543-9011
Senior Vice President
Age: 36
Senior Vice President of MLIM and FAM since 1999; Managing Director and
Portfolio Manager of Global Institutional Services at Bankers Trust from 1997
to 1999; Vice President of Quantitative Equities at Bankers Trust in 1996; Vice
President of Asset Allocations Strategies at Bankers Trust from 1994 to 1996;
Vice President of Foreign Exchange and Currency Overlay Strategies at Bankers
Trust from 1988 to 1999; Assistant Treasurer of Asset Management Group at
Bankers Trust from 1985 to 1988.
Sidney Hoots 1, 2
P.O. Box 9011
Princeton, New Jersey 08543-9011
Senior Vice President
Age: 39
Senior Vice President of MLIM and FAM since 1999; Managing Director of Global
Institutional Services at Bankers Trust from 1992 to 1999; Manager of
Quantitative U.S. Equities Group at Bankers Trust from 1991 to 1992; Manager of
Bond Index Funds at Bankers Trust from 1986 to 1991; Quantitative Analyst of
Index Funds at Bankers Trust from 1984 to 1986.
-----------------------
1 Interested person, as defined in the 1940 Act, as amended, of the
Portfolio.
2 Such Trustee or officer is a director, trustee, or officer of the
investment companies for which Merrill Lynch Asset Management, L.P. or its
affiliate acts as investment adviser.
3 Member of the Trust's Audit and Nominating Committee, which is responsible
for the selection of the independent auditors and the selection and
nomination of non-interested Trustees.
COMMITTEE AND BOARD MEETINGS. The Board has a standing Audit and
Nominating Committee (the "Committee"), which consists of Board Members who are
not "interested persons" of the Portfolio within the meaning of the 1940 Act.
The principal purpose of the Committee is to review the scope of the annual
audit conducted by the Portfolio's independent auditors and the evaluation by
such auditors of the accounting procedures followed by the Portfolio. The
Committee also reviews and nominates candidates to serve as non-interested
Board Members. The Committee generally will not consider nominees recommended
by shareholders of the Portfolio. The noninterested Board Members have retained
independent legal counsel to assist them in connection with these duties.
34
<PAGE>
The following table reflects fees paid to the Trustees of the Extended Market
Portfolio for the year ended December 31, 1999.
TRUSTEE COMPENSATION TABLE
Aggregate Total Compensation
Name of Person, Compensation from Fund Complex
Position From Portfolio Paid to Trustees
--------------- -------------- ------------------
M. Colyer Crum N/A N/A
Laurie Simon Hodrick N/A N/A
Terri K. Glenn None None
Jack B. Sunderland N/A $8,000
Stephen B. Swensrud N/A $8,000
J. Thomas Touchton N/A $8,000
Fred G. Weiss N/A N/A
Arthur Zeikel None None
INVESTMENT ADVISER
As described in the Funds' prospectus, USAA Investment Management Company
(IMCO) is the manager and investment adviser, providing the services under a
Management Agreement with respect to the S&P 500 Index Fund and the Extended
Market Index Fund and an Advisory Agreement with respect to the Nasdaq-100
Index Fund and the Global Titans Index Fund. IMCO, a wholly owned indirect
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 and Advisory
Agreements, IMCO 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 IMCO were approximately
$42 billion, of which approximately $29 billion were in mutual fund portfolios.
With respect to the S&P 500 Index Fund, under the Management Agreement,
IMCO presently monitors the services provided by Bankers Trust to the Equity
500 Portfolio. IMCO receives no fee for providing these monitoring services. In
the event the S&P 500 Index Fund's Board of Directors determines it is in the
best interests of the Fund's shareholders to withdraw its investment in the
Equity 500 Portfolio, IMCO would become responsible for directly managing the
assets of the S&P 500 Index Fund. In such event, the S&P 500 Index Fund would
pay IMCO an annual fee of .10% of the Fund's ANA, accrued daily and paid
monthly.
With respect to the Extended Market Index Fund, under the Management
Agreement, IMCO presently monitors the services provided by MLQA to the
Extended Market Portfolio. IMCO 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
Extended Market Portfolio, IMCO would become responsible for directly managing
the assets of the Fund. In such event, the Fund would pay IMCO an annual fee of
.30% of the Fund's ANA, accrued daily and paid monthly.
With respect to the S&P 500 Index Fund, the Management Agreement will
remain in effect until June 30, 2001. With respect to the Extended Market Index
Fund, the Management Agreement will remain in effect until June 30, 2002. The
Advisory Agreement will remain in effect until June 30, 2002, for the
Nasdaq-100 Index Fund and the Global Titans Index Fund. The Management
Agreement and the Advisory Agreement (Agreements) will continue in effect from
year to year thereafter for the Funds as long as it is approved at least
annually by a vote of the outstanding voting securities of the Funds (as
defined by the 1940 Act) or by the Board of Directors (on behalf of such Funds)
including a majority of the Directors who are not interested persons of IMCO or
(otherwise than as Directors) of the Company, at a meeting called for the
purpose of voting on such approval. These Agreements may be terminated at any
time by either the Company or IMCO on 60 days' written notice. It will
automatically terminate in the event of its assignment (as defined by the 1940
Act).
35
<PAGE>
From time to time IMCO may voluntarily, without prior notice to
shareholders, waive all or any portion of fees or agree to reimburse expenses
incurred by a Fund. In addition to any amounts otherwise payable to IMCO as an
advisory fee for current services under the Agreements, the Company shall be
obligated to pay IMCO all amounts previously waived by IMCO with respect to a
Fund, provided that such additional payments are made not later than three
years from October 27, 2000, and provided further that the amount of such
additional payment in any year, together with all other expenses of the Fund,
in the aggregate, would not cause the Fund's expense ratio in such year to
exceed, in the case of the Extended Market Index Fund, 0.50% of the average net
assets of the Fund, in the case of the Nasdaq-100 Index Fund, 0.85% of the
average net assets of the Fund, or in the case of the Global Titans Index Fund,
0.85% of the average net assets of the Fund. IMCO has voluntarily agreed to
limit the annual expenses of the Extended Market Index Fund to 0.50%, the
Nasdaq-100 Index Fund to 0.85%, and the Global Titans Index Fund to 0.85% of
the Fund's ANA, respectively, until May 1, 2001, and will reimburse the Funds
for all expenses in excess of such limitations. After May 1, 2001, any such
waiver or reimbursement may be terminated by IMCO at any time without prior
notice to the shareholders.
SUBADVISER TO THE FUNDS. IMCO has entered into a subadvisory agreement
(Subadvisory Agreement) with Barclays Global Fund Advisors located at 45
Fremont Street, San Francisco, CA 94105. Under the Subadvisory Agreement,
Barclays is responsible for the day-to-day management of the Nasdaq-100 Index
and Global Titans Index Funds' assets pursuant to each Fund's investment
objective and restrictions. For its services, with respect to the Nasdaq-100
Index Fund, Barclays receives a fee from IMCO at an annual rate equal to 0.06%
of the Fund's average daily net assets on amounts up to $250 million and 0.03%
of daily net assets on amounts above $250 million. For its services, with
respect to the Global Titans Index Fund, Barclays receives a fee from IMCO at
an annual rate equal to 0.09% of the Fund's average daily net assets on amounts
up to $250 million and 0.04% of daily net assets on amounts above $250 million.
The Subadvisory Agreement is subject to the same approval of the Board of
Directors as the oversight and renewal of the Advisory Agreement. Barclays has
agreed to provide to the Funds, among other things, analysis and statistical
and economic data and information concerning the compilation of the Nasdaq-100
Index and the Dow Jones Global Titans Index, including portfolio composition.
Both the Advisory Agreement and the Subadvisory Agreement will continue in
effect for more than two years provided the continuance is approved annually
(i) by the holders of a majority of each Fund's outstanding voting securities
or by each Fund's Board of Directors and (ii) by a majority of the Directors of
the Funds who are not parties to the Advisory Agreement or the Subadvisory
Agreement or affiliates of any such party. Both the Advisory Agreement and the
Subadvisory Agreement may be terminated on sixty (60) days' written notice by
any such party and will terminate automatically if assigned. Asset allocation,
index and modeling strategies are employed by Barclays for other investment
companies and accounts advised or sub-advised by Barclays. If these strategies
indicate particular securities should be purchased or sold at the same time by
the Funds and one or more of these investment companies or accounts, available
investments or opportunities for sales will be allocated equitably to each by
Barclays. In some cases, these procedures may adversely affect the size of the
position obtained for or disposed of by each Fund or the price paid or received
by each Fund.
While the officers and employees of IMCO, as well as those of the Funds,
may engage in personal securities transactions, they are restricted by the
procedures in a Joint Code of Ethics adopted by IMCO and the Funds. The Joint
Code of Ethics was designed to ensure that the shareholders' interests come
before those of the individuals who manage their Funds. It also prohibits the
portfolio managers and other investment personnel from buying securities in an
initial public offering or from profiting from the purchase or sale of the same
security within 60 calendar days. Additionally, the Joint Code of Ethics
requires the portfolio manager and other employees with access information
about the purchase or sale of securities by the Funds to obtain approval before
executing permitted personal trades. Copies of the Joint Code of Ethics for
IMCO, MLQA, and Bankers Trust have been filed with the SEC and are available
for public view.
Additionally, while the officers and employees of Barclays may engage in
personal securities transactions, they are restricted by the procedures in a
Code of Ethics adopted by Barclays. The Code of Ethics was designed to ensure
that the shareholders' interests come before those of the individuals who
manage their funds. It also prohibits the portfolio managers and other
investment personnel from buying securities in an initial public offering or
from profiting from the purchase or sale of the same security within 60
calendar days. Additionally, the Code of Ethics requires the portfolio manager
and other employees with access information about the purchase or sale of
securities by the Funds to obtain approval before executing permitted personal
trades.
Bankers Trust Corporation is a wholly owned subsidiary of Deutsche Bank
A.G. ("Deutsche Bank"). Deutsche Bank is a banking company with limited
liability organized under the laws of the Federal Republic of Germany. Deutsche
Bank is the parent company of a group consisting of banks, capital markets
companies, fund management companies, mortgage banks, a property finance
company, installment financing and leasing companies, insurance companies,
research and consultancy companies, and other domestic and foreign companies.
Bankers Trust, subject to the supervision and direction of the Board of
Trustees of the Equity 500 Portfolio, manages the Equity 500 Portfolio in
accordance with the Equity 500 Portfolio's investment objective and stated
investment policies, makes investment decisions for the Equity 500 Portfolio,
places orders to purchase and sell securities and other financial
36
<PAGE>
instruments on behalf of the Equity 500 Portfolio and employs professional
investment managers and securities analysts who provide research services to
the Equity 500 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 investment transactions on behalf of the Equity 500
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 Equity 500 Portfolio only if Bankers Trust believes that
the affiliate's charge for the transaction does not exceed usual and customary
levels. The Equity 500 Portfolio will not invest in obligations for which
Bankers Trust or any of its affiliates is the ultimate obligor or accepting
bank. The Equity 500 Portfolio may, however, invest in the obligations of
correspondents and customers of Bankers Trust.
Under the terms of the Equity 500 Portfolio's investment advisory
agreement with Bankers Trust (the Advisory Agreements), Bankers Trust manages
the Equity 500 Portfolio subject to the supervision and direction of the Board
of Trustees of the Equity 500 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 Equity 500 Portfolio in accordance with the Equity 500
Portfolio's investment objective, restrictions, and policies; (3) make
investment decisions for the Equity 500 Portfolio; and (4) place purchase and
sale orders for securities and other financial instruments on behalf of the
Equity 500 Portfolio.
Bankers Trust bears all expenses in connection with the performance of
services under the Advisory Agreement. The S&P 500 Index Fund and the Equity
500 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 Equity 500 Portfolio or Directors of the Company; and any extraordinary
expenses.
For the years ended December 31, 1999, 1998, and 1997, Bankers Trust
earned $5,134,906, $3,186,503, and $2,430,147, respectively, as compensation
for investment advisory services provided to the Equity 500 Portfolio. During
the same periods, Bankers Trust reimbursed $0, $799,296, and $1,739,490,
respectively, to the Equity 500 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 Equity 500 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 Equity 500 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 Equity 500 Portfolio, Bankers Trust
will not inquire or take into consideration whether an issuer of securities
proposed for purchase or sale by the Equity 500 Portfolio is a customer of
Bankers Trust, its parent, or its subsidiaries or affiliates and, in dealing
with its customers, Bankers Trust, its parent, subsidiaries, and affiliates
will not inquire or take into consideration whether securities of such
customers are held by any fund managed by Bankers Trust or such affiliate.
ADMINISTRATOR
Under the terms of each Fund's administration agreement with IMCO, IMCO 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. IMCO 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, Bylaws, 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.
37
<PAGE>
Under the administration and services agreement between the Equity 500
Portfolio and Bankers Trust, Bankers Trust is obligated on a continuous basis
to provide such administrative services as the Board of Trustees of the Equity
500 Portfolio reasonably deems necessary for the proper administration of the
Equity 500 Portfolio. Bankers Trust will generally assist in all aspects of the
Equity 500 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, Bylaws, 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, 1999, 1998, and 1997, Bankers
Trust earned $344,960, $676,625, and $1,215,073, respectively, as compensation
for administrative and other services provided to the Equity 500 Portfolio. For
the fiscal year ended December 31, 1999, no administrative fees were waived to
the Equity 500 Portfolio. For the fiscal year 1998, Bankers Trust waived
$139,957 in administrative fees charged to the Equity 500 Portfolio.
For the fiscal years ended December 31, 1999, 1998, and 1997 IMCO earned
$1,479,126, $461,363, and $93,126, respectively, as compensation for
administrative and other services provided to the S&P 500 Index Fund.
IMCO has entered into a servicing agreement with Bankers Trust pursuant to
which Bankers Trust has agreed to pay the IMCO a fee for performing the
following services: providing marketing and promotional materials and other
information relating to the Equity 500 Portfolio and the S&P 500 Index Fund to
current and prospective shareholders of the S&P 500 Index Fund; assisting
shareholders in opening or maintaining accounts with the S&P 500 Index Fund;
and maintaining and preserving records in connection with providing these
services. For these services, Bankers Trust has agreed to pay IMCO a monthly
fee in the following amounts: .03 of 1% per annum for average daily net assets
of the S&P 500 Index Fund invested in the Equity 500 Portfolio up to $2.5
billion; .04 of 1% per annum for the next $1.5 billion average daily net assets
of the S&P 500 Index Fund invested in the Equity 500 Portfolio; and .045 of 1%
per annum of the amount by which the average daily net assets of the S&P 500
Index Fund invested in the Equity 500 Portfolio exceed $4 billion.
Under the administration and services agreement between the Extended
Market Portfolio and MLQA, MLQA is obligated on a continuous basis to provide
such administrative services as the Board of Trustees of the Extended Market
Portfolio reasonably deems necessary for the proper administration of the
Extended Market Portfolio. MLQA will generally assist in all aspects of the
Extended Market Portfolio's operations; supply and maintain office facilities
(which may be in MLQA'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, Bylaws, 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.
GENERAL INFORMATION
UNDERWRITER
The Company has an agreement with IMCO for exclusive underwriting and
distribution of the Funds' shares on a continuing, best-efforts basis. This
agreement provides that IMCO will receive no fee or other compensation for such
distribution services.
TRANSFER AGENT
The Transfer Agent performs transfer agent services for the Company under a
Transfer Agency Agreement. Services include maintenance of shareholder account
records, handling of communications with shareholders, distribution of Fund
dividends, and production of reports with respect to account activity for
shareholders and the Company. For its services under the Transfer Agency
Agreement, each Fund pays the Transfer Agent an annual fixed fee of $26 per
account, except the S&P 500 Index Fund, which pays the Transfer Agent an annual
fixed fee of $20 per account. The fee is subject to change at any time.
38
<PAGE>
The fee to the Transfer Agent includes processing of all transactions and
correspondence. Fees are billed on a monthly basis at the rate of one-twelfth
of the annual fee. In addition, each Fund pays all out-of-pocket expenses of
the Transfer Agent and other expenses, which are incurred at the specific
direction of the Company.
CUSTODIAN
The Custodian is responsible for, among other things, safeguarding and
controlling each Fund's cash and securities, handling the receipt and delivery
of securities, and collecting interest on the Funds' investments in the
Nasdaq-100 Index Fund, the Global Titans Index Fund, and the Extended Market
Index Fund. State Street Bank and Trust Company, P. O. Box 1713, Boston, MA
02105, is the custodian for the Nasdaq-100 Index Fund and the Global Titans
Index Fund. Bankers Trust serves as custodian for both the S&P 500 Index Fund
and the Equity 500 Portfolio. As custodian, it holds both the S&P 500 Index
Fund's and the Equity 500 Portfolio's assets. Bankers Trust will comply with
the self-custodian provisions of Rule 17f-2 under the 1940 Act. Chase Manhattan
Bank, 4 Chase MetroTech, 18th Floor, Brooklyn, New York 11245 is the custodian
for the Extended Market Index Fund and the Extended Market Portfolio.
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 Equity 500 Portfolio. Swidler, Berlin,
Shereff, Friedman, LLP, The Chrysler Building, 405 Lexington Avenue, New York,
New York 10174 serves as counsel to the Extended Market Portfolio.
INDEPENDENT ACCOUNTANTS
KPMG LLP, 112 East Pecan, Suite 2400, San Antonio, TX 78205, is the Company's
independent auditor. In this capacity, the firm is responsible for auditing the
annual financial statements of the Funds and reporting thereon.
PricewaterhouseCoopers LLP, 250 West Pratt Street, Baltimore, Maryland 21201
has been selected as the independent accountants for the Equity 500 Portfolio.
Deloitte & Touche LLP, Princeton Forrestal Village, 116-300 Village Boulevard,
Princeton, New Jersey 08540-6400 has been selected as the independent
accountants for the Extended Market Portfolio.
BANKING REGULATORY MATTERS
Bankers Trust has been advised by its counsel that in its opinion Bankers Trust
may perform the services for the Equity 500 Portfolio contemplated by the
Advisory Agreements and other activities for the S&P 500 Index Fund and the
Equity 500 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
Equity 500 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, 1999,
39
<PAGE>
performance does not reflect the annual $10 account maintenance fee for the S&P
500 Index Fund, which fee is waived for accounts of $10,000 or more. As of
December 31, 1999, the S&P 500 Index Fund's average account size was
approximately $22,135.
The S&P 500 Index Fund's total return for the fiscal year ended December
31, 1999, was 20.67%.
APPENDIX A - COMPARISON OF FUND PERFORMANCE
Occasionally, we may make comparisons in advertising and sales literature
between the Funds and other comparable funds in the industry. 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.
CDA/WEISENBERGER MUTUAL FUNDS INVESTMENT REPORT, a monthly newsletter that
reports on both specific mutual fund companies and the mutual fund industry as
a whole.
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.
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.
KIPLINGER'S PERSONAL FINANCE MAGAZINE, a monthly investment advisory
publication that periodically features the performance of a variety of
securities.
LIPPER, A REUTER'S COMPANY, EQUITY FUND PERFORMANCE ANALYSIS, a weekly and
monthly publication of industry-wide mutual fund averages by type of fund.
LIPPER, A REUTER'S COMPANY, FIXED INCOME FUND PERFORMANCE ANALYSIS, a monthly
publication of industry-wide mutual fund performance averages by type of fund.
40
<PAGE>
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.
MONEY FUND REPORT, a weekly publication of iMoneyNet, Inc. (formerly 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 "Taxable First Tier Fund Average."
MONEY MARKET INSIGHT, a monthly money market industry analysis prepared by
iMoneyNet, Inc. (formerly IBC Financial Data, Inc.)
MONEYLETTER, a biweekly newsletter that covers financial news and from time to
time rates specific mutual funds.
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.
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.
41
<PAGE>
APPENDIX B - SHORT-TERM DEBT RATINGS
MOODY'S MUNICIPAL
MIG-1/VMIG1 This designation denotes best quality. There is present
strong protection by established cash flows, superior
liquidity support or demonstrated broad-based access to
the market for refinancing.
MIG-2/VMIG2 This designation denotes high quality. Margins of
protection are ample although not so large as in the
preceding group.
MOODY'S CORPORATE AND GOVERNMENT
Prime-1 Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term promissory obligations.
Prime-1 repayment capacity will normally be evidenced by the
following characteristics:
o Leading market positions in well-established industries.
o High rates of return on funds employed.
o Conservative capitalization structures with moderate reliance on
debt and ample asset protection.
o Broad margins in earning coverage of fixed financial charges and
high internal cash generation.
o Well-established access to a range of financial markets and
assured sources of alternate liquidity.
Prime-2 Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term promissory obligations.
This will normally be evidenced by many of the characteristics cited
above but to a lesser degree. Earnings trends and coverage ratios,
while sound, may be more subject to variation. Capitalization
characteristics, while still appropriate, may be more affected by
external conditions. Ample alternate liquidity is maintained.
S&P MUNICIPAL
SP-1 Strong capacity to pay principal and interest. Issues determined to
possess very strong characteristics are given a plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest, with some
vulnerability to adverse financial and economic changes over the term
of the notes.
S&P CORPORATE AND GOVERNMENT
A-1 This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely
strong safety characteristics are denoted with a plus (+) sign
designation.
A-2 Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as
for issues designated A-1.
42
<PAGE>
APPENDIX C - DOLLAR-COST AVERAGING
Dollar-cost averaging is a systematic investing method, which can be used by
investors as a disciplined technique for investing. A fixed amount of money is
invested in a security (such as a stock or mutual fund) on a regular basis over
a period of time, regardless of whether securities markets are moving up or
down.
This practice reduces average share costs to the investor who acquires
more shares in periods of lower securities prices and fewer shares in periods
of higher prices.
While dollar-cost averaging does not assure a profit or protect against
loss in declining markets, this investment strategy is an effective way to help
calm the effect of fluctuations in the financial markets. Systematic investing
involves continuous investment in securities regardless of fluctuating price
levels of such securities. Investors should consider their financial ability to
continue purchases through periods of low and high price levels.
As the following chart illustrates, dollar-cost averaging tends to
keep the overall cost of shares lower. This example is for illustration only,
and different trends would result in different average costs.
===============================================================================
HOW DOLLAR-COST AVERAGING WORKS
$100 Invested Regularly for 5 Periods
Market Trend
--------------------------------------------------------------------
Down Up Mixed
-------------------- --------------------- --------------------
Share Shares Share Shares Share Shares
Investment Price Purchased Price Purchased Price Purchased
-------------------- --------------------- --------------------
$100 10 10 6 16.67 10 10
100 9 11.1 7 14.29 9 11.1
100 8 12.5 7 14.29 8 12.5
100 8 12.5 9 11.1 9 11.1
100 6 16.67 10 10 10 10
---- -- ----- -- ----- -- -----
$500 ***41 62.77 ***39 66.35 ***46 54.7
*Avg. Cost: $ 7.97 *Avg. Cost: $ 7.54 *Avg. Cost: $ 9.14
----- ----- -----
**Avg. Price: $ 8.20 **Avg. Price: $ 7.80 **Avg. Price: $ 9.20
----- ----- -----
* Average Cost is the total amount invested divided by number of shares
purchased.
** Average Price is the sum of the prices paid divided by number of
purchases.
*** Cumulative total of share prices used to compute average prices.
===============================================================================
43
<PAGE>
28083-1000
<PAGE>
Part B
Statement of Additional Information
For the Capital Growth Fund
<PAGE>
USAA USAA STATEMENT OF
EAGLE MUTUAL ADDITIONAL INFORMATION
LOGO FUND, INC. OCTOBER 27, 2000
-------------------------------------------------------------------------------
USAA MUTUAL FUND, INC.
(CAPITAL GROWTH FUND)
USAA MUTUAL FUND, INC. (the Company) is a registered investment company
offering shares of seventeen no-load mutual funds, one of which are described
in this statement of additional information (SAI): the Capital Growth Fund. The
Fund is classified as diversified and has its own investment objective designed
to meet different investment goals.
You may obtain a free copy of a prospectus dated October 27, 2000, for the Fund
by writing to USAA Mutual Fund, Inc., 9800 Fredericksburg Road, San Antonio, TX
78288, or by calling toll free 1-800-531-8181. The prospectus provides the
basic information you should know before investing in the Fund. This SAI is not
a prospectus and contains information in addition to and more detailed than
that set forth in the Fund's prospectus. It is intended to provide you with
additional information regarding the activities and operations of the Company
and the Fund and should be read in conjunction with the Fund's prospectus.
-------------------------------------------------------------------------------
TABLE OF CONTENTS
PAGE
2 Valuation of Securities
2 Conditions of Purchase and Redemption
2 Additional Information Regarding Redemption of Shares
3 Investment Plans
4 Investment Policies
6 Investment Restrictions
7 Portfolio Transactions
8 Description of Shares
9 Tax Considerations
9 Directors and Officers of the Company
12 The Company's Manager
13 General Information
14 Calculation of Performance Data
14 Appendix A - Long-Term and Short-Term Debt Ratings
16 Appendix B - Comparison of Portfolio Performance
19 Appendix C - Dollar-Cost Averaging
<PAGE>
VALUATION OF SECURITIES
Shares of 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 all its
portfolio securities and other assets, deducting its liabilities, and dividing
by the number of shares outstanding.
The Fund's NAV per share is calculated each day, Monday through Friday,
except on days the New York Stock Exchange (NYSE) is closed. The NYSE is
currently scheduled to be closed on New Year's Day, Martin Luther King, Jr.
Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving, and Christmas, and on the preceding Friday or subsequent Monday
when one of these holidays falls on a Saturday or Sunday, respectively.
The value of the securities of the Fund is determined by one or more of
the following methods:
(1) Portfolio securities, except as otherwise noted, traded primarily on a
domestic securities exchange are valued at the last sales price on that
exchange. Portfolio securities traded primarily on foreign securities
exchanges are generally valued at the closing values of such securities on
the exchange where primarily traded. If no sale is reported, the average
of the bid and asked prices is generally used depending upon local custom
or regulation.
(2) Over-the-counter securities are priced at the last sales price or, if not
available, at the average of the bid and asked prices at the time trading
closes on the NYSE.
(3) Debt securities purchased with maturities of 60 days or less are stated at
amortized cost, which approximates market value. Repurchase agreements are
valued at cost.
(4) Other debt securities may be valued each business day by a pricing service
(the Service) approved by the Board of Directors. The Service uses the
mean between quoted bid and asked prices or the last sales price to price
securities when, in the Service's judgment, these prices are readily
available and are representative of the securities' market values. For
many securities, such prices are not readily available. The Service
generally prices those securities based on methods which include
consideration of yields or prices of securities of comparable quality,
coupon, maturity and type, indications as to values from dealers in
securities, and general market conditions.
(5) Securities that cannot be valued by the methods set forth above, and all
other assets, are valued in good faith at fair value using methods
determined by the Manager under the general supervision of the Board of
Directors.
Securities trading in various foreign markets may take place on days when
the NYSE is closed. Further, when the NYSE is open, the foreign markets may be
closed. Therefore, the calculation of a Fund's NAV may not take place at the
same time the prices of certain securities held by a Fund are determined. In
most cases, events affecting the values of portfolio securities that occur
between the time their prices are determined and the close of normal trading on
the NYSE on a day a Fund's NAV is calculated will not be reflected in a Fund's
NAV. If, however, the Manager determines that a particular event would
materially affect a Fund's NAV, then the Manager, under the general supervision
of the Board of Directors, will use all relevant, available information to
determine a fair value for the affected portfolio securities.
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 $25 fee is charged for
all returned items, including checks and electronic funds transfers.
TRANSFER OF SHARES
You may transfer Fund shares to another person by sending written instructions
to the Transfer Agent. The account must be clearly identified, and you must
include the number of shares to be transferred, the signatures of all
registered owners, and all stock certificates, if any, which are the subject of
transfer. You also need to send written instructions signed by all registered
owners and supporting documents to change an account registration due to events
such as divorce, marriage, or death. If a new account needs to be established,
you must complete and return an application to the Transfer Agent.
ADDITIONAL INFORMATION REGARDING REDEMPTION OF SHARES
The value of your investment at the time of redemption may be more or less than
the cost at purchase, depending on the value of the securities held in each
Fund's portfolio. Requests for redemption that are subject to any special
conditions or
2
<PAGE>
which specify an effective date other than as provided herein cannot be
accepted. A gain or loss for tax purposes may be realized on the sale of
shares, depending upon the price when redeemed.
The Board of Directors may cause the redemption of an account with a
balance of less than 10 shares of the 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 net asset value is not reasonably practicable, or (3) for such other
periods as the SEC by order may permit for protection of the Company's
shareholders.
For the mutual protection of the investor and the Funds, the Company may
require a signature guarantee. If required, EACH signature on the account
registration must be guaranteed. Signature guarantees are acceptable from FDIC
member banks, brokers, dealers, municipal securities dealers, municipal
securities brokers, government securities dealers, government securities
brokers, credit unions, national securities exchanges, registered securities
associations, clearing agencies, and savings associations. A signature
guarantee for active duty military personnel stationed abroad may be provided
by an officer of the United States Embassy or Consulate, a staff officer of the
Judge Advocate General, or an individual's commanding officer.
INVESTMENT PLANS
The Company makes available the following investment plans to shareholders of
all the Funds. At the time you sign up for any of the following investment
plans that utilize the electronic funds transfer service, you will choose the
day of the month (the effective date) on which you would like to regularly
purchase shares. When this day falls on a weekend or holiday, the electronic
transfer will take place on the last business day before the effective date.
You may terminate your participation in a plan at any time. Please call the
Manager for details and necessary forms or applications.
AUTOMATIC PURCHASE OF SHARES
INVESTART(R) - A no initial investment purchase plan. With this plan the
regular minimum initial investment amount is waived if you make monthly
additions of at least $50 through electronic funds transfer from a checking or
savings account.
INVESTRONIC(R) - The regular purchase of additional shares through electronic
funds transfer from a checking or savings account. You may invest as little as
$50 per month.
DIRECT PURCHASE SERVICE - The periodic purchase of shares through electronic
funds transfer a non-governmental employer, an income-producing investment, or
an account with a participating financial institution.
DIRECT DEPOSIT PROGRAM - The monthly transfer of certain federal benefits to
directly purchase shares of a USAA mutual fund. Eligible federal benefits
include: Social Security, Supplemental Security Income, Veterans Compensation
and Pension, Civil Service Retirement Annuity, and Civil Service Survivor
Annuity.
GOVERNMENT ALLOTMENT - The transfer of military pay by the U.S. Government
Finance Center for the purchase of USAA mutual fund shares.
AUTOMATIC PURCHASE PLAN - The periodic transfer of funds from a USAA money
market fund to purchase shares in another non-money market USAA mutual fund.
There is a minimum investment required for this program of $5,000 in the money
market fund, with a monthly transaction minimum of $50.
BUY/SELL SERVICE - The intermittent purchase or redemption of shares through
electronic funds transfer to or from a checking or savings account. You may
initiate a "buy" or "sell" whenever you choose.
DIRECTED DIVIDENDS - If you own shares in more than one of the Funds in the
USAA Family of Funds, you may direct that dividends and/or capital gain
distributions earned in one Fund be used to purchase shares automatically in
another fund.
Participation in these automatic purchase plans allows you to engage in
dollar-cost averaging. For additional information concerning the benefits of
dollar-cost averaging, see APPENDIX C.
SYSTEMATIC WITHDRAWAL PLAN
If you own shares having a net asset value 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
3
<PAGE>
electronic funds transfer service, you may choose to have withdrawals
electronically deposited at their bank or other financial institution. You may
also elect to have checks mailed to a designated address.
This plan may be initiated by depositing shares worth at least $5,000 with
the Transfer Agent and by completing a Systematic Withdrawal Plan application,
which may be requested from the Manager. You may terminate participation in the
plan at any time. You are not charged for withdrawals under the Systematic
Withdrawal Plan. The Company will not bear any expenses in administering the
plan beyond the regular transfer agent and custodian costs of issuing and
redeeming shares. The Manager will bear any additional expenses of
administering the plan.
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 additional
investments in one or any combination of the portfolios described in the
prospectus of each Fund of USAA Mutual Fund, Inc. and USAA Investment Trust
(not available in the Growth and Tax Strategy Fund).
Retirement plan applications for the IRA and 403(b)(7) programs should be
sent directly to USAA Shareholder Account Services, 9800 Fredericksburg Road,
San Antonio, TX 78288. USAA Federal Savings Bank serves as Custodian for these
tax-deferred retirement plans under the programs made available by the Manager.
Applications for these retirement plans received by the Manager will be
forwarded to the Custodian for acceptance.
An administrative fee of $25 is deducted from the money sent to you after
closing an account. Exceptions to the fee are: partial distributions, total
transfer within USAA, and distributions due to disability or death. This charge
is subject to change as provided in the various agreements. There may be
additional charges, as mutually agreed upon between you and the Custodian, for
further services requested of the Custodian.
Each employer or individual establishing a tax-deferred retirement plan is
advised to consult with a tax adviser before establishing the plan. You may
obtain detailed information about the plans from the Manager.
INVESTMENT POLICIES
The sections captioned WHAT IS THE FUND'S INVESTMENT OBJECTIVE AND MAIN
STRATEGY? and FUND INVESTMENTS in the Fund's prospectus describe the investment
objective and the investment policies applicable to the Fund. 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 following is provided as additional information.
SECTION 4(2) COMMERCIAL PAPER AND RULE 144A SECURITIES
The Fund may invest in commercial paper issued in reliance on the "private
placement" exemption from registration afforded by Section 4(2) of the
Securities Act of 1933 (Section 4(2) Commercial Paper). Section 4(2) Commercial
Paper is restricted as to disposition under the federal securities laws;
therefore, any resale of Section 4(2) Commercial Paper must be effected in a
transaction exempt from registration under the Securities Act of 1933 (1933
Act). Section 4(2) Commercial Paper is normally resold to other investors
through or with the assistance of the issuer or investment dealers who make a
market in Section 4(2) Commercial Paper, thus providing liquidity.
The Fund may also purchase restricted securities eligible for resale to
"qualified institutional buyers" pursuant to Rule 144A under the 1933 Act (Rule
144A Securities). Rule 144A provides a non-exclusive safe harbor from the
registration requirements of the 1933 Act for resales of certain securities to
institutional investors.
LIQUIDITY DETERMINATIONS
The Board of Directors has established guidelines pursuant to which Section
4(2) Commercial Paper, Rule 144A Securities, and certain restricted debt
securities that are subject to unconditional put or demand features exercisable
within seven days (Restricted Put Bonds) may be determined to be liquid for
purposes of complying with SEC limitations applicable to each Fund's
investments in illiquid securities. In determining the liquidity of Section
4(2) Commercial Paper and Rule 144A Securities, the Manager will consider the
following factors, among others, established by the Board
4
<PAGE>
of Directors: (1) the frequency of trades and quotes for the security, (2) the
number of dealers willing to purchase or sell the security and the number of
other potential purchasers, (3) dealer undertakings to make a market in the
security, and (4) the nature of the security and the nature of the marketplace
trades, including the time needed to dispose of the security, the method of
soliciting offers, and the mechanics of transfer. Additional factors considered
by the Manager in determining the liquidity of a municipal lease obligation
are: (1) whether the lease obligation is of a size that will be attractive to
institutional investors, (2) whether the lease obligation contains a
non-appropriation clause and the likelihood that the obligor will fail to make
an appropriation therefor, and (3) such other factors as the Manager may
determine to be relevant to such determination. In determining the liquidity of
Restricted Put Bonds, the Manager will evaluate the credit quality of the party
(the Put Provider) issuing (or unconditionally guaranteeing performance on) the
unconditional put or demand feature of the Restricted Put Bond. In evaluating
the credit quality of the Put Provider, the Manager will consider all factors
that it deems indicative of the capacity of the Put Provider to meet its
obligations under the Restricted Put Bond based upon a review of the Put
Provider's outstanding debt and financial statements and general economic
conditions.
Certain foreign securities (including Eurodollar obligations) may be
eligible for resale pursuant to Rule 144A in the United States and may also
trade without restriction in one or more foreign markets. Such securities may
be determined to be liquid based upon these foreign markets without regard to
their eligibility for resale pursuant to Rule 144A. In such cases, these
securities will not be treated as Rule 144A Securities for purposes of the
liquidity guidelines established by the Board of Directors.
FOREIGN SECURITIES
The Fund may invest its assets in foreign securities purchased in either
foreign or U.S. markets, including American Depositary Receipts (ADRs) and
Global Depositary Receipts (GDRs). These foreign holdings may include
securities issued in emerging markets as well as securities issued in
established markets. Investing in foreign securities poses unique risks:
currency exchange rate fluctuations; foreign market illiquidity; increased
price volatility; exchange control regulations; foreign ownership limits;
different accounting, reporting, and disclosure requirements; political
instability; and difficulties in obtaining legal judgments. In the past, equity
and debt instruments of foreign markets have been more volatile than equity and
debt instruments of U.S. securities markets.
FORWARD CURRENCY CONTRACTS
The Fund may enter into forward currency contracts in order to protect against
uncertainty in the level of future foreign exchange rates.
A forward contract involves an agreement to purchase or sell a specific
currency at a specified future date or over a specified time period at a price
set at the time of the contract. These contracts are usually traded directly
between currency traders (usually large commercial banks) and their customers.
A forward contract generally has no deposit requirements, and no commissions
are charged.
The Fund may enter into forward currency contracts under two
circumstances. First, when the Fund enter into a contract for the purchase or
sale of a security denominated in a foreign currency, it may desire to "lock
in" the U.S. dollar price of the security until settlement. By entering into
such a contract, the Fund will be able to protect itself against a possible
loss resulting from an adverse change in the relationship between the U.S.
dollar and the foreign currency from the date the security is purchased or sold
to the date on which payment is made or received. Second, when management of
the Funds believe that the currency of a specific country may deteriorate
relative to the U.S. dollar, it may enter into a forward contract to sell that
currency. The Fund may not hedge with respect to a particular currency for an
amount greater than the aggregate market value (determined at the time of
making any sale of forward currency) of the securities held in its portfolio
denominated or quoted in, or bearing a substantial correlation to, such
currency.
The use of forward contracts involves certain risks. The precise matching
of contract amounts and the value of securities involved generally will not be
possible since the future value of such securities in currencies more than
likely will change between the date the contract is entered into and the date
it matures. The projection of short-term currency market movements is extremely
difficult and successful execution of a short-term hedging strategy is
uncertain. Under normal circumstances, consideration of the prospect for
currency parities will be incorporated into the longer term investment
strategies. The Manager believes it is important, however, to have the
flexibility to enter into such contracts when it determines it is in the best
interest of the Fund to do so. It is impossible to forecast what the market
value of portfolio securities will be at the expiration of a contract.
Accordingly, it may be necessary for the Fund to purchase additional currency
(and bear the expense of such purchase) if the market value of the security is
less than the amount of currency the Fund is obligated to deliver and if a
decision is made to sell the security and make delivery of the currency.
Conversely, it may be necessary to sell some of the foreign currency received
on the sale of the portfolio security if its market value exceeds the amount of
currency the Fund is obligated to deliver.
The Fund is not required to enter into such transactions and will not do
so unless deemed appropriate by the Manager.
5
<PAGE>
Although the Fund values its assets each business day in terms of U.S.
dollars, it does not intend to convert its foreign currencies into U.S. dollars
on a daily basis. It will do so from time to time, and you should be aware of
currency conversion costs. Although foreign exchange dealers do not charge a
fee for conversion, they do realize a profit based on the difference (spread)
between the prices at which they are buying and selling various currencies.
Thus, a dealer may offer to sell a foreign currency to the Fund at one rate,
while offering a lesser rate of exchange should the Fund desire to resell that
currency to the dealer.
INVESTMENTS IN REAL ESTATE INVESTMENT TRUSTS (REITS)
Because the Fund may invest its assets in equity securities of REITs, the Fund
may be subject to certain risks associated with direct investments in REITs.
REITs may be affected by changes in the value of their underlying properties
and by defaults by borrowers or tenants. Furthermore, REITs are dependent upon
specialized management skills of their managers and may have limited geographic
diversification, thereby, subjecting them to risks inherent in financing a
limited number of projects. REITs depend generally on their ability to generate
cash flow to make distributions to shareholders, and certain REITs have
self-liquidation provisions by which mortgages held may be paid in full and
distributions of capital returns may be made at any time.
CONVERTIBLE SECURITIES
Convertible securities are bonds, preferred stocks, and other securities that
pay interest or dividends and offer the buyer the ability to convert the
security into common stock. The value of convertible securities depends
partially on interest rate changes and the credit quality of the issuer.
Because a convertible security affords an investor the opportunity, through its
conversion feature, to participate in the capital appreciation of the
underlying common stock, the value of convertible securities also depends on
the price of the underlying common stock.
The convertible securities in which the Fund will invest may be rated
below investment grade as determined by Moody's Investors Service, (Moody's) or
Standard & Poor's Ratings Group (S&P), or unrated but judged by the Manager to
be of comparable quality (commonly called junk bonds). For a more complete
description of debt ratings, see APPENDIX A. Such securities are deemed to be
speculative and involve greater risk of default due to changes in interest
rates, economic conditions, and the issuer's creditworthiness. As a result,
their market prices tend to fluctuate more than higher-quality securities.
During periods of general economic downturns or rising interest rates, issuers
of such securities may experience financial difficulties, which could affect
their ability to make timely interest and principal payments. A Fund's ability
to timely and accurately value and dispose of lower-quality securities may also
be affected by the absence or periodic discontinuance of liquid trading
markets.
REPURCHASE AGREEMENTS
The Fund may invest in repurchase agreements that are collateralized by
obligations issued or guaranteed as to both principal and interest by the U.S.
government, its agencies or instrumentalities. A repurchase agreement is a
transaction in which a security is purchased with a simultaneous commitment to
sell it back to the seller (a commercial bank or recognized securities dealer)
at an agreed upon price on an agreed upon date. This date is usually not more
than seven days from the date of purchase. The resale price reflects the
purchase price plus an agreed upon market rate of interest, which is unrelated
to the coupon rate or maturity of the purchased security. The obligation of the
seller to pay the agreed upon price is in effect secured by the value of the
underlying security. In these transactions, the securities purchased by a Fund
will have a total value equal to or in excess of the amount of the repurchase
obligation and will be held by the Fund's custodian until repurchased. If the
seller defaults and the value of the underlying security declines, the Fund may
incur a loss and may incur expenses in selling the collateral. If the seller
seeks relief under the bankruptcy laws, the disposition of the collateral may
be delayed or limited.
TEMPORARY DEFENSIVE POLICY
The Fund may on a temporary basis because of market, economic, political, or
other conditions, invest up to 100% of its assets in investment-grade,
short-term debt instruments. Such securities may consist of obligations of the
U.S. government, its agencies or instrumentalities, and repurchase agreements
secured by such instruments; certificates of deposit of domestic banks having
capital, surplus, and undivided profits in excess of $100 million; banker's
acceptances of similar banks; commercial paper, and other corporate debt
obligations.
INVESTMENT RESTRICTIONS
The following investment restrictions have been adopted by the Company and is
applicable to the Fund. These restrictions may not be changed for any given
Fund without approval by the lesser of (1) 67% or more of the voting securities
present at a meeting of the Fund if more than 50% of the outstanding voting
securities of the Fund are present or represented by proxy or (2) more than 50%
of the Fund's outstanding voting securities.
6
<PAGE>
The Fund may not:
(1) With respect to 75% of its total assets, purchase the securities of any
issuer (except U.S. government securities, as such term is defined in the
1940 Act, and shares of any registered investment company) 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 in an amount not exceeding 33 1/3% of its total
assets (including the amount borrowed) less liabilities (other than
borrowings).
(3) Invest 25% or more of the value of its total assets in any one industry;
provided, this limitation does not apply to securities issued or
guaranteed by the U.S. government and its agencies or instrumentalities.
(4) Issue senior securities, except as permitted under the 1940 Act.
(5) Underwrite securities of other issuers, except to the extent that it may
be deemed to act as a statutory underwriter in the distribution of any
restricted securities or not readily marketable securities.
(6) Lend any securities or make any loan if, as a result, more than 33 1/3%
of its total assets would be lent to other parties, except that this
limitation does not apply to purchases of debt securities or to
repurchase agreements.
(7) Purchase or sell commodities, except that the Fund may invest in
financial futures contracts, options thereon, and similar instruments.
(8) Purchase or sell real estate unless acquired as a result of ownership of
securities or other instruments, except that 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.
With respect to the Fund's concentration policy as described above and in
its prospectus, the Manager uses industry classifications for industries based
on categories established by Standard & Poor's Corporation (Standard & Poor's)
for the Standard & Poor's 500 Composite Index, with certain modifications.
Because the Manager has determined that certain categories within, or in
addition to, those set forth by Standard & Poor's have unique investment
characteristics, additional industries are included as industry
classifications. The Manager classifies municipal obligations by projects with
similar characteristics, such as toll road revenue bonds, housing revenue
bonds, or higher education revenue bonds.
ADDITIONAL RESTRICTION
The following restriction is not considered to be a fundamental policy of the
Fund. The Board of Directors may change this additional restriction without
notice to or approval by the shareholders.
The Fund may not purchase any security while borrowings representing more
than 5% of the Fund's total assets are outstanding.
PORTFOLIO TRANSACTIONS
The Manager, pursuant to the Advisory Agreement dated September 21, 1990, and
subject to the general control of the Company's Board of Directors, places all
orders for the purchase and sale of Fund securities. In executing portfolio
transactions and selecting brokers and dealers, it is the Company's policy to
seek the best overall terms available. The Manager shall consider such factors
as it deems relevant, including the breadth of the market in the security, the
financial condition and execution capability of the broker or dealer, and the
reasonableness of the commission, if any, for the specific transaction or on a
continuing basis. Securities purchased or sold in the over-the-counter market
will be executed through principal market makers, except when, in the opinion
of the Manager, better prices and execution are available elsewhere.
The Fund will have no obligation to deal with any particular broker or
group of brokers in the execution of portfolio transactions. The Fund
contemplates that, consistent with obtaining the best overall terms available,
brokerage transactions may be effected through USAA Brokerage Services, a
discount brokerage service of the Manager. The Company's Board of Directors has
adopted procedures in conformity with Rule 17e-1 under the 1940 Act designed to
ensure that all brokerage commissions paid to USAA Brokerage Services are
reasonable and fair. The Company's Board of Directors has authorized the
Manager, as a member of the Chicago Stock Exchange, to effect portfolio
transactions for the Fund on such exchange and to retain compensation in
connection with such transactions. Any such transactions will be effected and
related compensation paid only in accordance with applicable SEC regulations.
In the allocation of brokerage business, preference may be given to those
broker-dealers who provide statistical research or other services to the
Manager as long as there is no sacrifice in obtaining the best overall terms
available. Such research and other services may include, for example: advice
concerning the value of securities; the advisability of investing in,
purchasing, or selling securities, and the availability of securities or the
purchasers or sellers of securities; analyses and reports concerning issuers,
industries, securities, economic factors and trends, portfolio strategy, and
performance of accounts; and various functions incidental to effecting
securities transactions, such as clearance and settlement. These
7
<PAGE>
research services may also include access to research on third party data
bases, such as historical data on companies, financial statements, earnings
history and estimates, and corporate releases; real-time quotes and financial
news; research on specific fixed income securities; research on international
market news and securities; and rating services on companies and industries. In
return for such services, a Fund may pay to those brokers a higher commission
than may be charged by other brokers, provided that the Manager determines in
good faith that such commission is reasonable in terms of either that
particular transaction or of the overall responsibility of the Manager to the
Funds and its other clients. The receipt of research from broker-dealers that
execute transactions on behalf of the Company may be useful to the Manager in
rendering investment management services to other clients (including affiliates
of the Manager), and conversely, such research provided by broker-dealers who
have executed transaction orders on behalf of other clients may be useful to
the Manager in carrying out its obligations to the Company. While such research
is available to and may be used by the Manager in providing investment advice
to all its clients (including affiliates of the Manager), not all of such
research may be used by the Manager for the benefit of the Company. Such
research and services will be in addition to and not in lieu of research and
services provided by the Manager, and the expenses of the Manager will not
necessarily be reduced by the receipt of such supplemental research. See THE
COMPANY'S MANAGER.
Securities of the same issuer may be purchased, held, or sold at the same
time by the Company for any or all of its Funds or other accounts or companies
for which the Manager acts as the investment adviser (including affiliates of
the Manager). On occasions when the Manager deems the purchase or sale of a
security to be in the best interest of the Company, as well as the Manager's
other clients, the Manager, to the extent permitted by applicable laws and
regulations, may aggregate such securities to be sold or purchased for the
Company with those to be sold or purchased for other customers in order to
obtain best execution and lower brokerage commissions, if any. In such event,
allocation of the securities so purchased or sold, as well as the expenses
incurred in the transaction, will be made by the Manager in the manner it
considers to be most equitable and consistent with its fiduciary obligations to
all such customers, including the Company. In some instances, this procedure
may impact the price and size of the position obtainable for the Company.
The Company pays no brokerage commissions as such for debt securities. The
market for such securities is typically a "dealer" market in which investment
dealers buy and sell the securities for their own accounts, rather than for
customers, and the price may reflect a dealer's mark-up or mark-down. In
addition, some securities may be purchased directly from issuers.
PORTFOLIO TURNOVER RATES
The rate of portfolio turnover will not be a limiting factor when the Manager
deems changes in the Fund's portfolio appropriate in view of the Fund's
investment objective. Although the Fund will not purchase or sell securities
solely to achieve short-term trading profits, the Fund may sell portfolio
securities without regard to the length of time held if consistent with the
Fund's investment objective. A higher degree of portfolio activity will
increase brokerage costs to a Fund.
The portfolio turnover rate is computed by dividing the dollar amount of
securities purchased or sold (whichever is smaller) by the average value of
securities owned during the year. Short-term investments such as commercial
paper, short-term U.S. government securities, and variable rate securities
(those securities with put date intervals of less than one year) are not
considered when computing the turnover rate.
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 on October 14, 1980. The Company is authorized to issue shares in
separate series or Funds. Seventeen Funds have been established, one of which
are described in this SAI. Under the Articles of Incorporation, the Board of
Directors is authorized to create new Funds in addition to those already
existing without shareholder approval.
The 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 the Fund represents an equal
proportionate interest in that Fund with every other share and is entitled to
such dividends and distributions out of the net income and capital gains
belonging to that Fund when declared by the Board.
Under the provisions of the Bylaws of the Company, no annual meeting of
shareholders is required. Thus, there will ordinarily be no shareholder meeting
unless required by the 1940 Act. Under certain circumstances, however,
shareholders may apply for shareholder information to obtain signatures to
request a special shareholder meeting. The Company may fill vacancies on the
Board or appoint new Directors if the result is that at least two-thirds of the
Directors
8
<PAGE>
have still been elected by shareholders. Moreover, pursuant to the Bylaws of
the Company, any Director may be removed by the affirmative vote of a majority
of the outstanding Company shares; and holders of 10% or more of the
outstanding shares of the Company can require Directors to call a meeting of
shareholders for the purpose of voting on the removal of one or more Directors.
The Company will assist in communicating to other shareholders about the
meeting. On any matter submitted to the shareholders, the holder of each Fund
share is entitled to one vote per share (with proportionate voting for
fractional shares) regardless of the relative net asset values of the Funds'
shares. However, on matters affecting an individual Fund, a separate vote of
the shareholders of that Fund is required. Shareholders of a Fund are not
entitled to vote on any matter 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.
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, the 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 Internal Revenue Code of 1986, as amended (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 a Fund
receives a distribution taxable as long-term capital gain with respect to
shares of a Fund and redeems or exchanges the shares before he 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.
DIRECTORS AND OFFICERS OF THE COMPANY
The Board of Directors of the Company consists of eight 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: 53
President and Chief Executive Officer of United Services Automobile Association
(USAA) (4/00-present); President and Chief Operating Officer of USAA
(6/99-4/00); Director of USAA (2/99-present); Deputy Chief Executive Officer
for Capital Management of USAA (6/98-5/99); 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
9
<PAGE>
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 Federal Savings Bank, and USAA Real Estate Company.
Michael J.C. Roth 1, 2, 4
Director, President, and Vice Chairman of the Board of Directors
Age: 59
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.
David G. Peebles 1
Director and Vice President
Age: 60
Senior Vice President, Equity Investments, IMCO (11/98-present); Vice
President, Equity Investments, IMCO (2/88-11/98). Mr. Peebles 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; and Vice President of USAA Life Investment Trust.
Barbara B. Dreeben 3, 4, 5
200 Patterson #1008
San Antonio, TX 78209
Director
Age: 55
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.
Michael F. Reimherr 3, 4, 5
128 East Arrowhead
San Antonio, Texas 78228
Director
Age: 55
President of Reimherr Business Consulting (5/95-present). Mr. Reimherr serves
as a Director/Trustee of each of the remaining funds within the USAA Family of
Funds.
Laura T. Starks, Ph.D. 3, 4, 5
5405 Ridge Oak Drive
Austin, TX 78731-5405
Director
Age: 50
Charles E and Sarah M Seay Regents Chair Professor of Finance, University of
Texas at Austin (9/96-present); Sarah Meadows Seay Regents, Professor of
Finance, University of Texas at Austin (9/94-9/96). Dr. Starks 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: 54
Staff Analyst, Southwest Research Institute (9/98-present); Manager,
Statistical Analysis Section, Southwest Research Institute (2/79-9/98). Dr.
Mason serves as a Director/Trustee of each of the remaining funds within the
USAA Family of Funds.
10
<PAGE>
Richard A. Zucker 2, 3, 4, 5
407 Arch Bluff
San Antonio, TX 78216
Director
Age: 57
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.
Kenneth E. Willmann 1
Vice President
Age: 54
Senior Vice President, Fixed Income Investments, IMCO (12/99-present); Vice
President, Mutual Fund Portfolios, IMCO (09/94-12/99). Mr. Willmann serves as
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,
and Vice President of USAA Life Investment Trust.
Michael D. Wagner 1
Secretary
Age: 52
Senior Vice President, USAA Capital Corporation (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.
Mark S. Howard 1
Assistant Secretary
Age: 37
Vice President, Securities Counsel & Compliance, IMCO (7/00-present); Assistant
Vice President, Securities Counsel, USAA (2/98-7/00); Executive Director,
Securities Counsel, USAA (9/96-2/98); Senior Associate Counsel, Securities
Counsel, USAA (5/95-8/96). Mr. Howard serves as Assistant Secretary for IMCO,
USAA Shareholder Account Services, USAA Financial Planning Network, Inc., each
of the remaining funds within the USAA Family of Funds, and for USAA Life
Investment Trust.
Sherron A. Kirk 1
Treasurer
Age: 55
Senior Vice President, Senior Financial Officer, IMCO (1/00-present); Vice
President, Senior Financial Officer, IMCO (8/98-1/00); Vice President,
Controller, IMCO (10/92-8/98). Ms. Kirk serves as Treasurer of each of the
remaining funds within the USAA Family of Funds; Senior Vice President, Senior
Financial Officer of USAA Shareholder Account Services.
Roberto Galindo, Jr. 1
Assistant Treasurer
Age: 40
Executive Director, Mutual Fund Analysis & Support, IMCO (6/00-present);
Director, Mutual Fund Analysis, IMCO (9/99-6/00); Vice President, Portfolio
Administration, Founders Asset Management LLC (7/98-8/99); Assistant Vice
President, Director of Fund & Private Client Accounting, Founders Asset
Management LLC (7/93-7/98). Mr. Galindo 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
11
<PAGE>
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 auditors' reports and undertakes certain studies
and analyses as directed by the Board. The Corporate Governance Committee of
the Board of Directors maintains oversight of the organization, performance,
and effectiveness of the Board and independent Directors.
In addition to the previously listed Directors and/or officers of the
Company who also serve as Directors and/or officers of the Manager, the
following individuals are executive officers of the Manager: Christopher W.
Claus, Senior Vice President, Investment Sales and Services; and Samuel J.
Borowski, Senior Vice President, Investment Operations. There are no family
relationships among the Directors, officers, and managerial level employees of
the Company or its Manager.
The following table sets forth information describing the compensation of
the current Directors of the Company for their services as Directors for the
fiscal year ended July 31, 2000.
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 $9,875 $39,500
Howard L. Freeman, Jr. (c) $3,500 $14,000
Robert L. Mason $9,875 $39,500
David G. Peebles None (a) None (a)
Michael F. Reimherr $6,375 $25,500
Michael J. C. Roth None (a) None (a)
John W. Saunders, Jr. (c) None (a) None (a)
Richard A. Zucker $9,875 $39,500
Laura T. Starks $3,500 $14,000
-------------------------------------------------------------------------------
(a) Robert G. Davis, Michael J.C. Roth, John W. Saunders, Jr., and David G.
Peebles are affiliated with the Company's investment adviser, IMCO, and,
accordingly, receive no remuneration from the Company or any other Fund
of the USAA Family of Funds.
(b) On July 31, 2000, the USAA Family of Funds consisted of four registered
investment companies offering 36 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 available
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.
(c) Effective December 31, 1999, John W. Saunders, Jr. and Howard L. Freeman,
Jr. retired from the Board of Directors.
All of the above Directors are also Directors/Trustees of the other funds
within the USAA Family of Funds. No compensation is paid by any fund to any
Director/Trustee who is a director, officer, or employee of IMCO or its
affiliates. No pension or retirement benefits are accrued as part of fund
expenses. The Company reimburses certain expenses of the Directors who are not
affiliated with the investment adviser.
THE COMPANY'S MANAGER
As described in the Fund's prospectus, USAA Investment Management Company is
the Manager and investment adviser, providing services under the Advisory
Agreement. The Manager, a wholly owned indirect subsidiary of United Services
Automobile Association (USAA), a large, diversified financial services
institution, was organized in May 1970 and has served as investment adviser and
underwriter for USAA Mutual Fund, Inc. from its inception.
In addition to managing the Company's assets, the Manager advises and
manages the investments for USAA and its affiliated companies as well as those
of USAA Tax Exempt Fund, Inc., USAA Investment Trust, 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 $42 billion, of which
approximately $29 billion were in mutual fund portfolios.
While the officers and employees of the Manager, as well as those of the
Funds, may engage in personal securities transactions, they are restricted by
the procedures in a Joint Code of Ethics adopted by the Manager and the Funds.
The
12
<PAGE>
Joint Code of Ethics was designed to ensure that the shareholders' interests
come before the individuals who manage their Funds. It also prohibits the
portfolio managers and other investment personnel from buying securities in an
initial public offering or from profiting from the purchase or sale of the same
security within 60 calendar days. Additionally, the Joint Code of Ethics
requires the portfolio manager and other employees with access information
about the purchase or sale of securities by the Funds to obtain approval before
executing permitted personal trades. A copy of the Joint Code of Ethics for the
Manager has been filed with the SEC and is available for public view.
ADVISORY AGREEMENT
Under the Advisory Agreement, the Manager provides an investment program,
carries out the investment policy, and manages the portfolio assets for each
Fund. The Manager is authorized, subject to the control of the Board of
Directors of the Company, to determine the selection, amount, and time to buy
or sell securities for each Fund. In addition to providing investment services,
the Manager pays for office space, facilities, business equipment, and
accounting services (in addition to those provided by the Custodian) for the
Company. The Manager compensates all personnel, officers, and Directors of the
Company if such persons are also employees of the Manager or its affiliates.
For these services under the Advisory Agreement, the Company has agreed to pay
the Manager a fee computed as described under FUND MANAGEMENT in each Fund's
prospectus. Management fees are computed and accrued daily and are payable
monthly.
Except for the services and facilities provided by the Manager, the Fund
pays all other expenses incurred in its operations. Expenses for which the Fund
is responsible include taxes (if any); brokerage commissions on portfolio
transactions (if any); expenses of issuance and redemption of shares; charges
of transfer agents, custodians, and dividend disbursing agents; costs of
preparing and distributing proxy material; costs of printing and engraving
stock certificates; auditing and legal expenses; certain expenses of
registering and qualifying shares for sale; fees of Directors who are not
interested persons (not affiliated) of the Manager; costs of printing and
mailing the prospectus, SAI, and periodic reports to existing shareholders; and
any other charges or fees not specifically enumerated. The Manager pays the
cost of printing and mailing copies of the prospectus, the SAI, and reports to
prospective shareholders.
The Advisory Agreement will remain in effect until June 30, 2002, 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 the Fund) including a majority of the Directors who are
not interested persons of the Manager or (otherwise than as Directors) of the
Company, at a meeting called for the purpose of voting on such approval. The
Advisory Agreement may be terminated at any time by either the Company or the
Manager on 60 days' written notice. It will automatically terminate in the
event of its assignment (as defined in the 1940 Act).
UNDERWRITER
The Company has an agreement with the Manager for exclusive underwriting and
distribution of the Fund's shares on a continuing, best-efforts basis. This
agreement provides that the Manager will receive no fee or other compensation
for such distribution services.
TRANSFER AGENT
The Transfer Agent performs transfer agent services for the Company under a
Transfer Agency Agreement. Services include maintenance of shareholder account
records; handling of communications with shareholders; distribution of Fund
dividends; and production of reports with respect to account activity for
shareholders and the Company. For its services under the Transfer Agency
Agreement, the Fund pays the Transfer Agent an annual fixed fee of $26 per
account. The fee is subject to change at any time.
The fee to the Transfer Agent includes processing of all transactions and
correspondence. Fees are billed on a monthly basis at the rate of one-twelfth
of the annual fee. In addition, each Fund pays all out-of-pocket expenses of
the Transfer Agent and other expenses which are incurred at the specific
direction of the Company.
GENERAL INFORMATION
CUSTODIAN
State Street Bank and Trust Company, P.O. Box 1713, Boston, MA 02105, is the
Company's Custodian. The Custodian is responsible for, among other things,
safeguarding and controlling the Company's cash and securities; handling the
receipt and delivery of securities; and collecting interest on the Company's
investments.
COUNSEL
Goodwin, Procter & Hoar LLP, Exchange Place, Boston, MA 02109, will review
certain legal matters for the Company in connection with the shares offered by
the prospectus.
13
<PAGE>
INDEPENDENT AUDITORS
KPMG LLP, 112 East Pecan, Suite 2400, San Antonio, TX 78205, is the Company's
independent auditor. In this capacity, the firm is responsible for auditing the
annual financial statements of the Funds and reporting thereon.
CALCULATION OF PERFORMANCE DATA
Information regarding the total return of the Fund is provided under COULD THE
VALUE OF YOUR INVESTMENT IN THE FUND FLUCTUATE? in its prospectus. See
VALUATION OF SECURITIES herein for a discussion of the manner in which the
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 Funds are
reinvested at the price stated in the prospectus on the reinvestment dates
during the period and includes all recurring fees that are charged to all
shareholder accounts.
APPENDIX A - LONG-TERM AND SHORT-TERM DEBT RATINGS
1. LONG-TERM DEBT RATINGS:
MOODY'S INVESTOR SERVICES
Aaa Bonds that are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally
referred to as "gilt edged." Interest payments are protected by a
large or by an exceptionally stable margin and principal is secure.
While the various protective elements are likely to change, such
changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa Bonds that are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are
generally known as high-grade bonds. They are rated lower than the
best bonds because margins of protection may not be as large as in Aaa
securities or fluctuation of protective elements may be of greater
amplitude or there may be other elements present which make the
long-term risks appear somewhat larger than in Aaa securities.
A Bonds that are rated A possess many favorable investment attributes
and are to be considered as upper-medium-grade obligations. Factors
giving security to principal and interest are considered adequate, but
elements may be present that suggest a susceptibility to impairment
sometime in the future.
Baa Bonds that are rated Baa are considered as medium-grade obligations
(i.e., they are neither highly protected nor poorly secured). Interest
payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
Ba Bonds that are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate, and thereby not
well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class.
B Bonds that are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of
time may be small.
Caa Bonds that are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
Ca Bonds that are rated Ca represent obligations which are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.
14
<PAGE>
C Bonds that are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
NOTE: MOODY'S APPLIES NUMERICAL MODIFIERS 1, 2, AND 3 IN EACH GENERIC RATING
CLASSIFICATION. THE MODIFIER 1 INDICATES THAT THE OBLIGATION RANKS IN THE
HIGHER END OF ITS GENERIC RATING CATEGORY, THE MODIFIER 2 INDICATES A MID-RANGE
RANKING, AND THE MODIFIER 3 INDICATES A RANKING IN THE LOWER END OF THAT
GENERIC RATING CATEGORY.
STANDARD & POOR'S RATINGS GROUP
AAA An obligation rated "AAA" has the highest rating assigned by Standard
& Poor's. The obligor's capacity to meet its financial commitment on
the obligation is extremely strong.
AA An obligation rated "AA" differs from the highest rated issues only in
small degree. The obligor's capacity to meet its financial commitment
on the obligation is VERY STRONG.
A An obligation rated "A" is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than
obligations in higher rated categories. However, the obligor's
capacity to meet its financial commitment on the obligation is still
STRONG.
BBB An obligation rated "BBB" exhibits adequate capacity to pay interest
and repay principal. However, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity of the
obligor to meet its financial commitment on the obligation.
B An obligation rated "B" is MORE VULNERABLE to nonpayment than
obligations rated "BB," but the obligor currently has the capacity to
meet its financial commitment on the obligation. Adverse business,
financial, or economic conditions will likely impair the obligor's
capacity or willingness to meet its financial commitment on the
obligation.
CCC An obligation rated "CCC" is CURRENTLY VULNERABLE to nonpayment, and
is dependent upon favorable business, financial, and economic
conditions for the obligor to meet its financial commitment on the
obligation. In the event of adverse business, financial, or economic
conditions, the obligor is not likely to have the capacity to meet its
financial commitment on the obligation.
CC An obligation rated "C" is CURRENTLY HIGHLY VULNERABLE to nonpayment.
C The "C" rating may be used to cover a situation where a bankruptcy
petition has been filed or similar action has been taken, but payments
on this obligation are being continued.
D An obligation rated "D" is in payment default. The "D" rating category
is used when payments on an obligation are not made on the date due
even if the applicable grace period has not expired, unless Standard &
Poor's believes that such payments will be made during such grace
period. The "D" rating also will be used upon the filing of a
bankruptcy petition or the taking of a similar action if payments on
an obligation are jeopardized.
PLUS (+) OR MINUS (-): THE RATINGS FROM "AA" TO "CCC" MAY BE MODIFIED BY THE
ADDITION OF A PLUS OR MINUS SIGN TO SHOW RELATIVE STANDING WITHIN THE MAJOR
RATING CATEGORIES.
FITCH INFORMATION, INC.
AAA Highest credit quality. "AAA" ratings denote the lowest expectation of
credit risk. They are assigned only in case of exceptionally strong
capacity for timely payment of financial commitments. This capacity is
highly unlikely to be adversely affected by foreseeable events.
AA Very high credit quality. "AA" ratings denote a very low expectation
of credit risk. They indicate very strong capacity for timely payment
of financial commitments. This capacity is not significantly
vulnerable to foreseeable events.
A High credit quality. "A" ratings denote a low expectation of credit
risk. The capacity for timely payment of financial commitments is
considered strong. This capacity may, nevertheless, be more vulnerable
to changes in circumstances or in economic conditions than is the case
for higher ratings.
BBB Good credit quality. "BBB" ratings indicate that there is currently a
low expectation of credit risk. The capacity for timely payment of
financial commitments is considered adequate, but adverse changes in
circumstances and in economic conditions are more likely to impair
this capacity. This is the lowest investment-grade category.
PLUS (+) MINUS(-) SIGNS MAY BE APPENDED TO A RATING TO DENOTE RELATIVE STATUS
WITHIN MAJOR RATING CATEGORIES. SUCH SUFFIXES ARE NOT ADDED TO THE AAA RATING
CATEGORY OR TO CATEGORIES BELOW CCC.
15
<PAGE>
2. SHORT-TERM DEBT RATINGS:
MOODY'S CORPORATE AND GOVERNMENT
Prime-1 Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1
repayment ability will often be evidenced by many of the following
characteristics:
* Leading market positions in well-established industries.
* High rates of return on funds employed.
* Conservative capitalization structure with moderate reliance on
debt and ample asset protection.
* Broad margins in earnings coverage of fixed financial charges and
high internal cash generation.
* Well-established access to a range of financial markets and
assured sources of alternate liquidity.
Prime-2 Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This
will normally be evidenced by many of the characteristics cited
above but to a lesser degree. Earnings trends and coverage ratios,
while sound, may be more subject to variation. Capitalization
characteristics, while still appropriate, may be more affected by
external conditions. Ample alternate liquidity is maintained.
MOODY'S MUNICIPAL
MIG 1/VMIG 1 This designation denotes best quality. There is present
strong protection by established cash flows, superior
liquidity support, or demonstrated broad-based access to
the market for refinancing.
MIG 2/VMIG 2 This designation denotes high quality. Margins of
protection are ample although not so large as in the
preceding group.
S&P CORPORATE AND GOVERNMENT
A-1 A short-term obligation rated "A-1" is rated in the highest category
by Standard & Poor's. The obligor's capacity to meet its financial
commitment on the obligation is strong. Within this category, certain
obligations are designated with a plus (+) sign. This indicates that
the obligor's capacity to meet its financial commitment on these
obligations is extremely strong.
A-2 A short-term obligation rated "A-2" is somewhat more susceptible to
the adverse effects of changes in circumstances and economic
conditions than obligations in higher rating categories. However, the
obligor's capacity to meet its financial commitment on the obligation
is satisfactory.
S&P MUNICIPAL
SP-1 Strong capacity to pay principal and interest. Issues determined to
possess very strong characteristics are given a plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest, with some
vulnerability to adverse financial and economic changes over the term
of the notes.
FITCH
F1 Highest credit quality. Indicates the strongest capacity for timely
payment of financial commitments; may have an added "+" to denote any
exceptionally strong credit feature.
F2 Good credit quality. A satisfactory capacity for timely payment of
financial commitments, but the margin of safety is not as great as in
the case of the higher ratings.
APPENDIX B - COMPARISON OF PORTFOLIO PERFORMANCE
Occasionally, we may make comparisons in advertising and sales literature
between the Fund and other comparable funds in the industry. These comparisons
may include such topics as risk and reward, investment objectives, investment
strategies, and performance.
Fund performance also may be compared to the performance of broad groups
of mutual funds with similar investment goals or unmanaged indexes of
comparable securities. Evaluations of Fund performance made by independent
sources may also be used in advertisements concerning the Fund, including
reprints of, or selections from, editorials or articles about the Fund. The
Fund or its performance may also be compared to products and services not
constituting securities subject to registration under the 1933 Act such as, but
not limited to, certificates of deposit and money market accounts. Sources for
performance information and articles about the Fund may include but 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.
16
<PAGE>
AUSTIN AMERICAN-STATESMAN, a newspaper that may cover financial news.
BARRON'S, a Dow Jones and Company, Inc. business and financial weekly that
periodically reviews mutual fund performance data.
THE BOND BUYER, a daily newspaper that covers bond market news.
BUSINESS WEEK, a national business weekly that periodically reports the
performance rankings and ratings of a variety of mutual funds.
CDA/WEISENBERGER MUTUAL FUNDS INVESTMENT REPORT, a monthly newsletter that
reports on both specific mutual fund companies and the mutual fund industry as
a whole.
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 periodically features companies in
the mutual fund industry.
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.
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.
KIPLINGER'S PERSONAL FINANCE MAGAZINE, a monthly investment advisory
publication that periodically features the performance of a variety of
securities.
LIPPER, A REUTER'S COMPANY EQUITY FUND PERFORMANCE ANALYSIS, a weekly and
monthly publication of industry-wide mutual fund performance averages by type
of fund.
LIPPER, A REUTER'S COMPANY 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.
MONEY FUND REPORT, a weekly publication of iMoneyNet, Inc. (formerly 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 "Taxable First Tier Fund Average."
MONEY MARKET INSIGHT, a monthly money market industry analysis prepared by
iMoneyNet, Inc. (formerly IBC Financial Data, Inc.)
MONEYLETTER, a biweekly newsletter that covers financial news and from time to
time rates specific mutual funds.
MORNINGSTAR 5 STAR INVESTOR, a monthly newsletter that covers financial news
and rates mutual funds produced by Morningstar, Inc. (a data service that
tracks open-end mutual funds).
17
<PAGE>
MUNI BOND FUND REPORT, a monthly newsletter that covers news on the municipal
bond market and features performance data for municipal bond mutual funds.
MUNIWEEK, a weekly newspaper that covers news on the municipal bond market.
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.
that 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.
WORTH, a magazine that covers financial and investment subjects including
mutual funds.
YOUR MONEY, a monthly magazine directed towards the novice investor.
In addition to the sources above, performance of our 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.
For comparative purposes, unmanaged indexes of comparable securities or
economic data may be cited. Examples include the following:
- Ibbotson Associates, Inc., Stocks, Bonds, Bills, and Inflation Yearbook.
- Russell 2000(R) Index is an index that consists of the 2,000 smallest
companies in the Russell 3000(R) Index, a widely recognized small cap index.
- NASDAQ Industrials, a composite index of approximately 3000 unmanaged
securities of industrial corporations traded over the counter.
Other sources for total return and other performance data that may be used
by a Fund or by those publications listed previously are Schabaker Investment
Management and Investment Company Data, Inc. These are services that collect
and compile data on mutual fund companies.
18
<PAGE>
APPENDIX C - DOLLAR-COST AVERAGING
Dollar-cost averaging is a systematic investing method, which can be used by
investors as a disciplined technique for investing. A fixed amount of money is
invested in a security (such as a stock or mutual fund) on a regular basis over
a period of time, regardless of whether securities markets are moving up or
down.
This practice reduces average share costs to the investor who acquires
more shares in periods of lower securities prices and fewer shares in periods
of higher prices.
While dollar-cost averaging does not assure a profit or protect against
loss in declining markets, this investment strategy is an effective way to help
calm the effect of fluctuations in the financial markets. Systematic investing
involves continuous investment in securities regardless of fluctuating price
levels of such securities. Investors should consider their financial ability to
continue purchases through periods of low and high price levels.
As the following chart illustrates, dollar-cost averaging tends to keep
the overall cost of shares lower. This example is for illustration only, and
different trends would result in different average costs.
===============================================================================
HOW DOLLAR-COST AVERAGING WORKS
$100 Invested Regularly for 5 Periods
Market Trend
--------------------------------------------------------------------
Down Up Mixed
-------------------- --------------------- --------------------
Share Shares Share Shares Share Shares
Investment Price Purchased Price Purchased Price Purchased
-------------------- --------------------- --------------------
$100 10 10 6 16.67 10 10
100 9 11.1 7 14.29 9 11.1
100 8 12.5 7 14.29 8 12.5
100 8 12.5 9 11.1 9 11.1
100 6 16.67 10 10 10 10
---- -- ----- -- ----- -- -----
$500 ***41 62.77 ***39 66.35 ***46 54.7
*Avg. Cost: $ 7.97 *Avg. Cost: $ 7.54 *Avg. Cost: $ 9.14
----- ----- -----
**Avg. Price: $ 8.20 **Avg. Price: $ 7.80 **Avg. Price: $ 9.20
----- ----- -----
* Average Cost is the total amount invested divided by number of shares
purchased.
** Average Price is the sum of the prices paid divided by number of
purchases.
*** Cumulative total of share prices used to compute average prices.
===============================================================================
19
<PAGE>
36838-1000
<PAGE>
USAA MUTUAL FUND, INC.
PART C. OTHER INFORMATION
Item 23. EXHIBITS
1 (a) Articles of Incorporation dated October 10, 1980 (1)
(b) Articles of Amendment dated January 14, 1981 (1)
(c) Articles Supplementary dated July 28, 1981 (1)
(d) Articles Supplementary dated November 3, 1982 (1)
(e) Articles of Amendment dated May 18, 1983 (1)
(f) Articles Supplementary dated August 8, 1983 (1)
(g) Articles Supplementary dated July 27, 1984 (1)
(h) Articles Supplementary dated November 5, 1985 (1)
(i) Articles Supplementary dated January 23, 1987 (1)
(j) Articles Supplementary dated May 13, 1987 (1)
(k) Articles Supplementary dated January 25, 1989 (1)
(l) Articles Supplementary dated May 2, 1991 (1)
(m) Articles Supplementary dated November 14, 1991 (1)
(n) Articles Supplementary dated April 14, 1992 (1)
(o) Articles Supplementary dated November 4, 1992 (1)
(p) Articles Supplementary dated March 23, 1993 (1)
(q) Articles Supplementary dated May 5, 1993 (1)
(r) Articles Supplementary dated November 8, 1993 (1)
(s) Articles Supplementary dated January 18, 1994 (1)
(t) Articles Supplementary dated November 9, 1994 (1)
(u) Articles Supplementary dated November 8, 1995 (2)
(v) Articles Supplementary dated February 6, 1996 (3)
(w) Articles Supplementary dated March 12, 1996 (4)
(x) Articles Supplementary dated November 13, 1996 (7)
(y) Articles Supplementary dated May 9, 1997 (8)
(z) Articles of Amendment dated July 9, 1997 (9)
(aa) Articles Supplementary dated November 12, 1997 (10)
(bb) Articles Supplementary dated April 3, 1998 (13)
(cc) Articles Supplementary dated May 6, 1999 (14)
(dd) Articles Supplementary dated November 18, 1999 (16)
(ee) Articles Supplementary dated July 19, 2000 (17)
2 Bylaws, as amended July 19, 2000 (17)
3 SPECIMEN CERTIFICATES FOR SHARES OF
(a) Growth Fund (1)
(b) Income Fund (1)
(c) Money Market Fund (1)
(d) Aggressive Growth Fund (1)
(e) Income Stock Fund (1)
(f) Growth & Income Fund (1)
(g) Short-Term Bond Fund (1)
(h) S&P 500 Index Fund (4)
(i) Science & Technology Fund (9)
C-1
<PAGE>
Item 23. EXHIBITS
(j) First Start Growth Fund (9)
(k) Intermediate-Term Bond Fund (15)
(l) High-Yield Opportunities Fund (15)
(m) Small Cap Stock Fund (15)
(n) Form of Extended Market Index Fund (17)
(o) Form of Nasdaq-100 Index Fund (17)
(p) Form of Global Titans Index Fund (17)
(q) Form of Capital Growth Fund (17)
4 (a) Advisory Agreement dated September 21, 1990 (1)
(b) Letter Agreement dated June 1, 1993 adding Growth & Income Fund and
Short-Term Bond Fund (1)
(c) Management Agreement dated May 1, 1996 with respect to the S&P 500
Index Fund (5)
(d) Administration Agreement dated May 1, 1996 with respect to the S&P 500
Index Fund (5)
(e) Letter Agreement to the Management Agreement dated May 1, 1996 with
respect to the S&P 500 Index Fund (5)
(f) Amendment to Administration Agreement dated May 1, 1997 with respect
to the S&P 500 Index Fund (7)
(g) Letter Agreement to the Advisory Agreement dated August 1, 1997
adding the Science & Technology Fund and First Start Growth Fund (9)
(h) Letter Agreement to the Advisory Agreement dated August 2, 1999
adding Intermediate-Term Bond Fund, High-Yield Opportunities Fund,
and Small Cap Stock Fund (15)
(i) Form of Management Agreement with respect to the Extended Market
Index Fund (filed herewith)
(j) Form of Administration Agreement with respect to the Extended Market
Index Fund (filed herewith)
(k) Form of Advisory Agreement with respect to the Nasdaq-100 Index Fund
and the Global Titans Index Fund (filed herewith)
(l) Form of Administration Agreement with respect to the Nasdaq-100
Index Fund and the Global Titans Index Fund (filed herewith)
(m) Form of Letter Agreement to the Advisory Agreement adding the
Capital Growth Fund (filed herewith)
(n) Form of Sub-Advisory Agreement with respect to the Nasdaq-100 Index
Fund and the Global Titans Index Fund (filed herewith)
(o) Form of Accounting Services Agreement with respect to the Extended
Market Index Fund (filed herewith)
5 (a) Underwriting Agreement dated July 25, 1990 (1)
(b) Letter Agreement to the Underwriting Agreement dated June 1, 1993
adding Growth & Income Fund and Short-Term Bond Fund (1)
(c) Letter Agreement to the Underwriting Agreement dated May 1, 1996
adding S&P 500 Index Fund (5)
(d) Letter Agreement to the Underwriting Agreement dated August 1, 1997
adding Science & Technology Fund and First Start Growth Fund (9)
(e) Letter Agreement to the Underwriting Agreement dated August 2, 1999
adding Intermediate-Term Bond Fund, High-Yield Opportunities Fund,
and Small Cap Stock Fund (15)
(f) Form of Letter Agreement to the Underwriting Agreement adding the
Extended Market Index Fund, the Nasdaq-100 Index Fund, the Global
Titans Index Fund, and the Capital Growth Fund (filed herewith)
6 Not Applicable
7 (a) Custodian Agreement dated November 3, 1982 (1)
(b) Letter Agreement dated April 20, 1987 adding Income Stock Fund (1)
(c) Amendment No. 1 to the Custodian Contract dated October 30, 1987 (1)
C-2
<PAGE>
Item 23. EXHIBITS
(d) Amendment to the Custodian Contract dated November 3, 1988 (1)
(e) Amendment to the Custodian Contract dated February 6, 1989 (1)
(f) Amendment to the Custodian Contract dated November 8, 1993 (1)
(g) Letter Agreement dated June 1, 1993 adding Growth & Income Fund and
Short-Term Bond Fund (1)
(h) Subcustodian Agreement dated March 24, 1994 (3)
(i) Custodian Agreement dated May 1, 1996 with respect to the S&P 500
Index Fund (5)
(j) Subcustodian Agreement dated May 1, 1996 with respect to the S&P 500
Index Fund (5)
(k) Letter Agreement to the Custodian Agreement dated May 1, 1996 with
respect to the S&P 500 Index Fund (5)
(l) Amendment to Custodian Contract dated May 13, 1996 (5)
(m) Letter Agreement to the Custodian Agreement dated August 1, 1997 with
respect to the Science & Technology Fund and First Start Growth
Fund (9)
(n) Letter Agreement to the Custodian Agreement dated August 2, 1999 with
respect to the Intermediate-Term Bond Fund, High-Yield Opportunities
Fund, and Small Cap Stock Fund (15)
(o) Form of Custody Letter Agreement with respect to the Extended Market
Index Fund (filed herewith)
(p) Form of Addendum to the Custody Letter Agreement with respect to the
Extended Market Index Fund (filed herewith)
(q) Form of Letter Agreement to the Custodian Agreement with respect to
the Nasdaq-100 Index Fund, the Global Titans Index Fund, and the
Capital Growth Fund (filed herewith)
8 (a) Articles of Merger dated January 30, 1981 (1)
(b) Transfer Agency Agreement dated January 23, 1992 (1)
(c) Letter Agreement dated June 1, 1993 to Transfer Agency Agreement
adding Growth & Income Fund and Short-Term Bond Fund (1)
(d) Amendments dated January 1, 1999 to the Transfer Agency Agreement Fee
Schedules for Growth Fund, Aggressive Growth Fund, Income Fund,
Growth & Income Fund, Income Stock Fund, Money Market Fund, Short-
Term Bond Fund, Science Technology Fund and First Start Growth
Fund (15)
(e) Amendment No. 1 to Transfer Agency Agreement dated November 14, 1995
(2)
(f) Third Party Feeder Fund Agreement dated May 1, 1996 with respect to
the S&P 500 Index Fund (5)
(g) Letter Agreement to Transfer Agency Agreement dated May 1, 1996
adding S&P 500 Index Fund (5)
(h) Transfer Agency Agreement Fee Schedule dated May 1, 2000 for S&P 500
Index Fund (16)
(i) Master Revolving Credit Facility Agreement with USAA Capital
Corporation dated January 11, 2000 ($500,000,000) (16)
(j) Master Revolving Credit Facility Agreement with Bank of America dated
January 12, 2000 (16)
(k) Letter Agreement to Transfer Agency Agreement dated August 1, 1997
adding Science & Technology Fund and First Start Growth Fund (9)
(l) Master Revolving Credit Facility Agreement with USAA Capital
Corporation dated January 11, 2000 ($250,000,000) (16)
(m) Letter Agreement to Transfer Agency Agreement dated August 2, 1999
adding Intermediate-Term Bond Fund, High-Yield Opportunities Fund
and Small Cap Stock Fund (15)
(n) Transfer Agency Agreement Fee Schedule for Intermediate-Term Bond
Fund (15)
(o) Transfer Agency Agreement Fee Schedule for High-Yield Opportunities
Fund (15)
(p) Transfer Agency Agreement Fee Schedule for Small Cap Stock Fund (15)
(q) Form of Master-Feeder Participation Agreement with respect to the
Extended Market Index Fund (filed herewith)
(r) Form of Letter Agreement to the Transfer Agency Agreement adding the
Extended Market Index Fund, the Nasdaq-100 Index Fund, the Global
Titans Index Fund, and the Capital Growth Fund (filed herewith)
C-3
<PAGE>
Item 23. EXHIBITS
(s) Form of Transfer Agency Agreement Fee Schedule for the Extended
Market Index Fund (filed herewith)
(t) Form of Transfer Agency Agreement Fee Schedule for the Nasdaq-100
Index Fund (filed herewith)
(u) Form of Transfer Agency Agreement Fee Schedule for the Global Titans
Index Fund (filed herewith)
(v) Form of Transfer Agency Agreement Fee Schedule for the Capital Growth
Fund (filed herewith)
(w) Form of License Agreement for Nasdaq-100 Index Fund (filed herewith)
(x) Form of License Agreement for Global Titans Index Fund (filed
herewith)
(y) Form of Sub-License Agreement for Extended Market Index Fund (filed
herewith)
(z) Form of Commodity Customer's Agreement for the Nasdaq-100 Index Fund
and the Global Titans Index Fund (filed herewith)
9 (a) Opinion of Counsel with respect to the Growth Fund, Income Fund,
Money Market Fund, Income Stock Fund, Growth & Income Fund, and
Short-Term Bond Fund (2)
(b) Opinion of Counsel with respect to the S&P 500 Index Fund (16)
(c) Opinion of Counsel with respect to the Aggressive Growth Fund (6)
(d) Consent of Counsel with respect to the Aggressive Growth Fund, Growth
Fund, Growth & Income Fund, Income Stock Fund, Income Fund, Short-
Term Bond Fund, Money Market Fund, Science & Technology Fund, and
First Start Growth Fund (15)
(e) Opinion of Counsel with respect to the Science & Technology Fund and
First Start Growth Fund (8)
(f) Opinion and Consent of Counsel with respect to the Intermediate-Term
Bond Fund, High-Yield Opportunities Fund, and Small Cap Stock Fund
(14)
(g) Consent of Counsel with respect to the S&P 500 Index Fund (filed
herewith)
(h) Opinion and Consent of Counsel with respect to the Extended Market
Index Fund, the Nasdaq-100 Index Fund, the Global Titans Index Fund,
and the Capital Growth Fund (filed herewith)
10 Independent Accountants' Consent with respect to the S&P 500 Index
Fund - (filed herewith)
11 Omitted financial statements - Not Applicable
12 SUBSCRIPTIONS AND INVESTMENT LETTERS
(a) Subscription and Investment Letter for Growth & Income Fund and
Short-Term Bond Fund (1)
(b) Subscription and Investment Letter for S&P 500 Index Fund (5)
(c) Subscription and Investment Letter for Science & Technology Fund and
First Start Growth Fund (9)
(d) Subscription and Investment Letter for the Intermediate-Term Bond
Fund, High-Yield Opportunities Fund, and Small Cap Stock Fund (15)
(e) Form of Subscription and Investment Letter for the Extended Market
Index Fund, Nasdaq-100 Index Fund, Global Titans Index Fund, and
Capital Growth Fund (17)
13 12b-1 Plans - Not Applicable
14 18f-3 Plans - Not Applicable
15 Plan Adopting Multiple Classes of Shares - Not Applicable
16 CODE OF ETHICS
(a) USAA Investment Management Company (filed herewith)
(b) Bankers Trust Company (16)
(c) Merrill Lynch Investment Managers (filed herewith)
(d) Barclays Global Investors, N.A. (filed herewith)
C-4
<PAGE>
Item 23. EXHIBITS
17 POWERS OF ATTORNEY
(a) Powers of Attorney for Sherron A. Kirk, David G. Peebles, Robert L.
Mason, Richard A. Zucker, Barbara B. Dreeben, and Michael F. Reimherr
dated April 18, 2000 and Michael J.C. Roth dated April 22, 2000 (16)
(b) With respect to the S&P 500 Index Fund, Powers of Attorney for John
Y. Keffer, Charles A. Rizzo, Charles P. Biggar, S. Leland Dill,
Richard T. Hale, Richard J. Herring, Bruce E. Langton, Martin J.
Gruber, Philip Saunders, Jr., and Harry Van Benscoten, Trustees of
the Equity 500 Index Portfolio, dated September 8, 1999 (16)
(c) Power of Attorney for Robert G. Davis dated July 19, 2000 (17)
-------------------------------------------------------------------------------
(1) Previously filed with Post-Effective Amendment No. 38 of the Registrant
(No. 2-49560) filed with the Securities and Exchange Commission on
September 29, 1995.
(2) Previously filed with Post-Effective Amendment No. 39 of the Registrant
(No. 2-49560) filed with the Securities and Exchange Commission on
November 21, 1995.
(3) Previously filed with Post-Effective Amendment No. 40 of the Registrant
(No. 2-49560) filed with the Securities and Exchange Commission on
February 15, 1996.
(4) Previously filed with Post-Effective Amendment No. 41 of the Registrant
(No. 2-49560) filed with the Securities and Exchange Commission on
April 26, 1996.
(5) Previously filed with Post-Effective Amendment No. 42 of the Registrant
(No. 2-49560) filed with the Securities and Exchange Commission on
September 11, 1996.
(6) Previously filed with Post-Effective Amendment No. 43 of the Registrant
(No. 2-49560) filed with the Securities and Exchange Commission on
October 1, 1996.
(7) Previously filed with Post-Effective Amendment No. 44 of the Registrant
(No. 2-49560) filed with the Securities and Exchange Commission on
April 21, 1997.
(8) Previously filed with Post-Effective Amendment No. 45 of the Registrant
(No. 2-49560) filed with the Securities and Exchange Commission on
May 16, 1997.
(9) Previously filed with Post-Effective Amendment No. 46 of the Registrant
(No. 2-49560) filed with the Securities and Exchange Commission on
September 30, 1997.
(10) Previously filed with Post-Effective Amendment No. 47 of the Registrant
(No. 2-49560) filed with the Securities and Exchange Commission on
February 26, 1998.
(11) Previously filed with Post-Effective Amendment No. 48 of the Registrant
(No. 2-49560) filed with the Securities and Exchange Commission on
February 27, 1998.
(12) Previously filed with Post-Effective Amendment No. 49 of the Registrant
(No. 2-49560) filed with the Securities and Exchange Commission on
September 30, 1998.
C-5
<PAGE>
(13) Previously filed with Post-Effective Amendment No. 50 of the Registrant
(No. 2-49560) filed with the Securities and Exchange Commission on
February 26, 1999.
(14) Previously filed with Post-Effective Amendment No. 51 of the Registrant
(No. 2-49560) filed with the Securities and Exchange Commission on
May 14, 1999.
(15) Previously filed with Post-Effective Amendment No. 52 of the Registrant
(No. 2-49560) filed with the Securities and Exchange Commission on
November 30, 1999.
(16) Previously filed with Post-Effective Amendment No. 53 of the Registrant
(No. 2-49560) filed with the Securities and Exchange Commission on
April 28, 2000.
(17) Previously filed with Post-Effective Amendment No. 54 of the Registrant
(No. 2-49560) filed with the Securities and Exchange Commission on
August 4, 2000.
C-6
<PAGE>
Item 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH FUND
Information pertaining to persons controlled by or under common
control with Registrant is hereby incorporated by reference to
the section captioned "Directors and Officers of the Company" in
the Statement of Additional Information.
Item 25. INDEMNIFICATION
Protection for the liability of the adviser and underwriter and
for the officers and directors of the Registrant is provided by
two methods:
(a) THE DIRECTOR AND OFFICER LIABILITY POLICY. This policy covers all
losses incurred by the Registrant, its adviser and its
underwriter from any claim made against those entities or persons
during the policy period by any shareholder or former shareholder
of the Fund by reason of any alleged negligent act, error or
omission committed in connection with the administration of the
investments of said Registrant or in connection with the sale or
redemption of shares issued by said Registrant.
(b) STATUTORY INDEMNIFICATION PROVISIONS. Under Section 2-418 of the
Maryland General Corporation Law, the Registrant is authorized to
indemnify any past or present director, officer, agent or
employee against judgments, penalties, fines, settlements and
reasonable expenses actually incurred by him in connection with
any proceeding in which he is a party by reason of having served
as a director, officer, agent or employee, if he acted in good
faith and reasonably believed that, (i) in the case of conduct in
his official capacity with the Registrant, that his conduct was
in the best interests of the Registrant, or (ii) in all other
cases, that his conduct was at least not opposed to the best
interests of the Registrant. In the case of any criminal
proceeding, said director, officer, agent, or employee must in
addition have had no reasonable cause to believe that his conduct
was unlawful. In the case of a proceeding by or in the right of
the Registrant, indemnification may only be made against
reasonable expenses and may not be made in respect of any
proceeding in which the director, officer, agent, or employee
shall have been adjudged to be liable to the Registrant. The
termination of any proceeding by judgment, order, settlement,
conviction, or upon a plea of nolo contendere, or its equivalent
creates a rebuttable presumption that the director, officer,
agent, or employee did not meet the requisite standard of conduct
for indemnification. No indemnification may be made in respect of
any proceeding charging improper personal benefit to the
director, officer, agent, or employee whether or not involving
action in such person's official capacity, if such person was
adjudged to be liable on the basis that improper personal benefit
was received. If such director, officer, agent, or employee is
successful, on the merits or otherwise, in defense of any such
proceeding against him, he shall be indemnified against the
reasonable expenses incurred by him (unless such indemnification
is limited by the Registrant's charter, which it is not).
Additionally, a court of appropriate jurisdiction may order
indemnification in certain circumstances even if the appropriate
standard of conduct set forth above was not met.
Indemnification may not be made unless authorized in the specific
case after determination that the applicable standard of conduct
has been met. Such determination shall be made by either: (i) the
board of directors by either (x) a majority vote of a quorum
consisting of directors not parties to the proceeding or (y) if
such a quorum cannot be obtained, then by a majority vote of a
committee of the board consisting solely of two or more directors
not at the time parties to such proceeding who were duly
designated to act in the matter by a majority vote of the full
board in which the designated directors who are parties may
participate; (ii) special legal counsel selected by the board of
directors or a committee of the board by vote as set forth in (i)
above, or, if the requisite quorum of the board cannot be
obtained therefore and the committee cannot be established, by a
majority vote of the full board in which directors who are
parties may participate; or (iii) the stockholders.
C-7
<PAGE>
Reasonable expenses may be reimbursed or paid by the Registrant
in advance of final disposition of a proceeding after a
determination, made in accordance with the procedures set forth
in the preceding paragraph, that the facts then known to those
making the determination would not preclude indemnification under
the applicable standards provided the Registrant receives (i) a
written affirmation of the good faith belief of the person
seeking indemnification that the applicable standard of conduct
necessary for indemnification has been met, and (ii) written
undertaking to repay the advanced sums if it is ultimately
determined that the applicable standard of conduct has not been
met.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers,
and controlling persons of the Registrant pursuant to the
Registrant's Articles of Incorporation or otherwise, the
Registrant has been advised that, in the opinion of the
Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer,
or controlling person of the Registrant in the successful defense
of any action, suit or proceeding) is asserted by such director,
officer, or controlling person in connection with the securities
being registered, then the Registrant will, unless in the opinion
of its counsel the matter has been settled by a controlling
precedent, submit to a court of appropriate jurisdiction the
question of whether indemnification by it is against public
policy as expressed in the Act and will be governed by the final
adjudication of such issue.
Item 26. BUSINESS AND OTHER CONNECTIONS OF THE INVESTMENT ADVISER
Information pertaining to business and other connections of the
Registrant's investment adviser is hereby incorporated by
reference to the section of the Prospectus captioned "Fund
Management" and to the section of the Statement of Additional
Information captioned "Directors and Officers of the Company."
Item 26. PRINCIPAL UNDERWRITERS
(a) USAA Investment Management Company (the "Adviser") acts as
principal underwriter and distributor of the Registrant's shares
on a best-efforts basis and receives no fee or commission for its
underwriting services. The Adviser, wholly owned by United
Services Automobile Association, also serves as principal
underwriter for USAA Tax Exempt Fund, Inc., USAA Investment
Trust, and USAA State Tax-Free Trust.
(b) Set forth below is information concerning each director and
executive officer of USAA Investment Management Company.
Name and Principal Position and Offices Position and Offices
Business Address with Underwriter with Registrant
------------------ -------------------- ---------------------
Robert G. Davis Director and Chairman Director and
9800 Fredericksburg Road of the Board of Chairman of the
San Antonio, TX 78288 Directors Board of Directors
Michael J.C. Roth Chief Executive Officer, President, Director
9800 Fredericksburg Road President, Director, and and Vice Chairman of
San Antonio, TX 78288 Vice Chairman of the the Board of Directors
Board of Directors
C-8
<PAGE>
David G. Peebles Senior Vice President, Vice President and
9800 Fredericksburg Road Equity Investments, and Director
San Antonio, TX 78288 Director
Kenneth E. Willmann Senior Vice President, Vice President
9800 Fredericksburg Road Fixed Income Investments
San Antonio, TX 78288 and Director
Christopher W. Claus Senior Vice President, None
9800 Fredericksburg Road Investment Sales and
San Antonio, TX 78288 Service
Samuel J. Borowski Senior Vice President, None
9800 Fredericksburg Investment Operations
San Antonio, TX 78288
Michael D. Wagner Vice President, Secretary Secretary
9800 Fredericksburg Road and Counsel
San Antonio, TX 78288
Mark S. Howard Vice President, Securities Assistant Secretary
9800 Fredericksburg Road Counsel and Compliance,
San Antonio, TX 78288 and Assistant Secretary
Sherron A. Kirk Senior Vice President, Treasurer
9800 Fredericksburg Road Senior Financial Officer,
San Antonio, TX 78288 and Treasurer
(c) Not Applicable
Item 28. LOCATION OF ACCOUNTS AND RECORDS
The following entities prepare, maintain, and preserve the
records required by Section 31(a) of the Investment Company Act
of 1940 (the "1940 Act") for the Registrant. These services are
provided to the Registrant through written agreements between the
parties to the effect that such services will be provided to the
Registrant for such periods prescribed by the Rules and
Regulations of the Securities and Exchange Commission under the
1940 Act and such records are the property of the entity required
to maintain and preserve such records and will be surrendered
promptly on request:
USAA Investment Management Company
9800 Fredericksburg Road
San Antonio, Texas 78288
USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, Texas 78288
State Street Bank and Trust Company
1776 Heritage Drive
North Quincy, Massachusetts 02171
C-9
<PAGE>
Bankers Trust Company
Four Albany Street
New York, New York 10006
Chase Manhattan Bank
4 Chase MetroTech
18th Floor
Brooklyn, New York 11245
Item 29. MANAGEMENT SERVICES
Not Applicable
Item 30. UNDERTAKINGS
None
C-10
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act and the Investment
Company Act, the Registrant certifies that it meets all requirements for
effectiveness of this registration statement purchase to Rule 485(b) under the
Securities Act and has duly caused this amendment to its registration statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in
the city of San Antonio and state of Texas on the 27th day of October 2000.
USAA MUTUAL FUND, INC.
*
--------------------------
Michael J.C. Roth
President
Pursuant to the requirements of the Securities Act, this amendment to
its Registration Statement has been signed below by the following persons in
the capacities and on the date(s) indicated.
(Signature) (Title) (Date)
* Chairman of the
----------------------------- Board of Directors
Robert G. Davis
Vice Chairman of the Board
of Directors and President
* (Principal Executive Officer)
----------------------------
Michael J.C. Roth
Treasurer (Principal
Financial and
* Accounting Officer)
----------------------------
Sherron A. Kirk
*
----------------------------- Director
David G. Peebles
* Director
----------------------------
Robert L. Mason
* Director
----------------------------
Michael F. Reimherr
* Director
----------------------------
Richard A. Zucker
* Director
----------------------------
Barbara B. Dreeben
* Director
----------------------------
Laura T. Starks
*By: /s/ Mark S. Howard
----------------------
Mark S. Howard, Attorney-in-Fact, under Powers of Attorney dated April 22,
2000, and July 19, 2000, incorporated by reference to Post Effective Amendments
Nos. 53 and 54 filed with the Securities and Exchange Commission on April 28,
2000, and August 4, 2000, respectively.
C-11
<PAGE>
SIGNATURES
Equity 500 Index Portfolio has duly caused this Post-effective Amendment
No. 55 to the Registration Statement on Form N-1A of USAA Mutual Fund, Inc. to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
city of Baltimore and state of Maryland on the 19 day of October, 2000.
EQUITY 500 INDEX PORTFOLIO
By: /S/ RICHARD T. HALE
--------------------------------
President
This Post-Effective Amendment No. 55 to the Registration Statement on Form
N-1A of USAA Mutual Fund, Inc. has been signed below by the following persons
in the capacities included with respect to Equity 500 Index Portfolio on
October 19, 2000.
SIGNATURE TITLE
Charles P. Biggar* Trustee
S. Leland Dill* Trustee
Martin J. Gruber* Trustee
Richard Hale* Trustee and President
Richard J. Herring* Trustee
Bruce E. Langton* Trustee
Philip Saunders, Jr.* Trustee
Harry Van Benschoten* Trustee
John Y. Keffer* President and Chief Executive Officer
Charles A. Rizzo Treasurer and Principal Financial and Accounting
Officer
By: /S/ DANIEL O. HIRSCH
----------------------------------------
Daniel O. Hirsh, Secretary of Equity 500 Index Portfolio,
As Attorney-in-Fact to a Power of Attorney.
C-12
<PAGE>
SIGNATURES
Master Extended Market Index Portfolio has duly caused this Post-effective
Amendment No. 55 to the Registration Statement on Form N-1A of USAA Mutual
Fund, Inc. to be signed on it behalf by the undersigned, thereunto duly
authorized, in the township of Plainsboro and state of New Jersey on the 19
day to October, 2000.
MASTER EXTENDED MARKET INDEX PORTFOLIO
By: /S/ TERRY K. GLENN
--------------------------------
President
This Post-Effective Amendment No. 55 to the Registration Statement of Form
N-1A of USAA Mutual Fund, Inc. has been signed by the following persons in the
capacities included with respect to Master Extended Market Index Portfolio on
October 19, 2000.
SIGNATURE TITLE
Terry K. Glenn* President and Trustee
M. Colyer Crum* Trustee
Laurie Simon Hodrick* Trustee
Jack B. Sunderland* Trustee
Stephen B. Swensrun* Trustee
J. Thomas Touchton Trustee
Fred G. Weiss* Trustee
Arthur Zeikel* Trustee
*By /S/ TERRY K. GLENN
----------------------------
Terry K. Glenn
As Attorney-in-Fact to a Power of Attorney
C-13
<PAGE>
EXHIBIT INDEX
EXHIBIT ITEM PAGE NO. *
1 (a) Articles of Incorporation dated October 10, 1980 (1)
(b) Articles of Amendment dated January 14, 1981 (1)
(c) Articles Supplementary dated July 28, 1981 (1)
(d) Articles Supplementary dated November 3, 1982 (1)
(e) Articles of Amendment dated May 18, 1983 (1)
(f) Articles Supplementary dated August 8, 1983 (1)
(g) Articles Supplementary dated July 27, 1984 (1)
(h) Articles Supplementary dated November 5, 1985 (1)
(i) Articles Supplementary dated January 23, 1987 (1)
(j) Articles Supplementary dated May 13, 1987 (1)
(k) Articles Supplementary dated January 25, 1989 (1)
(l) Articles Supplementary dated May 2, 1991 (1)
(m) Articles Supplementary dated November 14, 1991 (1)
(n) Articles Supplementary dated April 14, 1992 (1)
(o) Articles Supplementary dated November 4, 1992 (1)
(p) Articles Supplementary dated March 23, 1993 (1)
(q) Articles Supplementary dated May 5, 1993 (1)
(r) Articles Supplementary dated November 8, 1993 (1)
(s) Articles Supplementary dated January 18, 1994 (1)
(t) Articles Supplementary dated November 9, 1994 (1)
(u) Articles Supplementary dated November 8, 1995 (2)
(v) Articles Supplementary dated February 6, 1996 (3)
(w) Articles Supplementary dated March 12, 1996 (4)
(x) Articles Supplementary dated November 13, 1996 (7)
(y) Articles Supplementary dated May 9, 1997 (8)
(z) Articles of Amendment dated July 9, 1997 (9)
(aa) Articles Supplementary dated November 12, 1997 (10)
(bb) Articles Supplementary dated April 3, 1998 (13)
(cc) Articles Supplementary dated May 6, 1999 (14)
(dd) Articles Supplementary dated November 18, 1999 (16)
(ee) Articles Supplementary dated July 19, 2000 (17)
2 Bylaws, as amended July 19, 2000 (17)
3 SPECIMEN CERTIFICATES FOR SHARES OF
(a) Growth Fund (1)
(b) Income Fund (1)
(c) Money Market Fund (1)
(d) Aggressive Growth Fund (1)
(e) Income Stock Fund (1)
(f) Growth & Income Fund (1)
(g) Short-Term Bond Fund (1)
(h) S&P 500 Index Fund (4)
(i) Science & Technology Fund (9)
(j) First Start Growth Fund (9)
C-14
<PAGE>
EXHIBIT ITEM PAGE NO.*
(k) Intermediate-Term Bond Fund (15)
(l) High-Yield Opportunities Fund (15)
(m) Small Cap Stock Fund (15)
(n) Form of Extended Market Index Fund (17)
(o) Form of Nasdaq-100 Index Fund (17)
(p) Form of Global Titans Index Fund (17)
(q) Form of Capital Growth Fund (17)
4 (a) Advisory Agreement dated September 21, 1990 (1)
(b) Letter Agreement dated June 1, 1993 adding Growth & Income
Fund and Short-Term Bond Fund (1)
(c) Management Agreement dated May 1, 1996 with respect to the
S&P 500 Index Fund (5)
(d) Administration Agreement dated May 1, 1996 with respect to
the S&P 500 Index Fund (5)
(e) Letter Agreement to the Management Agreement dated May 1,
1996 with respect to the S&P 500 Index Fund (5)
(f) Amendment to Administration Agreement dated May 1, 1997
with respect to the S&P 500 Index Fund (7)
(g) Letter Agreement to the Advisory Agreement dated August 1,
1997 adding Science & Technology Fund and First Start
Growth Fund (9)
(h) Letter Agreement to the Advisory Agreement dated August 2,
1999 adding Intermediate-Term Bond Fund, High-Yield
Opportunities Fund, and Small Cap Stock Fund (15)
(i) Form of Management Agreement with respect to the Extended
Market Index Fund (filed herewith) 143
(j) Form of Administration Agreement with respect to the
Extended Market Index Fund (filed herewith) 150
(k) Form of Advisory Agreement with respect to the Nasdaq-100
Index Fund and the Global Titans Index Fund (filed herewith) 156
(l) Form of Administration Agreement with respect to the
Nasdaq-100 Index Fund and the Global Titans Index Fund
(filed herewith) 163
(m) Form of Letter Agreement to the Advisory Agreement adding the
Capital Growth Fund (filed herewith) 169
(n) Form of Sub-Advisory Agreement with respect to the Nasdaq-100
Index Fund and the Global Titans Index Fund (filed herewith) 171
(o) Form of Accounting Services Agreement with respect to the
Extended Market Index Fund (filed herewith) 188
5 (a) Underwriting Agreement dated July 25, 1990 (1)
(b) Letter Agreement to the Underwriting Agreement dated June 1,
1993 adding Growth & Income Fund and Short-Term Bond Fund (1)
(c) Letter Agreement to the Underwriting Agreement dated May 1,
1996 adding S&P 500 Index Fund (5)
(d) Letter Agreement to the Underwriting Agreement dated August
1, 1997 adding Science & Technology Fund and First Start
Growth Fund (9)
(e) Letter Agreement to the Underwriting Agreement dated August
2, 1999 adding Intermediate-Term Bond Fund, High-Yield
Opportunities Fund, and Small Cap Stock Fund (15)
C-15
<PAGE>
EXHIBIT ITEM PAGE NO.*
(f) Form of Letter Agreement to the Underwriting Agreement adding
the Extended Market Index Fund, the Nasdaq-100 Index Fund,
the Global Titans Index Fund, and the Capital Growth Fund
(filed herewith) 194
6 Not Applicable
7 (a) Custodian Agreement dated November 3, 1982 (1)
(b) Letter Agreement dated April 20, 1987 adding Income Stock Fund (1)
(c) Amendment No. 1 to the Custodian Contract dated October 30, 1987 (1)
(d) Amendment to the Custodian Contract dated November 3, 1988 (1)
(e) Amendment to the Custodian Contract dated February 6, 1989 (1)
(f) Amendment to the Custodian Contract dated November 8, 1993 (1)
(g) Letter Agreement dated June 1, 1993 adding Growth & Income
Fund and Short-Term Bond Fund (1)
(h) Subcustodian Agreement dated March 24, 1994 (3)
(i) Custodian Agreement dated May 1, 1996 with respect to the S&P
500 Index Fund (5)
(j) Subcustodian Agreement dated May 1, 1996 with respect to the
S&P 500 Index Fund (5)
(k) Letter Agreement to the Custodian Agreement dated May 1, 1996
with respect to the S&P 500 Index Fund (5)
(l) Amendment to Custodian Contract dated May 13, 1996 (5)
(m) Letter Agreement to the Custodian Agreement dated August 1,
1997 with respect to the Science & Technology Fund and
First Start Growth Fund (9)
(n) Letter Agreement to the Custodian Agreement dated August 2, 1999
with respect to the Intermediate-Term Bond Fund, High-Yield
Opportunities Fund, and Small Cap Stock Fund (15)
(o) Form of Custody Letter Agreement with respect to the Extended
Market Index Fund (filed herewith) 196
(p) Form of Addendum to Custody Letter Agreement with respect to
the Extended Market Index Fund (filed herewith) 200
(q) Form of Letter Agreement to the Custodian Agreement with
respect to the Nasdaq-100 Index Fund, the Global Titans
Index Fund, and the Capital Growth Fund (filed herewith) 217
8 (a) Articles of Merger dated January 30, 1981 (1)
(b) Transfer Agency Agreement dated January 23, 1992 (1)
(c) Letter Agreement dated June 1, 1993 to Transfer Agency
Agreement adding Growth & Income Fund and Short-Term
Bond Fund (1)
(d) Amendments dated January 1, 1999 to the Transfer Agency
Agreement Fee Schedules for Growth Fund, Aggressive Growth
Fund, Income Fund, Growth & Income Fund, Income Stock Fund,
Money Market Fund, Short-Term Bond Fund, Science & Technology
Fund, and First Start Growth Fund (15)
(e) Amendment No. 1 to Transfer Agency Agreement dated November
14, 1995(2)
(f) Third Party Feeder Fund Agreement dated May 1, 1996 with
respect to the S&P 500 Index Fund (5)
(g) Letter Agreement to Transfer Agency Agreement dated May 1,
1996 adding S&P 500 Index Fund (5)
(h) Transfer Agency Agreement Fee Schedule dated May 1, 2000 for
S&P 500 Index Fund (16)
C-16
<PAGE>
EXHIBIT ITEM PAGE NO.*
(i) Master Revolving Credit Facility Agreement with USAA Capital
Corporation dated January 11, 2000 ($500,000,000)(16)
(j) Master Revolving Credit Facility Agreement with Bank of
America dated January 12, 2000 (16)
(k) Letter Agreement to Transfer Agency Agreement dated
August 1, 1997 adding Science & Technology Fund and First
Start Growth Fund (9)
(l) Master Revolving Credit Facility Agreement with USAA Capital
Corporation dated January 11, 2000 ($250,000,000) (16)
(m) Letter Agreement to Transfer Agency Agreement dated August 2,
1999 adding Intermediate-Term Bond Fund, High-Yield
Opportunities Fund and Small Cap Stock Fund (15)
(n) Transfer Agency Agreement Fee Schedule for Intermediate-Term
Bond Fund (15)
(o) Transfer Agency Agreement Fee Schedule for High-Yield
Opportunities Fund (15)
(p) Transfer Agency Agreement Fee Schedule for Small Cap Stock
Fund (15)
(q) Form of Master-Feeder Participation Agreement with respect
to the Extended Market Index Fund (filed herewith) 219
(r) Form of Letter Agreement to the Transfer Agency Agreement
adding the Extended Market Index Fund, the Nasdaq-100
Index Fund, the Global Titans Index Fund, and the
Capital Growth Fund (filed herewith) 234
(s) Form of Transfer Agency Agreement Fee Schedule for the
Extended Market Index Fund (filed herewith) 236
(t) Form of Transfer Agency Agreement Fee Schedule for the
Nasdaq-100 Index Fund (filed herewith) 238
(u) Form of Transfer Agency Agreement Fee Schedule for
Global Titans Index Fund (filed herewith) 240
(v) Form of Transfer Agency Agreement Fee Schedule for Capital
Growth Fund (filed herewith) 242
(w) Form of license Agreement for Nasdaq-100 Index Fund
(filed herewith) 244
(x) Form of License Agreement for Global Titans Index
Fund (filed herewith) 262
(y) Form of Sub-license Agreement for the Extended Market Index
Fund (filed herewith) 278
(z) Form of Commodity Customer's Agreement for the Nasdaq-100
Index Fund and Global Titans Index Fund (file herewith) 284
9 (a) Opinion of Counsel with respect to the Growth Fund, Income
Fund, Money Market Fund, Income Stock Fund, Growth & Income
Fund, and Short-Term Bond Fund (2)
(b) Opinion of Counsel with respect to the S&P 500 Index Fund (16)
(c) Opinion of Counsel with respect to the Aggressive Growth
Fund (6)
(d) Consent of Counsel with respect to the Aggressive Growth Fund,
Growth Fund, Growth & Income Fund, Income Stock Fund,
Income Fund, Short-Term Bond Fund, Money Market Fund,
Science & Technology Fund, and First Start Growth Fund (15)
(e) Opinion of Counsel with respect to the Science & Technology
Fund and First Start Growth Fund (8)
(g) Opinion of Counsel with respect to the Intermediate-Term Bond
Fund, High-Yield Opportunities Fund, and Small Cap Stock
Fund (14)
(h) Consent of Counsel with respect to the S&P 500 Index Fund
(filed herewith) 304
(i) Opinion and Consent of Counsel with respect to the
Extended Market Index Fund, the Nasdaq-100 Index Fund,
the Global Titans Index Fund, and the Capital Growth Fund
(filed herewith) 306
C-17
<PAGE>
EXHIBIT ITEM PAGE NO.*
10 Independent Accountants' Consent with respect to the S&P 500
Index Fund (filed herewith) 308
11 Omitted financial statements - Not Applicable
12 SUBSCRIPTIONS AND INVESTMENT LETTERS
(a) Subscription and Investment Letter for Growth & Income Fund and
Short-Term Bond Fund (1)
(b) Subscription and Investment Letter for S&P 500 Index Fund (5)
(c) Subscription and Investment Letter for Science & Technology
Fund and First Start Growth Fund (9)
(d) Subscription and Investment Letter for the Intermediate-Term
Bond Fund, High-Yield Opportunities Fund, and Small Cap
Stock Fund (15)
(e) Form of Subscription and Investment Letter for the Extended
Market Index Fund, Nasdaq-100 Index Fund, Global Titans
Index Fund, and Capital Growth Fund (17)
13 12b-1 Plans - Not Applicable
14 18f-3 Plans - Not Applicable
15 Plan Adopting Multiple Classes of Shares - Not Applicable
16 CODE OF ETHICS
(a) USAA Investment Management Company (filed herewith) 310
(b) Bankers Trust Company (16)
(c) Merrill Lynch Investment Managers (filed herewith) 329
(d) Barclays Global Investors, N.A. (filed herewith) 341
17 POWERS OF ATTORNEY
(a) Powers of Attorney for Sherron A. Kirk, David G. Peebles, Robert
L. Mason, Richard A. Zucker, Barbara B. Dreeben, and Michael F.
Reimherr dated April 18, 2000 and Michael J.C. Roth dated April
22, 2000 (16)
(b) With respect to the S&P 500 Index Fund, Powers of Attorney for
John Y. Keffer, Charles A. Rizzo, Charles P. Biggar, S. Leland
Dill, Richard T. Hale, Richard J. Herring, Bruce E. Langton,
Martin J. Gruber, Philip Saunders, Jr., and Harry Van Benscoten,
Trustees of the Equity 500 Index Portfolio, dated September
8, 1999 (16)
(e) Power of Attorney for Robert G. Davis dated July 19, 2000 (17)
-------------------------------------------------------------------------------
(1) Previously filed with Post-Effective Amendment No. 38 of the Registrant
(No. 2-49560) filed with the Securities and Exchange Commission on
September 29, 1995.
(2) Previously filed with Post-Effective Amendment No. 39 of the Registrant
(No. 2-49560) filed with the Securities and Exchange Commission on
November 21, 1995.
(3) Previously filed with Post-Effective Amendment No. 40 of the Registrant
(No. 2-49560) filed with the Securities and Exchange Commission on
February 15, 1996.
C-18
<PAGE>
(4) Previously filed with Post-Effective Amendment No. 41 of the Registrant
(No. 2-49560) filed with the Securities and Exchange Commission on
April 26, 1996.
(5) Previously filed with Post-Effective Amendment No. 42 of the Registrant
(No. 2-49560) filed with the Securities and Exchange Commission on
September 11, 1996.
(6) Previously filed with Post-Effective Amendment No. 43 of the Registrant
(No. 2-49560) filed with the Securities and Exchange Commission on
October 1, 1996.
(7) Previously filed with Post-Effective Amendment No. 44 of the Registrant
(No. 2-49560) filed with the Securities and Exchange Commission on
April 21, 1997.
(8) Previously filed with Post-Effective Amendment No. 45 of the Registrant
(No. 2-49560) filed with the Securities and Exchange Commission on
May 16, 1997.
(9) Previously filed with Post-Effective Amendment No. 46 of the Registrant
(No. 2-49560) filed with the Securities and Exchange Commission on
September 30, 1997.
(10) Previously filed with Post-Effective Amendment No. 47 of the Registrant
(No. 2-49560) filed with the Securities and Exchange Commission on
February 26, 1998.
(11) Previously filed with Post-Effective Amendment No. 48 of the Registrant
(No. 2-49560) filed with the Securities and Exchange Commission on
February 27, 1998.
(12) Previously filed with Post-Effective Amendment No. 49 of the Registrant
(No. 2-49560) filed with the Securities and Exchange Commission on
September 30, 1998.
(13) Previously filed with Post-Effective Amendment No. 50 of the Registrant
(No. 2-49560) filed with the Securities and Exchange Commission on
February 26, 1999.
(14) Previously filed with Post-Effective Amendment No. 51 of the Registrant
(No. 2-49560) filed with the Securities and Exchange Commission on
May 14, 1999.
(15) Previously filed with Post-Effective Amendment No. 52 of the Registrant
(No. 2-49560) filed with the Securities and Exchange Commission on
November 30, 1999.
(16) Previously filed with Post-Effective Amendment No. 53 of the Registrant
(No. 2-49560) filed with the Securities and Exchange Commission on
April 28, 2000.
(17) Previously filed with Post-Effective Amendment No. 54 of the Registrant
(No. 2-49560) filed with the Securities and Exchange Commission on
August 4, 2000.
* Refers to sequentially numbered page
C-19
<PAGE>
