<PAGE>
USAA AGGRESSIVE
GROWTH FUND
PROSPECTUS
DECEMBER 1, 2000
The Fund has discontinued public sale of its shares to new investors.
Shareholders who currently have open Fund accounts may make additional
investments and reinvest dividends and capital gains distributions into those
accounts. If a Fund account is closed, however, additional investments in the
Fund may not be possible.
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.
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?................................................... 3
Could the Value of Your Investment in This Fund Fluctuate?.............. 3
Fees and Expenses....................................................... 5
Fund Investments........................................................ 6
Fund Management......................................................... 8
Using Mutual Funds in an Investment Program............................. 9
How to Invest........................................................... 10
How to Redeem........................................................... 13
Important Information About Purchases and Redemptions................... 14
Exchanges............................................................... 15
Shareholder Information................................................. 15
Financial Highlights.................................................... 19
Appendix A.............................................................. 20
Appendix B.............................................................. 21
<PAGE>
USAA Investment Management Company manages this Fund. For easier reading, USAA
Investment Management Company will be referred to as "we" or "us" throughout
the prospectus.
WHAT IS THE FUND'S INVESTMENT OBJECTIVE AND MAIN STRATEGY?
The Fund's investment objective is capital appreciation. We will attempt to
achieve this objective by investing the Fund's assets primarily in equity
securities of companies with the prospect of rapidly growing earnings.
Because any investment involves risk, there is no assurance that the Fund's
objective will be achieved. See FUND INVESTMENTS on page 6 for more
information.
WHAT ARE THE MAIN RISKS OF INVESTING IN THIS FUND?
The primary risks of investing in this Fund are market risk and the risk of
investing in companies with small market capitalizations.
[SIDE BAR]
MARKET CAPITALIZATION IS THE TOTAL MARKET VALUE OF A COMPANY'S
OUTSTANDING SHARES OF COMMON STOCK.
o 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.
o 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.
Another risk of the Fund described later in the prospectus includes the risks
of foreign investing. As with other mutual funds, losing money is also a risk
of investing in this Fund.
As you consider an investment in this Fund, you should also take into account
your tolerance for the daily fluctuations of the financial markets and whether
you can afford to leave your money in the investment for long periods of time
to ride out down periods.
An investment in this Fund is not a deposit of USAA Federal Savings Bank, or
any other bank, and is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency.
Look for this symbol [CAUTION LIGHT] throughout the prospectus. We use it to
mark more detailed information about the risks you will face as a Fund
shareholder.
2
<PAGE>
IS THIS FUND FOR YOU?
This Fund might be appropriate as part of your investment portfolio if . . .
o You are willing to accept very high risk.
o You are looking for a long-term investment.
o 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 . . .
o You are unwilling to take greater risk for long-term goals.
o You need an investment that provides steady income.
o You need an investment that provides tax-free income.
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.
The following bar chart illustrates the Fund's volatility and performance from
year to year for each full calendar year over the past ten years.
Total Return
[SIDE BAR]
TOTAL RETURN MEASURES THE PRICE CHANGE IN A SHARE ASSUMING THE
REINVESTMENT OF ALL DIVIDEND INCOME AND CAPITAL GAIN DISTRIBUTIONS.
All mutual funds must use the same formula to calculate total return.
[BAR CHART]
CALENDAR TOTAL
YEAR RETURN
1990 -11.92%
1991 71.69%
1992 -8.51%
1993 8.14%
1994 -.81%
1995 50.42%
1996 16.47%
1997 7.56%
1998 22.22%
1999 91.09%
THE FUND'S TOTAL RETURN FOR THE NINE-MONTH PERIOD ENDED
SEPTEMBER 30, 2000, WAS 11.11%.
3
<PAGE>
During the periods shown in the previous bar chart, the highest total return
for a quarter was 51.19% (quarter ending December 31, 1999) and the lowest
total return for a quarter was -27.50% (quarter ending September 30, 1990).
The table below shows how the Fund's average annual total returns for the one-,
five-, and ten-year periods, as well as the life of the Fund, compared to those
of a broad-based securities market index. Remember, historical performance does
not necessarily indicate what will happen in the future.
===============================================================================
Average Annual Total Returns
(for the periods ending December 31, 1999)
Past Past Past Life of
1 Year 5 Years 10 Years Fund
===============================================================================
Aggressive Growth Fund 91.09% 34.50% 20.64% 16.00%
-------------------------------------------------------------------------------
Russell 2000 Index* 21.26% 16.69% 13.40% 13.57%
-------------------------------------------------------------------------------
S&P 500 Index* 21.03% 28.54% 18.19% 18.52%
===============================================================================
*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.
Please consider performance information in light of the Fund's investment
objective and policies and market conditions during the reported time periods.
The value of your shares may go up or down. You may obtain the most current
price and return information for this Fund through our usaa.com Web site once
you have established Internet access. See page 12 for information on
establishing Internet access. You may also obtain this information by calling
USAA TouchLine(R) at 1-800-531-8777. Press 1 for the Mutual Fund Menu, press 1
again for prices and returns. Then, press 38# when asked for the fund code.
[SIDE BAR]
[TELEPHONE GRAPHIC]
TOUCHLINE(R)
1-800-531-8777
PRESS
(1)
THEN
(1)
(3) (8) (#)
Additionally, you may find the most current price of your shares in the
business section of your newspaper in the mutual fund section under the heading
"USAA Group" and the symbol "AgvGt." If you prefer to obtain this information
from an online computer service, you can do so by using the ticker symbol
"USAUX."
[SIDE BAR]
NEWSPAPER
SYMBOL
AgvGt
TICKER
SYMBOL
USAUX
4
<PAGE>
FEES AND EXPENSES
This summary shows what it will cost you, directly and indirectly, to invest in
this 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" include expenses such as custodian
and transfer agent fees. The figures below show actual expenses during the past
fiscal year ended July 31, 2000, and are calculated as a percentage of average
net assets.
[SIDE BAR]
12b-1 FEES - SOME MUTUAL FUNDS CHARGE THESE FEES TO PAY FOR
ADVERTISING AND OTHER COSTS OF SELLING FUND SHARES.
--------------------------------------------
Management Fees .35%
Distribution (12b-1) Fees None
Other Expenses .25%
----
Total Annual Fund Operating Expenses .60%
====
--------------------------------------------
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........... $ 61
3 years.......... 192
5 years.......... 335
10 years.......... 750
==============================
5
<PAGE>
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.
[CAUTION LIGHT]
MARKET RISK. Because this Fund invests in equity securities, it is subject to
stock market risk. Stock prices in general may decline over short or even
extended periods, regardless of the success or failure of 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.
[CAUTION LIGHT]
SMALL-CAP COMPANY RISKS. Small-cap companies may be more vulnerable than larger
companies to adverse business or economic developments. Small-cap companies may
also have limited product lines, markets, or financial resources. Securities of
such companies may be less liquid and more volatile than securities of larger
companies or the market averages in general and, therefore, may involve greater
risk than investing in
6
<PAGE>
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 U.S. markets. These foreign
holdings may include securities issued in emerging markets as well as
securities issued in established markets.
[CAUTION LIGHT]
FOREIGN INVESTING 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.
o 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.
o 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.
7
<PAGE>
For additional information about other securities in which we may invest the
Fund's assets, see APPENDIX A on page 20.
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. As of the date of
this prospectus, we had approximately $42 billion in total assets under
management. Our mailing address is 9800 Fredericksburg Road, San Antonio, TX
78288.
We provide management services to the Fund pursuant to an Advisory Agreement.
We are responsible for managing the Fund's portfolio (including placement of
brokerage orders) and its business affairs, subject to the authority of and
supervision by the Fund's Board of Directors. For our services, the Fund pays
us an annual fee. This fee, which is accrued daily and paid monthly, is
computed as a percentage of average net assets. The fee is computed at one-half
of one percent (.50%) of the first $200 million of average net assets,
two-fifths of one percent (.40%) for that portion of average net assets in
excess of $200 million but not over $300 million, and one-third of one percent
(.33%) for that portion of average net assets in excess of $300 million. The
fee we received for the fiscal year ended July 31, 2000, was equal to .35% 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 March 1995.
[PHOTOGRAPH]
Eric M. Efron and John K. Cabell, Jr.
8
<PAGE>
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.
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.
USING MUTUAL FUNDS IN AN INVESTMENT PROGRAM
I. 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.
II. Using Funds in an Investment Program
In choosing a mutual fund as an investment vehicle, you are giving up some
investment decisions, but must still make others. The decisions you don't have
to make are those involved with choosing individual securities. We will perform
that function. In addition, we will arrange for the safekeeping of securities,
auditing the annual financial statements, and daily valuation of the Fund, as
well as other functions.
You, however, retain at least part of the responsibility for an equally
important decision. This decision involves determining a portfolio of mutual
funds that balances your investment goals with your tolerance for risk. It is
likely that this decision may include the use of more than one fund of the USAA
family of funds.
9
<PAGE>
For example, assume you wish to invest in a widely diversified, common stock
portfolio. You could combine an investment in the Aggressive Growth Fund with
investments in other mutual funds that invest in stocks of large and small
companies and high-dividend stocks. This is just one way you could combine
funds to fit your own risk and reward goals.
III. USAA's Family of Funds
We offer you another alternative with our asset strategy funds listed in
APPENDIX B under asset allocation on page 21. 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 21 for a
complete list of the USAA family of no-load mutual funds.
HOW TO INVEST
Purchase of Shares
Effective the close of business October 27, 2000, the Fund's shares are no
longer available to new accounts. If you were a shareholder of the Fund on that
date, you may continue to buy shares in accounts existing on that date.
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.
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
10
<PAGE>
(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
[MONEY GRAPHIC]
o $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 PURCHASES
o $50 per transaction, per account.
HOW TO PURCHASE BY . . .
MAIL
[ENVELOPE GRAPHIC]
o To open an account, send your application and check to:
USAA Investment Management Company
9800 Fredericksburg Road
San Antonio, TX 78288 (FOR OVERNIGHT MAIL, USE ZIP CODE 78240)
o To add to your account, send your check and the deposit stub in the
business reply envelope that accompanies your Fund's transaction
confirmation to the transfer agent:
USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, TX 78288
IN PERSON
[HANDSHAKE GRAPHIC]
o 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
11
<PAGE>
BANK WIRE
[WIRE GRAPHIC]
o 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 Aggressive Growth Fund
USAA Account Number: 69384998
Shareholder(s) Name(s)____________________________
Shareholder(s) Mutual Fund Account Number________________________
ELECTRONIC FUNDS TRANSFER (EFT)
[CALENDAR GRAPHIC]
o Additional purchases on a regular basis can be deducted from a bank
account, paycheck, income-producing investment, or USAA money market fund
account. Sign up for these services when opening an account or call
1-800-531-8448 to add these services.
PHONE 1-800-531-8448 (IN SAN ANTONIO, 456-7202)
[TELEPHONE GRAPHIC]
o 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)
[TOUCHLINE GRAPHIC]
o 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
[COMPUTER GRAPHIC]
o 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.
12
<PAGE>
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
[FAX MACHINE GRAPHIC]
o Send your written instructions to:
USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, TX 78288 (FOR OVERNIGHT MAIL, USE ZIP CODE 78240)
o Visit a member service representative at our San Antonio investment sales
and service office at USAA Federal Savings Bank.
o Send a signed fax to 1-800-292-8177, or send a telegram to USAA Shareholder
Account Services.
o Call toll free 1-800-531-8448 (in San Antonio, 456-7202) to speak with a
member service representative.
o Call toll free 1-800-531-8777 (in San Antonio, 498-8777) to access our
24-hour USAA TouchLine(R) service.
o 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)
13
<PAGE>
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
[INVESTOR'S GUIDE GRAPHIC]
Upon your initial investment with us, you will receive the INVESTOR'S GUIDE to
help you get the most out of your USAA mutual fund account and to 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:
o reject purchase or exchange orders when in the best interest of the Fund;
o limit or discontinue the offering of shares of the Fund without notice to
the shareholders;
o impose a redemption charge of up to 1% of the net asset value of shares
redeemed if circumstances indicate a charge is necessary for the protection
of remaining investors (for example, if excessive market-timing share
activity unfairly burdens long-term investors); however, this 1% charge
will not be imposed upon shareholders unless authorized by the Fund's Board
of Directors and the required notice has been given to shareholders;
14
<PAGE>
o require a signature guarantee for transactions or changes in account
information in those instances where the appropriateness of a signature
authorization is in question (the statement of additional information
contains information on acceptable guarantors);
o redeem an account with less than 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 Fund has undertaken certain procedures regarding telephone transactions as
described on page 13.
Exchange Limitations, Excessive Trading
To minimize Fund costs and to protect the Funds and their shareholders from
unfair expense burdens, the Funds restrict excessive exchanges. The limit on
exchanges out of any Fund in the USAA family of funds for each account is six
per calendar year (except there is no limitation on exchanges out of the Tax
Exempt Short-Term Fund, Short-Term Bond Fund, or any of the money market funds
in the USAA family of funds). 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
[SIDE BAR]
NAV PER SHARE
EQUALS
TOTAL ASSETS
MINUS
LIABILITIES
DIVIDED BY
# OF SHARES
OUTSTANDING
Share Price Calculation
The price at which you purchase and redeem Fund shares is equal to the net
asset value (NAV) per share determined on the effective date of the purchase or
redemption. You may buy and sell Fund shares at the NAV per share without a
sales charge. The Fund's NAV per share is calculated at the
15
<PAGE>
close of the regular trading session of the NYSE, which is usually 4 p.m.
Eastern Time.
Portfolio securities, except as otherwise noted, traded primarily on a domestic
securities exchange are valued at the last sales price on that exchange.
Portfolio securities traded primarily on foreign securities exchanges are
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 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.
16
<PAGE>
We will automatically reinvest all income dividends and capital gain
distributions in the Fund unless you instruct us differently. The share price
will be the NAV of the Fund shares computed on the ex-dividend date. Any income
dividends or capital gain distributions paid by the Fund will reduce the NAV
per share by the amount of the dividend or distribution 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 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.
Regardless of the length of time you held the Fund shares, distributions of net
long-term capital gains are taxable as long-term capital gains whether received
in cash or reinvested in additional shares.
WITHHOLDING - Federal law requires the Fund to withhold and remit to the U.S.
Treasury a portion of the income dividends and capital gain distributions and
proceeds of redemptions paid to any non-corporate shareholder who:
o fails to furnish the Fund with a correct tax identification number,
o underreports dividend or interest income, or
o fails to certify that he or she is not subject to withholding.
17
<PAGE>
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.
18
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the Funds
financial performance for the past five years. 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 this Fund (assuming reinvestment of all dividends and
distributions). This information has been audited by KPMG LLP, whose report,
along with the Funds financial statements, are included in the annual report,
which is available upon request.
Year Ended July 31,
--------------------------------------------------------
2000 1999 1998 1997 1996
--------------------------------------------------------
Net asset value at
beginning of period $ 38.23 $ 31.62 $ 32.82 $ 27.88 $ 24.49
Net investment loss (.22)a (.17)a (.12)a (.14)a (.12)a
Net realized and
unrealized gain 20.65 10.77 1.26 5.65 5.12
Distributions of realized
capital gains (2.31) (3.99) (2.34) (.57) (1.61)
--------------------------------------------------------
Net asset value at
end of period $ 56.35 $ 38.23 $ 31.62 $ 32.82 $ 27.88
========================================================
Total return (%)* 56.71 43.14 3.91 20.00 21.16
Net assets at end of
period (000) $1,981,674 $1,029,282 $ 36,450 $ 753,984 $ 607,437
Ratio of expenses to
average net assets (%) .60 .72 .71 .74 .74
Ratio of net investment
loss to average net
assets (%) (.42) (.55) (.38) (.47) (.42)
Portfolio turnover (%) 33.07 35.18 83.32 57.15 43.75
____________
* Assumes reinvestment of all capital gain distributions during the period.
(a) Calculated using weighted average shares.
19
<PAGE>
APPENDIX A
THE FOLLOWING ARE DESCRIPTIONS OF CERTAIN TYPES OF SECURITIES
IN WHICH WE MAY INVEST THE FUNDS ASSETS:
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.
20
<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
-------------------------------------------------------------------------------
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 INDEX(SM)" 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.
21
<PAGE>
APPENDIX B (CONTINUED)
FUND TYPE/NAME (CONTINUED) RISK
-------------------------------------------------------------------------------
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
-------------------------------------------------------------------------------
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.
22
<PAGE>
NOTES
<PAGE>
If you would like more information about the Fund, you may call 1-800-531-8181
to request a free copy of the Fund's statement of additional information (SAI),
annual or semiannual report, or to ask other questions about the Fund. The SAI
has been filed with the Securities and Exchange Commission (SEC) and is legally
a part of this prospectus. In the Fund's annual report, you will find a
discussion of the market conditions and investment strategies that
significantly affected the Fund's performance during the last fiscal year.
To view these documents, along with other related documents, you can visit the
EDGAR database on 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 paying 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 CUSTODIAN
USAA Shareholder Account Services State Street Bank and Trust Company
9800 Fredericksburg Road P.O. Box 1713
San Antonio, Texas 78288 Boston, Massachusetts 02105
----------------------------------------------------------------
TELEPHONE ASSISTANCE HOURS
Call toll free - Central Time
Monday - Friday 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 No. 811-2429
<PAGE>
USAA GROWTH FUND
PROSPECTUS
DECEMBER 1, 2000
As with other mutual funds, the Securities and Exchange Commission has not
approved or disapproved of this Fund's shares or determined whether this
prospectus is accurate or complete. Anyone who tells you otherwise is
committing a crime.
TABLE OF CONTENTS
What Is the Fund's Investment Objective and Main Strategy?.............. 2
What Are the Main Risks of Investing in This Fund?...................... 2
Is This Fund for You?................................................... 3
Could the Value of Your Investment in This Fund Fluctuate?.............. 3
Fees and Expenses....................................................... 4
Fund Investments........................................................ 5
Fund Management......................................................... 7
Using Mutual Funds in an Investment Program............................. 8
How to Invest........................................................... 9
How to Redeem........................................................... 11
Important Information About Purchases and Redemptions................... 13
Exchanges............................................................... 14
Shareholder Information................................................. 14
Financial Highlights.................................................... 17
Appendix A.............................................................. 18
Appendix B.............................................................. 19
<PAGE>
USAA Investment Management Company manages this Fund. For easier reading, USAA
Investment Management Company will be referred to as we or us throughout the
prospectus.
WHAT IS THE FUND'S INVESTMENT OBJECTIVE AND MAIN STRATEGY?
The Fund's primary investment objective is long-term growth of capital with
secondary objectives of regular income and conservation of principal. We will
attempt to achieve these objectives by investing the Fund's assets in equity
securities of companies that are, or have the prospect of becoming, one of the
dominant companies within its industry. We will primarily invest in companies
with above-average growth in revenues and earnings per share.
Because any investment involves risk, there is no assurance that the Fund's
objectives will be achieved. See FUND INVESTMENTS on page 5 for more
information.
WHAT ARE THE MAIN RISKS OF INVESTING IN THIS FUND?
The primary risk of investing in this Fund is market risk.
o 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.
Another risk of the Fund described later in the prospectus is the risk of
foreign investing. As with other mutual funds, losing money is also a risk of
investing in this Fund.
As you consider an investment in this Fund, you should also take into account
your tolerance for the daily fluctuations of the financial markets and whether
you can afford to leave your money in the investment for long periods of time
to ride out down periods.
An investment in this Fund is not a deposit of USAA Federal Savings Bank, or
any other bank, and is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency.
Look for this symbol [CAUTION LIGHT] throughout the prospectus. We use it to
mark more detailed information about the risks you will face as a Fund
shareholder.
2
<PAGE>
IS THIS FUND FOR YOU?
This Fund might be appropriate as part of your investment portfolio if . . .
o You are looking for long-term growth.
o You are willing to accept moderate to high risk.
o You are looking for a long-term investment.
This Fund MAY NOT be appropriate as part of your investment portfolio if . . .
o You are unwilling to take greater risk for long-term goals.
o You need an investment that provides regular income or tax-free income.
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. The
following bar chart illustrates the Fund's volatility and performance from year
to year for each full calendar year over the past ten years.
Total Return
[SIDE BAR]
TOTAL RETURN MEASURES THE PRICE CHANGE IN A SHARE ASSUMING THE
REINVESTMENT OF ALL DIVIDEND INCOME AND CAPITAL GAIN DISTRIBUTIONS.
All mutual funds must use the same formula to calculate total return.
[BAR CHART]
CALENDAR TOTAL
YEAR RETURN
1990 -.05%
1991 27.81%
1992 9.95%
1993 7.45%
1994 3.35%
1995 32.06%
1996 17.80%
1997 3.69%
1998 32.13%
1999 21.67%
THE FUND'S TOTAL RETURN FOR THE NINE-MONTH PERIOD ENDED
SEPTEMBER 30, 2000, WAS -1.12%.
3
<PAGE>
During the periods shown in the previous bar chart, the highest total return
for a quarter was 26.08% (quarter ending December 31, 1998) and the lowest
total return for a quarter was -16.14% (quarter ending December 31, 1997).
The table below shows how the Fund's average annual total returns for the one-,
five-, and ten-year periods, as well as the life of the Fund, compared to those
of a broad-based securities market index. Remember, historical performance does
not necessarily indicate what will happen in the future.
===============================================================================
Average Annual Total Returns
(for the periods ending December 31, 1999)
Past Past Past Life of
1 Year 5 Years 10 Years Fund
===============================================================================
Growth Fund 21.67% 21.00% 15.00% 9.62%
-------------------------------------------------------------------------------
S&P 500 Index* 21.03% 28.54% 18.19% 13.80%
===============================================================================
*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.
Please consider performance information in light of the Fund's investment
objectives and policies and market conditions during the reported time periods.
The value of your shares may go up or down. You may obtain the most current
price and return information for this Fund through our usaa.com Internet Web
site once you have established Internet access. See page 11 for information on
establishing Internet access. You may also obtain this information by calling
USAA TouchLine(R) at 1-800-531-8777. Press 1 for the Mutual Fund Menu, press 1
again for prices and returns. Then, press 41# when asked for the fund code.
[SIDE BAR]
[TELEPHONE GRAPHIC]
TOUCHLINE(R)
1-800-531-8777
PRESS
(1)
THEN
(1)
(4) (1) (#)
Additionally, you may find the most current price of your shares in the
business section of your newspaper in the mutual fund section under the heading
"USAA Group" and the symbol "Grwth." If you prefer to obtain this information
from an online computer service, you can do so by using the ticker symbol
"USAAX."
[SIDEBAR]
NEWSPAPER
SYMBOL
Grwth
TICKER
SYMBOL
USAAX
FEES AND EXPENSES
This summary shows what it will cost you, directly and indirectly, to invest in
this 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
4
<PAGE>
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" include expenses such as custodian
and transfer agent fees. The figures below show actual expenses during the past
fiscal year ended July 31, 2000, and are calculated as a percentage of average
net assets.
[SIDE BAR]
12b-1 FEES - SOME MUTUAL FUNDS CHARGE THESE FEES TO PAY FOR
ADVERTISING AND OTHER COSTS OF SELLING FUND SHARES.
----------------------------------------------
Management Fees .75%
Distribution (12b-1) Fees None
Other Expenses .21%
----
Total Annual Fund Operating Expenses .96%
====
----------------------------------------------
Example of Effect of Fund's Operating Expenses
This example is intended to help you compare the cost of investing in 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........... $ 98
3 years.......... 306
5 years.......... 531
10 years.......... 1,178
-----------------------------
FUND INVESTMENTS
Principal Investment Strategies and Risks
Q What is the Fund's principal investment strategy?
A The Fund's principal strategy is the investment of its assets primarily in
common stocks. We may also invest the Fund's assets in warrants, rights,
real estate investment trusts, convertible securities, and in
nonconvertible debt securities when we believe these securities will offer
a good prospect for appreciation. However, we will limit the Fund's
investment in
5
<PAGE>
convertible securities to 5% of the value of the Fund's net assets at the
time these securities are purchased.
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.
[CAUTION LIGHT]
MARKET RISK. Because this Fund invests in stocks, it is subject to stock market
risk. Stock prices in general may decline over short or even extended periods,
regardless of the success or failure of 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.
Q May the Fund's assets be invested in securities of foreign issuers?
A Yes. We may invest up to 30% of the Fund's total assets in American
Depositary Receipts (ADRs) or similar forms of ownership interest in
securities of foreign issuers deposited with a depositary, and securities
of foreign issuers that are traded on U.S. securities exchanges or in U.S.
over-the-counter markets.
[CAUTION LIGHT]
FOREIGN INVESTING RISK. Investing in securities of foreign issuers poses unique
risks: currency-exchange-rate fluctuations; increased-price volatility;
different accounting, reporting, and disclosure requirements; and political or
social instability. In the past, equity and debt instruments of foreign issuers
have been more volatile than equity and debt instruments of U.S. issuers.
Q How are the decisions to buy and sell common stocks made?
A We generally invest in companies that are, or have the prospect of
becoming, one of the dominant companies within its industry. We will
primarily invest in companies with above-average growth in revenues and
earnings per share. We consider a number of factors such as:
o a company's strategic position in its industry,
- industry fundamentals,
- management,
6
<PAGE>
o growth in sales and earnings,
o growth in cash flow,
o growth in book value, and
o growth in dividends.
We will sell a security when we perceive that our original investment
thesis no longer holds.
For additional information about other securities in which we may invest the
Fund's assets, see APPENDIX A on page 18.
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. As of the date of
this prospectus, we had approximately $42 billion in total assets under
management. Our mailing address is 9800 Fredericksburg Road, San Antonio, TX
78288.
We provide management services to the Fund pursuant to an Advisory Agreement.
We are responsible for managing the Fund's portfolio (including placement of
brokerage orders) and its business affairs, subject to the authority of and
supervision by the Fund's Board of Directors. For our services, the Fund pays
us an annual fee. This fee was computed and paid at three-fourths of one
percent (.75%) of average net assets for the fiscal year ended July 31, 2000.
We also provide services related to selling the Fund's shares and receive no
compensation for those services.
Portfolio Manager
[PHOTOGRAPH]
Patrick O'Hare
Patrick O'Hare, vice president of Domestic Mutual Funds, has managed the Fund
since March 2000. Mr. O'Hare has seven years' investment management experience
working for us. He earned the Chartered Financial Analyst designation in 1996
and is a member of the Association for Investment Management and Research and
the San Antonio Financial Analysts Society, Inc. He holds an MBA from the
Wharton School, University of Pennsylvania and a BBA from the University of
Oklahoma.
7
<PAGE>
USING MUTUAL FUNDS IN AN INVESTMENT PROGRAM
I. 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.
II. Using Funds in an Investment Program
In choosing a mutual fund as an investment vehicle, you are giving up some
investment decisions, but must still make others. The decisions you don't have
to make are those involved with choosing individual securities. We will perform
that function. In addition, we will arrange for the safekeeping of securities,
auditing the annual financial statements, and daily valuation of the Fund, as
well as other functions.
You, however, retain at least part of the responsibility for an equally
important decision. This decision involves determining a portfolio of mutual
funds that balances your investment goals with your tolerance for risk. It is
likely that this decision may include the use of more than one fund of the USAA
family of funds.
For example, assume you wish to invest in a widely diversified, common stock
portfolio. You could combine an investment in the Growth Fund with investments
in other mutual funds that invest in stocks of large and small companies and
high-dividend stocks. This is just one way you could combine funds to fit your
own risk and reward goals.
III. USAA's Family of Funds
We offer you another alternative with our asset strategy funds listed in
APPENDIX B under asset allocation on page 19. These unique mutual funds provide
a professionally managed, diversified investment portfolio within a mutual
fund. Designed for the individual who prefers to delegate the asset allocation
process to an investment manager, their structure achieves diversification
across a number of investment categories.
8
<PAGE>
Whether you prefer to create your own mix of mutual funds or use a USAA asset
strategy fund, the USAA family of funds provides a broad range of choices
covering just about any investor's investment objectives. Our 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 19 for a
complete list of the USAA family of no-load mutual funds.
HOW TO INVEST
Purchase of Shares
OPENING AN ACCOUNT
You may open an account and make an investment as described below by mail, in
person, bank wire, 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.
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
[MONEY GRAPHIC]
o $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
9
<PAGE>
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 PURCHASES
o $50 per transaction, per account.
HOW TO PURCHASE BY . . .
MAIL
[ENVELOPE GRAPHIC]
o To open an account, send your application and check to:
USAA Investment Management Company
9800 Fredericksburg Road
San Antonio, TX 78288 (FOR OVERNIGHT MAIL, USE ZIP CODE 78240)
o To add to your account, send your check and the deposit stub in the
business reply envelope that accompanies your Fund's transaction
confirmation to the transfer agent:
USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, TX 78288
IN PERSON
[HANDSHAKE GRAPHIC]
o 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
[WIRE GRAPHIC]
o 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 Growth Fund
USAA Account Number: 69384998
Shareholder(s) Name(s)_______________________
Shareholder(s) Mutual Fund Account Number_______________________
10
<PAGE>
ELECTRONIC FUNDS TRANSFER (EFT)
[CALENDAR GRAPHIC]
o Additional purchases on a regular basis can be deducted from a bank
account, paycheck, income-producing investment, or USAA money market fund
account. Sign up for these services when opening an account or call
1-800-531-8448 to add these services.
PHONE 1-800-531-8448 (IN SAN ANTONIO, 456-7202)
[TELEPHONE GRAPHIC]
o 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)
[TOUCHLINE GRAPHIC]
o 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
[COMPUTER GRAPHIC]
o 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.
11
<PAGE>
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
[FAX MACHINE GRAPHIC]
o Send your written instructions to:
USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, TX 78288 (FOR OVERNIGHT MAIL, USE ZIP CODE 78240)
o Visit a member service representative at our San Antonio investment sales
and service office at USAA Federal Savings Bank.
o Send a signed fax to 1-800-292-8177, or send a telegram to USAA
Shareholder Account Services.
o Call toll free 1-800-531-8448 (in San Antonio, 456-7202) to speak with a
member service representative.
o Call toll free 1-800-531-8777 (in San Antonio, 498-8777) to access our
24-hour USAA TouchLine(R) service.
o 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.
12
<PAGE>
IMPORTANT INFORMATION ABOUT PURCHASES AND REDEMPTIONS
INVESTOR'S GUIDE to USAA Mutual Fund Services
[INVESTOR'S GUIDE GRAPHIC]
Upon your initial investment with us, you will receive the INVESTOR'S GUIDE to
help you get the most out of your USAA mutual fund account and to 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:
o reject purchase or exchange orders when in the best interest of the Fund;
o limit or discontinue the offering of shares of the Fund without notice to
the shareholders;
o impose a redemption charge of up to 1% of the net asset value of shares
redeemed if circumstances indicate a charge is necessary for the protection
of remaining investors (for example, if excessive market-timing share
activity unfairly burdens long-term investors); however, this 1% charge
will not be imposed upon shareholders unless authorized by the Fund's Board
of Directors and the required notice has been given to shareholders;
o require a signature guarantee for transactions or changes in account
information in those instances where the appropriateness of a signature
authorization is in question (the statement of additional information
contains information on acceptable guarantors);
o redeem an account with less than ten shares, with certain limitations.
13
<PAGE>
EXCHANGES
Exchange Privilege
The exchange privilege is automatic when you complete your application. You may
exchange shares among Funds in the USAA family of funds, provided you do not
hold these shares in stock certificate form and the shares to be acquired are
offered in your state of residence. 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 Fund has undertaken certain procedures regarding telephone transactions as
described on page 12.
Exchange Limitations, Excessive Trading
To minimize Fund costs and to protect the Funds and their shareholders from
unfair expense burdens, the Funds restrict excessive exchanges. The limit on
exchanges out of any Fund in the USAA family of funds for each account is six
per calendar year (except there is no limitation on exchanges out of the Tax
Exempt Short-Term Fund, Short-Term Bond Fund, or any of the money market funds
in the USAA family of funds). 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
[SIDE BAR]
NAV PER SHARE
EQUALS
TOTAL ASSETS
MINUS
LIABILITIES
DIVIDED BY
# OF SHARES
OUTSTANDING
The price at which you purchase and redeem Fund shares is equal to the net
asset value (NAV) per share determined on the effective date of the purchase or
redemption. You may buy and sell Fund shares at the NAV per share without a
sales charge. The Fund's NAV per share is calculated at the close of the
regular trading session of the NYSE, which is usually 4 p.m. Eastern Time.
Portfolio securities, except as otherwise noted, traded primarily on a
securities exchange are valued at the last sales price on that exchange. If no
sale is reported, the average of the bid and asked prices is generally used.
14
<PAGE>
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.
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.
15
<PAGE>
SHAREHOLDER - Dividends from taxable net investment income and distributions of
net short-term capital gains are taxable to you as ordinary income, whether
received in cash or reinvested in additional shares. A portion of these
dividends may qualify for the 70% dividends-received deduction available to
corporations.
Regardless of the length of time you have held the Fund shares, distributions
of net long-term capital gains are taxable as long-term capital gains whether
received in cash or reinvested in additional shares.
WITHHOLDING - Federal law requires the Fund to withhold and remit to the U.S.
Treasury a portion of the income dividends and capital gain distributions and
proceeds of redemptions paid to any non-corporate shareholder who:
o fails to furnish the Fund with a correct tax identification number,
o underreports dividend or interest income, or
o fails to certify that he or she is not subject to withholding.
To avoid this withholding requirement, you must certify, on your application or
on a separate Form W-9 supplied by the 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.
16
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the Fund's
financial performance for the past five years. 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 this Fund (assuming reinvestment of all dividends and
distributions). This information has been audited by KPMG LLP, whose report,
along with the Fund's financial statements, are included in the Annual Report,
which is available upon request.
Year Ended July 31,
------------------------------------------------------
2000 1999 1998 1997 1996
------------------------------------------------------
Net asset value at
beginning of period $ 24.03 $ 20.04 $ 23.66 $ 20.05 $ 19.06
Net investment
income (loss) (.03)a .04 .01 .24 .33
Net realized and
unrealized gain (loss) 3.06 4.72 (1.31) 6.92 1.92
Distributions from net
investment income (.02) (.03) (.09) (.34) (.29)
Distributions of realized
capital gains (2.54) (.74) (2.23) (3.21) (.97)
------------------------------------------------------
Net asset value at
end of period $ 24.50 $ 24.03 $ 20.04 $ 23.66 $ 20.05
======================================================
Total return (%)* 14.13 24.92 (4.91) 42.48 12.44
Net assets at end of
period (000) $1,874,570 $1,683,008 $1,403,573 $1,650,257 $1,162,262
Ratio of expenses to
average net assets (%) .96 .97 .96 .97 1.01
Ratio of net investment
income (loss) to
average net assets (%) (.11) .18 .04 1.28 1.70
Portfolio turnover (%) 133.43 39.60 68.93 75.41 62.30
____________
* Assumes reinvestment of all dividend income and capital gain distributions
during the period.
(a) Calculated using weighted average shares.
17
<PAGE>
APPENDIX A
THE FOLLOWING ARE DESCRIPTIONS OF CERTAIN TYPES OF SECURITIES
IN WHICH WE MAY INVEST THE FUNDS ASSETS:
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.
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.
18
<PAGE>
APPENDIX B
USAA Family of No-Load Mutual Funds
The USAA family of no-load mutual funds includes a variety of Funds, each with
different objectives and policies. In combination, these Funds are designed to
provide you with the opportunity to formulate your own investment program. You
may exchange any shares you hold in any one USAA Fund for shares in any other
USAA Fund, 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
-------------------------------------------------------------------------------
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 INDEX(SM)" 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.
19
<PAGE>
APPENDIX B (CONTINUED)
FUND TYPE/NAME (CONTINUED) RISK
-------------------------------------------------------------------------------
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
-------------------------------------------------------------------------------
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.
20
<PAGE>
If you would like more information about the Fund, you may call 1-800-531-8181
to request a free copy of the Fund's statement of additional information (SAI),
annual or semiannual report, or to ask other questions about the Fund. The SAI
has been filed with the Securities and Exchange Commission (SEC) and is legally
a part of this prospectus. In the Fund's annual report, you will find a
discussion of the market conditions and investment strategies that
significantly affected the Fund's performance during the last fiscal year.
To view these documents, along with other related documents, you can visit the
EDGAR database on 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 paying 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 CUSTODIAN
USAA Shareholder Account Services State Street Bank and Trust Company
9800 Fredericksburg Road P.O. Box 1713
San Antonio, Texas 78288 Boston, Massachusetts 02105
----------------------------------------------------------------
TELEPHONE ASSISTANCE HOURS
Call toll free - Central Time
Monday - Friday 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 No. 811-2429
<PAGE>
USAA GROWTH &
INCOME FUND
PROSPECTUS
DECEMBER 1, 2000
As with other mutual funds, the Securities and Exchange Commission has not
approved or disapproved of this Fund's shares or determined whether this
prospectus is accurate or complete. Anyone who tells you otherwise is
committing a crime.
TABLE OF CONTENTS
What Is the Fund's Investment Objective and Main Strategy? ............ 2
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 ..................................................... 4
Fund Investments ...................................................... 5
Fund Management ....................................................... 7
Using Mutual Funds in an Investment Program ........................... 7
How to Invest ......................................................... 9
How to Redeem ......................................................... 11
Important Information About Purchases and Redemptions ................. 12
Exchanges ............................................................. 13
Shareholder Information ............................................... 14
Financial Highlights .................................................. 17
Appendix A ............................................................ 18
Appendix B ............................................................ 19
<PAGE>
USAA Investment Management Company manages this Fund. For easier reading, USAA
Investment Management Company will be referred to as "we" or "us" throughout
the prospectus.
WHAT IS THE FUND'S INVESTMENT OBJECTIVE AND MAIN STRATEGY?
The Fund's investment objectives are capital growth and current income. We will
attempt to achieve these objectives by investing the Fund's assets primarily in
dividend-paying equity securities.
Because any investment involves risk, there is no assurance that the Fund's
objectives will be achieved. See FUND INVESTMENTS on page 5 for more
information.
WHAT ARE THE MAIN RISKS OF INVESTING IN THIS FUND?
The primary risk of investing in this Fund is market risk.
* MARKET RISK involves the possibility that the 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.
Other risks of the Fund described later in the prospectus include the risks of
foreign investing and investing in real estate investment trusts (REITs). As
with other mutual funds, losing money is also a risk of investing in this Fund.
As you consider an investment in this Fund, you should also take into account
your tolerance for the daily fluctuations of the financial markets and whether
you can afford to leave your money in the investment for long periods of time
to ride out down periods.
An investment in this Fund is not a deposit of USAA Federal Savings Bank, or
any other bank, and is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency.
Look for this symbol [CAUTION LIGHT] 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 looking for capital growth and current income.
* You are willing to accept moderate risk.
* You are looking for a long-term investment.
2
<PAGE>
This Fund MAY NOT be appropriate as part of your investment portfolio if . . .
* You need an investment that provides tax-free income.
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. The
bar chart shown below illustrates the Fund's volatility and performance from
year to year for each full calendar year since the Fund's inception.
Total Return
All mutual funds must use the same formula to calculate total return.
[SIDE BAR]
TOTAL RETURN MEASURES THE PRICE CHANGE IN A SHARE ASSUMING THE REINVESTMENT
OF ALL DIVIDEND INCOME AND CAPITAL GAIN DISTRIBUTIONS.
[BAR CHART]
CALENDAR YEAR TOTAL RETURN
1994* 1.29%
1995 31.57%
1996 23.04%
1997 26.04%
1998 6.46%
1999 14.11%
*FUND BEGAN OPERATIONS ON JUNE 1, 1993.
THE FUND'S TOTAL RETURN FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30,
2000, WAS .90%.
During the periods shown in the above bar chart, the highest total return for a
quarter was 17.52% (quarter ending December 31, 1998) and the lowest total
return for a quarter was -17.48% (quarter ending September 30, 1998).
3
<PAGE>
The table below shows how the Fund's average annual total returns for the one-
and five-year periods, as well as the life of the Fund, compared to those of a
broad-based securities market index. Remember, historical performance does not
necessarily indicate what will happen in the future.
-------------------------------------------------------------------------------
Average Annual Total Returns
(for the periods ending December 31, 1999)
Past Past Life of
1 Year 5 Years Fund
-------------------------------------------------------------------------------
Growth & Income Fund 14.11% 19.91% 15.83%
-------------------------------------------------------------------------------
S&P 500 Index* 21.03% 28.54% 22.18%
-------------------------------------------------------------------------------
* 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.
[SIDE BAR]
[TOUCHLINE GRAPHIC]
TOUCHLINE(R)
1-800-531-8777
PRESS
1
THEN
1
THEN
3 7 #
Please consider performance information in light of the Fund's investment
objectives and policies and market conditions during the reported time periods.
The value of your shares may go up or down. You may obtain the most current
price and return information for this Fund through our usaa.com Web site once
you have established Internet access. See page 11 for information on
establishing Internet access. You may also obtain this information by calling
USAA TouchLine(R) at 1-800-531-8777. Press 1 for the Mutual Fund Menu, press 1
again for prices and returns. Then, press 37# when asked for the fund code.
[SIDE BAR]
Newspaper
Symbol
Gr&Inc
Ticker
Symbol
USGRX
Additionally, you may find the most current price of your shares in the
business section of your newspaper in the mutual fund section under the heading
"USAA Group" and the symbol "Gr&Inc." If you prefer to obtain this information
from an online computer service, you can do so by using the ticker symbol
"USGRX."
FEES AND EXPENSES
This summary shows what it will cost you, directly and indirectly, to invest in
this 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.)
4
<PAGE>
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
and transfer agent fees. The figures below show actual expenses during the past
fiscal year ended July 31, 2000, and are calculated as a percentage of average
net assets.
-----------------------------------------------------------
Management Fees .60%
Distribution (12b-1) Fees None
Other Expenses .30%
----
Total Annual Fund Operating Expenses .90%
====
-----------------------------------------------------------
[SIDE BAR]
12b-1 FEES - SOME MUTUAL FUNDS CHARGE THESE FEES TO PAY FOR ADVERTISING
AND OTHER COSTS OF SELLING FUND SHARES.
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........... $ 92
3 years.......... 287
5 years.......... 498
10 years.......... 1,108
--------------------------------------------------------
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 dividend-paying equity securities. We use the term "equity
securities" to include common stocks, securities convertible into common
stocks, securities that carry the right to buy common stocks, and real
estate investment trusts (REITs). We will limit the Fund's investment in
convertible securities to 5% of the value of the Fund's net assets at
the time these securities are purchased. We may also invest in
convertible debt securities and nonconvertible preferred stock.
5
<PAGE>
As a temporary defensive measure because of market, economic, political,
or other conditions, we may invest up to 100% of the Fund's assets in
investment-grade, short-term debt instruments. This may result in the
Fund not achieving its investment objective during the time it is in
this temporary defensive posture.
[CAUTION LIGHT GRAPHIC]
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.
[CAUTION LIGHT GRAPHIC]
REITS. Investing in REITs may subject the Fund to many of the same risks
associated with the direct ownership of real estate. Additionally, REITs are
dependent upon the capabilities of the REIT manager(s), have limited
diversification, and could be significantly impacted by changes in tax laws.
Q May the Fund's assets be invested in securities of foreign issuers?
A Yes. We may invest up to 30% of the Fund's total assets in American
Depositary Receipts (ADRs) or similar forms of ownership interest in
securities of foreign issuers deposited with a depositary, and
securities of foreign issuers that are traded on U.S. securities
exchanges or in U.S. over-the-counter markets.
[CAUTION LIGHT GRAPHIC]
FOREIGN INVESTING RISK. Investing in securities of foreign issuers poses unique
risks: currency-exchange-rate fluctuations; increased-price volatility;
different accounting, reporting, and disclosure requirements; and political or
social instability. In the past, equity and debt instruments of foreign issuers
have been more volatile than equity and debt instruments of U.S. issuers.
Q How are the decisions to buy and sell securities made?
A We appraise a stock's price in relation to the company's earnings, cash
flow, book value, and yield. We also consider various qualitative
factors such as the number of shares the company's management owns, the
attitude of investors in general toward the company, and the quality of
management.
6
<PAGE>
We use the same criteria in deciding which securities to sell. For
example, when a company's shares sell well above their relative
historical levels of valuation, we may decide to sell the stock.
For additional information about other securities in which we may invest the
Fund's assets, see APPENDIX A on page 18.
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. As of the date of
this prospectus, we had approximately $42 billion in total assets under
management. Our mailing address is 9800 Fredericksburg Road, San Antonio, TX
78288.
We provide management services to the Fund pursuant to an Advisory Agreement.
We are responsible for managing the Fund's portfolio (including placement of
brokerage orders) and its business affairs, subject to the authority of and
supervision by the Fund's Board of Directors. For our services, the Fund pays
us an annual fee. This fee was computed and paid at three-fifths of one percent
(.60%) of average net assets for the fiscal year ended July 31, 2000. We also
provide services related to selling the Fund's shares and receive no
compensation for those services.
Portfolio Manager
[PHOTOGRAPH]
R. DAVID ULLOM
R. David Ullom, assistant vice president of Equity Investments, has managed the
Fund since its inception in June 1993. Mr. Ullom has 25 years' investment
management experience and has worked for us for 14 years. He earned the
Chartered Financial Analyst designation in 1980 and is a member of the
Association for Investment Management and Research and the San Antonio
Financial Analysts Society, Inc. He holds an MBA from Washington University,
Missouri, and a BS from Oklahoma State University.
USING MUTUAL FUNDS IN AN INVESTMENT PROGRAM
I. 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
7
<PAGE>
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.
II. Using Funds in an Investment Program
In choosing a mutual fund as an investment vehicle, you are giving up some
investment decisions, but must still make others. The decisions you don't have
to make are those involved with choosing individual securities. We will perform
that function. In addition, we will arrange for the safekeeping of securities,
auditing the annual financial statements, and daily valuation of the Fund, as
well as other functions.
You, however, retain at least part of the responsibility for an equally
important decision. This decision involves determining a portfolio of mutual
funds that balances your investment goals with your tolerance for risk. It is
likely that this decision may include the use of more than one fund of the USAA
family of funds.
For example, assume you wish to invest in a widely diversified, common stock
portfolio. You could combine an investment in the Growth & Income Fund with
investments in other mutual funds that primarily seek capital appreciation by
investing in stocks of large and small companies. This is just one way you
could combine funds to fit your own risk and reward goals.
III. USAA's Family of Funds
We offer you another alternative with our asset strategy funds listed in
APPENDIX B under asset allocation on page 19. These unique mutual funds provide
a professionally managed, diversified investment portfolio within a mutual
fund. Designed for the individual who prefers to delegate the asset allocation
process to an investment manager, their structure achieves diversification
across a number of investment categories.
Whether you prefer to create your own mix of mutual funds or use a USAA asset
strategy fund, the USAA family of funds provides a broad range of choices
covering just about any investor's investment objectives. Our 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 19 for a
complete list of the USAA family of no-load mutual funds.
8
<PAGE>
HOW TO INVEST
Purchase of Shares
OPENING AN ACCOUNT
You may open an account and make an investment as described below by mail, in
person, bank wire, 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.
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
[MONEY GRAPHIC]
* $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 PURCHASES
* $50 per transaction, per account.
9
<PAGE>
HOW TO PURCHASE BY . . .
MAIL
[ENVELOPE GRAPHIC]
* 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 in the
business reply envelope that accompanies your Fund's transaction
confirmation to the transfer agent:
USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, TX 78288
IN PERSON
[HANDSHAKE GRAPHIC]
* To open an account, bring your application and check to our San Antonio
investment sales and service office at:
USAA Federal Savings Bank
10750 Robert F. McDermott Freeway
San Antonio, TX 78288
BANK WIRE
[WIRE GRAPHIC]
* 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 Growth & Income Fund
USAA Account Number: 69384998
Shareholder(s) Name(s) _______________________________________
Shareholder(s) Mutual Fund Account Number ____________________
ELECTRONIC FUNDS TRANSFER (EFT)
[CALENDAR GRAPHIC]
* Additional purchases on a regular basis can be deducted from a bank
account, paycheck, income-producing investment, or USAA money market fund
account. Sign up for these services when opening an account or call
1-800-531-8448 to add these services.
PHONE 1-800-531-8448 (IN SAN ANTONIO, 456-7202)
[TELEPHONE GRAPHIC]
* If you have an existing USAA mutual fund account and would like to open a
new account or exchange to another USAA Fund, call for instructions. To
open an account by phone, the new account must have the same registration
as your existing account.
10
<PAGE>
USAA TOUCHLINE(R)1-800-531-8777 (IN SAN ANTONIO, 498-8777)
[TOUCHLINE GRAPHIC]
* 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
[COMPUTER GRAPHIC]
* 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.
11
<PAGE>
HOW TO REDEEM BY . . .
MAIL, IN PERSON, FAX, TELEGRAM, TELEPHONE, TOUCHLINE(R), OR INTERNET
[FAX MACHINE GRAPHIC]
* 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.
* 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
[INVESTORS GUIDE GRAPHIC]
Upon your initial investment with us, you will receive the INVESTOR'S GUIDE to
help you get the most out of your USAA mutual fund account and to 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.
12
<PAGE>
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 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 Fund's 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. 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
13
<PAGE>
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 Fund has undertaken certain procedures regarding telephone transactions as
described on page 12.
Exchange Limitations, Excessive Trading
To minimize Fund costs and to protect the Funds and their shareholders from
unfair expense burdens, the Funds restrict excessive exchanges. The limit on
exchanges out of any Fund in the USAA family of funds for each account is six
per calendar year (except there is no limitation on exchanges out of the Tax
Exempt Short-Term Fund, Short-Term Bond Fund, or any of the money market funds
in the USAA family of funds). 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
[SIDE BAR]
NAV PER SHARE
EQUALS
TOTAL ASSETS
MINUS
LIABILITIES
DIVIDED BY
# OF SHARES
OUTSTANDING
The price at which you purchase and redeem Fund shares is equal to the net
asset value (NAV) per share determined on the effective date of the purchase or
redemption. You may buy and sell Fund shares at the NAV per share without a
sales charge. The Fund's NAV per share is calculated at the close of the
regular trading session of the NYSE, which is usually 4 p.m. Eastern Time.
Portfolio securities, except as otherwise noted, traded primarily on a
securities exchange are valued at the last sales price on that exchange. If no
sale is reported, the average of the bid and asked prices is generally used.
Over-the-counter securities are generally priced at the last sales price or, if
not available, at the average of the bid and asked prices.
Debt securities purchased with maturities of 60 days or less are stated at
amortized cost, which approximates market value. Other debt securities are
valued each business day at their current market value as determined by a
pricing service approved by the Fund's Board of Directors. Securities
14
<PAGE>
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 quarterly. 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.
We will automatically invest 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.
15
<PAGE>
Regardless of the length of time you have held the Fund shares, distributions
of net long-term capital gains are taxable as long-term capital gains whether
received in cash or reinvested in additional shares.
WITHHOLDING - Federal law requires the Fund to withhold and remit to the U.S.
Treasury a portion of the income dividends and capital gain distributions and
proceeds of redemptions paid to any non-corporate shareholder who:
* fails to furnish the Fund with a correct tax identification number,
* underreports dividend or interest income, or
* fails to certify that he or she is not subject to withholding.
To avoid this withholding requirement, you must certify, on your application or
on a separate Form W-9 supplied by the Fund's transfer agent, that your tax
identification number is correct and you are not currently subject to backup
withholding.
REPORTING - The Fund will report information to you annually concerning the tax
status of dividends and distributions for federal income tax purposes.
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.
16
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the Fund's
financial performance for the past five years. 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 this Fund (assuming reinvestment of all dividends and
distributions). This information has been audited by KPMG LLP, whose report,
along with the Fund's financial statements, are included in the annual report,
which is available upon request.
Year Ended July 31,
--------------------------------------------------------
2000 1999 1998 1997 1996
--------------------------------------------------------
Net asset value at
beginning of period $ 20.43 $ 18.88 $ 18.85 $ 13.46 $ 12.07
Net investment income .16 .16 .21 .23 .24a
Net realized and
unrealized gain - 2.46 .69 5.84 1.51
Distributions from net
investment income (.16) (.16) (.21) (.23) (.23)
Distributions of realized
capital gains (.64) (.91) (.66) (.45) (.13)
---------------------------------------------------------
Net asset value at
end of period $ 19.79 $ 20.43 $ 18.88 $ 18.85 $ 13.46
=========================================================
Total return (%)* .99 15.53 4.99 46.69 14.68
Net assets at end of
period (000) $1,098,474 $1,136,339 $1,078,589 $ 825,092 $ 371,801
Ratio of expenses to
average net assets (%) .90 .89 .85 .89 .95
Ratio of net investment
income to average
net assets (%) .78 .85 1.07 1.50 1.84
Portfolio turnover (%) 22.90 24.53 29.38 14.67 16.13
--------------------
* Assumes reinvestment of all dividend income and capital gain distributions
during the period.
(a) Calculated using weighted average shares.
17
<PAGE>
APPENDIX A
THE FOLLOWING ARE DESCRIPTIONS OF CERTAIN TYPES OF SECURITIES
IN WHICH WE MAY INVEST THE FUND'S ASSETS:
CONVERTIBLE SECURITIES
We may invest the Fund's assets in convertible securities, which are bonds,
preferred stocks, and other securities that pay interest or dividends and offer
the buyer the ability to convert the security into common stock. The value of
convertible securities depends partially on interest rate changes and the
credit quality of the issuer. Because a convertible security affords an
investor the opportunity, through its conversion feature, to participate in the
capital appreciation of the underlying common stock, the value of convertible
securities also depends on the price of the underlying common stock.
ILLIQUID SECURITIES
We may invest up to 15% of the Fund's net assets in securities that are
illiquid. Illiquid securities are those securities which cannot be disposed of
in the ordinary course of business, seven days or less, at approximately the
same value at which the Fund has valued the securities.
MONEY MARKET INSTRUMENTS
We may hold a certain portion of the Fund's 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,
banker's acceptances, and other financial institution obligations. These
securities may carry fixed or variable interest rates.
AMERICAN DEPOSITARY RECEIPTS (ADRS)
We may invest the Fund's 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.
18
<PAGE>
APPENDIX B
USAA FAMILY OF NO-LOAD MUTUAL FUNDS
The USAA family of no-load mutual funds includes a variety of Funds, each with
different objectives and policies. In combination, these Funds are designed to
provide you with the opportunity to formulate your own investment program. You
may exchange any shares you hold in any one USAA Fund for shares in any other
USAA Fund, 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
-------------------------------------------------------------------------------
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 INDEX(SM)" 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.
19
<PAGE>
APPENDIX B (CONTINUED)
FUND TYPE/NAME (CONTINUED) RISK
-------------------------------------------------------------------------------
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
-------------------------------------------------------------------------------
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.
20
<PAGE>
If you would like more information about the Fund, you may call 1-800-531-8181
to request a free copy of the Fund's statement of additional information (SAI),
annual or semiannual report, or to ask other questions about the Fund. The SAI
has been filed with the Securities and Exchange Commission (SEC) and is legally
a part of this prospectus. In the Fund's annual report, you will find a
discussion of the market conditions and investment strategies that
significantly affected the Fund's performance during the last fiscal year.
To view these documents, along with other related documents, you can visit the
EDGAR database on 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 paying 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 CUSTODIAN
USAA Shareholder Account Services State Street Bank and Trust Company
9800 Fredericksburg Road P.O. Box 1713
San Antonio, Texas 78288 Boston, Massachusetts 02105
----------------------------------------------------------------
TELEPHONE ASSISTANCE HOURS
Call toll free - Central Time
Monday - Friday 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 No. 811-2429
<PAGE>
USAA INCOME
STOCK FUND
PROSPECTUS
DECEMBER 1, 2000
As with other mutual funds, the Securities and Exchange Commission has not
approved or disapproved of this Fund's shares or determined whether this
prospectus is accurate or complete. Anyone who tells you otherwise is
committing a crime.
TABLE OF CONTENTS
What Is the Fund's Investment Objective and Main Strategy?............. 2
What Are the Main Risks of Investing in This Fund?..................... 2
Is This Fund for You?.................................................. 3
Could the Value of Your Investment in This Fund Fluctuate?............. 3
Fees and Expenses...................................................... 5
Fund Investments....................................................... 6
Fund Management........................................................ 8
Using Mutual Funds in an Investment Program............................ 9
How to Invest.......................................................... 10
How to Redeem.......................................................... 13
Important Information About Purchases and Redemptions.................. 14
Exchanges.............................................................. 15
Shareholder Information................................................ 16
Financial Highlights................................................... 18
Appendix A............................................................. 19
Appendix B............................................................. 20
<PAGE>
USAA Investment Management Company manages this Fund. For easier reading, USAA
Investment Management Company will be referred to as "we" or "us" throughout
the prospectus.
WHAT IS THE FUND'S INVESTMENT OBJECTIVE AND MAIN STRATEGY?
The Fund's investment objective is current income with the prospect of
increasing dividend income and the potential for capital appreciation. We will
attempt to achieve this objective by investing the Fund's assets primarily in
common stocks of well-established, large companies with above-average dividend
yields.
Because any investment involves risk, there is no assurance that the Fund's
objective will be achieved. See FUND INVESTMENTS on page 6 for more
information.
WHAT ARE THE MAIN RISKS OF INVESTING IN THIS FUND?
The primary risks of investing in this Fund are market risk, interest rate
risk, and credit risk.
o 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.
o INTEREST RATE RISK involves the possibility that the value of the Fund's
investments will fluctuate because of changes in interest rates.
IF INTEREST RATES INCREASE: the yield of the Fund may increase and the
market value of the Fund's securities will likely decline, adversely
affecting the net asset value and total return.
IF INTEREST RATES DECREASE: the yield of the Fund may decrease and the
market value of the Fund's securities may increase, which would likely
increase the Fund's net asset value and total return.
o CREDIT RISK involves the possibility that a borrower cannot make timely
interest and principal payments on its securities.
Another risk of the Fund described later in the prospectus is the risk of
foreign investing. As with other mutual funds, losing money is also a risk of
investing in this Fund.
2
<PAGE>
As you consider an investment in this Fund, you should also take into account
your tolerance for the daily fluctuations of the financial markets and whether
you can afford to leave your money in the investment for long periods of time
to ride out down periods.
An investment in this Fund is not a deposit of USAA Federal Savings Bank, or
any other bank, and is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency.
Look for this symbol [CAUTION LIGHT] 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 . . .
o You are seeking current income and the prospect of capital appreciation.
o You are willing to accept moderate risk.
o You are looking for a long-term investment.
This Fund MAY NOT be appropriate as part of your investment portfolio if . . .
o Your primary goal is to maximize long-term growth through capital
appreciation.
o You need an investment that provides tax-free income.
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. The
bar chart shown on the next page illustrates the Fund's volatility and
performance from year to year for each full calendar year over the past ten
years.
3
<PAGE>
Total Return
All mutual funds must use the same formula to calculate total return.
[SIDE BAR]
TOTAL RETURN MEASURES THE PRICE CHANGE IN A SHARE ASSUMING THE
REINVESTMENT OF ALL DIVIDEND INCOME AND CAPITAL GAIN DISTRIBUTIONS.
[BAR CHART]
CALENDAR TOTAL
YEAR RETURN
1990 -1.42%
1991 27.33%
1992 7.80%
1993 11.56%
1994 -.70%
1995 28.62%
1996 18.70%
1997 26.99%
1998 8.10%
1999 2.46%
THE FUND'S TOTAL RETURN FOR THE NINE-MONTH PERIOD ENDED
SEPTEMBER 30, 2000, WAS 5.09%.
During the periods shown in the above bar chart, the highest total return for a
quarter was 10.81% (quarter ending March 31, 1991) and the lowest total return
for a quarter was -8.30% (quarter ending September 30, 1990).
The table below shows how the Fund's average annual total returns for the one-,
five-, and ten-year periods, as well as the life of the Fund, compared to those
of a broad-based securities market index. Remember, historical performance does
not necessarily indicate what will happen in the future.
===============================================================================
Average Annual Total Returns
(for the periods ending December 31, 1999)
Past Past Past Life of
1 Year 5 Years 10 Years Fund
===============================================================================
Income Stock Fund 2.46% 16.52% 12.40% 12.62%
-------------------------------------------------------------------------------
S&P 500 Index* 21.03% 28.54% 18.19% 16.79%
===============================================================================
*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.
4
<PAGE>
Please consider performance information in light of the Fund's investment
objective and policies and market conditions during the reported time periods.
The value of your shares may go up or down. You may obtain the most current
price and return information for this Fund through our usaa.com Web site once
you have established Internet access. See page 12 for information on
establishing Internet access. You may also obtain this information by calling
USAA TouchLine(R) at 1-800-531-8777. Press 1 for the Mutual Fund Menu, press 1
again for prices and returns. Then, press 35# when asked for the fund code.
[SIDE BAR]
[TELEPHONE GRAPHIC]
TOUCHLINE(R)
1-800-531-8777
PRESS
(1)
THEN
(1)
(3) (5) (#)
Additionally, you may find the most current price of your shares in the
business section of your newspaper in the mutual fund section under the heading
"USAA Group" and the symbol "IncStk." If you prefer to obtain this information
from an online computer service, you can do so by using the ticker symbol
"USISX."
[SIDEBAR]
NEWSPAPER
SYMBOL
IncStk
TICKER
SYMBOL
USISX
FEES AND EXPENSES
This summary shows what it will cost you, directly and indirectly, to invest in
this 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" include expenses such as custodian
and transfer agent fees. The figures below show actual expenses during the past
fiscal year ended July 31, 2000, and are calculated as a percentage of average
net assets.
[SIDE BAR]
12b-1 FEES - SOME MUTUAL FUNDS CHARGE THESE FEES TO PAY FOR
ADVERTISING AND OTHER COSTS OF SELLING FUND SHARES.
-------------------------------------------
Management Fees .50%
Distribution (12b-1) Fees None
Other Expenses .17%
----
Total Annual Fund Operating Expenses .67%
====
-------------------------------------------
5
<PAGE>
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.............. $ 68
3 years............. 214
5 years............. 373
10 years............. 835
==============================
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
the common stocks of well-established, large companies that have
demonstrated an ability to increase their dividends. We attempt to provide
a portfolio with a dividend yield above the average of the S&P 500 Index.
We may include common stocks, real estate investment trusts (REITs),
securities convertible into common stocks, and securities that carry the
right to buy common stocks in the portfolio.
As a temporary defensive measure because of market, economic, political,
or other conditions, we may invest up to 100% of the Fund's assets in
investment-grade, short-term debt instruments. This may result in the Fund
not achieving its investment objective during the time it is in this
temporary defensive posture.
[CAUTION LIGHT]
MARKET RISK. Because this Fund invests in stocks, including convertible
securities, it is subject to stock market risk. Stock prices in general may
decline over short or even extended periods, regardless of the success or
failure of 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.
6
<PAGE>
[CAUTION LIGHT]
REITS. Investing in REITs may subject the Fund to many of the same risks
associated with the direct ownership of real estate. Additionally, REITs are
dependent upon the capabilities of the REIT manager(s), have limited
diversification, and could be significantly impacted by changes in tax laws.
Q Are there any limitations on how much of the Fund's assets may be invested
in any particular securities?
A We may only invest up to 25% of the Fund's net assets in securities
convertible into common stocks measured at the time a security is
purchased. These convertible securities may be rated below investment
grade as determined by Moody's Investors Service or Standard & Poor's
Ratings Group or may be unrated.
[CAUTION LIGHT]
INTEREST RATE RISK. Interest rate risk is the risk that the market value of
certain securities will decline because of rising interest rates. Some of the
Fund's portfolio securities have similar interest rate risk characteristics to
bonds. In general, when interest rates rise, the prices of these securities
fall and when interest rates fall, the prices of these securities generally
rise.
[CAUTION LIGHT]
CREDIT RISK. Credit risk is the possibility that an issuer of a security will
fail to make timely payments of interest or principal. When evaluating
potential investments for the Fund, our analysts also assess credit risk and
its impact on the Fund's portfolio. Securities rated below investment grade are
deemed to be speculative and involve greater risk of default because of changes
in interest rates, economic conditions, and the issuer's creditworthiness. As a
result, their prices tend to go up or down more than higher-quality securities.
During periods of economic downturns or rising interest rates, issuers of such
securities may experience financial difficulties, which could affect their
ability to make timely principal and interest payments. The Fund's ability to
timely and accurately value and dispose of lower-quality securities may also be
affected by the absence or periodic discontinuance of liquid trading markets.
Q May the Fund's assets be invested in securities of foreign issuers?
A Yes. We may invest up to 10% of the Fund's total assets in American
Depositary Receipts (ADRs) or similar forms of ownership interest in
securities of foreign issuers deposited with a depositary, and securities
of foreign issuers that are traded on U.S. securities exchanges or in U.S.
over-the-counter markets.
7
<PAGE>
[CAUTION LIGHT]
FOREIGN INVESTING RISKS. Investing in securities of foreign issuers poses
unique risks: currency-exchange-rate fluctuations; increased-price volatility;
different accounting, reporting, and disclosure requirements; and political or
social instability. In the past, equity and debt instruments of foreign issuers
have been more volatile than equity and debt instruments of U.S. issuers.
Q How are the decisions to buy and sell securities made?
A We select stocks based on independent research of the following:
o the quality of management,
o industry fundamentals, and
o the company's future prospects.
These factors are combined with an attractive valuation to make the
purchase decision. We will sell a security when we perceive that one or
more of the factors has changed.
For additional information about other securities in which we may invest the
Fund's assets, see APPENDIX A on page 19.
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. As of the date of
this prospectus, we had approximately $42 billion in total assets under
management. Our mailing address is 9800 Fredericksburg Road, San Antonio, TX
78288.
We provide management services to the Fund pursuant to an Advisory Agreement.
We are responsible for managing the Fund's portfolio (including placement of
brokerage orders) and its business affairs, subject to the authority of and
supervision by the Fund's Board of Directors. For our services, the Fund pays
us an annual fee. This fee was computed and paid at one-half of one percent
(.50%) of average net assets for the fiscal year ended July 31, 2000. We also
provide services related to selling the Fund's shares and receive no
compensation for those services.
8
<PAGE>
Portfolio Manager
[PHOTOGRAPH]
Stephan J. Klaffke
Stephan J. Klaffke, assistant vice president of Equity Investments, has managed
the Fund since August 1998. He has 16 years' investment management experience
and has worked for us for seven years. Mr. Klaffke earned the Chartered
Financial Analyst designation in 1987 and is a member of the Association of
Investment Management and Research and the San Antonio Financial Analysts
Society, Inc. He holds an MBA from Texas Christian University and a BS from
Indiana University.
USING MUTUAL FUNDS IN AN INVESTMENT PROGRAM
I. 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.
II. Using Funds in an Investment Program
In choosing a mutual fund as an investment vehicle, you are giving up some
investment decisions, but must still make others. The decisions you don't have
to make are those involved with choosing individual securities. We will perform
that function. In addition, we will arrange for the safekeeping of securities,
auditing the annual financial statements, and daily valuation of the Fund, as
well as other functions.
You, however, retain at least part of the responsibility for an equally
important decision. This decision involves determining a portfolio of mutual
funds that balances your investment goals with your tolerance for risk. It is
likely that this decision may include the use of more than one fund of the USAA
family of funds.
9
<PAGE>
For example, assume you wish to invest in a widely diversified, common stock
portfolio. You could combine an investment in the Income Stock Fund with
investments in other mutual funds that invest in stocks of large and small
companies emphasizing capital appreciation as their primary objective. This is
just one way you could combine funds to fit your own risk and reward goals.
III. USAA's Family of Funds
We offer you another alternative with our asset strategy funds listed in
APPENDIX B under asset allocation on page 20. These unique mutual funds provide
a professionally managed, diversified investment portfolio within a mutual
fund. Designed for the individual who prefers to delegate the asset allocation
process to an investment manager, their structure achieves diversification
across a number of investment categories.
Whether you prefer to create your own mix of mutual funds or use a USAA asset
strategy fund, the USAA family of funds provides a broad range of 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 20 for a
complete list of the USAA family of no-load mutual funds.
HOW TO INVEST
Purchase of Shares
OPENING AN ACCOUNT
You may open an account and make an investment as described below by mail, in
person, bank wire, 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.
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
10
<PAGE>
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
[MONEY GRAPHIC]
o $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 PURCHASES
o $50 per transaction, per account.
HOW TO PURCHASE BY . . .
MAIL
[ENVELOPE GRAPHIC]
o To open an account, send your application and check to:
USAA Investment Management Company
9800 Fredericksburg Road
San Antonio, TX 78288 (FOR OVERNIGHT MAIL, USE ZIP CODE 78240)
o To add to your account, send your check and the deposit stub in the
business reply envelope that accompanies your Fund's transaction
confirmation to the transfer agent:
USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, TX 78288
IN PERSON
[HANDSHAKE GRAPHIC]
o 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
11
<PAGE>
BANK WIRE
[WIRE GRAPHIC]
o 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 Income Stock Fund
USAA Account Number: 69384998
Shareholder(s) Name(s)___________________________
Shareholder(s) Mutual Fund Account Number________________________
ELECTRONIC FUNDS TRANSFER (EFT)
[CALENDAR GRAPHIC]
o Additional purchases on a regular basis can be deducted from a bank
account, paycheck, income-producing investment, or USAA money market fund
account. Sign up for these services when opening an account or call
1-800-531-8448 to add these services.
PHONE 1-800-531-8448 (IN SAN ANTONIO, 456-7202)
[TELEPHONE GRAPHIC]
o 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)
[TOUCHLINE GRAPHIC]
o 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
[COMPUTER GRAPHIC]
o 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.
12
<PAGE>
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
[FAX MACHINE GRAPHIC]
o Send your written instructions to:
USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, TX 78288 (FOR OVERNIGHT MAIL, USE ZIP CODE 78240)
o Visit a member service representative at our San Antonio investment sales
and service office at USAA Federal Savings Bank.
o Send a signed fax to 1-800-292-8177, or send a telegram to USAA Shareholder
Account Services.
o Call toll free 1-800-531-8448 (in San Antonio, 456-7202) to speak with a
member service representative.
o Call toll free 1-800-531-8777 (in San Antonio, 498-8777) to access our
24-hour USAA TouchLine(R) service.
o 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
13
<PAGE>
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
[INVESTOR'S GUIDE GRAPHIC]
Upon your initial investment with us, you will receive the INVESTOR'S GUIDE to
help you get the most out of your USAA mutual fund account and to 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:
o reject purchase or exchange orders when in the best interest of the Fund;
o limit or discontinue the offering of shares of the Fund without notice to
the shareholders;
o impose a redemption charge of up to 1% of the net asset value of shares
redeemed if circumstances indicate a charge is necessary for the protection
of remaining investors (for example, if excessive
14
<PAGE>
market-timing share activity unfairly burdens long-term investors);
however, this 1% charge will not be imposed upon shareholders unless
authorized by the Fund's Board of Directors and the required notice has
been given to shareholders;
o require a signature guarantee for transactions or changes in account
information in those instances where the appropriateness of a signature
authorization is in question (the statement of additional information
contains information on acceptable guarantors);
o redeem an account with less than 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 Fund has undertaken certain procedures regarding telephone transactions as
described on page 13.
Exchange Limitations, Excessive Trading
To minimize Fund costs and to protect the Funds and their shareholders from
unfair expense burdens, the Funds restrict excessive exchanges. The limit on
exchanges out of any Fund in the USAA family of funds for each account is six
per calendar year (except there is no limitation on exchanges out of the Tax
Exempt Short-Term Fund, Short-Term Bond Fund, or any of the money market funds
in the USAA family of funds). 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.
15
<PAGE>
SHAREHOLDER INFORMATION
[SIDE BAR]
NAV PER SHARE
EQUALS
TOTAL ASSETS
MINUS
LIABILITIES
DIVIDED BY
# OF SHARES
OUTSTANDING
Share Price Calculation
The price at which you purchase and redeem Fund shares is equal to the net
asset value (NAV) per share determined on the effective date of the purchase or
redemption. You may buy and sell Fund shares at the NAV per share without a
sales charge. The 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.
Portfolio securities, except as otherwise noted, traded primarily on a
securities exchange are valued at the last sales price on that exchange. If no
sale is reported, the average of the bid and asked prices is generally used.
Over-the-counter securities are generally priced at the last sales price or, if
not available, at the average of the bid and asked prices.
Debt securities purchased with maturities of 60 days or less are stated at
amortized cost, which approximates market value. Other debt securities are
valued each business day at their current market value as determined by a
pricing service approved by the 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 quarterly. 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.
We will automatically reinvest all income dividends and capital gain
distributions in the Fund unless you instruct us differently. The share price
will be the NAV of the Fund shares computed on the ex-dividend date. Any income
dividends or capital gain distributions paid by the Fund will reduce the NAV
per share by the amount of the dividend or distribution. You should consider
carefully the effects of purchasing shares of the Fund shortly before any
dividend or distribution. 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
16
<PAGE>
of the voided check will be invested in your account at the then-current NAV
per share.
Federal Taxes
This tax information is quite general and refers to the federal income tax
provisions in effect as of the date of this prospectus. Note that the Taxpayer
Relief Act of 1997 and the technical provisions adopted by the IRS
Restructuring and Reform Act of 1998 may affect the status and treatment of
certain distributions shareholders receive from the Fund. Because each
investor's tax circumstances are unique and because the tax laws are subject to
change, we recommend that you consult your tax advisor about your investment.
SHAREHOLDER - Dividends from taxable net investment income and distributions of
net short-term capital gains are taxable to you as ordinary income, whether
received in cash or reinvested in additional shares. A portion of these
dividends may qualify for the 70% dividends-received deduction available to
corporations.
Regardless of the length of time you have held the Fund shares, distributions
of net long-term capital gains are taxable as long-term capital gains whether
received in cash or reinvested in additional shares.
WITHHOLDING - Federal law requires the Fund to withhold and remit to the U.S.
Treasury a portion of the income dividends and capital gain distributions and
proceeds of redemptions paid to any non-corporate shareholder who:
o fails to furnish the Fund with a correct tax identification number,
o underreports dividend or interest income, or
o fails to certify that he or she is not subject to withholding.
To avoid this withholding requirement, you must certify, on your application or
on a separate Form W-9 supplied by the 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.
17
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the Funds
financial performance for the past five years. 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 this Fund (assuming reinvestment of all dividends and
distributions). This information has been audited by KPMG LLP, whose report,
along with the Funds financial statements, are included in the annual report,
which is available upon request.
Year Ended July 31,
-------------------------------------------------------
2000 1999 1998 1997 1996
-------------------------------------------------------
Net asset value at
beginning of period $ 20.69 $ 19.65 $ 19.01 $ 15.85 $ 14.96
Net investment income .56 .60 .75 .81 .77
Net realized and
unrealized gain (loss) (1.38) 1.75 1.66 3.88 1.16
Distributions from net
investment income (.58) (.58) (.75) (.79) (.77)
Distributions of realized
capital gains (1.66) (.73) (1.02) (.74) (.27)
-------------------------------------------------------
Net asset value at
end of period $ 17.63 $ 20.69 $ 19.65 $ 19.01 $ 15.85
=======================================================
Total return (%)* (3.85) 13.05 13.28 31.46 13.21
Net assets at end of
period (000) $1,882,665 $2,484,296 $2,496,570 $2,186,329 $1,710,769
Ratio of expenses to
average net assets (%) .67 .65 .65 .68 .72
Ratio of net investment
income to average net
assets (%) 2.97 3.06 3.85 4.73 4.84
Portfolio turnover (%) 13.34 34.20 22.34 34.95 32.38
___________
* Assumes reinvestment of all dividend income and capital gain distributions
during the period.
18
<PAGE>
APPENDIX A
THE FOLLOWING ARE DESCRIPTIONS OF CERTAIN TYPES OF SECURITIES
IN WHICH WE MAY INVEST THE FUNDS ASSETS:
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.
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.
CALL OPTIONS
We may write covered call options with respect to not more than 5% of the Funds
total assets.
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.
19
<PAGE>
APPENDIX B
USAA Family of No-Load Mutual Funds
The USAA family of no-load mutual funds includes a variety of Funds, each with
different objectives and policies. In combination, these Funds are designed to
provide you with the opportunity to formulate your own investment program. You
may exchange any shares you hold in any one USAA Fund for shares in any other
USAA Fund, 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
-------------------------------------------------------------------------------
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 INDEX(SM)" 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.
20
<PAGE>
FUND TYPE/NAME (CONTINUED) RISK
-------------------------------------------------------------------------------
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
-------------------------------------------------------------------------------
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.
21
<PAGE>
NOTES
<PAGE>
NOTES
<PAGE>
If you would like more information about the Fund, you may call 1-800-531-8181
to request a free copy of the Fund's statement of additional information (SAI),
annual or semiannual report, or to ask other questions about the Fund. The SAI
has been filed with the Securities and Exchange Commission (SEC) and is legally
a part of this prospectus. In the Fund's annual report, you will find a
discussion of the market conditions and investment strategies that
significantly affected the Fund's performance during the last fiscal year.
To view these documents, along with other related documents, you can visit the
EDGAR database on 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 paying 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 CUSTODIAN
USAA Shareholder Account Services State Street Bank and Trust Company
9800 Fredericksburg Road P.O. Box 1713
San Antonio, Texas 78288 Boston, Massachusetts 02105
----------------------------------------------------------------
TELEPHONE ASSISTANCE HOURS
Call toll free - Central Time
Monday - Friday 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 No. 811-2429
<PAGE>
USAA INCOME FUND
PROSPECTUS
DECEMBER 1, 2000
As with other mutual funds, the Securities and Exchange Commission has not
approved or disapproved of this Fund's shares or determined whether this
prospectus is accurate or complete. Anyone who tells you otherwise is
committing a crime.
TABLE OF CONTENTS
What Is the Fund's Investment Objective and Main Strategy?.............. 2
What Are the Main Risks of Investing in This Fund?...................... 2
Is This Fund for You?................................................... 3
Could the Value of Your Investment in This Fund Fluctuate?.............. 3
Fees and Expenses....................................................... 5
Fund Investments........................................................ 6
Fund Management......................................................... 9
Using Mutual Funds in an Investment Program............................. 10
How to Invest........................................................... 11
How to Redeem........................................................... 14
Important Information About Purchases and Redemptions................... 15
Exchanges............................................................... 16
Shareholder Information................................................. 17
Financial Highlights.................................................... 20
Appendix A.............................................................. 21
Appendix B ............................................................. 24
<PAGE>
USAA Investment Management Company manages this Fund. For easier reading, USAA
Investment Management Company will be referred to as "we" or "us" throughout
the prospectus.
WHAT IS THE FUND'S INVESTMENT OBJECTIVE AND MAIN STRATEGY?
The Fund's investment objective is maximum current income without undue risk to
principal. We will attempt to achieve this objective by investing the Fund's
assets primarily in income-producing securities.
Because any investment involves risk, there is no assurance that the Fund's
objective will be achieved. See FUND INVESTMENTS on page 6 for more
information.
WHAT ARE THE MAIN RISKS OF INVESTING IN THIS FUND?
The primary risks of investing in this Fund are interest rate risk, prepayment
risk, credit risk, and market risk.
* INTEREST RATE RISK involves the possibility that the value of the Fund's
investments will fluctuate because of changes in interest rates.
IF INTEREST RATES INCREASE: the yield of the Fund may increase and the
market value of the Fund's securities will likely decline, adversely
affecting the net asset value and total return.
IF INTEREST RATES DECREASE: the yield of the Fund may decrease and the
market value of the Fund's securities may increase, which would likely
increase the Fund's net asset value and total return.
* PREPAYMENT RISK involves the possibility that prepayments of mortgages in
the Fund's portfolio will require reinvestment at lower interest rates,
resulting in less interest income to the Fund.
* CREDIT RISK involves the possibility that a borrower cannot make timely
interest and principal payments on its securities.
* MARKET RISK involves the possibility that the 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.
2
<PAGE>
Another risk of the Fund described later in the prospectus is the risk of
investing in real estate investment trusts. As with other mutual funds, losing
money is also a risk of investing in this Fund.
As you consider an investment in this Fund, you should also take into account
your tolerance for the daily fluctuations of the financial markets and whether
you can afford to leave your money in the investment for long periods of time
to ride out down periods.
An investment in this Fund is not a deposit of USAA Federal Savings Bank, or
any other bank, and is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency.
Look for this symbol [CAUTION LIGHT] 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 need steady income.
* You are willing to accept moderate risk.
* You are looking for a long-term investment.
This Fund MAY NOT be appropriate as part of your investment portfolio if . . .
* Your primary goal is to maximize long-term growth.
* You need an investment that provides tax-free income.
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. The
bar chart shown on the next page illustrates the Fund's volatility and
performance from year to year for each full calendar year over the past ten
years.
3
<PAGE>
Total Return
All mutual funds must use the same formula to calculate total return.
[SIDE BAR]
TOTAL RETURN MEASURES THE PRICE CHANGE IN A SHARE ASSUMING THE REINVESTMENT
OF ALL DIVIDEND INCOME AND CAPITAL GAIN DISTRIBUTIONS.
[BAR CHART]
CALENDAR YEAR TOTAL RETURN
1990 7.69%
1991 19.38%
1992 8.37%
1993 9.94%
1994 -5.21%
1995 24.47%
1996 1.33%
1997 11.05%
1998 8.75%
1999 -3.85%
THE FUND'S TOTAL RETURN FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30,
2000, WAS 9.25%.
During the periods shown in the above bar chart, the highest total return for a
quarter was 6.92% (quarter ending June 30, 1995) and the lowest total return
for a quarter was -5.09% (quarter ending March 31, 1994).
The table below shows how the Fund's average annual total returns for the one-,
five-, and ten-year periods, as well as the life of the Fund, compared to those
of a broad-based securities market index. Remember, historical performance does
not necessarily indicate what will happen in the future.
-------------------------------------------------------------------------------
Average Annual Total Returns
(for the period ending December 31, 1999)
Past Past Past Life of
1 Year 5 Years 10 Years Fund
-------------------------------------------------------------------------------
Income Fund -3.85% 7.93% 7.84% 9.72%
-------------------------------------------------------------------------------
Lehman Brothers
Aggregate Bond Index* -.82% 7.73% 7.70% 10.48%
-------------------------------------------------------------------------------
* THE LEHMAN BROTHERS AGGREGATE BOND INDEX IS AN UNMANAGED INDEX OF THE
GOVERNMENT/CORPORATE INDEX, THE MORTGAGE-BACKED SECURITIES INDEX, AND THE
ASSET-BACKED SECURITIES INDEX.
4
<PAGE>
Yield
[SIDE BAR]
YIELD IS THE ANNUALIZED NET INCOME OF THE FUND DURING A SPECIFIED PERIOD
AS A PERCENTAGE OF THE FUND'S SHARE PRICE.
All mutual funds must use the same formula to calculate yield. The Fund may
advertise performance in terms of a 30-day yield quotation. The Fund's 30-day
yield for the period ended December 31, 1999, was 7.15%.
Please consider performance information in light of the Fund's investment
objective and policies and market conditions during the reported time periods.
The value of your shares may go up or down. You may obtain the most current
price, yield, and return information for this Fund through our usaa.com Web
site once you have established Internet access. See page 13 for information on
establishing Internet access. You may also obtain this information by calling
USAA TouchLine(R) at 1-800-531-8777. Press 1 for the Mutual Fund Menu, press 1
again for prices, yields, and returns. Then, press 40# when asked for the fund
code.
[SIDE BAR]
[TOUCHLINE GRAPHIC]
TOUCHLINE(R)
1-800-531-8777
PRESS
1
THEN
1
THEN
4 0 #
Newspaper
Symbol
Inco
Ticker
Symbol
USAIX
Additionally, you may find the most current price of your shares in the
business section of your newspaper in the mutual fund section under the heading
"USAA Group" and the symbol "Inco." If you prefer to obtain this information
from an online computer service, you can do so by using the ticker symbol
"USAIX."
FEES AND EXPENSES
This summary shows what it will cost you, directly and indirectly, to invest in
this 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" include expenses such as custodian
and transfer agent fees. The figures below show actual expenses during the past
fiscal year ended July 31, 2000, and are calculated as a percentage of average
net assets.
-----------------------------------------------------------
Management Fees .24%
Distribution (12b-1) Fees None
Other Expenses .18%
----
Total Annual Fund Operating Expenses .42%
====
-----------------------------------------------------------
[SIDE BAR]
12b-1 FEES - SOME MUTUAL FUNDS CHARGE THESE FEES TO PAY FOR ADVERTISING
AND OTHER COSTS OF SELLING FUND SHARES.
5
<PAGE>
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.......... $ 43
3 years......... 135
5 years......... 235
10 years......... 530
-----------------------------------------------------------
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 U.S. dollar-denominated securities that have been selected for their
high yields relative to the risk involved. Consistent with this policy,
when interest rates rise, we will invest a greater portion of the Fund's
portfolio in securities whose value we believe to be less sensitive to
interest rate changes.
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.
[CAUTION LIGHT GRAPHIC]
INTEREST RATE RISK. As a mutual fund investing in bonds, the Fund is subject to
the risk that the market value of the bonds will decline because of rising
interest rates. Bond prices are linked to the prevailing market interest rates.
In general, when interest rates rise, bond prices fall and when interest rates
fall, bond prices rise. The price volatility of a bond also depends on its
maturity. Generally, the longer the maturity of a bond, the greater its
sensitivity to interest rates. To compensate investors for this higher risk,
bonds with longer maturities generally offer higher yields than bonds with
shorter maturities.
6
<PAGE>
[CAUTION LIGHT GRAPHIC]
PREPAYMENT RISK. Mortgagors may generally pay off mortgages without penalty
before the due date. When mortgaged property is sold, which can occur at any
time for a variety of reasons, the old mortgage is usually prepaid. Also, when
mortgage interest rates fall far enough to make refinancing attractive,
prepayments tend to accelerate. Prepayments require reinvestment of the
principal at the then-current level of interest rates, which are often at a
lower level than when the mortgages were originally issued. Reinvestment at
lower rates tends to reduce the interest payments received by the Fund and,
therefore, the size of the dividend payments available to shareholders. If
reinvestment occurs at a higher level of interest rates, the opposite effect is
true.
Q What types of securities are included in the Fund's portfolio?
A The Fund's portfolio may consist of any of the following:
* obligations of the U.S. government, its agencies and
instrumentalities, and repurchase agreements collateralized
by such obligations;
* mortgage-backed securities;
* asset-backed securities;
* corporate debt securities such as notes, bonds, and commercial
paper;
* U.S. bank obligations, including certificates of deposit and
banker's acceptances;
* obligations of state and local governments and their agencies
and instrumentalities;
* master demand notes;
* Eurodollar obligations;
* Yankee obligations;
* other debt securities;
* convertible securities;
* equity and debt securities of real estate investment trusts;
* common stocks; and
* preferred stocks.
For a further description of these securities, see APPENDIX A on page
21.
7
<PAGE>
Q What will be the quality of the debt securities included in the Fund's
portfolio?
A The debt securities must be investment grade at the time of purchase.
Investment-grade securities are those securities issued or guaranteed by
the U.S. government, its agencies and instrumentalities; those rated or
subject to a guarantee that is rated within the three highest long-term
rating categories by:
* Moody's Investors Service,
* Standard & Poor's Ratings Group, or
* Fitch Information, Inc.
If unrated by these agencies, we must determine that the securities are
of equivalent investment quality.
You will find a complete description of the above debt ratings in the
Fund's statement of additional information.
[CAUTION LIGHT GRAPHIC]
CREDIT RISK. Credit risk is the possibility that an issuer of a fixed income
instrument such as a bond or repurchase agreement will fail to make timely
payments of interest or principal. We attempt to minimize the Fund's credit
risk by investing in securities considered investment grade at the time of
purchase. When evaluating potential investments for the Fund, our analysts also
assess credit risk and its impact on the Fund's portfolio. Nevertheless, even
investment-grade securities are subject to some credit risk. Securities in the
lowest-rated, investment-grade category have speculative characteristics.
Changes in economic conditions or other circumstances are more likely to lead
to a weakened capability to make principal and interest payments on these
securities than is the case for higher-rated securities. In addition, the
ratings of securities are estimates by the rating agencies of the credit
quality of the securities. The ratings may not take into account every risk
related to whether interest or principal will be repaid on a timely basis.
Q What happens if the rating of a security is downgraded below investment
grade?
A We will determine whether it is in the best interest of the Fund's
shareholders to continue to hold the security in the Fund's portfolio.
If downgrades result in more than 5% of the Fund's net assets being
invested in securities that are less than investment-grade quality, we
will take immediate action to reduce the Fund's holdings in such
securities to 5% or less of the Fund's net assets, unless otherwise
directed by the Fund's Board of Directors.
8
<PAGE>
Q What other risks apply to the Fund's portfolio?
[CAUTION LIGHT GRAPHIC]
A MARKET RISK. Because this Fund may invest in equity securities, it can
be subject to stock market risk. Stock prices in general may decline
over short or even extended periods, regardless of the success or
failure of 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.
Q How are the decisions to buy and sell securities made?
A We search for securities that represent value at the time given
current market conditions. For fixed income securities, value is a
combination of yield, credit quality, structure (maturity, coupon,
redemption features), and liquidity. Recognizing value is the result of
simultaneously analyzing the interaction of these factors among the
securities available in the market. We will sell a security if we become
concerned about its credit risk, are forced by market factors to raise
money, or an attractive replacement security is available. For common
stocks, value involves selecting individual dividend-paying stocks,
whose yields are sensitive to interest rate levels when their dividend
yields are close to bond yields, which implies undervaluation. Such
stocks are generally sold when their yields return to a normal
relationship versus bonds through price appreciation.
For additional information about other securities in which we may invest the
Fund's assets, see APPENDIX A on page 21.
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. As of the date of
this prospectus, we had approximately $42 billion in total assets under
management. Our mailing address is 9800 Fredericksburg Road, San Antonio, TX
78288.
We provide management services to the Fund pursuant to an Advisory Agreement.
We are responsible for managing the Fund's portfolio (including placement of
brokerage orders) and its business affairs, subject to the authority of and
supervision by the Fund's Board of Directors. For our services, the Fund pays
us an annual fee. This fee was computed and paid
9
<PAGE>
at twenty-four one hundredths of one percent (.24%) of average net assets for
the fiscal year ended July 31, 2000. We also provide services related to
selling the Fund's shares and receive no compensation for those services.
Portfolio Manager
[PHOTOGRAPH]
MARGARET WEINBLATT
Margaret Weinblatt, vice president of Mutual Fund Portfolios, has managed the
Fund since February 2000. She has 21 years' investment management experience
and has worked for us since January 2000. Prior to joining us, she worked for
Countrywide Investments from June 1998 to November 1999; Copernicus Asset
Management, Ltd. from January 1996 to 1998; and Neuberger & Berman from 1986 to
October 1995. Ms. Weinblatt earned the Chartered Financial Analyst designation
in 1985 and is a member of the Association for Investment Management and
Research, the San Antonio Financial Analysts Society, Inc., and the New York
Society of Securities Analysts. She holds a Ph.D. and MA from the University of
Pennsylvania and BA from Radcliffe College.
USING MUTUAL FUNDS IN AN INVESTMENT PROGRAM
I. 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.
II. Using Funds in an Investment Program
In choosing a mutual fund as an investment vehicle, you are giving up some
investment decisions, but must still make others. The decisions you don't have
to make are those involved with choosing individual securities. We will perform
that function. In addition, we will arrange for the safekeeping of securities,
auditing the annual financial statements, and daily valuation of the Fund, as
well as other functions.
You, however, retain at least part of the responsibility for an equally
important decision. This decision involves determining a portfolio of
10
<PAGE>
mutual funds that balances your investment goals with your tolerance for risk.
It is likely that this decision may include the use of more than one fund of
the USAA family of funds.
For example, assume you wish to invest in a widely diversified portfolio. You
could combine an investment in the Income Fund with investments in other mutual
funds that invest in stocks of large and small companies and high-dividend
stocks. This is just one way you could combine funds to fit your own risk and
reward goals.
III. USAA's Family of Funds
We offer you another alternative with our asset strategy funds listed in
APPENDIX B under asset allocation on page 24. These unique mutual funds provide
a professionally managed, diversified investment portfolio within a mutual
fund. Designed for the individual who prefers to delegate the asset allocation
process to an investment manager, their structure achieves diversification
across a number of investment categories.
Whether you prefer to create your own mix of mutual funds or use a USAA asset
strategy fund, the USAA family of funds provides a broad range of choices
covering just about any 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 24 for a
complete list of the USAA family of no-load mutual funds.
HOW TO INVEST
Purchase of Shares
OPENING AN ACCOUNT
You may open an account and make an investment as described below by mail, in
person, bank wire, 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.
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
11
<PAGE>
(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
[MONEY GRAPHIC]
* $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 PURCHASES
* $50 per transaction, per account.
HOW TO PURCHASE BY . . .
MAIL
[ENVELOPE GRAPHIC]
* 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 in the
business reply envelope that accompanies your Fund's transaction
confirmation to the transfer agent:
USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, TX 78288
IN PERSON
[HANDSHAKE GRAPHIC]
* To open an account, bring your application and check to our San Antonio
investment sales and service office at:
USAA Federal Savings Bank
10750 Robert F. McDermott Freeway
San Antonio, TX 78288
12
<PAGE>
BANK WIRE
[WIRE GRAPHIC]
* 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 Income Fund
USAA Account Number: 69384998
Shareholder(s) Name(s) _______________________________________
Shareholder(s) Mutual Fund Account Number ____________________
ELECTRONIC FUNDS TRANSFER (EFT)
[CALENDAR GRAPHIC]
* Additional purchases on a regular basis can be deducted from a bank
account, paycheck, income-producing investment, or USAA money market fund
account. Sign up for these services when opening an account or call
1-800-531-8448 to add these services.
PHONE 1-800-531-8448 (IN SAN ANTONIO, 456-7202)
[TELEPHONE GRAPHIC]
* If you have an existing USAA mutual fund account and would like to open a
new account or exchange to another USAA Fund, call for instructions. To
open an account by phone, the new account must have the same registration
as your existing account.
USAA TOUCHLINE(R)1-800-531-8777 (IN SAN ANTONIO, 498-8777)
[TOUCHLINE GRAPHIC]
* 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
[COMPUTER GRAPHIC]
* 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.
13
<PAGE>
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
[FAX MACHINE GRAPHIC]
* 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.
* 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)
14
<PAGE>
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
[INVESTORS GUIDE GRAPHIC]
Upon your initial investment with us, you will receive the INVESTOR'S GUIDE to
help you get the most out of your USAA mutual fund account and to 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 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
15
<PAGE>
unless authorized by the Fund's 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. 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 Fund has undertaken certain procedures regarding telephone transactions as
described on page 14.
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.
16
<PAGE>
SHAREHOLDER INFORMATION
Share Price Calculation
[SIDE BAR]
NAV PER SHARE
EQUALS
TOTAL ASSETS
MINUS
LIABILITIES
DIVIDED BY
# OF SHARES
OUTSTANDING
The price at which you purchase and redeem Fund shares is equal to the net
asset value (NAV) per share determined on the effective date of the purchase or
redemption. You may buy and sell Fund shares at the NAV per share without a
sales charge. The Fund's NAV per share is calculated at the close of the
regular trading session of the NYSE, which is usually 4 p.m. Eastern Time.
Portfolio securities, except as otherwise noted, traded primarily on a
securities exchange are valued at the last sale price on that exchange. If no
sale is reported, the average of the bid and asked prices is generally used.
Over-the-counter securities are generally priced at the last sales price or, if
not available, at the average of the bid and asked prices.
Debt securities purchased with maturities of 60 days or less are stated at
amortized cost, which approximates market value. Other debt securities are
valued each business day at their current market value as determined by a
pricing service approved by the 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 monthly based on the projection of its
annual net investment income. Therefore, the amount of each monthly
distribution may be different from the actual net investment income. The
purpose of this distribution procedure is to attempt to provide you with an
even monthly distribution payment. If the total distributions in a year exceed
net investment income for the Fund's current year, a portion of your
distributions could be a return of capital for federal income tax purposes and
thereby reduce your cost basis in the Fund's shares. If you receive
distributions in additional Fund shares rather than cash, the capital returned
would be automatically reinvested, and your total cost basis in the Fund would
remain the same. Any net capital 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.
17
<PAGE>
We will automatically reinvest all income dividends and capital gain
distributions in the Fund unless you instruct us differently. The share price
will be the NAV of the Fund shares computed on the ex-dividend date. Any income
dividends or capital gain distributions paid by the Fund will reduce the NAV
per share by the amount of the dividend or distribution 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.
Regardless of the length of time you have held the Fund shares, distributions
of net long-term capital gains are taxable as long-term capital gains whether
received in cash or reinvested in additional shares.
WITHHOLDING - Federal law requires the Fund to withhold and remit to the U.S.
Treasury a portion of the income dividends and capital gain distributions and
proceeds of redemptions paid to any non-corporate shareholder who:
* fails to furnish the Fund with a correct tax identification number,
* underreports dividend or interest income, or
* fails to certify that he or she is not subject to withholding.
18
<PAGE>
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.
19
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the Fund's
financial performance for the past five years. 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 this Fund (assuming reinvestment of all dividends and
distributions). This information has been audited by KPMG LLP, whose report,
along with the Fund's financial statements, are included in the annual report,
which is available upon request.
Year Ended July 31,
---------------------------------------------------------
2000 1999 1998 1997 1996
---------------------------------------------------------
Net asset value at
beginning of period $ 11.70 $ 12.88 $ 12.54 $ 11.97 $ 12.11
Net investment income .78 .80 .85 .83 .83
Net realized and
unrealized gain (loss) (.10) (.72) .33 .57 (.13)
Distributions from net
investment income (.75) (.80) (.84) (.83) (.84)
Distributions of realized
capital gains (.03) (.46) - - -
---------------------------------------------------------
Net asset value at
end of period $ 11.60 $ 11.70 $ 12.88 $ 12.54 $ 11.97
=========================================================
Total return (%)* 6.11 .40 9.72 12.15 5.78
Net assets at end of
period (000) $1,273,281 $1,415,397 $1,751,574 $ 1,662,981 $1,737,306
Ratio of expenses to
average net assets (%) .42 .38 .38 .39 .40
Ratio of net investment
income to average
net assets (%) 6.78 6.31 6.62 6.76 6.64
Portfolio turnover (%) 24.68 54.02 47.35 57.50 81.26
--------------
* Assumes reinvestment of all dividend income and capital gain distributions
during the period.
20
<PAGE>
APPENDIX A
THE FOLLOWING ARE DESCRIPTIONS OF CERTAIN TYPES OF SECURITIES
IN WHICH WE MAY INVEST THE FUND'S ASSETS:
PUT BONDS
We may invest the Fund's assets in securities (including securities with
variable interest rates) that may be redeemed or sold back (put) to the issuer
of the security or a third party prior to stated maturity (put bonds). Such
securities will normally trade as if maturity is the earlier put date, even
though stated maturity is longer.
REPURCHASE AGREEMENTS
We may invest the Fund's assets in repurchase agreements that are
collateralized by obligations issued or guaranteed as to both principal and
interest by the U.S. government, its agencies and instrumentalities. A
repurchase agreement is a transaction in which a security is purchased with a
simultaneous commitment to sell it back to the seller (a commercial bank or
recognized securities dealer) at an agreed upon price on an agreed upon date.
This date is usually not more than seven days from the date of purchase. The
resale price reflects the purchase price plus an agreed upon market rate of
interest, which is unrelated to the coupon rate or maturity of the purchased
security.
VARIABLE RATE SECURITIES
We may invest the Fund's assets in securities that bear interest at rates which
are adjusted periodically to market rates.
* These interest rate adjustments can both raise and lower the income
generated by such securities. These changes will have the same effect on
the income earned by the Fund depending on the proportion of such
securities held.
* Because the interest rates of variable rate securities are periodically
adjusted to reflect current market rates, their market value is less
affected by changes in prevailing interest rates than the market value of
securities with fixed interest rates.
* The market value of a variable rate security usually tends toward par (100%
of face value) at interest rate adjustment time.
WHEN-ISSUED SECURITIES
We may invest the Fund's assets in new issues of debt securities offered on a
when-issued basis.
* Delivery and payment take place after the date of the commitment to
purchase, normally within 45 days. Both price and interest rate are fixed
at the time of commitment.
* The Fund does not earn interest on the securities until settlement, and the
market value of the securities may fluctuate between purchase and
settlement.
* Such securities can be sold before settlement date.
MORTGAGE-BACKED AND ASSET-BACKED SECURITIES
We may invest the Fund's assets in mortgage-backed and asset-backed securities.
Mortgage-backed securities include, but are not limited to, securities issued
by the Government National Mortgage Association (Ginnie Mae), the Federal
National Mortgage
21
<PAGE>
Association (Fannie Mae), and the Federal Home Loan Mortgage Corporation
(Freddie Mac). These securities represent ownership in a pool of mortgage
loans. They differ from conventional bonds in that principal is paid back to
the investor as payments are made on the underlying mortgages in the pool.
Accordingly, the Fund receives monthly scheduled payments of principal and
interest along with any unscheduled principal prepayments on the underlying
mortgages. Because these scheduled and unscheduled principal payments must be
reinvested at prevailing interest rates, mortgage-backed securities do not
provide an effective means of locking in long-term interest rates for the
investor. Like other fixed income securities, when interest rates rise, the
value of a mortgage-backed security generally will decline; however, when
interest rates are declining, the value of mortgage-backed securities with
prepayment features may not increase as much as other fixed income securities.
Mortgage-backed securities also include collateralized mortgage obligations
(CMOs). CMOs are obligations fully collateralized by a portfolio of mortgages
or mortgage-related securities. CMOs are divided into pieces (tranches) with
varying maturities. The cash flow from the underlying mortgages is used to pay
off each tranche separately. CMOs are designed to provide investors with more
predictable maturities than regular mortgage securities but such maturities can
be difficult to predict because of the effect of prepayments. Failure to
accurately predict prepayments can adversely affect the Fund's return on these
investments. CMOs may also be less marketable than other securities.
Asset-backed securities represent a participation in, or are secured by and
payable from, a stream of payments generated by particular assets, such as
credit card, motor vehicle, or trade receivables. They may be pass-through
certificates, which have characteristics very similar to mortgage-backed
securities, discussed above. They may also be in the form of asset-backed
commercial paper, which is issued by a special purpose entity, organized solely
to issue the commercial paper and to purchase interests in the assets. The
credit quality of these securities depends primarily upon the quality of the
underlying assets and the level of credit support and enhancement provided.
The weighted average life of such securities is likely to be substantially
shorter than their stated final maturity as a result of scheduled principal
payments and unscheduled principal prepayments.
EURODOLLAR AND YANKEE OBLIGATIONS
We may invest a portion of the Fund's assets in dollar-denominated instruments
that have been issued outside the U.S. capital markets by foreign corporations
and financial institutions and by foreign branches of U.S. corporations and
financial institutions (Eurodollar obligations) as well as dollar-denominated
instruments that have been issued by foreign issuers in the U.S. capital
markets (Yankee obligations).
MASTER DEMAND NOTES
We may invest the Fund's assets in master demand notes, which are obligations
that permit the investment of fluctuating amounts by the Fund, at varying rates
of interest using direct arrangements between the Fund, as lender, and the
borrower. These notes permit daily
22
<PAGE>
changes in the amounts borrowed. The Fund has the right to increase the amount
under the note at any time up to the full amount provided by the note
agreement, or to decrease the amount, and the borrower may repay up to the full
amount of the note without penalty. Frequently, such obligations are secured by
letters of credit or other credit support arrangements provided by banks.
Because master demand notes are direct lending arrangements between the lender
and borrower, these instruments generally will not be traded, and there
generally is no secondary market for these notes, although they are redeemable
(and immediately repayable by the borrower) at face value, plus accrued
interest, at any time. We will invest the Fund's assets in master demand notes
only if the Fund's Board of Directors or its delegate has determined that they
are of credit quality comparable to the debt securities in which the Fund
generally may invest.
MUNICIPAL LEASE OBLIGATIONS
We may invest the Fund's assets in a variety of instruments commonly referred
to as municipal lease obligations, including leases, installment purchase
contracts, and certificates of participation in such leases and contracts.
CONVERTIBLE SECURITIES
We may invest the Fund's assets in convertible securities, which are bonds,
preferred stocks, and other securities that pay interest or dividends and offer
the buyer the ability to convert the security into common stock. The value of
convertible securities depends partially on interest rate changes and the
credit quality of the issuer. Because a convertible security affords an
investor the opportunity, through its conversion feature, to participate in the
capital appreciation of the underlying common stock, the value of convertible
securities also depends on the price of the underlying common stock.
ILLIQUID SECURITIES
We may invest up to 15% of the Fund's net assets in securities 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.
REAL ESTATE INVESTMENT TRUSTS (REITS)
We may invest the Fund's assets in REITs, which may subject the Fund to many of
the same risks associated with the direct ownership of real estate.
Additionally, REITs are dependent upon the capabilities of the REIT manager(s),
have limited diversification, and could be significantly impacted by changes in
tax laws.
TREASURY INFLATION-PROTECTED SECURITIES (TIPS)
We may invest the Fund's assets in treasury inflation-protected securities,
which are U.S. Treasury securities that have been designed to provide a real
rate of return after being adjusted over time to reflect the impact of
inflation. Their principal value periodically adjusts to the rate of inflation.
They trade at prevailing real, or after inflation, interest rates. The U.S.
Treasury has guaranteed repayment of these securities of at least their face
value in the event of sustained deflation or a drop in prices.
23
<PAGE>
APPENDIX B
USAA Family of No-Load Mutual Funds
The USAA family of no-load mutual funds includes a variety of Funds, each with
different objectives and policies. In combination, these Funds are designed to
provide you with the opportunity to formulate your own investment program. You
may exchange any shares you hold in any one USAA Fund for shares in any other
USAA Fund, 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
-------------------------------------------------------------------------------
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 INDEX(SM)" 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.
24
<PAGE>
FUND TYPE/NAME (CONTINUED) RISK
-------------------------------------------------------------------------------
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
-------------------------------------------------------------------------------
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.
25
<PAGE>
NOTES
<PAGE>
NOTES
<PAGE>
If you would like more information about the Fund, you may call 1-800-531-8181
to request a free copy of the Fund's statement of additional information (SAI),
annual or semiannual report, or to ask other questions about the Fund. The SAI
has been filed with the Securities and Exchange Commission (SEC) and is legally
a part of this prospectus. In the Fund's annual report, you will find a
discussion of the market conditions and investment strategies that
significantly affected the Fund's performance during the last fiscal year.
To view these documents, along with other related documents, you can visit the
EDGAR database on 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 paying 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 CUSTODIAN
USAA Shareholder Account Services State Street Bank and Trust Company
9800 Fredericksburg Road P.O. Box 1713
San Antonio, Texas 78288 Boston, Massachusetts 02105
----------------------------------------------------------------
TELEPHONE ASSISTANCE HOURS
Call toll free - Central Time
Monday - Friday 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 No. 811-2429
<PAGE>
USAA SHORT-TERM
BOND FUND
PROSPECTUS
DECEMBER 1, 2000
As with other mutual funds, the Securities and Exchange Commission has not
approved or disapproved of this Fund's shares or determined whether this
prospectus is accurate or complete. Anyone who tells you otherwise is
committing a crime.
TABLE OF CONTENTS
What Is the Fund's Investment Objective and Main Strategy? ............. 2
What Are the Main Risks of Investing in This Fund? ..................... 2
Is This Fund for You? .................................................. 3
Could the Value of Your Investment in This Fund Fluctuate? ............. 3
Fees and Expenses ...................................................... 5
Fund Investments ....................................................... 6
Fund Management ........................................................ 9
Using Mutual Funds in an Investment Program ............................ 10
How to Invest .......................................................... 11
How to Redeem .......................................................... 13
Important Information About Purchases and Redemptions .................. 15
Exchanges .............................................................. 16
Shareholder Information ................................................ 16
Financial Highlights ................................................... 19
Appendix A ............................................................. 20
Appendix B ............................................................. 23
<PAGE>
USAA Investment Management Company manages this Fund. For easier reading, USAA
Investment Management Company will be referred to as "we" or "us" throughout
the prospectus.
WHAT IS THE FUND'S INVESTMENT OBJECTIVE AND MAIN STRATEGY?
The Fund's investment objective is high current income consistent with
preservation of principal. We will attempt to achieve this objective by
investing the Fund's assets primarily in a broad range of investment-grade debt
securities. We will maintain a dollar-weighted average portfolio maturity of
three years or less.
Because any investment involves risk, there is no assurance that the Fund's
objective will be achieved. See FUND INVESTMENTS on page 6 for more
information.
WHAT ARE THE MAIN RISKS OF INVESTING IN THIS FUND?
The primary risks of investing in this Fund are credit risk and interest rate
risk.
* CREDIT RISK involves the possibility that a borrower cannot make timely
interest and principal payments on its securities.
* INTEREST RATE RISK involves the possibility that the value of the Fund's
investments will fluctuate due to changes in interest rates.
IF INTEREST RATES INCREASE: the yield of the Fund may increase and the
market value of the Fund's securities will likely decline, adversely
affecting the net asset value and total return.
IF INTEREST RATES DECREASE: the yield of the Fund may decrease and the
market value of the Fund's securities may increase, which would likely
increase the Fund's net asset value and total return.
Additional risks of the Fund described later in the prospectus are prepayment
risk and the risk of investing in real estate investment trusts. 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.
2
<PAGE>
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.
Look for this symbol [CAUTION LIGHT GRAPHIC] 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 looking for current income.
* You are looking for an investment that is low risk.
* You are looking for a short-term investment.
This Fund MAY NOT be appropriate as part of your investment portfolio if . . .
* Your primary goal is to maximize long-term growth.
* You need a high total return to achieve your goals.
* You need an investment that provides tax-free income.
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. The
bar chart shown on the next page illustrates the Fund's volatility and
performance from year to year for each full calendar year since the Fund's
inception.
3
<PAGE>
Total Return
All mutual funds must use the same formula to calculate total return.
[SIDE BAR]
TOTAL RETURN MEASURES THE PRICE CHANGE IN A SHARE ASSUMING THE REINVESTMENT
OF ALL DIVIDEND INCOME AND CAPITAL GAIN DISTRIBUTIONS.
[BAR CHART]
CALENDAR YEAR TOTAL RETURN
1994* .02%
1995 11.18%
1996 6.31%
1997 7.16%
1998 5.03%
1999 4.06%
*FUND BEGAN OPERATIONS ON JUNE 1, 1993.
THE FUND'S TOTAL RETURN FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30,
2000, WAS 5.02%.
During the periods shown in the above bar chart, the highest total return for a
quarter was 4.72% (quarter ending June 30, 1995) and the lowest total return
for a quarter was -.82% (quarter ending March 31, 1994).
The table below shows how the Fund's average annual total returns for the one-
and five-year periods, as well as the life of the Fund, compared to those of a
broad-based securities market index. Remember, historical performance does not
necessarily indicate what will happen in the future.
-------------------------------------------------------------------------------
Average Annual Total Returns
(for the periods ending December 31, 1999)
Past Past Since Inception
1 Year 5 Years June 1, 1993
-------------------------------------------------------------------------------
Short-Term Bond Fund 4.06% 6.72% 5.52%
-------------------------------------------------------------------------------
Lehman Brothers
1- 3 Gov't/Corp Index* 3.15% 6.55% 5.47%
-------------------------------------------------------------------------------
* THE LEHMAN BROTHERS 1-3 YEAR GOVERNMENT/CORPORATE INDEX IS AN UNMANAGED INDEX
OF ALL THE GOVERNMENT, AGENCY, AND CORPORATE BONDS LONGER THAN ONE YEAR AND
LESS THAN THREE YEARS.
4
<PAGE>
Yield
[SIDE BAR]
YIELD IS THE ANNUALIZED NET INCOME OF THE FUND DURING A SPECIFIED PERIOD
AS A PERCENTAGE OF THE FUND'S SHARE PRICE.
All mutual funds must use the same formula to calculate yield. The Fund may
advertise performance in terms of a 30-day yield quotation. The Fund's 30-day
yield for the period ended December 31, 1999, was 7.35%.
Please consider performance information in light of the Fund's investment
objective and policies and market conditions during the reported time periods.
The value of your shares may go up or down. You may obtain the most current
price, yield, and return information for this Fund through our usaa.com Web
site once you have established Internet access. See page 13 for information on
establishing Internet access. You may also obtain this information by calling
USAA TouchLine(R) at 1-800-531-8777. Press 1 for the Mutual Fund Menu, press 1
again for prices, yields, and returns. Then, press 36# when asked for the fund
code.
[SIDE BAR]
[TOUCHLINE GRAPHIC]
TOUCHLINE(R)
1-800-531-8777
PRESS
1
THEN
1
THEN
3 6 #
Newspaper
Symbol
ShtTBond
Ticker
Symbol
USSBX
Additionally, you may find the most current price of your shares in the
business section of your newspaper in the mutual fund section under the heading
"USAA Group" and the symbol "ShtTBond." If you prefer to obtain this
information from an online computer service, you can do so by using the ticker
symbol "USSBX."
FEES AND EXPENSES
This summary shows what it will cost you, directly and indirectly, to invest in
this 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" include expenses such as custodian
and transfer agent fees. The figures below show actual expenses during the past
fiscal year ended July 31, 2000, and are calculated as a percentage of average
net assets.
------------------------------------------------------------------
Management Fees .24%
Distribution (12b-1) Fees None
Other Expenses .24%
----
Total Annual Fund Operating Expenses .48%
====
------------------------------------------------------------------
[SIDE BAR]
12b-1 FEES - SOME MUTUAL FUNDS CHARGE THESE FEES TO PAY FOR ADVERTISING
AND OTHER COSTS OF SELLING FUND SHARES.
5
<PAGE>
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 $10,000
investment, assuming (1) 5% annual return, (2) the Fund's operating expenses
remain the same, and (3) you redeem all of your shares at the end of the
periods shown.
-------------------------------------------------------
1 year................$ 49
3 years............... 154
5 years............... 269
10 years............... 604
-------------------------------------------------------
FUND INVESTMENTS
Principal Investment Strategies and Risks
Q What is the Fund's principal investment strategy?
[SIDE BAR]
DOLLAR-WEIGHTED AVERAGE PORTFOLIO MATURITY IS OBTAINED BY MULTIPLYING THE
DOLLAR VALUE OF EACH INVESTMENT BY THE NUMBER OF DAYS LEFT TO ITS
MATURITY, THEN ADDING THOSE FIGURES TOGETHER AND DIVIDING THE TOTAL BY THE
DOLLAR VALUE OF THE FUND'S PORTFOLIO.
A The Fund's principal strategy is the investment of its assets primarily
in U.S. dollar-denominated, investment-grade debt securities. These debt
securities must be investment grade at the time of purchase. We will
maintain a dollar-weighted average portfolio maturity of three years or
less.
Q What types of debt securities are included in the Fund's portfolio?
A The Fund's portfolio may consist of any of the following:
* obligations of the U.S. government, its agencies and
instrumentalities, and repurchase agreements collateralized
by such obligations;
* mortgage-backed securities;
* asset-backed securities;
* corporate debt securities such as notes, bonds, and commercial
paper;
* debt securities of real estate investment trusts (REITs);
* U.S. bank or foreign bank obligations, including certificates of
deposit and banker's acceptances;
* obligations of state and local governments and their agencies and
instrumentalities;
* master demand notes;
* Eurodollar obligations;
6
<PAGE>
* Yankee obligations; and
* other debt securities.
For a further description of these securities, see APPENDIX A on page
20.
Q What are considered investment-grade securities?
A Investment-grade securities include securities issued or guaranteed by
the U.S. government, its agencies and instrumentalities, as well as
securities rated or subject to a guarantee that is rated within the
categories listed by the following rating agencies:
========================================================================
LONG-TERM SHORT-TERM
RATING AGENCY DEBT SECURITIES DEBT SECURITIES
------------------------------------------------------------------------
Moody's Investors At least Prime-3
Service At least Baa or MIG4/VMIG4
------------------------------------------------------------------------
Standard & Poor's At least A-3
Ratings Group At least BBB or SP-2
------------------------------------------------------------------------
Fitch Information, Inc. At least BBB At least F-3
========================================================================
If unrated by these agencies, we must determine that the securities are
of equivalent investment quality.
You will find a complete description of the above debt ratings in the
Fund's statement of additional information.
Q What happens if the rating of a security is downgraded below investment
grade?
A We will determine whether it is in the best interest of the Fund's
shareholders to continue to hold the security in the Fund's portfolio.
If downgrades result in more than 5% of the Fund's net assets being
invested in securities that are less than investment-grade quality, we
will take immediate action to reduce the Fund's holdings in such
securities to 5% or less of the Fund's net assets, unless otherwise
directed by the Fund's Board of Directors.
[CAUTION LIGHT GRAPHIC]
CREDIT RISK. The bonds in the Fund's portfolio are subject to credit risk.
Credit risk is the possibility that an issuer of a fixed income instrument such
as a bond or repurchase agreement will fail to make timely payments of interest
or principal. We attempt to minimize the Fund's credit risk by investing in
securities considered investment grade at the time of purchase. When evaluating
potential investments for the Fund, our analysts also assess credit risk and
its impact on the Fund's portfolio. Nevertheless, even
7
<PAGE>
investment-grade securities are subject to some credit risk. Securities in the
lowest-rated, investment-grade category have speculative characteristics.
Changes in economic conditions or other circumstances are more likely to lead
to a weakened capability to make principal and interest payments on these
securities than is the case for higher-rated securities. In addition, the
ratings of securities are estimates by the rating agencies of the credit
quality of the securities. The ratings may not take into account every risk
related to whether interest or principal will be repaid on a timely basis.
[CAUTION LIGHT GRAPHIC]
INTEREST RATE RISK. As a mutual fund investing in bonds, the Fund is subject to
the risk that the market value of the bonds will decline due to rising interest
rates. Bond prices are linked to the prevailing market interest rates. In
general, when interest rates rise, bonds prices fall and when interest rates
fall, bond prices rise. The price volatility of a bond also depends on its
maturity. Generally, the longer the maturity of a bond, the greater its
sensitivity to interest rates. To compensate investors for this higher risk,
bonds with longer maturities generally offer higher yields than bonds with
shorter maturities.
[CAUTION LIGHT GRAPHIC]
PREPAYMENT RISK. Mortgagors may generally pay off mortgages without penalty
before the due date. When mortgaged property is sold, which can occur at any
time for a variety of reasons, the old mortgage is usually prepaid. Also, when
mortgage interest rates fall far enough to make refinancing attractive,
prepayments tend to accelerate. Prepayments require reinvestment of the
principal at the then-current level of interest rates, which are often at a
lower level than when the mortgages were originally issued. Reinvestment at
lower rates tends to reduce the interest payments received by the Fund and,
therefore, the size of the dividend payments available to shareholders. If
reinvestment occurs at a higher level of interest rates, the opposite effect is
true.
[CAUTION LIGHT GRAPHIC]
REITS. Investing in REITs may subject the Fund to many of the same risks
associated with the direct ownership of real estate. Additionally, REITs are
dependent upon the capabilities of the REIT manager(s), have limited
diversification, and could be significantly impacted by changes in tax laws.
Moreover, by investing in the debt securities of REITs, the Fund is also
subject to credit risk.
8
<PAGE>
Q How are the decisions to buy and sell securities made?
A We search for securities that represent value at the time given current
market conditions. Value is a combination of yield, credit quality,
structure (maturity, coupon, redemption features), and liquidity.
Recognizing value is the result of simultaneously analyzing the
interaction of these factors among the securities available in the
market. We will sell a security if we become concerned about its credit
risk, are forced by market factors to raise money, or an attractive
replacement is available.
For additional information about other securities in which we may invest the
Fund's assets, see APPENDIX A on page 20.
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. As of the date of
this prospectus, we had approximately $42 billion in total assets under
management. Our mailing address is 9800 Fredericksburg Road, San Antonio, TX
78288.
We provide management services to the Fund pursuant to an Advisory Agreement.
We are responsible for managing the Fund's portfolio (including placement of
brokerage orders) and its business affairs, subject to the authority of and
supervision by the Fund's Board of Directors. For our services, the Fund pays
us an annual fee. The fee was computed and paid at twenty-four one hundredths
of one percent (.24%) of average net assets for the fiscal year ended July 31,
2000. We also provide services related to selling the Fund's shares and receive
no compensation for those services.
Portfolio Manager
[PHOTOGRAPH]
PAUL H. LUNDMARK
Paul H. Lundmark, assistant vice president of Fixed Income Investments, has
managed the Fund since its inception in June 1993. Mr. Lundmark has 14 years'
investment management experience and has worked for us for eight years. He
earned the Chartered Financial Analyst designation in 1989 and is a member of
the Association for Investment Management and Research and the San Antonio
Financial Analysts Society, Inc. He holds an MBA and BSB from the University of
Minnesota.
9
<PAGE>
USING MUTUAL FUNDS IN AN INVESTMENT PROGRAM
I. 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.
II. Using Funds in an Investment Program
In choosing a mutual fund as an investment vehicle, you are giving up some
investment decisions, but must still make others. The decisions you don't have
to make are those involved with choosing individual securities. We will perform
that function. In addition, we will arrange for the safekeeping of securities,
auditing the annual financial statements, and daily valuation of the Fund, as
well as other functions.
You, however, retain at least part of the responsibility for an equally
important decision. This decision involves determining a portfolio of mutual
funds that balances your investment goals with your tolerance for risk. It is
likely that this decision may include the use of more than one fund of the USAA
family of funds.
For example, assume you wish to invest in a widely diversified portfolio. You
could combine an investment in the Short-Term Bond Fund with investments in
other mutual funds that invest in stocks of large and small companies and
high-dividend stocks. This is just one way you could combine funds to fit your
own risk and reward goals.
III. USAA's Family of Funds
We offer you another alternative with our asset strategy funds listed in
APPENDIX B under asset allocation on page 23. 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.
10
<PAGE>
Whether you prefer to create your own mix of mutual funds or use a USAA asset
strategy fund, the USAA family of funds provides a broad range of choices
covering just about any investor's investment objectives. Our 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 23 for a
complete list of the USAA family of no-load mutual funds.
HOW TO INVEST
Purchase of Shares
OPENING AN ACCOUNT
You may open an account and make an investment as described below by mail, in
person, bank wire, 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.
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
[MONEY GRAPHIC]
* $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
11
<PAGE>
reduce the minimum amounts for monthly electronic investments. Employees
of USAA and its affiliated companies may open an account through payroll
deduction for as little as $25 per pay period with no initial investment.
ADDITIONAL PURCHASES
* $50 per transaction, per account.
HOW TO PURCHASE BY . . .
MAIL
[ENVELOPE GRAPHIC]
* 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 in the
business reply envelope that accompanies your Fund's transaction
confirmation to the transfer agent:
USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, TX 78288
IN PERSON
[HANDSHAKE]
* 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
[WIRE GRAPHIC]
* 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 Short-Term Bond Fund
USAA Account Number: 69384998
Shareholder(s) Name(s) _________________________________
Shareholder(s) Mutual Fund Account Number ______________
ELECTRONIC FUNDS TRANSFER (EFT)
[CALENDAR GRAPHIC]
* Additional purchases on a regular basis can be deducted from a bank
account, paycheck, income-producing investment, or USAA money market fund
account. Sign up for these services when opening an account or call
1-800-531-8448 to add these services.
12
<PAGE>
PHONE 1-800-531-8448 (IN SAN ANTONIO, 456-7202)
[TELEPHONE GRAPHIC]
* If you have an existing USAA mutual fund account and would like to open a
new account or exchange to another USAA Fund, call for instructions. To
open an account by phone, the new account must have the same registration
as your existing account.
USAA TOUCHLINE(R)1-800-531-8777 (IN SAN ANTONIO, 498-8777)
[TOUCHLINE GRAPHIC]
* 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
[COMPUTER GRAPHIC]
* 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.
13
<PAGE>
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
[FAX MACHINE GRAPHIC]
* 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.
* 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.
CHECKWRITING
[CHECKBOOK GRAPHIC]
* Return a signed signature card, which accompanies your application, or
request a signature card separately and return it to:
USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, TX 78288
Your checkwriting privilege is subject to State Street Bank and Trust Company's
rules and regulations governing checking accounts. You may write checks in the
amount of $250 or more. Any checks written for less than $250 will be returned.
You will not be charged for the use of checks or any subsequent reorders.
Because the value of your account changes daily
14
<PAGE>
as dividends accrue, you may not write a check to close your account. Remember,
writing a check results in a taxable event and is therefore reportable for
federal tax purposes.
IMPORTANT INFORMATION ABOUT PURCHASES AND REDEMPTIONS
INVESTOR'S GUIDE to USAA Mutual Fund Services
[INVESTORS GUIDE GRAPHIC]
Upon your initial investment with us, you will receive the INVESTOR'S GUIDE to
help you get the most out of your USAA mutual fund account and to 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 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 Fund's Board
of Directors and the required notice has been given to shareholders;
15
<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 Fund has undertaken certain procedures regarding telephone transactions as
described on page 14.
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
[SIDE BAR]
NAV PER SHARE
EQUALS
TOTAL ASSETS
MINUS
LIABILITIES
DIVIDED BY
# OF SHARES
OUTSTANDING
The price at which you purchase and redeem Fund shares is equal to the net
asset value (NAV) per share determined on the effective date of the purchase or
redemption. You may buy and sell Fund shares at the NAV per
16
<PAGE>
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.
Portfolio securities, except as otherwise noted, traded primarily on a
securities exchange are valued at the last sales price on that exchange. If no
sale is reported, the average of the bid and asked prices is generally used.
Over-the-counter securities are generally priced at the last sales price or, if
not available, at the average of the bid and asked prices.
Debt securities purchased with maturities of 60 days or less are stated at
amortized cost, which approximates market value. Other debt securities are
valued each business day at their current market value as determined by a
pricing service approved by the 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
Net investment income is accrued daily and paid on the last business day of the
month. Daily dividends are declared at the time the NAV per share is
calculated. Dividends shall begin accruing on shares purchased the day
following the effective date and shall continue to accrue to the effective date
of redemption. When you choose to receive cash dividends monthly, we will send
you those funds that have accrued during the month after the payment date. Any
net capital gain distribution usually occurs annually within 61 days of the
July 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.
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
capital gain distribution paid by the Fund will reduce the NAV per share by the
amount of the distribution on the ex-dividend date. You should consider
carefully the effects of purchasing shares of the Fund shortly before any
distribution. Some or all of these 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.
17
<PAGE>
Federal Taxes
This tax information is quite general and refers to the federal income tax
provisions in effect as of the date of this prospectus. Note that the Taxpayer
Relief Act of 1997 and the technical provisions adopted by the IRS
Restructuring and Reform Act of 1998 may affect the status and treatment of
certain distributions shareholders receive from the Fund. Because each
investor's tax circumstances are unique and because the tax laws are subject to
change, we recommend that you consult your tax advisor about your investment.
SHAREHOLDER - Dividends from taxable net investment income and distributions of
net short-term capital gains are taxable to you as ordinary income, whether
received in cash or reinvested in additional shares.
Regardless of the length of time you have held the Fund shares, distributions
of net long-term capital gains are taxable as long-term capital gains whether
received in cash or reinvested in additional shares.
WITHHOLDING - Federal law requires the Fund to withhold and remit to the U.S.
Treasury a portion of the income dividends and capital gain distributions and
proceeds of redemptions paid to any non-corporate shareholder who:
* fails to furnish the Fund with a correct tax identification number,
* underreports dividend or interest income, or
* fails to certify that he or she is not subject to withholding.
To avoid this withholding requirement, you must certify, on your application or
on a separate Form W-9 supplied by the Fund's transfer agent, that your tax
identification number is correct and you are not currently subject to backup
withholding.
REPORTING - The Fund will report information to you annually concerning the tax
status of dividends and distributions for federal income tax purposes.
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.
18
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the Fund's
financial performance for the past five years. Certain information reflects
financial results for a single Fund share. The total returns in the table
represent the rate that an investor would have earned (or lost) on an
investment in the Fund (assuming reinvestment of all dividends and
distributions). This information has been audited by KPMG LLP, whose report,
along with the Fund's financial statements, are included in the annual report,
which is available upon request.
Year Ended July 31,
--------------------------------------------------------
2000 1999 1998 1997 1996
--------------------------------------------------------
Net asset value at
beginning of period $ 9.75 $ 9.99 $ 10.03 $ 9.79 $ 9.87
Net investment income .63 .58 .62 .61 .62
Net realized and
unrealized gain (loss) (.05) (.22) (.04) .25 (.08)
Distributions from net
investment income (.63) (.58) (.62) (.61) (.62)
Distributions of realized
capital gains - (.02) - (.01) -
--------------------------------------------------------
Net asset value at
end of period $ 9.70 $ 9.75 $ 9.99 $ 10.03 $ 9.79
========================================================
Total return (%)* 6.18 3.76 5.91 8.97 5.62
Net assets at end of
period (000) $293,003 $241,247 $181,171 $133,746 $ 101,032
Ratio of expenses to
average net assets (%) .48 .50 .50 .50 .50
Ratio of expenses
to average net
assets, excluding
reimbursements (%) n/a .52 .56 .61 .66
Ratio of net investment
income to average net
assets (%) 6.56 5.89 6.16 6.14 6.29
Portfolio turnover (%) 23.68 11.53 48.24 27.85 66.81
----------------
* Assumes reinvestment of all dividend income and capital gain distributions
during the period.
19
<PAGE>
APPENDIX A
THE FOLLOWING ARE DESCRIPTIONS OF CERTAIN TYPES OF SECURITIES
IN WHICH WE MAY INVEST THE FUND'S ASSETS:
PUT BONDS
We may invest the Fund's assets in securities (including securities with
variable interest rates) that may be redeemed or sold back (put) to the issuer
of the security or a third party prior to stated maturity (put bonds). Such
securities will normally trade as if maturity is the earlier put date, even
though stated maturity is longer.
VARIABLE RATE SECURITIES
We may invest the Fund's assets in securities that bear interest at rates which
are adjusted periodically to market rates.
* These interest rate adjustments can both raise and lower the income
generated by such securities. These changes will have the same effect on
the income earned by the Fund depending on the proportion of such
securities held.
* Because the interest rates of variable rate securities are periodically
adjusted to reflect current market rates, their market value is less
affected by changes in prevailing interest rates than the market value of
securities with fixed interest rates.
* The market value of a variable rate security usually tends toward par (100%
of face value) at interest rate adjustment time.
WHEN-ISSUED SECURITIES
We may invest the Fund's assets in new issues of debt securities offered on a
when-issued basis.
* Delivery and payment take place after the date of the commitment to
purchase, normally within 45 days. Both price and interest rate are fixed
at the time of commitment.
* The Fund does not earn interest on the securities until settlement, and the
market value of the securities may fluctuate between purchase and
settlement.
* Such securities can be sold before settlement date.
REPURCHASE AGREEMENTS
We may invest the Fund's assets in repurchase agreements that are
collateralized by obligations issued or guaranteed as to both principal and
interest by the U.S. government, its agencies and instrumentalities. A
repurchase agreement is a transaction in which a security is purchased with a
simultaneous commitment to sell it back to the seller (a commercial bank or
recognized securities dealer) at an agreed upon price on an agreed upon date.
This date is usually not more than seven days from the date of purchase. The
resale price reflects the purchase price plus an agreed upon market rate of
interest, which is unrelated to the coupon rate or maturity of the purchased
security.
20
<PAGE>
MUNICIPAL LEASE OBLIGATIONS
We may invest the Funds assets in a variety of instruments referred to as
municipal lease obligations, including leases, installment purchase contracts,
and certificates of participation in such leases and contracts.
MORTGAGE-BACKED AND ASSET-BACKED SECURITIES
We may invest the Fund's assets in mortgage-backed and asset-backed securities.
Mortgage-backed securities include, but are not limited to, securities issued
by the Government National Mortgage Association (Ginnie Mae), the Federal
National Mortgage Association (Fannie Mae), and the Federal Home Loan Mortgage
Corporation (Freddie Mac). These securities represent ownership in a pool of
mortgage loans. They differ from conventional bonds in that principal is paid
back to the investor as payments are made on the underlying mortgages in the
pool. Accordingly, the Fund receives monthly scheduled payments of principal
and interest along with any unscheduled principal prepayments on the underlying
mortgages. Because these scheduled and unscheduled principal payments must be
reinvested at prevailing interest rates, mortgage-backed securities do not
provide an effective means of locking in long-term interest rates for the
investor. Like other fixed income securities, when interest rates rise, the
value of a mortgage-backed security generally will decline; however, when
interest rates are declining, the value of mortgage-backed securities with
prepayment features may not increase as much as other fixed income securities.
Mortgage-backed securities also include collateralized mortgage obligations
(CMOs). CMOs are obligations fully collateralized by a portfolio of mortgages
or mortgage-related securities. CMOs are divided into pieces (tranches) with
varying maturities. The cash flow from the underlying mortgages is used to pay
off each tranche separately. CMOs are designed to provide investors with more
predictable maturities than regular mortgage securities but such maturities can
be difficult to predict because of the effect of prepayments. Failure to
accurately predict prepayments can adversely affect the Fund's return on these
investments. CMOs may also be less marketable than other securities.
Asset-backed securities represent a participation in, or are secured by and
payable from, a stream of payments generated by particular assets, such as
credit card, motor vehicle, or trade receivables. They may be pass-through
certificates, which have characteristics very similar to mortgage-backed
securities, discussed above. They may also be in the form of asset-backed
commercial paper, which is issued by a special purpose entity, organized solely
to issue the commercial paper and to purchase interests in the assets. The
credit quality of these securities depends primarily upon the quality of the
underlying assets and the level of credit support and enhancement provided.
The weighted average life of such securities is likely to be substantially
shorter than their stated final maturity as a result of scheduled principal
payments and unscheduled principal prepayments.
21
<PAGE>
EURODOLLAR AND YANKEE OBLIGATIONS
We may invest a portion of the Fund's assets in dollar-denominated instruments
that have been issued outside the U.S. capital markets by foreign corporations
and financial institutions and by foreign branches of U.S. corporations and
financial institutions (Eurodollar obligations) as well as dollar-denominated
instruments that have been issued by foreign issuers in the U.S. capital
markets (Yankee obligations).
MASTER DEMAND NOTES
We may invest the Fund's assets in master demand notes, which are obligations
that permit the investment of fluctuating amounts by the Fund, at varying rates
of interest using direct arrangements between the Fund, as lender, and the
borrower. These notes permit daily changes in the amounts borrowed. The Fund
has the right to increase the amount under the note at any time up to the full
amount provided by the note agreement, or to decrease the amount, and the
borrower may repay up to the full amount of the note without penalty.
Frequently, such obligations are secured by letters of credit or other credit
support arrangements provided by banks. Because master demand notes are direct
lending arrangements between the lender and borrower, these instruments
generally will not be traded, and there generally is no secondary market for
these notes, although they are redeemable (and immediately repayable by the
borrower) at face value, plus accrued interest, at any time. We will invest the
Fund's assets in master demand notes only if the Fund's Board of Directors or
its delegate has determined that they are of credit quality comparable to the
debt securities in which the Fund generally may invest.
ILLIQUID SECURITIES
We may invest up to 15% of the Fund's net assets in securities 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.
22
<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
-------------------------------------------------------------------------------
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 INDEX(SM)" 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.
23
<PAGE>
APPENDIX B (CONTINUED)
FUND TYPE/NAME (CONTINUED) RISK
-------------------------------------------------------------------------------
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
-------------------------------------------------------------------------------
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.
24
<PAGE>
If you would like more information about the Fund, you may call 1-800-531-8181
to request a free copy of the Fund's statement of additional information (SAI),
annual or semiannual report, or to ask other questions about the Fund. The SAI
has been filed with the Securities and Exchange Commission (SEC) and is legally
a part of this prospectus. In the Fund's annual report, you will find a
discussion of the market conditions and investment strategies that
significantly affected the Fund's performance during the last fiscal year.
To view these documents, along with other related documents, you can visit the
EDGAR database on 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 paying 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 CUSTODIAN
USAA Shareholder Account Services State Street Bank and Trust Company
9800 Fredericksburg Road P.O. Box 1713
San Antonio, Texas 78288 Boston, Massachusetts 02105
----------------------------------------------------------------
TELEPHONE ASSISTANCE HOURS
Call toll free - Central Time
Monday - Friday 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>
USAA MONEY MARKET FUND
PROSPECTUS
DECEMBER 1, 2000
As with other mutual funds, the Securities and Exchange Commission has not
approved or disapproved of this Fund's shares or determined whether this
prospectus is accurate or complete. Anyone who tells you otherwise is
committing a crime.
TABLE OF CONTENTS
What Is the Fund's Investment Objective and Main Strategy? ............. 2
What Are the Main Risks of Investing in This Fund? ..................... 2
Is This Fund for You? .................................................. 3
Could the Value of Your Investment in This Fund Fluctuate? ............. 3
Fees and Expenses ...................................................... 5
Fund Investments ....................................................... 6
Fund Management ........................................................ 9
Using Mutual Funds in an Investment Program ............................ 9
How to Invest .......................................................... 10
How to Redeem .......................................................... 13
Important Information About Purchases and Redemptions .................. 14
Exchanges .............................................................. 15
Shareholder Information ................................................ 16
Financial Highlights ................................................... 19
Appendix A ............................................................. 20
Appendix B ............................................................. 23
<PAGE>
USAA Investment Management Company manages this Fund. For easier reading, USAA
Investment Management Company will be referred to as "we" or "us" throughout
the prospectus.
WHAT IS THE FUND'S INVESTMENT OBJECTIVE AND MAIN STRATEGY?
The Fund's investment objective is the highest income consistent with
preservation of capital and the maintenance of liquidity. We will attempt to
achieve this objective by investing the Fund's assets in high-quality, U.S.
dollar-denominated, short-term debt instruments that present minimal credit
risk and comply with strict Securities and Exchange Commission (SEC) guidelines
applicable to money market funds.
Because any investment involves risk, there is no assurance that the Fund's
objective will be achieved. See FUND INVESTMENTS on page 6 for more
information.
WHAT ARE THE MAIN RISKS OF INVESTING IN THIS FUND?
The primary risks of investing in this Fund are interest rate risk and credit
risk.
* INTEREST RATE RISK involves the possibility that the value of the Fund's
investments will fluctuate due to changes in interest rates.
IF INTEREST RATES INCREASE: the yield of the Fund may increase, which
would likely increase the Fund's total return.
IF INTEREST RATES DECREASE: the yield of the Fund may decrease, which may
decrease the Fund's total return.
* CREDIT RISK involves the possibility that a borrower cannot make timely
interest and principal payments on its securities.
Money market funds are sometimes confused with savings accounts. A savings
account is a deposit with a bank. The bank is obligated to return the amount
deposited and to pay you interest for the use of your money. Up to a certain
dollar amount, the Federal Deposit Insurance Corporation (FDIC) will insure
that the bank meets its obligations.
2
<PAGE>
This Fund is not a savings account but, rather, is a money market mutual fund
that issues and redeems its shares at the Fund's net asset value (NAV) per
share. The Fund always seeks to maintain a constant NAV of $1 per share.
Just as a savings account pays interest on the amount deposited, the Fund pays
dividends on the shares you own. If these dividends are reinvested in the Fund,
the value of your account will grow over time.
Unlike a savings account, however, an investment in this Fund is not a deposit
of USAA Federal Savings Bank, or any other bank, and is not insured or
guaranteed by the FDIC or any other government agency. Although the Fund seeks
to preserve the value of your investment at $1 per share, it is possible to
lose money by investing in this Fund.
IS THIS FUND FOR YOU?
This Fund might be appropriate as part of your investment portfolio if . . .
* You need your money back within a short period.
* You need to preserve principal.
* You want a low-risk investment.
* You would like checkwriting privileges on the account.
This Fund MAY NOT be appropriate as part of your investment portfolio if . . .
* You need a high total return to achieve your goals.
* You need an investment that provides tax-free income.
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. We manage the Fund in accordance with strict SEC guidelines
designed to preserve the Fund's value at $1 per share, although, of course, we
cannot guarantee that the value will remain at $1 per share. The value of your
investment typically will grow through reinvested dividends. The bar chart
shown on the next page illustrates the Fund's volatility and performance from
year to year for each full calendar year over the past ten years.
3
<PAGE>
Total Return
All mutual funds must use the same formula to calculate total return.
[SIDE BAR]
TOTAL RETURN MEASURES THE PRICE CHANGE IN A SHARE ASSUMING THE REINVESTMENT
OF ALL DIVIDEND INCOME AND CAPITAL GAIN DISTRIBUTIONS.
[BAR CHART]
CALENDAR YEAR TOTAL RETURN
1990 7.97%
1991 6.07%
1992 3.80%
1993 3.01%
1994 4.05%
1995 5.80%
1996 5.24%
1997 5.40%
1998 5.34%
1999 4.97%
THE FUND'S TOTAL RETURN FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30,
2000, WAS 4.50%.
During the periods shown in the above bar chart, the highest total return for a
quarter was 1.95% (quarter ending September 30, 1990) and the lowest total
return for a quarter was -.73% (quarter ending December 31, 1993).
The table below shows the Fund's average annual total returns for the one-,
five-, and ten-year periods, as well as the life of the Fund. 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 Past Past Life of
1 Year 5 Years 10 Years Fund
-------------------------------------------------------------------------------
Money Market Fund 4.97% 5.35% 5.16% 7.14%
-------------------------------------------------------------------------------
Yield
[SIDE BAR]
YIELD IS THE ANNUALIZED NET INCOME OF THE FUND DURING A SPECIFIED PERIOD
AS A PERCENTAGE OF THE FUND'S SHARE PRICE.
All mutual funds must use the same formulas to calculate yield and effective
yield. The Fund typically advertises performance in terms of a 7-day yield and
effective yield and may advertise total return. The 7-day yield quotation more
closely reflects current earnings of the Fund than the total return quotation.
The effective yield will be slightly higher than the yield because
4
<PAGE>
of the compounding effect of the assumed reinvestment. Current yields and
effective yields fluctuate daily and will vary with factors such as interest
rates and the quality, length of maturities, and type of investments in the
portfolio. The Fund's 7-day yield for the period ended December 31, 1999, was
5.68%.
[SIDE BAR]
EFFECTIVE YIELD IS CALCULATED SIMILAR TO THE YIELD. HOWEVER, WHEN
ANNUALIZED, THE INCOME EARNED IS ASSUMED TO BE REINVESTED.
[TOUCHLINE GRAPHIC]
TOUCHLINE(R)
1-800-531-8777
PRESS
1
THEN
1
THEN
4 2 #
Please consider performance information in light of the Fund's investment
objective and policies and market conditions during the reported time periods.
The value of your shares may go up or down. You may obtain the most current
price, yield, and return information for this Fund through our usaa.com Web
site once you have established Internet access. See page 13 for information on
establishing Internet access. You may also obtain this information by calling
USAA TouchLine(R) at 1-800-531-8777. Press 1 for the Mutual Fund Menu, press 1
again for prices, yields, and returns. Then, press 42# when asked for the fund
code.
[SIDE BAR]
Ticker
Symbol
USAXX
If you prefer to obtain this information from an online computer service, you
can do so by using the ticker symbol "USAXX."
FEES AND EXPENSES
This summary shows what it will cost you, directly and indirectly, to invest in
this 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" include expenses such as custodian
and transfer agent fees. The figures below show actual expenses before waivers
during the past fiscal year ended July 31, 2000, and are calculated as a
percentage of average net assets (ANA).
[SIDE BAR]
12b-1 FEES - SOME MUTUAL FUNDS CHARGE THESE FEES TO PAY FOR ADVERTISING
AND OTHER COSTS OF SELLING FUND SHARES.
-------------------------------------------------------------
Management Fees .24%
Distribution (12b-1) Fees None
Other Expenses .24%
----
Total Annual Fund Operating Expenses* .48%
====
-------------------------------------------------------------
--------------
* During the year, we voluntarily limited the Total Annual Fund Operating
Expenses to .46% of its ANA. Beginning December 1, 2000 we will no
longer voluntarily limit the Fund's Total Annual Fund Operating Expenses
to .46% of its ANA.
5
<PAGE>
-------------------------------------------------------------
Total Annual Fund Operating Expenses .48%
Reimbursement from USAA Investment
Management Company (.02%)
------
Actual Fund Operating Expenses
After Reimbursement .46%
=====
-------------------------------------------------------------
Example of Effect of the 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 $10,000
investment, assuming (1) 5% annual return, (2) the Fund's operating expenses
(before any applicable reimbursement) remain the same, and (3) you redeem all
of your shares at the end of the periods shown.
-------------------------------------------------------------
1 year..............$ 49
3 years............. 154
5 years............. 269
10 years............. 604
-------------------------------------------------------------
FUND INVESTMENTS
Principal Investment Strategies and Risks
Q What is the Fund's principal investment strategy?
A The Fund's principal strategy is the investment of its assets in
high-quality, U.S. dollar-denominated debt securities of domestic and
foreign issuers that have been determined to present minimal credit
risk.
Q What types of money market instruments will the Fund's assets be
invested in?
A The Fund's portfolio may include the following:
* obligations of the U.S. government, its agencies and
instrumentalities, and repurchase agreements collateralized by
such obligations;
* short-term corporate debt obligations such as notes, bonds, and
commercial paper;
* U.S. bank or foreign bank obligations, including certificates of
deposit, banker's acceptances, and time deposits;
* obligations of state and local governments and their agencies and
instrumentalities;
6
<PAGE>
* municipal lease obligations;
* mortgage-backed securities;
* asset-backed securities;
* master demand notes;
* Eurodollar obligations;
* Yankee obligations; and
* other short-term debt securities.
For a further description of these securities, see APPENDIX A on page
20.
Q Are there any limits on how much can be invested in one issuer?
A Yes. The SEC has set certain diversification requirements for money
market funds. Generally, these requirements limit a money market fund's
investments in securities of any issuer to no more than 5% of the Fund's
assets. Also, strict SEC guidelines do not permit us to invest, with
respect to 75% of the Fund's assets, greater than 10% of the Fund's
assets in securities issued by or subject to guarantees by the same
institution. Purchases of securities issued or guaranteed by the U.S.
government or its agencies or instrumentalities are not counted toward
these limitations.
Q What is the credit quality of the Fund's investments?
A The Fund's investments consist of high-quality securities that qualify
as "first-tier" securities under the SEC rules that apply to money
market funds. In general, a first-tier security is defined as a security
that is:
* issued or guaranteed by the U.S. government or any agency or
instrumentality thereof;
* rated or subject to a guarantee that is rated in the highest
category for short-term securities by at least two Nationally
Recognized Statistical Rating Organizations (NRSROs), or by one
NRSRO if the security is rated by only one NRSRO;
* unrated but issued by an issuer or guaranteed by a guarantor that
has other comparable short-term obligations so rated; or
* unrated but determined by us to be of comparable quality.
In addition, we must consider whether a particular investment presents
minimal credit risk.
7
<PAGE>
Q Who are the Nationally Recognized Statistical Rating Organizations?
A Current NRSROs include:
* Moody's Investors Service;
* Standard & Poor's Ratings Group;
* Fitch Information, Inc.; and
* Thompson BankWatch.
Q What happens if the rating of a security is downgraded?
A If the rating of a security is downgraded after purchase, we will
determine whether it is in the best interest of the Fund's shareholders
to continue to hold the security in the Fund's portfolio.
Q Will the Fund always maintain a net asset value of $1 per share?
[SIDE BAR]
DOLLAR-WEIGHTED AVERAGE PORTFOLIO MATURITY IS OBTAINED BY MULTIPLYING THE
DOLLAR VALUE OF EACH INVESTMENT BY THE NUMBER OF DAYS LEFT TO ITS
MATURITY, THEN ADDING THOSE FIGURES TOGETHER AND DIVIDING THE TOTAL BY THE
DOLLAR VALUE OF THE FUND'S PORTFOLIO.
A While we will endeavor to maintain a constant Fund net asset value of $1
per share, there is no assurance that we will be able to do so.
Remember, the shares are neither insured nor guaranteed by the U.S.
government. As such, the Fund carries some risk.
For example, there is always a risk that the issuer of a security held
by the Fund will fail to pay interest or principal when due. We attempt
to minimize this credit risk by investing only in securities rated in
the highest category for short-term securities, or, if not rated, of
comparable quality, at the time of purchase. Additionally, we will not
purchase a security unless our analysts have determined that the
security presents minimal credit risk. In addition, the Fund has
purchased insurance to protect against defaults. This insurance is
subject to deductibles and dollar limits.
There is also a risk that rising interest rates will cause the value of
the Fund's securities to decline. We attempt to minimize this interest
rate risk by limiting the maturity of each security to 397 days or less
and maintaining a dollar-weighted average portfolio maturity for the
Fund of 90 days or less.
Q How are the decisions to buy or sell securities made?
A We balance factors such as credit quality and maturity to purchase the
best relative value available in the market at any given time. While
rare, sell decisions are usually based on a change in our credit
analysis or to take advantage of an opportunity to reinvest at a higher
yield.
8
<PAGE>
For additional information about other securities in which we may invest the
Fund's assets, see APPENDIX A on page 20.
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. As of the date of
this prospectus, we had approximately $42 billion in total assets under
management. Our mailing address is 9800 Fredericksburg Road, San Antonio, TX
78288.
We provide management services to the Fund pursuant to an Advisory Agreement.
We are responsible for managing the Fund's portfolio (including placement of
brokerage orders) and its business affairs, subject to the authority of and
supervision by the Fund's Board of Directors. For our services, the Fund pays
us an annual fee. The fee is computed at twenty-four one hundredths of one
percent (.24%) of average net assets. The fee we received for the fiscal year
ended July 31, 2000, after we made reimbursements to the Fund, was equal to
.22% of average net assets. We also provide services related to selling the
Fund's shares and receive no compensation for those services.
Portfolio Manager
[PHOTOGRAPH]
PAMELA BLEDSOE NOBLE
Pamela Bledsoe Noble, vice president of Money Market Funds, has managed the
Fund since May 1996. Ms. Noble has 12 years' investment management experience
and has worked for us for nine years. She earned the Chartered Financial
Analyst designation in 1992 and is a member of the Association for Investment
Management and Research and the San Antonio Financial Analysts Society, Inc.
She holds an MBA from Texas Christian University and a BS from Louisiana Tech
University.
USING MUTUAL FUNDS IN AN INVESTMENT PROGRAM
I. The Idea Behind Mutual Funds
Mutual funds provide 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
9
<PAGE>
individuals would have. As a result, you own an investment that in earlier
times would have been available only to the wealthiest people.
II. Using Funds in an Investment Program
In choosing a mutual fund as an investment vehicle, you are giving up some
investment decisions, but must still make others. The decisions you don't have
to make are those involved with choosing individual securities. We will perform
that function. In addition, we will arrange for the safekeeping of securities,
auditing the annual financial statements, and daily valuation of the Fund, as
well as other functions.
You, however, retain at least part of the responsibility for an equally
important decision. This decision involves determining a portfolio of mutual
funds that balances your investment goals with your tolerance for risk. It is
likely that this decision may include the use of more than one fund of the USAA
family of funds.
For example, assume you wish to invest in a widely diversified portfolio. You
could combine an investment in the Money Market Fund with investments in other
mutual funds that invest in stocks of large and small companies and
high-dividend stocks. This is just one way you could combine funds to fit your
own risk and reward goals.
III. USAA's Family of Funds
We offer you another alternative with our asset strategy funds listed in
APPENDIX B under asset allocation on page 23. 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 23 for a
complete list of the USAA family of no-load mutual funds.
HOW TO INVEST
Purchase of Shares
OPENING AN ACCOUNT
You may open an account and make an investment as described below by mail, in
person, bank wire, phone, or on the Internet. A complete, signed application is
required to open your initial account. However, after
10
<PAGE>
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.
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
[MONEY GRAPHIC]
* $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 PURCHASES
* $50 per transaction, per account. (Except on transfers from brokerage
accounts, which are exempt from the minimum).
HOW TO PURCHASE BY . . .
MAIL
[ENVELOPE GRAPHIC]
* 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)
11
<PAGE>
* To add to your account, send your check and the deposit stub in the
business reply envelope that accompanies your Fund's transaction
confirmation to the transfer agent:
USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, TX 78288
IN PERSON
[HANDSHAKE GRAPHIC]
* To open an account, bring your application and check to our San Antonio
investment sales and service office at:
USAA Federal Savings Bank
10750 Robert F. McDermott Freeway
San Antonio, TX 78288
BANK WIRE
[WIRE GRAPHIC]
* 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 Money Market Fund
USAA Account Number: 69384998
Shareholder(s) Name(s) __________________________________
Shareholder(s) Mutual Fund Account Number _______________
ELECTRONIC FUNDS TRANSFER (EFT)
[CALENDAR GRAPHIC]
* Additional purchases on a regular basis can be deducted from a bank
account, paycheck, income-producing investment, or USAA money market fund
account. Sign up for these services when opening an account or call
1-800-531-8448 to add these services.
PHONE 1-800-531-8448 (IN SAN ANTONIO, 456-7202)
[TELEPHONE GRAPHIC]
* If you have an existing USAA mutual fund account and would like to open a
new account or exchange to another USAA Fund, call for instructions. To
open an account by phone, the new account must have the same registration
as your existing account.
USAA TOUCHLINE(R)1-800-531-8777 (IN SAN ANTONIO, 498-8777)
[TOUCHLINE GRAPHIC]
* 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.
12
<PAGE>
INTERNET ACCESS - USAA.COM
[COMPUTER GRAPHIC]
* 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
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
[FAX MACHINE GRAPHIC]
* 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.
* Call toll free 1-800-531-8448 (in San Antonio, 456-7202) to speak with a
member service representative.
13
<PAGE>
* 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.
CHECKWRITING
[CHECKBOOK GRAPHIC]
* Return a signed signature card, which accompanies your application, or
request a signature card separately and return it to:
USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, TX 78288
You will not be charged for the use of checks or any subsequent reorders. Your
checkwriting privilege is subject to State Street Bank and Trust Company's
rules and regulations governing checking accounts. You may write checks in the
amount of $250 or more. Checks written for less than $250 will be returned
unpaid. Because the value of your account changes daily as dividends accrue,
you may not write a check to close your account.
IMPORTANT INFORMATION ABOUT PURCHASES AND REDEMPTIONS
INVESTOR'S GUIDE to USAA Mutual Fund Services
[INVESTORS GUIDE GRAPHIC]
Upon your initial investment with us, you will receive the INVESTOR'S GUIDE to
help you get the most out of your USAA mutual fund account and to 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.
14
<PAGE>
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 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 Fund's 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 500 shares, with certain limitations.
EXCHANGES
Exchange Privilege
The exchange privilege is automatic when you complete your application. You may
exchange shares among Funds in the USAA family of funds, provided you do not
hold these shares in stock certificate form and the shares to be acquired are
offered in your state of residence. Exchanges made through USAA TouchLine(R)
and the Internet require an ESA and EFT
15
<PAGE>
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 Fund has undertaken certain procedures regarding telephone transactions as
described on page 14.
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
[SIDE BAR]
NAV PER SHARE
EQUALS
TOTAL ASSETS
MINUS
LIABILITIES
DIVIDED BY
# OF SHARES
OUTSTANDING
The price at which you purchase and redeem Fund shares is equal to the net
asset value (NAV) per share determined on the effective date of the purchase or
redemption. You may buy and sell Fund shares at the NAV per share without a
sales charge. The Fund's NAV per share is calculated at the close of the
regular trading session of the NYSE, which is usually 4 p.m. Eastern Time.
Securities are stated at amortized cost, which approximates market value.
For additional information on how securities are valued, see VALUATION OF
SECURITIES in the Fund's statement of additional information.
Dividends and Distributions
Net investment income is accrued daily and paid on the last business day of the
month. Daily dividends are declared at the time the NAV per share is
calculated. Dividends shall begin accruing on shares purchased the day
following the effective date and shall continue to accrue to the effective
16
<PAGE>
date of redemption. When you choose to receive cash dividends monthly, we will
send you those funds that have accrued during the month after the payment date.
We will invest any dividend or distribution payment returned to us in your
account at the then-current NAV per share. Dividend and distribution checks
become void six months from the date on the check. The amount of the voided
check will be invested in your account at the then-current NAV per share.
Federal Taxes
This tax information is quite general and refers to the federal income tax
provisions in effect as of the date of this prospectus. Note that the Taxpayer
Relief Act of 1997 and the technical provisions adopted by the IRS
Restructuring and Reform Act of 1998 may affect the status and treatment of
certain distributions shareholders receive from the Fund. Because each
investor's tax circumstances are unique and because the tax laws are subject to
change, we recommend that you consult your tax advisor about your investment.
SHAREHOLDER - Dividends from taxable net investment income and distributions of
net short-term capital gains are taxable to you as ordinary income, whether
received in cash or reinvested in additional shares.
Regardless of the length of time you have held the Fund shares, distributions
of net long-term capital gains are taxable as long-term capital gains whether
received in cash or reinvested in additional shares.
WITHHOLDING - Federal law requires the Fund to withhold and remit to the U.S.
Treasury a portion of the income dividends and capital gain distributions and
proceeds of redemptions paid to any non-corporate shareholder who:
* fails to furnish the Fund with a correct tax identification number,
* underreports dividend or interest income, or
* fails to certify that he or she is not subject to withholding.
To avoid this withholding requirement, you must certify, on your application or
on a separate Form W-9 supplied by the Fund's transfer agent, that your tax
identification number is correct and you are not currently subject to backup
withholding.
REPORTING - The Fund will report information to you annually concerning the tax
status of dividends and distributions for federal income tax purposes.
17
<PAGE>
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.
18
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the Fund's
financial performance for the past five years. 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 this Fund (assuming reinvestment of all dividends and
distributions). This information has been audited by KPMG LLP, whose report,
along with the Fund's financial statements, are included in the annual report,
which is available upon request.
Year Ended July 31,
---------------------------------------------------------
2000 1999 1998 1997 1996
---------------------------------------------------------
Net asset value at
beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
Net investment income .05 .05 .05 .05 .05
Distributions from net
investment income (.05) (.05) (.05) (.05) (.05)
---------------------------------------------------------
Net asset value at
end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
=========================================================
Total return (%)* 5.66 4.95 5.45 5.28 5.41
Net assets at end of
period (000) $3,427,820 $3,011,013 $2,491,473 $2,161,691 $1,828,749
Ratio of expenses to
average net assets (%) .46a .45 .45 .45 .45
Ratio of expenses
to average net
assets, excluding
reimbursements (%) .48 .48 .48 .49 .51
Ratio of net investment
income to average net
assets (%) 5.56 4.83 5.32 5.16 5.27
---------------
* Assumes reinvestment of all dividend income distributions during the
period.
(a) Effective December 1, 1999, the Manager voluntarily agreed to limit the
Fund's expense ratio to .46% of the Fund's average annual net assets.
19
<PAGE>
APPENDIX A
THE FOLLOWING ARE DESCRIPTIONS OF CERTAIN TYPES OF SECURITIES
IN WHICH WE MAY INVEST THE FUND'S ASSETS:
PUT BONDS
We may invest the Fund's assets in securities (including securities with
variable interest rates) that may be redeemed or sold back (put) to the issuer
of the security or a third party prior to stated maturity (put bonds). Such
securities will normally trade as if maturity is the earlier put date, even
though stated maturity is longer.
VARIABLE RATE SECURITIES
We may invest the Fund's assets in securities that bear interest at rates which
are adjusted periodically to market rates.
* These interest rate adjustments can both raise and lower the income
generated by such securities. These changes will have the same effect on
the income earned by the Fund depending on the proportion of such
securities held.
* Because the interest rates of variable rate securities are periodically
adjusted to reflect current market rates, their market value is less
affected by the changes in prevailing interest rates than the market of
securities with fixed interest rates.
* The market value of a variable rate security usually tends toward par (100%
of face value) at interest rate adjustment time.
WHEN-ISSUED SECURITIES
We may invest the Fund's assets in new issues of debt securities offered on a
when-issued basis.
* Delivery and payment take place after the date of the commitment to
purchase, normally within 45 days. Both price and interest rate are fixed
at the time of commitment.
* The Fund does not earn interest on the securities until settlement, and the
market value of the securities may fluctuate between purchase and
settlement.
* Such securities can be sold before settlement date.
REPURCHASE AGREEMENTS
We may invest the Fund's assets in repurchase agreements that are
collateralized by obligations issued or guaranteed as to both principal and
interest by the U.S. government, its agencies and instrumentalities. A
repurchase agreement is a transaction in which a security is purchased with a
simultaneous commitment to sell it back to the seller (a commercial bank or
recognized securities dealer) at an agreed upon price on an agreed upon date.
This date is usually not more than seven days from the date of purchase. The
resale price reflects the purchase price plus an agreed upon market rate of
interest, which is unrelated to the coupon rate or maturity of the purchased
security.
20
<PAGE>
MUNICIPAL LEASE OBLIGATIONS
We may invest the Fund's assets in a variety of instruments commonly referred
to as municipal lease obligations, including leases, installment purchase
contracts, and certificates of participation in such leases and contracts.
EURODOLLAR AND YANKEE OBLIGATIONS
We may invest a portion of the Fund's assets in dollar-denominated instruments
that have been issued outside the U.S. capital markets by foreign corporations
and financial institutions and by foreign branches of U.S. corporations and
financial institutions (Eurodollar obligations) as well as dollar-denominated
instruments that have been issued by foreign issuers in the U.S. capital
markets (Yankee obligations).
MORTGAGE-BACKED AND ASSET-BACKED SECURITIES
We may invest the Fund's assets in mortgage-backed and asset-backed securities.
Mortgage-backed securities include, but are not limited to, securities issued
by the Government National Mortgage Association (Ginnie Mae), the Federal
National Mortgage Association (Fannie Mae), and the Federal Home Loan Mortgage
Corporation (Freddie Mac). These securities represent ownership in a pool of
mortgage loans. They differ from conventional bonds in that principal is paid
back to the investor as payments are made on the underlying mortgages in the
pool. Accordingly, the Fund receives monthly scheduled payments of principal
and interest along with any unscheduled principal prepayments on the underlying
mortgages. Because these scheduled and unscheduled principal payments must be
reinvested at prevailing interest rates, mortgage-backed securities do not
provide an effective means of locking in long-term interest rates for the
investor. Like other fixed income securities, when interest rates rise, the
value of a mortgage-backed security generally will decline; however, when
interest rates are declining, the value of mortgage-backed securities with
prepayment features may not increase as much as other fixed income securities.
Asset-backed securities represent a participation in, or are secured by and
payable from, a stream of payments generated by particular assets, such as
credit card, motor vehicle, or trade receivables. They may be pass-through
certificates, which have characteristics very similar to mortgage-backed
securities, discussed above. They may also be in the form of asset-backed
commercial paper, which is issued by a special purpose entity, organized solely
to issue the commercial paper and to purchase interests in the assets. The
credit quality of these securities depends primarily upon the quality of the
underlying assets and the level of credit support and enhancement provided.
21
<PAGE>
MASTER DEMAND NOTES
We may invest the Fund's assets in master demand notes, which are obligations
that permit the investment of fluctuating amounts by the Fund, at varying rates
of interest using direct arrangements between the Fund, as lender, and the
borrower. These notes permit daily changes in the amounts borrowed. The Fund
has the right to increase the amount under the note, at any time, up to the
full amount provided by the note agreement, or to decrease the amount, and the
borrower may repay up to the full amount of the note without penalty.
Frequently, such obligations are secured by letters of credit or other credit
support arrangements provided by banks. Because master demand notes are direct
lending arrangements between the lender and borrower, these instruments
generally will not be traded, and there generally is no secondary market for
these notes, although they are redeemable (and immediately repayable by the
borrower) at face value, plus accrued interest, at any time. We will invest the
Fund's assets in master demand notes only if the Fund's Board of Directors or
its delegate has determined that they are of credit quality comparable to the
debt securities in which the Fund generally may invest.
ILLIQUID SECURITIES
We may invest up to 10% of the Fund's net assets in securities 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.
22
<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
-------------------------------------------------------------------------------
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 INDEX(SM)" 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.
23
<PAGE>
APPENDIX B (CONTINUED)
FUND TYPE/NAME (CONTINUED) RISK
-------------------------------------------------------------------------------
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
-------------------------------------------------------------------------------
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.
24
<PAGE>
If you would like more information about the Fund, you may call 1-800-531-8181
to request a free copy of the Fund's statement of additional information (SAI),
annual or semiannual report, or to ask other questions about the Fund. The SAI
has been filed with the Securities and Exchange Commission (SEC) and is legally
a part of this prospectus. In the Fund's annual report, you will find a
discussion of the market conditions and investment strategies that
significantly affected the Fund's performance during the last fiscal year.
To view these documents, along with other related documents, you can visit the
EDGAR database on 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 paying 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 CUSTODIAN
USAA Shareholder Account Services State Street Bank and Trust Company
9800 Fredericksburg Road P.O. Box 1713
San Antonio, Texas 78288 Boston, Massachusetts 02105
----------------------------------------------------------------
TELEPHONE ASSISTANCE HOURS
Call toll free - Central Time
Monday - Friday 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>
USAA SCIENCE &
TECHNOLOGY FUND
PROSPECTUS
DECEMBER 1, 2000
As with other mutual funds, the Securities and Exchange Commission has not
approved or disapproved of this Fund's shares or determined whether this
prospectus is accurate or complete. Anyone who tells you otherwise is
committing a crime.
TABLE OF CONTENTS
What Is the Fund's Investment Objective and Main Strategy?.............. 2
What Are the Main Risks of Investing in This Fund?...................... 2
Is This Fund for You?................................................... 3
Could the Value of Your Investment in This Fund Fluctuate?.............. 3
Fees and Expenses....................................................... 5
Fund Investments........................................................ 6
Fund Management......................................................... 8
Using Mutual Funds in an Investment Program............................. 9
How to Invest........................................................... 10
How to Redeem........................................................... 13
Important Information About Purchases and Redemptions................... 14
Exchanges............................................................... 15
Shareholder Information................................................. 16
Financial Highlights.................................................... 19
Appendix A.............................................................. 20
Appendix B.............................................................. 21
<PAGE>
USAA Investment Management Company manages this Fund. For easier reading, USAA
Investment Management Company will be referred to as "we" or "us" throughout
the prospectus.
WHAT IS THE FUND'S INVESTMENT OBJECTIVE AND MAIN STRATEGY?
The Fund's investment objective is long-term capital appreciation. We will
attempt to achieve this objective by investing the Fund's assets in equity
securities of companies expected to benefit from the development and use of
scientific and technological advances and improvements.
Because any investment involves risk, there is no assurance that the Fund's
objective will be achieved. See FUND INVESTMENTS on page 6 for more
information.
WHAT ARE THE MAIN RISKS OF INVESTING IN THIS FUND?
The primary risks of investing in this Fund are market risk and industry risk.
o 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.
o INDUSTRY RISK involves the possibility that the Fund's investments in
companies whose value is highly dependent on scientific and technological
developments may be more volatile because of the short life cycles and
competitive pressures of many of the products or services of these
companies.
Another risk of the Fund described later in the prospectus is the risk of
foreign investing. 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.
2
<PAGE>
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.
Look for this symbol [CAUTION LIGHT] 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 . . .
o You are looking for significant growth.
o You are willing to accept very high risk.
o You are looking for a long-term investment.
This Fund MAY NOT be appropriate as part of your investment portfolio if . . .
o You need steady income.
o You are unwilling to take greater risk for long-term goals.
o You need an investment that provides tax-free income.
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. The
Fund's portfolio consists of companies whose value is highly dependent on
scientific and technological developments. Many of the products and services of
these companies are subject to short life cycles and competitive pressures.
Therefore, the market value of the Fund's portfolio and the Fund's price per
share are likely to fluctuate significantly.
The bar chart shown on the next page illustrates the Fund's volatility and
performance from year to year for each full calendar year since inception.
3
<PAGE>
Total Return
[SIDE BAR]
TOTAL RETURN MEASURES THE PRICE CHANGE IN A SHARE ASSUMING THE
REINVESTMENT OF ALL DIVIDEND INCOME AND CAPITAL GAIN DISTRIBUTIONS.
All mutual funds must use the same formula to calculate total return.
[BAR CHART]
CALENDAR TOTAL
YEAR RETURN
1998* 46.64%
1999 47.04%
*FUND BEGAN OPERATIONS ON AUGUST 1, 1997.
THE FUND'S TOTAL RETURN FOR THE NINE-MONTH PERIOD ENDED
SEPTEMBER 30, 2000, WAS 14.32%.
During the periods shown in the above bar chart, the highest total return for a
quarter was 31.68% (quarter ending December 31, 1998) and the lowest total
return for a quarter was -9.58% (quarter ending September 30, 1998).
The table below 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 a
broad-based securities market index. Remember, historical performance does not
necessarily indicate what will happen in the future.
===============================================================================
Average Annual Total Returns
(for the periods ending December 31, 1999)
Past Since Inception
1 Year August 1, 1997
===============================================================================
Science & Technology Fund 47.04% 31.99%
-------------------------------------------------------------------------------
S&P 500 Index* 21.03% 21.37%
===============================================================================
*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.
4
<PAGE>
Please consider performance information in light of the Fund's investment
objective and policies and market conditions during the reported time periods.
The value of your shares may go up or down. You may obtain the most current
price and total return information for this Fund through our usaa.com Web site
once you have established Internet access. See page 12 for information on
establishing Internet access. You may also obtain this information by calling
USAA TouchLine(R) at 1-800-531-8777. Press 1 for the Mutual Fund Menu, press 1
again for prices and returns. Then, press 31# when asked for the fund code.
[SIDE BAR]
[TELEPHONE GRAPHIC]
TOUCHLINE(R)
1-800-531-8777
PRESS
(1)
THEN
(1)
THEN
(3) (1) (#)
Additionally, you may find the most current price of your shares in the
business section of your newspaper in the mutual fund section under the heading
"USAA Group" and the symbol "SciTech." If you prefer to obtain this information
from an online computer service, you can do so by using the ticker symbol
"USSCX."
[SIDE BAR]
NEWSPAPER
SYMBOL
SciTech
TICKER
SYMBOL
USSCX
FEES AND EXPENSES
This summary shows what it will cost you, directly and indirectly, to invest in
this 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" include expenses such as custodian
and transfer agent fees. The figures below show actual expenses during the past
fiscal year ended July 31, 2000, and are calculated as a percentage of average
net assets.
----------------------------------------------
Management Fees .75%
Distribution (12b-1) Fees None
Other Expenses .47%
-----
Total Annual Fund Operating Expenses 1.22%
=====
----------------------------------------------
[SIDE BAR]
12-b FEES - SOME MUTUAL FUNDS CHARGE THESE FEES TO PAY FOR
ADVERTISING AND OTHER COSTS OF SELLING FUND SHARES.
5
<PAGE>
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............ $ 124
3 years........... 387
5 years........... 670
10 years........... 1,477
============================
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 at least 80% of its
assets in equity securities of companies that we expect will benefit from
the development and use of scientific and technological advances and
improvements. We use the term "equity securities" to include common
stocks, preferred stocks, securities convertible into common stocks, and
securities 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.
6
<PAGE>
[CAUTION LIGHT]
MARKET RISK. Because this Fund invests in equity securities, it is subject to
stock market risk. Stock prices in general may decline over short or even
extended periods, regardless of the success or failure of 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.
Q May the Fund's assets be invested in foreign securities?
A Yes. While most of the Fund's assets will be invested in U.S.
securities, we may also invest the Fund's assets in foreign securities
purchased in either foreign or U.S. markets when they are in line with the
Fund's investment objective.
[CAUTION LIGHT]
FOREIGN INVESTING RISK. 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; difficulties in obtaining legal judgments; and foreign withholding
taxes. In the past, equity and debt instruments of foreign markets have been
more volatile than equity and debt instruments of U.S. securities markets.
Q In what industries will the Fund's assets be invested?
A We will invest at least 80% of the Fund's net assets in industries such
as, but not limited to, biotechnology, computer hardware, software and
services, communication and telecommunication equipment and services,
electronics, health care, drugs, medical products and supplies,
specialized health care services, aerospace and defense, and other
industries we believe may benefit directly or indirectly from research and
development in the science and technology fields. We may invest the Fund's
remaining assets in any other industry.
7
<PAGE>
[CAUTION LIGHT]
INDUSTRY RISK. A mutual fund portfolio consisting of investments related to the
fields of science and technology is likely to be more volatile than a portfolio
that is more widely diversified in other economic sectors. Because of the
competitiveness and rapid changes in the fields of science and technology, many
of the companies in the Fund's portfolio are subject to distinctive risks. The
products and services of these companies may not be economically successful or
may quickly become outdated. Additionally, many of these companies must comply
with significant governmental regulations and may need governmental approval of
their products and services.
Q How are the decisions to buy or sell securities made?
A We generally invest in companies producing sales and earnings growth
rates greater than those of the overall market. Investment considerations
include a company's ability to exceed earnings expectations over the near
or long term, valuation, cash flow, acquisitions, and other corporate
actions. We employ a bottom-up, stock-picking strategy focusing on these
factors. We monitor our positions continually and will sell a stock when
we perceive our original investment thesis to no longer hold.
For additional information about other securities in which we may invest the
Fund's assets, see APPENDIX A on page 20.
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. As of the date of
this prospectus, we had approximately $42 billion in total assets under
management. Our mailing address is 9800 Fredericksburg Road, San Antonio, TX
78288.
We provide management services to the Fund pursuant to an Advisory Agreement.
We are responsible for managing the Fund's portfolio (including placement of
brokerage orders) and its business affairs, subject to the authority of and
supervision by the Fund's Board of Directors. For our services, the Fund pays
us an annual fee. This fee was computed and paid at three-fourths of one
percent (.75%) of average net assets for the fiscal year ended July 31, 2000.
We also provide services related to selling the Fund's shares and receive no
compensation for those services.
8
<PAGE>
Portfolio Manager
[PHOTOGRAPH PORTFOLIO MANAGER]
CURT ROHRMAN
Curt Rohrman, assistant vice president of Equity Investments, has managed the
Fund since its inception in August 1997. He has 12 years' investment management
experience and has worked for us for five years. He earned the Chartered
Financial Analyst designation in 1991 and is a member of the Association for
Investment Management and Research and the San Antonio Financial Analysts
Society, Inc. He holds an MBA from the University of Texas at Austin and a BBA
from Texas Christian University.
USING MUTUAL FUNDS IN AN INVESTMENT PROGRAM
I. The Idea Behind Mutual Funds
Mutual funds provide 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.
II. Using Funds in an Investment Program
In choosing a mutual fund as an investment vehicle, you are giving up some
investment decisions, but must still make others. The decisions you don't have
to make are those involved with choosing individual securities. We will perform
that function. In addition, we will arrange for the safekeeping of securities,
auditing the annual financial statements, and daily valuation of the Fund, as
well as other functions.
You, however, retain at least part of the responsibility for an equally
important decision. This decision involves determining a portfolio of mutual
funds that balances your investment goals with your tolerance for risk. It is
likely that this decision may include the use of more than one fund of the USAA
family of funds.
9
<PAGE>
For example, assume you wish to invest in a widely diversified, common stock
portfolio. You could combine an investment in the Science & Technology Fund
with investments in other mutual funds that invest in value-oriented stocks and
high-dividend stocks. This is just one way you could combine funds to fit your
own risk and reward goals.
III. USAA's Family of Funds
We offer you another alternative with our asset strategy funds listed in
APPENDIX B under asset allocation on page 21. 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 21 for a
complete list of the USAA family of no-load mutual funds.
HOW TO INVEST
Purchase of Shares
OPENING AN ACCOUNT
You may open an account and make an investment as described below by mail, in
person, bank wire, 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.
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
10
<PAGE>
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
[MONEY GRAPHIC]
o $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 PURCHASES
o $50 per transaction, per account.
HOW TO PURCHASE BY . . .
MAIL
[ENVELOPE GRAPHIC]
o To open an account, send your application and check to:
USAA Investment Management Company
9800 Fredericksburg Road
San Antonio, TX 78288 (FOR OVERNIGHT MAIL, USE ZIP CODE 78240)
o To add to your account, send your check and the deposit stub in the
business reply envelope that accompanies your Fund's transaction
confirmation to the transfer agent:
USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, TX 78288
IN PERSON
[HANDSHAKE GRAPHIC]
o 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
11
<PAGE>
BANK WIRE
[WIRE GRAPHIC]
o 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 Science & Technology Fund
USAA Account Number: 69384998
Shareholder(s) Name(s)__________________________
Shareholder(s) Mutual Fund Account Number____________________________
ELECTRONIC FUNDS TRANSFER (EFT)
[CALENDAR GRAPHIC]
o Additional purchases on a regular basis can be deducted from a bank
account, paycheck, income-producing investment, or USAA money market fund
account. Sign up for these services when opening an account or call
1-800-531-8448 to add these services.
PHONE 1-800-531-8448 (IN SAN ANTONIO, 456-7202)
[TELEPHONE GRAPHIC]
o 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)
[TOUCHLINE GRAPHIC]
o 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
[COMPUTER GRAPHIC]
o 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.
12
<PAGE>
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
[FAX MACHINE GRAPHIC]
o Send your written instructions to:
USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, TX 78288 (FOR OVERNIGHT MAIL, USE ZIP CODE 78240)
o Visit a member service representative at our San Antonio investment sales
and service office at USAA Federal Savings Bank.
o Send a signed fax to 1-800-292-8177, or send a telegram to USAA Shareholder
Account Services.
o Call toll free 1-800-531-8448 (in San Antonio, 456-7202) to speak with a
member service representative.
o Call toll free 1-800-531-8777 (in San Antonio, 498-8777) to access our
24-hour USAA TouchLine(R) service.
o 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
13
<PAGE>
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
[INVESTOR'S GUIDE GRAPHIC]
Upon your initial investment with us, you will receive the INVESTOR'S GUIDE to
help you get the most out of your USAA mutual fund account and to 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:
o reject purchase or exchange orders when in the best interest of the Fund;
o limit or discontinue the offering of shares of the Fund without notice to
the shareholders;
o impose a redemption charge of up to 1% of the net asset value of shares
redeemed if circumstances indicate a charge is necessary for the protection
of remaining investors (for example, if excessive market-timing share
activity unfairly burdens long-term investors);
14
<PAGE>
however, this 1% charge will not be imposed upon shareholders unless
authorized by the Fund's Board of Directors and the required notice has
been given to shareholders;
o require a signature guarantee for transactions or changes in account
information in those instances where the appropriateness of a signature
authorization is in question (the statement of additional information
contains information on acceptable guarantors);
o redeem an account with less than 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 Fund has undertaken certain procedures regarding telephone transactions as
described on page 13.
Exchange Limitations, Excessive Trading
To minimize Fund costs and to protect the Funds and their shareholders from
unfair expense burdens, the Funds restrict excessive exchanges. The limit on
exchanges out of any Fund in the USAA family of funds for each account is six
per calendar year (except there is no limitation on exchanges out of the Tax
Exempt Short-Term Fund, Short-Term Bond Fund, or any of the money market funds
in the USAA family of funds). 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.
15
<PAGE>
SHAREHOLDER INFORMATION
[SIDE BAR]
NAV PER SHARE
EQUALS
TOTAL ASSETS
MINUS
LIABILITIES
DIVIDED BY
NUMBER OF SHARES
OUTSTANDING
Share Price Calculation
The price at which you purchase and redeem Fund shares is equal to the net
asset value (NAV) per share determined on the effective date of the purchase or
redemption. You may buy and sell Fund shares at the NAV per share without a
sales charge. The 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.
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 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.
16
<PAGE>
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.
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.
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.
17
<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:
o fails to furnish the Fund with a correct tax identification number,
o underreports dividend or interest income, or
o fails to certify that he or she is not subject to withholding.
To avoid this withholding requirement, you must certify, on your application or
on a separate Form W-9 supplied by the 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.
18
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the Fund's
financial performance since inception. Certain information reflects financial
results for a single Fund share. The total returns in the table represent the
rate that an investor would have earned (or lost) on an investment in this Fund
(assuming reinvestment of all dividends and distributions). This information
has been audited by KPMG LLP, whose report, along with the Fund's financial
statements, are included in the annual report, which is available upon request.
Year Ended July 31,
-------------------------------------------
2000 1999 1998**
-------------------------------------------
Net asset value at
beginning of period $ 15.18 $ 11.17 $ 10.00
Net investment loss (.13)a (.06)a (.07)a
Net realized and
unrealized gain 6.26 4.07 1.24
Distributions of realized
capital gains (.17) - -
Distribution of tax
return of capital (.08) - -
-------------------------------------------
Net asset value at
end of period $ 21.06 $ 15.18 $ 11.17
===========================================
Total return (%)* 40.73 35.90 11.70
Net assets at end of
period (000) $624,528 $ 257,992 $ 111,318
Ratio of expenses to
average net assets (%) 1.22 1.33 1.42
Ratio of net investment
loss to average net
assets (%) (.65) (.47) (.69)
Portfolio turnover (%) 69.21 44.39 76.31
_________
* Assumes reinvestment of all capital gain distributions during the period.
** Fund commenced operations on August 1, 1997.
(a) Calculated using weighted average shares.
19
<PAGE>
APPENDIX A
THE FOLLOWING ARE DESCRIPTIONS OF CERTAIN TYPES OF SECURITIES
IN WHICH WE MAY INVEST THE FUNDS ASSETS:
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.
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.
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.
FORWARD CURRENCY CONTRACTS
We may hold securities denominated in foreign currencies. As a result, the
value of these securities will be affected by changes in the exchange rate
between the dollar and the foreign currencies. In managing currency exposure,
the Fund may enter into forward currency contracts. A forward currency contract
is an agreement to purchase or sell a specified currency at a specified future
date or over a specified time period at a price set at the time of the
contract. 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.
AMERICAN DEPOSITARY RECEIPTS (ADRS)
We may invest the Fund's 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 Fund's 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.
20
<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
-------------------------------------------------------------------------------
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 INDEX(SM)" 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.
21
<PAGE>
APPENDIX B (CONTINUED)
FUND TYPE/NAME (CONTINUED) RISK
-------------------------------------------------------------------------------
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
-------------------------------------------------------------------------------
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.
22
<PAGE>
NOTES
<PAGE>
If you would like more information about the Fund, you may call 1-800-531-8181
to request a free copy of the Fund's statement of additional information (SAI),
annual or semiannual report, or to ask other questions about the Fund. The SAI
has been filed with the Securities and Exchange Commission (SEC) and is legally
a part of this prospectus. In the Fund's annual report, you will find a
discussion of the market conditions and investment strategies that
significantly affected the Fund's performance during the last fiscal year.
To view these documents, along with other related documents, you can visit the
EDGAR database on 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 paying 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 CUSTODIAN
USAA Shareholder Account Services State Street Bank and Trust Company
9800 Fredericksburg Road P.O. Box 1713
San Antonio, Texas 78288 Boston, Massachusetts 02105
----------------------------------------------------------------
TELEPHONE ASSISTANCE HOURS
Call toll free - Central Time
Monday - Friday 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 No. 811-2429
<PAGE>
USAA FIRST START
GROWTH FUND
PROSPECTUS
DECEMBER 1, 2000
The USAA First Start Growth Fund is designed to stimulate interest in long-term
investing by young people. It is part of USAA First Start, a money management
plan for young people.
As with other mutual funds, the Securities and Exchange Commission has not
approved or disapproved of this Fund's shares or determined whether this
prospectus is accurate or complete. Anyone who tells you otherwise is
committing a crime.
TABLE OF CONTENTS
What Is the Fund's Investment Objective and Main Strategy?............. 2
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...................................................... 4
Fund Investments....................................................... 6
Fund Management........................................................ 8
Using Mutual Funds in an Investment Program............................ 9
How to Invest.......................................................... 10
How to Redeem.......................................................... 13
Important Information About Purchases and Redemptions.................. 14
Exchanges.............................................................. 15
Shareholder Information................................................ 16
Financial Highlights................................................... 19
Appendix A............................................................. 20
Appendix B............................................................. 21
<PAGE>
USAA Investment Management Company manages this Fund. For easier reading, USAA
Investment Management Company will be referred to as "we" or "us" throughout
the prospectus.
WHAT IS THE FUND'S INVESTMENT OBJECTIVE AND MAIN STRATEGY?
The Fund's investment objective is long-term capital appreciation. We will
attempt to achieve this objective by investing the Fund's assets in equity
securities of companies that provide goods or services we believe are familiar
to young people.
Because any investment involves risk, there is no assurance that the Fund's
objective will be achieved. See FUND INVESTMENTS on page 6 for more
information.
WHAT ARE THE MAIN RISKS OF INVESTING IN THIS FUND?
The primary risk of investing in this Fund is market risk.
o 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.
Another risk of the Fund described later in the prospectus is the risk of
foreign investing. As with other mutual funds, losing money is also a risk of
investing in this Fund.
As you consider an investment in this Fund, you should also take into account
your tolerance for the daily fluctuations of the financial markets and whether
you can afford to leave your money in the investment for long periods of time
to ride out down periods.
An investment in this Fund is not a deposit of USAA Federal Savings Bank, or
any other bank, and is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency.
Look for this symbol [CAUTION LIGHT] 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 . . .
o You are interested in learning about investments.
o You are willing to accept moderate to high risk.
o You are looking for a long-term investment.
2
<PAGE>
This Fund MAY NOT be appropriate as part of your investment portfolio if . . .
o You need steady income.
o You are unwilling to take greater risk for long-term goals.
o You need an investment that provides tax-free income
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. The
following bar chart illustrates the Fund's volatility and performance from year
to year for each full calendar year since inception.
Total Return
[SIDE BAR]
TOTAL RETURN MEASURES THE PRICE CHANGE IN A SHARE ASSUMING THE
REINVESTMENT OF ALL DIVIDEND INCOME AND CAPITAL GAIN DISTRIBUTIONS.
All mutual funds must use the same formula to calculate total return.
[BAR CHART]
CALENDAR TOTAL
YEAR RETURN
1998* 40.46%
1999 21.83%
*FUND BEGAN OPERATIONS ON AUGUST 1, 1997.
THE FUND'S TOTAL RETURN FOR THE NINE-MONTH PERIOD ENDED
SEPTEMBER 30, 2000, WAS 1.07%.
During the periods shown in the above bar chart, the highest total return for a
quarter was 30.12% (quarter ending December 31, 1998) and the lowest total
return for a quarter was -12.27% (quarter ending September 30, 1998).
3
<PAGE>
The table below 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 a
broad-based securities market index. Remember, historical performance does not
necessarily indicate what will happen in the future.
===============================================================================
Average Annual Total Returns
(for the periods ending December 31, 1999)
Past Since Inception
1 Year August 1, 1997
===============================================================================
First Start Growth Fund 21.83% 24.79%
-------------------------------------------------------------------------------
S&P 500 Index* 21.03% 21.37%
===============================================================================
* 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.
Please consider performance information in light of the Fund's investment
objective and policies and market conditions during the reported time periods.
The value of your shares may go up or down. You may obtain the most current
price and total return information for this Fund through our usaa.com Web site
once you have established Internet access. See page 12 for information on
establishing Internet access. You may also obtain this information by calling
USAA TouchLine(R) at 1-800-531-8777. Press 1 for the Mutual Fund Menu, press 1
again for prices and returns. Then, press 32# when asked for the fund code.
[SIDE BAR]
[TELEPHONE GRAPHIC]
TOUCHLINE(R)
1-800-531-8777
PRESS
(1)
THEN
(1)
THEN
(3) (2) (#)
Additionally, you may find the most current price of your shares in the
business section of your newspaper in the mutual fund section under the heading
"USAA Group" and the symbol "FStrtGr." If you prefer to obtain this information
from an online computer service, you can do so by using the ticker symbol
"UFSGX."
[SIDE BAR]
NEWSPAPER
SYMBOL
FStrtGr
TICKER
SYMBOL
UFSGX
FEES AND EXPENSES
This summary shows what it will cost you, directly and indirectly, to invest in
this 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.)
4
<PAGE>
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
and transfer agent fees. The figures below show actual expenses before waivers
during the past fiscal year ended July 31, 2000, 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 Fees .75%
Distribution (12b-1) Fees None
Other Expenses 1.20%
-----
Total Annual Fund Operating Expenses *1.95%
=====
-----------------------------------------------
_____________
* During the year, we voluntarily limited the Total Annual Fund Operating
Expenses to 1.65% as follows:
----------------------------------------------------
Total Annual Fund Operating Expenses 1.95%
Reimbursement from USAA Investment
Management Company (.30%)
------
Actual Fund Operating Expenses
After Reimbursement 1.65%
======
----------------------------------------------------
We have voluntarily agreed to limit the Fund's annual expenses to 1.65%
of its ANA and will reimburse the Fund for all expenses in excess of that
amount until December 1, 2000.
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............ $ 198
3 years........... 612
5 years........... 1,052
10 years........... 2,275
5
<PAGE>
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 in equity
securities of companies providing goods or services we believe are
familiar to young people. We use the term "equity securities" to include
common stocks, securities convertible into common stocks, and securities
that carry the right to buy common stocks.
We designed the Fund as part of a program to stimulate interest in
long-term investing by young people. Shareholders of the Fund may give us
their suggestions about the types of companies they would like us to
consider for investment by the Fund. We invite shareholders to tell us the
investment topics or the names of stocks they would like us to feature in
the Fund's communications to shareholders.
As a temporary defensive measure because of market, economic, political,
or other conditions, we may invest up to 100% of the Fund's assets in
investment-grade, short-term debt instruments. This may result in the Fund
not achieving its investment objective during the time it is in this
temporary defensive posture.
[CAUTION LIGHT]
MARKET RISK. Because this Fund invests in equity securities, it is subject to
stock market risk. Stock prices in general may decline over short or even
extended periods, regardless of the success or failure of 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.
Q May the Fund's assets be invested in foreign securities?
A Yes. While most of the Fund's assets will be invested in U.S.
securities, we may also invest the Fund's assets in foreign securities
purchased on either foreign or U.S. markets when they are in line with the
Fund's investment objective.
6
<PAGE>
[CAUTION LIGHT]
FOREIGN INVESTING RISK. 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; difficulties in obtaining legal judgements; and foreign
withholding taxes. In the past, equity and debt instruments of foreign markets
have been more volatile than equity and debt instruments of U.S. securities
markets.
Q In what industries will the Fund's assets be invested?
A We will invest in many different industries. The Fund is not a "sector"
fund that focuses its investments in a specific industry or sector of the
economy. We believe that goods or services which are likely to be familiar
to young investors are provided by companies engaged in many different
types of industries. Such companies may include computer hardware and
software manufacturers, Internet service providers, and companies in the
apparel, automobile, communications, entertainment, financial services,
health services, and travel industries, among others. We believe that the
flexibility to select equity securities of companies across a broad
universe of industries maximizes our opportunity to find attractive
investments as we pursue the Fund's objective of long-term capital
appreciation.
Q Are the Fund's assets prohibited from being invested in any specific
industries?
A Yes. We will not invest in companies whose primary line of business is
the production of tobacco products or alcoholic beverages. Investments
in firms primarily focused on gaming activities are also prohibited.
Q What special services are provided to shareholders in this Fund?
A In addition to providing an investment opportunity for long-term capital
appreciation, shareholders will receive educational information targeted
to young people about the basic concepts of saving and investing.
7
<PAGE>
Q How are the decisions to buy and sell securities made?
A We buy stocks of companies that provide goods or services we believe are
familiar to young people. We generally invest in companies producing sales
and earnings growth rates greater than those of the overall market.
Investment considerations include a company's ability to exceed earnings
expectations over the near or long term, valuation, cash flow,
acquisitions, and other corporate actions. We employ a bottom-up,
stock-picking strategy focusing on these factors. We monitor our positions
continually and will sell a stock when we perceive our original investment
thesis to no longer hold.
For additional information about other securities in which we may invest the
Fund's assets, see APPENDIX A on page 20.
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. As of the date of
this prospectus, we had approximately $42 billion in total assets under
management. Our mailing address is 9800 Fredericksburg Road, San Antonio, TX
78288.
We provide management services to the Fund pursuant to an Advisory Agreement.
We are responsible for managing the Fund's portfolio (including placement of
brokerage orders) and its business affairs, subject to the authority of and
supervision by the Fund's Board of Directors. For our services, the Fund pays
us an annual fee. The fee is computed at three-fourths of one percent (.75%) of
average net assets. The fee we received for the fiscal year ended July 31,
2000, after we made reimbursements to the Fund, was equal to .45% of average
net assets. We also provide services related to selling the Fund's shares and
receive no compensation for those services.
8
<PAGE>
Portfolio Manager
[PORTFOLIO MANAGER PHOTOGRAPH]
Curt Rohrman
Curt Rohrman, assistant vice president of Equity Investments, has managed the
Fund since its inception in August 1997. He has 12 years' investment management
experience and has worked for us for five years. He earned the Chartered
Financial Analyst designation in 1991 and is a member of the Association for
Investment Management and Research and the San Antonio Financial Analysts
Society, Inc. He holds an MBA from the University of Texas at Austin and a BBA
from Texas Christian University.
USING MUTUAL FUNDS IN AN INVESTMENT PROGRAM
I. The Idea Behind Mutual Funds
Mutual funds provide 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.
II. Using Funds in an Investment Program
In choosing a mutual fund as an investment vehicle, you are giving up some
investment decisions, but must still make others. The decisions you don't have
to make are those involved with choosing individual securities. We will perform
that function. In addition, we will arrange for the safekeeping of securities,
auditing the annual financial statements, and daily valuation of the Fund, as
well as other functions.
You, however, retain at least part of the responsibility for an equally
important decision. This decision involves determining a portfolio of mutual
funds that balances your investment goals with your tolerance for risk. It is
likely that this decision may include the use of more than one fund of the USAA
family of funds.
9
<PAGE>
For example, assume you wish to invest in a widely diversified, common stock
portfolio. You could combine an investment in the First Start Growth Fund with
investments in other mutual funds that invest in high-dividend stocks. This is
just one way you could combine funds to fit your own risk and reward goals.
III. USAA's Family of Funds
We offer you another alternative with our asset strategy funds listed in
APPENDIX B under asset allocation on page 21. 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 21 for a
complete list of the USAA family of no-load mutual funds.
HOW TO INVEST
Purchase of Shares
OPENING AN ACCOUNT
You may open an account and make an investment as described below by mail, in
person, bank wire, 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.
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
10
<PAGE>
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
[MONEY GRAPHIC]
o $3,000 [$250 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 $20 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 PURCHASES
o $20 per transaction, per account.
HOW TO PURCHASE BY . . .
MAIL
[ENVELOPE GRAPHIC]
o To open an account, send your application and check to:
USAA Investment Management Company
9800 Fredericksburg Road
San Antonio, TX 78288 (FOR OVERNIGHT MAIL, USE ZIP CODE 78240)
o To add to your account, send your check and the deposit stub in the
business reply envelope that accompanies your Fund's transaction
confirmation to the transfer agent:
USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, TX 78288
IN PERSON
[HANDSHAKE GRAPHIC]
o 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
11
<PAGE>
BANK WIRE
[WIRE GRAPHIC]
o 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 First Start Growth Fund
USAA Account Number: 69384998
Shareholder(s) Name(s)___________________________
Shareholder(s) Mutual Fund Account Number__________________________
ELECTRONIC FUNDS TRANSFER (EFT)
[CALENDAR GRAPHIC]
o Additional purchases on a regular basis can be deducted from a bank
account, paycheck, income-producing investment, or USAA money market fund
account. Sign up for these services when opening an account or call
1-800-531-8448 to add these services.
PHONE 1-800-531-8448 (IN SAN ANTONIO, 456-7202)
[TELEPHONE GRAPHIC]
o 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)
[TOUCHLINE GRAPHIC]
o 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
[COMPUTER GRAPHIC]
o 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.
12
<PAGE>
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
[FAX MACHINE GRAPHIC]
o Send your written instructions to:
USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, TX 78288 (FOR OVERNIGHT MAIL, USE ZIP CODE 78240)
o Visit a member service representative at our San Antonio investment sales
and service office at USAA Federal Savings Bank.
o Send a signed fax to 1-800-292-8177, or send a telegram to USAA Shareholder
Account Services.
o Call toll free 1-800-531-8448 (in San Antonio, 456-7202) to speak with a
member service representative.
o Call toll free 1-800-531-8777 (in San Antonio, 498-8777) to access our
24-hour USAA TouchLine(R) service.
o 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
13
<PAGE>
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
[INVESTOR'S GUIDE GRAPHIC]
Upon your initial investment with us, you will receive the INVESTOR'S GUIDE to
help you get the most out of your USAA mutual fund account and to 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:
o reject purchase or exchange orders when in the best interest of the Fund;
o limit or discontinue the offering of shares of the Fund without notice to
the shareholders;
o impose a redemption charge of up to 1% of the net asset value of shares
redeemed if circumstances indicate a charge is necessary for the protection
of remaining investors (for example, if excessive
14
<PAGE>
market-timing share activity unfairly burdens long-term investors);
however, this 1% charge will not be imposed upon shareholders unless
authorized by the Fund's Board of Directors and the required notice has
been given to shareholders;
o require a signature guarantee for transactions or changes in account
information in those instances where the appropriateness of a signature
authorization is in question (the statement of additional information
contains information on acceptable guarantors);
o redeem an account with less than 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 Fund has undertaken certain procedures regarding telephone transactions as
described on page 13.
Exchange Limitations, Excessive Trading
To minimize Fund costs and to protect the Funds and their shareholders from
unfair expense burdens, the Funds restrict excessive exchanges. The limit on
exchanges out of any Fund in the USAA family of funds for each account is six
per calendar year (except there is no limitation on exchanges out of the Tax
Exempt Short-Term Fund, Short-Term Bond Fund, or any of the money market funds
in the USAA family of funds). 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.
15
<PAGE>
SHAREHOLDER INFORMATION
[SIDE BAR]
NAV PER SHARE
EQUALS
TOTAL ASSETS
MINUS
LIABILITIES
DIVIDED BY
NUMBER OF SHARES
OUTSTANDING
Share Price Calculation
The price at which you purchase and redeem Fund shares is equal to the net
asset value (NAV) per share determined on the effective date of the purchase or
redemption. You may buy and sell Fund shares at the NAV per share without a
sales charge. The 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.
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 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.
16
<PAGE>
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.
We will automatically reinvest all income dividends and capital gain
distributions in the Fund unless you instruct us differently. The share price
will be the NAV of the Fund shares computed on the ex-dividend date. Any income
dividends or capital gain distributions paid by the Fund will reduce the NAV
per share by the amount of the dividend or distribution. You should consider
carefully the effects of purchasing shares of the Fund shortly before any
dividend or distribution. 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.
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.
17
<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:
o fails to furnish the Fund with a correct tax identification number,
o underreports dividend or interest income, or
o fails to certify that he or she is not subject to withholding.
To avoid this withholding requirement, you must certify, on your application or
on a separate Form W-9 supplied by the 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.
18
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the Fund's
financial performance since inception. Certain information reflects financial
results for a single Fund share. The total returns in the table represent the
rate that an investor would have earned (or lost) on an investment in this Fund
(assuming reinvestment of all dividends and distributions). This information
has been audited by KPMG LLP, whose report, along with the Fund's financial
statements, are included in the Annual Report, which is available upon request.
Year Ended July 31,
-------------------------------------------
2000 1999 1998*
-------------------------------------------
Net asset value at
beginning of period $ 15.44 $ 12.27 $ 10.00
Net investment loss (.15)a (.07)a (.10)a
Net realized and
unrealized gain 1.94 3.32 2.37
Distributions of realized
capital gains (.06) (.08) -
-------------------------------------------
Net asset value at
end of period $ 17.17 $ 15.44 $ 12.27
===========================================
Total return (%)** 11.58 26.81 22.70
Net assets at end
of period (000) $ 248,990 $ 155,802 $ 45,344
Ratio of expenses to
average net assets (%) 1.65 1.65 1.65
Ratio of expenses to average
net assets excluding
reimbursement (%) 1.95 1.87 -
Ratio of net investment
loss to average
net assets (%) (.92) (.50) (.83)
Portfolio turnover (%) 52.58 26.64 52.11
________________
* Fund commenced operations on August 1, 1997.
** Assumes reinvestment of all capital gain distributions during the period.
(a) Calculated using weighted average shares.
19
<PAGE>
APPENDIX A
THE FOLLOWING ARE DESCRIPTIONS OF CERTAIN TYPES OF SECURITIES
IN WHICH WE MAY INVEST THE FUNDS ASSETS:
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.
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.
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.
FORWARD CURRENCY CONTRACTS
We may hold securities denominated in foreign currencies. As a result, the
value of these securities will be affected by changes in the exchange rate
between the dollar and the foreign currencies. In managing currency exposure,
the Fund may enter into forward currency contracts. A forward currency contract
is an agreement to purchase or sell a specified currency at a specified future
date or over a specified time period at a price set at the time of the
contract. 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.
AMERICAN DEPOSITARY RECEIPTS (ADRS)
We may invest the Fund's 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 Fund's 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.
20
<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
-------------------------------------------------------------------------------
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 INDEX(SM)" 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.
21
<PAGE>
APPENDIX B (CONTINUED)
FUND TYPE/NAME (CONTINUED) RISK
-------------------------------------------------------------------------------
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
-------------------------------------------------------------------------------
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.
22
<PAGE>
NOTES
<PAGE>
If you would like more information about the Fund, you may call 1-800-531-8181
to request a free copy of the Fund's statement of additional information (SAI),
annual or semiannual report, or to ask other questions about the Fund. The SAI
has been filed with the Securities and Exchange Commission (SEC) and is legally
a part of this prospectus. In the Fund's annual report, you will find a
discussion of the market conditions and investment strategies that
significantly affected the Fund's performance during the last fiscal year.
To view these documents, along with other related documents, you can visit the
EDGAR database on 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 paying 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 CUSTODIAN
USAA Shareholder Account Services State Street Bank and Trust Company
9800 Fredericksburg Road P.O. Box 1713
San Antonio, Texas 78288 Boston, Massachusetts 02105
----------------------------------------------------------------
TELEPHONE ASSISTANCE HOURS
Call toll free - Central Time
Monday - Friday 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 No. 811-2429
<PAGE>
USAA INTERMEDIATE-TERM
BOND FUND
PROSPECTUS
DECEMBER 1, 2000
As with other mutual funds, the Securities and Exchange Commission has not
approved or disapproved of this Fund's shares or determined whether this
prospectus is accurate or complete. Anyone who tells you otherwise is
committing a crime.
TABLE OF CONTENTS
What Is the Fund's Investment Objective and Main Strategy? ............ 2
What Are the Main Risks of Investing in This Fund? .................... 2
Is This Fund for You? ................................................. 3
Could the Value of Your Investment in This Fund Fluctuate? ............ 3
Fees and Expenses ..................................................... 4
Fund Investments ...................................................... 5
Fund Management ....................................................... 8
Using Mutual Funds in an Investment Program ........................... 9
How to Invest ......................................................... 10
How to Redeem ......................................................... 13
Important Information About Purchases and Redemptions ................. 14
Exchanges ............................................................. 15
Shareholder Information ............................................... 16
Financial Highlights .................................................. 19
Appendix A ............................................................ 20
Appendix B ............................................................ 23
<PAGE>
USAA Investment Management Company manages this Fund. For easier reading, USAA
Investment Management Company will be referred to as "we" or "us" throughout
the prospectus.
WHAT IS THE FUND'S INVESTMENT OBJECTIVE AND MAIN STRATEGY?
The Fund's investment objective is high current income without undue risk to
principal. We will attempt to achieve this objective by investing the Fund's
assets primarily in a broad range of investment-grade debt securities. We will
maintain a dollar-weighted average portfolio maturity between three to ten
years.
The Fund's Board of Directors may change the Fund's investment objective
without shareholder approval.
Because any investment involves risk, there is no assurance that the Fund's
objective will be achieved. See FUND INVESTMENTS on page 5 for more
information.
WHAT ARE THE MAIN RISKS OF INVESTING IN THIS FUND?
The primary risks of investing in this Fund are credit risk and interest rate
risk.
* CREDIT RISK involves the possibility that a borrower cannot make timely
interest and principal payments on its securities.
* INTEREST RATE RISK involves the possibility that the value of the Fund's
investments will fluctuate because of changes in interest rates.
IF INTEREST RATES INCREASE: the yield of the Fund may increase and the
market value of the Fund's securities will likely decline, adversely
affecting the net asset value and total return.
IF INTEREST RATES DECREASE: the yield of the Fund may decrease and the
market value of the Fund's securities may increase, which would likely
increase the Fund's net asset value and total return.
Additional risks of the Fund described later in this prospectus are prepayment
risk and the risk of investing in real estate investment trusts. 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.
2
<PAGE>
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.
Look for this symbol [CAUTION LIGHT GRAPHIC] 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 low to moderate risk.
* You are looking for moderate to high current income.
* You are looking for an investment in bonds to balance your stock
portfolio.
THIS FUND MAY NOT BE APPROPRIATE AS PART OF YOUR INVESTMENT PORTFOLIO IF . . .
* You are unwilling to accept low to moderate risk.
* You need an investment that provides tax-efficient returns.
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.
[SIDE BAR]
[TOUCHLINE GRAPHIC]
TOUCHLINE(R)
1-800-531-8777
PRESS
1
THEN
1
THEN
3 0 #
Performance history for this Fund will be available in the prospectus after the
Fund has been in operation for one full calendar year. You may obtain the most
current price, yield, and return information for this Fund through our usaa.com
Web site once you have established Internet access. See page 12 for information
on establishing Internet access. You may also obtain this information by
calling USAA TouchLine(R) at 1-800-531-8777. Press 1 for the Mutual Fund Menu,
press 1 again for prices, yields, and returns. Then, press 30# when asked for
the fund code. You must remember that historical performance does not
necessarily indicate what will happen in the future.
[SIDE BAR]
Newspaper
Symbol
IntTerBd
Ticker
Symbol
USIBX
Additionally, you may find the most current price of your shares in the
business section of your newspaper in the mutual fund section under the heading
"USAA Group" and the symbol "IntTerBd." If you prefer to obtain this
information from an online computer service, you can do so by using the ticker
symbol "USIBX."
3
<PAGE>
You may see the Fund's yield and total return quoted in advertisements and
reports. All mutual funds must use the same formulas to calculate yield and
total return. Yield is the annualized net income of the Fund during a specified
30-day period as a percentage of the Fund's share price. Total return measures
the price change in a share assuming the reinvestment of all dividend income
and capital gain distributions. You may also see a comparison of the Fund's
performance to that of other mutual funds with similar investment objectives
and to bond or relevant indexes.
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" include expenses such as custodian
and transfer agent fees. The figures below show actual expenses before waivers
during the past fiscal year ended July 31, 2000, and are calculated as a
percentage of average net assets (ANA).
[SIDE BAR]
12b-1 FEES - SOME MUTUAL FUNDS CHARGE THESE FEES TO PAY FOR ADVERTISING
AND OTHER COSTS OF SELLING FUND SHARES.
----------------------------------------------------------
Management Fees .50%
Distribution (12b-1) Fees None
Other Expenses .53%
-----
Total Annual Fund Operating Expenses* 1.03%
=====
----------------------------------------------------------
-------------------
* We have voluntarily agreed to limit the Fund's Total Annual Fund
Operating Expenses to .65% of its ANA and to reimburse the Fund for all
expenses in excess of that amount until December 1, 2001. Up to August
2, 2002, 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:
----------------------------------------------------------
Total Annual Fund Operating Expenses 1.03%
Reimbursement from USAA Investment
Management Company (.38%)
------
Actual Fund Operating Expenses
After Reimbursement .65%
=====
-----------------------------------------------------------
4
<PAGE>
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............. $ 105
3 years............ 328
5 years............ 569
10 years............ 1,259
-----------------------------------------------------------
FUND INVESTMENTS
Principal Investment Strategies and Risks
Q What is the Fund's principal investment strategy?
[SIDE BAR]
DOLLAR-WEIGHTED AVERAGE PORTFOLIO MATURITY IS OBTAINED BY MULTIPLYING THE
DOLLAR VALUE OF EACH INVESTMENT BY THE NUMBER OF DAYS LEFT TO ITS
MATURITY, THEN ADDING THOSE FIGURES TOGETHER AND DIVIDING THE TOTAL BY THE
DOLLAR VALUE OF THE FUND'S PORTFOLIO.
A The Fund's principal strategy is the investment of its assets primarily
in U.S. dollar-denominated debt securities. These debt securities must
be investment grade at the time of purchase. We will maintain a
dollar-weighted average portfolio maturity between three and ten years.
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.
Q What types of debt securities are included in the Fund's portfolio?
A The Fund's portfolio may consist of any of the following:
* obligations of the U.S. government, its agencies and
instrumentalities, and repurchase agreements collateralized by
such obligations;
* mortgage-backed securities;
* asset-backed securities;
* corporate debt securities such as notes, bonds, and commercial
paper;
5
<PAGE>
* debt securities of real estate investment trusts (reits);
* U.S. bank or foreign bank obligations, including certificates of
deposit and banker's acceptances;
* obligations of state and local governments and their agencies and
instrumentalities;
* master demand notes;
* eurodollar obligations;
* yankee obligations; and
* other debt securities.
For additional information on these securities see APPENDIX A on page
20.
Q What are considered investment-grade securities?
A Investment-grade securities include securities issued or guaranteed by
the U.S. government, its agencies and instrumentalities, as well as
securities rated or subject to a guarantee that is rated within the
categories listed by the following rating agencies:
========================================================================
LONG-TERM SHORT-TERM
RATING AGENCY DEBT SECURITIES DEBT SECURITIES
------------------------------------------------------------------------
Moody's Investors At least Prime-3
Services At least Baa or MIG4/VMIG4
------------------------------------------------------------------------
Standard & Poor's At least A-3
Ratings Group At least BBB or SP-2
------------------------------------------------------------------------
Fitch Information, Inc. At least BBB At least F-3
========================================================================
or if unrated by these agencies, we must determine that these securities
are of equivalent investment quality.
You will find a complete description of the above debt ratings in the
Fund's statement of additional information.
Q What happens if the rating of a security is downgraded below investment
grade?
A We will determine whether it is in the best interest of the Fund's
shareholders to continue to hold the security in the Fund's portfolio.
If downgrades result in more than 5% of the Fund's net assets being
invested in securities that are less than investment-grade quality, we
will take immediate action to
6
<PAGE>
reduce the Fund's holdings in such securities to 5% or less of the
Fund's net assets, unless otherwise directed by the Fund's Board of
Directors.
[CAUTION LIGHT GRAPHIC]
CREDIT RISK. The bonds in the Fund's portfolio are subject to credit risk.
Credit risk is the possibility that an issuer of a fixed income instrument such
as a bond or repurchase agreement will fail to make timely payments of interest
or principal. We attempt to minimize the Fund's credit risk by investing in
securities considered investment grade at the time of purchase. When evaluating
potential investments for the Fund, our analysts also assess credit risk and
its impact on the Fund's portfolio. Nevertheless, even investment-grade
securities are subject to some credit risk. Securities in the lowest-rated,
investment-grade category have speculative characteristics. Changes in economic
conditions or other circumstances are more likely to lead to a weakened
capability to make principal and interest payments on these securities than is
the case for higher-rated securities. In addition, the ratings of securities
are estimates by the rating agencies of the credit quality of the securities.
The ratings may not take into account every risk related to whether interest or
principal will be repaid on a timely basis.
[CAUTION LIGHT GRAPHIC]
INTEREST RATE RISK. As a mutual fund investing in bonds, the Fund is subject to
the risk that the market value of the bonds will decline due to rising interest
rates. Bond prices are linked to the prevailing market interest rates. In
general, when interest rates rise, bond prices fall and when interest rates
fall, bond prices rise. The price volatility of a bond also depends on its
maturity. Generally, the longer the maturity of a bond, the greater its
sensitivity to interest rates. To compensate investors for this higher risk,
bonds with longer maturities generally offer higher yields than bonds with
shorter maturities.
[CAUTION LIGHT GRAPHIC]
PREPAYMENT RISK. Mortgagors may generally pay off mortgages without penalty
before the due date. When mortgaged property is sold, which can occur at any
time for a variety of reasons, the old mortgage is usually prepaid. Also, when
mortgage interest rates fall far enough to make refinancing attractive,
prepayments tend to accelerate. Prepayments require reinvestment of the
principal at the then-current level of interest rates, which is often at a
lower level than when the mortgages were originally issued. Reinvestment at
lower rates tends to reduce the interest payments received by the Fund and,
therefore, the size of the dividend payments available to shareholders. If
reinvestment occurs at a higher level of interest rates, the opposite effect is
true.
7
<PAGE>
[CAUTION LIGHT GRAPHIC]
REITS. Investing in REITs may subject the Fund to many of the same risks
associated with the direct ownership of real estate. Additionally, REITs are
dependent upon the capabilities of the REIT manager(s), have limited
diversification, and could be significantly impacted by changes in tax laws.
Moreover, by investing in the debt securities of REITs, the Fund is also
subject to credit risk.
Q How are the decisions to buy and sell securities made?
A We search for securities that represent value at the time given
current market conditions. Value is a combination of yield, credit
quality, structure (maturity, coupon, redemption features), and
liquidity. Recognizing value is the result of simultaneously analyzing
the interaction of these factors among the securities available in the
market. We will sell a security if we become concerned about its credit
risk, we are forced by market factors to raise money, or an attractive
replacement is available.
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. As of the date of
this prospectus, we had approximately $42 billion in total assets under
management. Our mailing address is 9800 Fredericksburg Road, San Antonio, TX
78288.
We provide management services to the Fund pursuant to an Advisory Agreement.
We are responsible for managing the Fund's portfolio (including placement of
brokerage orders) and its business affairs, subject to the authority of and
supervision by the Fund's Board of Directors. For our services, the Fund pays
us an annual fee. The fee is computed at one-half of one percent (.50%) of the
first $50 million of average net assets, two-fifths of one percent (.40%) of
that portion of average net assets over $50 million but not over $100 million,
and three-tenths of one percent (.30%) of that portion of average net assets in
excess of $100 million. The fee we received for the fiscal year ended July 31,
2000, after we made reimbursements to the Fund, was equal to .12% 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 December 1, 2001, to waive our annual management fee to
the extent that total expenses of the Fund exceed .65% of the Fund's average
annual net assets. Under the Advisory Agreement,
8
<PAGE>
the Fund is required to pay us back the amount waived in subsequent years
through August 2, 2002, but only if the additional payments do not cause the
Fund's total expenses to exceed .65% of the Fund's average annual net assets.
Portfolio Manager
[PHOTOGRAPH]
PAUL H. LUNDMARK
Paul H. Lundmark, assistant vice president of Fixed Income Investments, has
managed the Fund since its inception in August 1999. Mr. Lundmark has 14 years'
investment management experience and has worked for us for eight years. He
earned the Chartered Financial Analyst designation in 1989 and is a member of
the Association for Investment Management and Research and the San Antonio
Financial Analysts Society, Inc. He holds an MBA and BSB from the University of
Minnesota.
USING MUTUAL FUNDS IN AN INVESTMENT PROGRAM
I. The Idea Behind Mutual Funds
Mutual funds provide 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.
II. Using Funds in an Investment Program
In choosing a mutual fund as an investment vehicle, you are giving up some
investment decisions, but must still make others. The decisions you don't have
to make are those involved with choosing individual securities. We will perform
that function. In addition, we will arrange for the safekeeping of securities,
auditing the annual financial statements, and daily valuation of the Fund, as
well as other functions.
You, however, retain at least part of the responsibility for an equally
important decision. This decision involves determining a portfolio of mutual
funds that balances your investment goals with your tolerance for risk. It is
likely that this decision may include the use of more than one fund of the USAA
family of funds.
9
<PAGE>
For example, assume you wish to invest in a widely diversified portfolio. You
could combine an investment in the Intermediate-Term Bond Fund with investments
in other mutual funds that invest in stocks of large and small companies and
high-dividend stocks. This is just one way you could combine funds to fit your
own risk and reward goals.
III. USAA's Family of Funds
We offer you another alternative with our asset strategy funds listed in
APPENDIX B under asset allocation on page 23. 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 23 for a
complete list of the USAA family of no-load mutual funds.
HOW TO INVEST
Purchase of Shares
Opening an Account
You may open an account and make an investment as described below by mail, in
person, bank wire, 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.
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
10
<PAGE>
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
[MONEY GRAPHIC]
* $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 PURCHASES
* $50 per transaction, per account.
How to Purchase by . . .
MAIL
[ENVELOPE GRAPHIC]
* 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 in the
business reply envelope that accompanies your Fund's transaction
confirmation to the transfer agent:
USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, TX 78288
IN PERSON
[HANDSHAKE GRAPHIC]
* To open an account, bring your application and check to our San Antonio
investment sales & service office at:
USAA Federal Savings Bank
10750 Robert F. McDermott Freeway
San Antonio, TX 78288
11
<PAGE>
BANK WIRE
[WIRE GRAPHIC]
* 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 Intermediate-Term Bond Fund
USAA Account Number: 69384998
Shareholder(s) Name(s)_____________________________________
Shareholder(s) Mutual Fund Account Number _________________
ELECTRONIC FUNDS TRANSFER (EFT)
[CALENDAR GRAPHIC]
* Additional purchases on a regular basis can be deducted from a bank
account, paycheck, income-producing investment, or USAA money market fund
account. Sign up for these services when opening an account or call
1-800-531-8448 to add these services.
PHONE 1-800-531-8448 (IN SAN ANTONIO, 456-7202)
[TELEPHONE GRAPHIC]
* If you have an existing USAA mutual fund account and would like to open a
new account or exchange to another USAA Fund, call for instructions. To
open an account by phone, the new account must have the same registration
as your existing account.
USAA TOUCHLINE(R)1-800-531-8777 (IN SAN ANTONIO, 498-8777)
[TOUCHLINE GRAPHIC]
* 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
[COMPUTER GRAPHIC]
* 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.
12
<PAGE>
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
[FAX MACHINE GRAPHIC]
* 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.
* 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
13
<PAGE>
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
[INVESTOR'S GUIDE GRAPHIC]
Upon your initial investment with us, you will receive the INVESTOR'S GUIDE to
help you get the most out of your USAA mutual fund account and to 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 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);
14
<PAGE>
however, this 1% charge will not be imposed upon shareholders unless
authorized by the Fund's 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. 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 Fund has undertaken certain procedures regarding telephone transactions as
described on page 13.
Exchange Limitations, Excessive Trading
To minimize Fund costs and to protect the Funds and their shareholders from
unfair expense burdens, the Funds restrict excessive exchanges. The limit on
exchanges out of any Fund in the USAA family of funds for each account is six
per calendar year (except there is no limitation on exchanges out of the Tax
Exempt Short-Term Fund, Short-Term Bond Fund, or any of the money market funds
in the USAA family of funds). 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.
15
<PAGE>
SHAREHOLDER INFORMATION
Share Price Calculation
[SIDE BAR]
NAV PER SHARE
EQUALS
TOTAL ASSETS
MINUS
LIABILITIES
DIVIDED BY
# OF SHARES
OUTSTANDING
The price at which you purchase and redeem Fund shares is equal to the net
asset value (NAV) per share determined on the effective date of the purchase or
redemption. You may buy and sell Fund shares at the NAV per share without a
sales charge. The Fund's NAV per share is calculated at the close of the
regular trading session of the NYSE, which is usually 4 p.m. Eastern Time.
Portfolio securities, except as otherwise noted, traded primarily on a
securities exchange are valued at the last sales price on that exchange. If no
sale is reported, the average of the bid and asked prices is generally used.
Over-the-counter securities are generally priced at the last sales price or, if
not available, at the average of the bid and asked prices.
Debt securities purchased with maturities of 60 days or less are stated at
amortized cost, which approximates market value. Other debt securities are
valued each business day at their current market value as determined by a
pricing service approved by the 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
Net investment income is accrued daily and paid on the last business day of the
month. Daily dividends are declared at the time the NAV per share is
calculated. Dividends shall begin accruing on shares purchased the day
following the effective date and shall continue to accrue to the effective date
of redemption. When you choose to receive cash dividends monthly, we will send
you those funds that have accrued during the month after the payment date. Any
net capital gain distribution usually occurs 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.
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
capital gain distribution paid by the Fund will reduce the NAV per share by
16
<PAGE>
the amount of the distribution on the ex-dividend date. You should consider
carefully the effects of purchasing shares of the Fund shortly before any
distribution. Some or all of these 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.
Regardless of the length of time you have held the Fund shares, distributions
of net long-term capital gains are taxable as long-term capital gains whether
received in cash or reinvested in additional shares.
WITHHOLDING - Federal law requires the Fund to withhold and remit to the U.S.
Treasury a portion of the income dividends and capital gain distributions and
proceeds of redemptions paid to any non-corporate shareholder who:
* fails to furnish the Fund with a correct tax identification number,
* underreports dividend or interest income, or
* fails to certify that he or she is not subject to withholding.
To avoid this withholding requirement, you must certify on your application, or
on a separate Form W-9 supplied by the Fund's transfer agent, that your tax
identification number is correct and you are not currently subject to backup
withholding.
REPORTING - The Fund will report information to you annually concerning the tax
status of dividends and distributions for federal income tax purposes.
17
<PAGE>
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.
18
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the Fund's
financial performance since inception. Certain information reflects financial
results for a single Fund share. The total returns in the table represent the
rate that an investor would have earned (or lost) on an investment in the Fund
(assuming reinvestment of all dividends and distributions). This information
has been audited by KPMG LLP, whose report, along with the Fund's financial
statements, are included in the annual report, which is available upon request.
Period Ended
July 31, 2000*
--------------
Net asset value at
beginning of period $ 10.00
Net investment income .72
Net realized and unrealized loss (.18)
Distributions from net
investment income (.72)
------------
Net asset value at end of period $ 9.82
============
Total return (%)** 5.56
Net assets at end of period (000) $ 63,872
Ratio of expenses to
average net assets (%) .65
Ratio of expenses to average
net assets, excluding
reimbursement (%) 1.03
Ratio of net investment income to
average net assets (%) 7.37
Portfolio turnover (%) 8.60
---------
* Fund commenced operations on August 2, 1999.
** Assumes reinvestment of all dividend income during the period.
19
<PAGE>
APPENDIX A
THE FOLLOWING ARE DESCRIPTIONS OF THE PRINCIPAL TYPES OF SECURITIES
IN WHICH THE FUND'S ASSETS MAY BE INVESTED:
EURODOLLAR AND YANKEE OBLIGATIONS
We may invest a portion of the Fund's assets in dollar-denominated instruments
that have been issued outside the U.S. capital markets by foreign corporations
and financial institutions and by foreign branches of U.S. corporations and
financial institutions (Eurodollar obligations) as well as dollar-denominated
instruments that have been issued by foreign issuers in the U.S. capital
markets (Yankee obligations).
ILLIQUID SECURITIES
We may invest up to 15% of the Fund's net assets in securities that are
illiquid. Illiquid securities are those securities which cannot be disposed of
in the ordinary course of business, seven days or less, at approximately the
same value at which the Fund has valued the securities.
MASTER DEMAND NOTES
We may invest the Fund's assets in master demand notes, which are obligations
that permit the investment of fluctuating amounts by the Fund, at varying rates
of interest using direct arrangements between the Fund, as lender, and the
borrower. These notes permit daily changes in the amounts borrowed. The Fund
has the right to increase the amount under the note at any time up to the full
amount provided by the note agreement, or to decrease the amount, and the
borrower may repay up to the full amount of the note without penalty.
Frequently, such obligations are secured by letters of credit or other credit
support arrangements provided by banks. Because master demand notes are direct
lending arrangements between the lender and borrower, these instruments
generally will not be traded, and there generally is no secondary market for
these notes, although they are redeemable (and immediately repayable by the
borrower) at face value, plus accrued interest, at any time. We will invest the
Fund's assets in master demand notes only if the Fund's Board of Directors or
its delegate has determined that they are of credit quality comparable to the
debt securities in which the Fund generally may invest.
MORTGAGE-BACKED AND ASSET-BACKED SECURITIES
We may invest the Fund's assets in mortgage-backed and asset-backed securities.
Mortgage-backed securities include, but are not limited to, securities issued
by the Government National Mortgage Association (Ginnie Mae), the Federal
National Mortgage Association (Fannie Mae), and the Federal Home Loan Mortgage
Corporation (Freddie Mac). These securities represent ownership in a pool of
mortgage loans. They differ from conventional bonds in that principal is paid
back to the investor as payments are made on the underlying mortgages in the
pool. Accordingly, the Fund receives monthly scheduled payments of principal
and interest along with any unscheduled principal prepayments on the underlying
mortgages. Because these scheduled and unscheduled principal payments
20
<PAGE>
must be reinvested at prevailing interest rates, mortgage-backed securities do
not provide an effective means of locking in long-term interest rates for the
investor. Like other fixed income securities, when interest rates rise, the
value of a mortgage-backed security generally will decline; however, when
interest rates are declining, the value of mortgage-backed securities with
prepayment features may not increase as much as other fixed income securities.
Mortgage-backed securities also include collateralized mortgage obligations
(CMOs). CMOs are obligations fully collateralized by a portfolio of mortgages
or mortgage-related securities. CMOs are divided into pieces (tranches) with
varying maturities. The cash flow from the underlying mortgages is used to pay
off each tranche separately. CMOs are designed to provide investors with more
predictable maturities than regular mortgage securities but such maturities can
be difficult to predict because of the effect of prepayments. Failure to
accurately predict prepayments can adversely affect the Fund's return on these
investments. CMOs may also be less marketable than other securities.
Asset-backed securities represent a participation in, or are secured by and
payable from, a stream of payments generated by particular assets, such as
credit card, motor vehicle, or trade receivables. They may be pass-through
certificates, which have characteristics very similar to mortgage-backed
securities, discussed above. They may also be in the form of asset-backed
commercial paper, which is issued by a special purpose entity, organized solely
to issue the commercial paper and to purchase interests in the assets. The
credit quality of these securities depends primarily upon the quality of the
underlying assets and the level of credit support and enhancement provided.
The weighted average life of such securities is likely to be substantially
shorter than their stated final maturity as a result of scheduled principal
payments and unscheduled principal prepayments.
PUT BONDS
We may invest the Fund's assets in securities (including securities with
variable interest rates) that may be redeemed or sold back (put) to the issuer
of the security or a third party prior to stated maturity (put bonds). Such
securities will normally trade as if maturity is the earlier put date, even
though stated maturity is longer.
REPURCHASE AGREEMENTS
We may invest the Fund's assets in repurchase agreements that are
collateralized by obligations issued or guaranteed as to both principal and
interest by the U.S. government, its agencies and instrumentalities. A
repurchase agreement is a transaction in which a security is purchased with a
simultaneous commitment to sell it back to the seller (a commercial bank or
recognized securities dealer) at an agreed upon price on an agreed upon date.
This date is usually not more than seven days from the date of purchase. The
resale price reflects the purchase price plus an agreed upon market rate of
interest, which is unrelated to the coupon rate or maturity of the purchased
security.
21
<PAGE>
VARIABLE RATE SECURITIES
We may invest the Fund's assets in securities that bear interest at rates which
are adjusted periodically to market rates.
* These interest rate adjustments can raise or lower the income generated by
such securities. These changes will have the same effect on the income
earned by the Fund depending on the proportion of such securities held.
* Because the interest rates of variable rate securities are periodically
adjusted to reflect current market rates, their market value is less
affected by changes in prevailing interest rates than the market value of
securities with fixed interest rates.
* The market value of a variable rate security usually tends toward par (100%
of face value) at interest rate adjustment time.
WHEN-ISSUED SECURITIES
We may invest the Fund's assets in new issues of debt securities offered on a
when-issued basis.
* Delivery and payment take place after the date of the commitment to
purchase, normally within 45 days. Both price and interest rate are
fixed at the time of commitment.
* The Fund does not earn interest on the securities until settlement, and the
market value of the securities may fluctuate between purchase and
settlement.
* Such securities can be sold before settlement date.
22
<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
-------------------------------------------------------------------------------
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 INDEX(SM)" 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.
23
<PAGE>
APPENDIX B (CONTINUED)
FUND TYPE/NAME (CONTINUED) RISK
-------------------------------------------------------------------------------
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
-------------------------------------------------------------------------------
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.
24
<PAGE>
If you would like more information about the Fund, you may call 1-800-531-8181
to request a free copy of the Fund's statement of additional information (SAI),
annual or semiannual report, or to ask other questions about the Fund. The SAI
has been filed with the Securities and Exchange Commission (SEC) and is legally
a part of this prospectus. In the Fund's annual report, you will find a
discussion of the market conditions and investment strategies that
significantly affected the Fund's performance during the last fiscal year.
To view these documents, along with other related documents, you can visit the
EDGAR database on 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 paying 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 CUSTODIAN
USAA Shareholder Account Services State Street Bank and Trust Company
9800 Fredericksburg Road P.O. Box 1713
San Antonio, Texas 78288 Boston, Massachusetts 02105
----------------------------------------------------------------
TELEPHONE ASSISTANCE HOURS
Call toll free - Central Time
Monday - Friday 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>
USAA HIGH-YIELD
OPPORTUNITIES
FUND
PROSPECTUS
DECEMBER 1, 2000
As with other mutual funds, the Securities and Exchange Commission has not
approved or disapproved of this Fund's shares or determined whether this
prospectus is accurate or complete. Anyone who tells you otherwise is
committing a crime.
TABLE OF CONTENTS
What Is the Fund's Investment Objective and Main Strategy? ........... 2
What Are the Main Risks of Investing in This Fund? ................... 2
Is This Fund for You? ................................................ 3
Could the Value of Your Investment in This Fund Fluctuate? ........... 3
Fees and Expenses .................................................... 4
Fund Investments ..................................................... 6
Fund Management ...................................................... 10
Using Mutual Funds in an Investment Program .......................... 11
How to Invest ........................................................ 12
How to Redeem ........................................................ 15
Important Information About Purchases and Redemptions ................ 16
Exchanges ............................................................ 17
Shareholder Information .............................................. 18
Financial Highlights ................................................. 21
Appendix A ........................................................... 22
Appendix B ........................................................... 27
Appendix C ........................................................... 28
<PAGE>
USAA Investment Management Company manages this Fund. For easier reading, USAA
Investment Management Company will be referred to as "we" or "us" throughout
the prospectus.
WHAT IS THE FUND'S INVESTMENT OBJECTIVE AND MAIN STRATEGY?
The Fund's investment objective is to provide an attractive total return
primarily through high current income and secondarily through capital
appreciation. We will attempt to achieve this objective by normally investing
at least 80% of the Fund's assets in high-yield securities, including bonds
(often referred to as "junk" bonds), convertible securities, or preferred
stocks.
The Fund's Board of Directors may change the Fund's investment objective
without shareholder approval.
Because any investment involves risk, there is no assurance that the Fund's
objective will be achieved. See FUND INVESTMENTS on page 6 for more
information.
WHAT ARE THE MAIN RISKS OF INVESTING IN THIS FUND?
The primary risks of investing in this Fund are credit risk, market
illiquidity, and interest rate risk.
* CREDIT RISK involves the possibility that an issuer cannot make timely
dividend, interest, and principal payments on its securities.
* MARKET ILLIQUIDITY involves the risk of investing in securities whose
market is generally less liquid than the market for higher-quality
securities.
* INTEREST RATE RISK involves the possibility that the value of the Fund's
investments will fluctuate because of changes in interest rates.
IF INTEREST RATES INCREASE: the yield of the Fund may increase and the
market value of the Fund's securities will likely decline, adversely
affecting the net asset value and total return.
IF INTEREST RATES DECREASE: the yield of the Fund may decrease and the
market value of the Fund's securities may increase, which would likely
increase the Fund's net asset value and total return.
Another risk of the Fund described later in the prospectus is the risk of
foreign investing. As with other mutual funds, losing money is also a risk of
investing in this Fund.
2
<PAGE>
As you consider an investment in this Fund, you should also take into account
your tolerance for the daily fluctuations of the financial markets and whether
you can afford to leave your money in the investment for long periods of time
to ride out down periods.
An investment in this Fund is not a deposit of USAA Federal Savings Bank, or
any other bank, and is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency.
Look for this symbol [CAUTION LIGHT GRAPHIC] 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 a substantial risk of fluctuation in share
value.
* You are looking for a high level of monthly, taxable income with a
potential for capital appreciation. However, income will vary and there is
no guarantee that the Fund will pay a monthly dividend.
* You currently have a well-diversified investment portfolio and are looking
for returns greater than those typically available on investment-grade,
fixed-income securities without all of the risks associated with equity
securities.
* You are looking for a long-term investment.
This Fund may not be appropriate as part of your investment portfolio if . . .
* You are unwilling to take greater risk for long-term goals.
* You are seeking a stable level of income.
* You need an investment that provides tax-efficient returns.
The Fund by itself does not constitute a balanced investment program.
Diversifying your investments may improve your long-run investment return and
lower the volatility of your overall investment portfolio.
COULD THE VALUE OF YOUR INVESTMENT IN THIS FUND FLUCTUATE?
Yes, it could. In fact, the value of your investment in this Fund will
fluctuate with the changing market values of the investments in the Fund.
As an investor in this Fund, you should be prepared for price fluctuations that
may be greater than those associated with bond funds emphasizing high-quality
investments. Because a major portion of the Fund's assets are invested in
high-yield securities, the value of your investment will vary from day to day.
Changes in the economy, adverse political events, and changing interest rates
will cause the value of the Fund to fluctuate. These types of
3
<PAGE>
developments could affect an issuer's ability to meet its principal, dividend,
and interest obligations. If an issuer does default, the Fund could experience
a decline in the market value of its securities.
[SIDE BAR]
[TOUCHLINE GRAPHIC]
TOUCHLINE(R)
1-800-531-8777
PRESS
1
THEN
1
THEN
8 0 #
Performance history for this Fund will be available in the prospectus after the
Fund has been in operation for one full calendar year. You may obtain the most
current price, yield, and return information for this Fund through our usaa.com
Web site once you have established Internet access. See page 14 for information
on establishing Internet access. You may also obtain this information by
calling USAA TouchLine(R) at 1-800-531-8777. Press 1 for the Mutual Fund Menu,
press 1 again for prices, yields, and returns. Then, press 80# when asked for
the fund code. You must remember that historical performance does not
necessarily indicate what will happen in the future.
[SIDE BAR]
Newspaper
Symbol
HYldOpp
Ticker
Symbol
USHYX
Additionally, you may find the current price of your shares in the business
section of your newspaper in the mutual fund section under the heading "USAA
Group" and the symbol "HYldOpp." If you prefer to obtain this information from
an online computer service, you can do so by using the ticker symbol "USHYX."
You may see the Fund's yield and total return quoted in advertisements and
reports. All mutual funds must use the same formulas to calculate yield and
total return. Yield is the annualized net income of the Fund during a specified
30-day period as a percentage of the Fund's share price. Total return measures
the price change in a share assuming the reinvestment of all dividend income
and capital gain distributions. You may also see a comparison of the Fund's
performance to that of other mutual funds with similar investment objectives
and to bond or relevant indexes.
FEES AND EXPENSES
This summary shows what it will cost you, directly and indirectly, to invest in
the Fund.
Shareholder Transaction Expenses -- (Direct Costs)
Generally, 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.) IN ADDITION, IF YOU SELL
OR EXCHANGE SHARES WITHIN SIX MONTHS OF PURCHASE, YOU MAY BE SUBJECT TO A
SHORT-TERM TRADING FEE PAYABLE TO THE FUND OF 1% OF THE VALUE OF THE SHARES
REDEEMED OR EXCHANGED.
4
<PAGE>
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
and transfer agent fees. The figures below show actual expenses before waivers
during the past fiscal year ended July 31, 2000, and are calculated as a
percentage of average net assets (ANA).
[SIDE BAR]
12B-1 FEES - SOME MUTUAL FUNDS CHARGE THESE FEES TO PAY FOR ADVERTISING
AND OTHER COSTS OF SELLING FUND SHARES.
-----------------------------------------------------------
Management Fees .50%
Distribution (12b-1) Fees None
Other Expenses .69%
-----
Total Annual Fund Operating Expenses* 1.19%
=====
-----------------------------------------------------------
---------
* We have voluntarily agreed to limit the Fund's Total Annual Fund
Operating Expenses to .75% of its ANA and to reimburse the Fund for all
expenses in excess of that amount until December 1, 2001. Up to August
2, 2002, 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:
-----------------------------------------------------------
Total Annual Fund Operating Expenses 1.19%
Reimbursement from USAA Investment
Management Company (.44%)
------
Actual Fund Operating Expenses
After Reimbursement .75%
======
-----------------------------------------------------------
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............... $ 121
3 years.............. 378
5 years.............. 654
10 years.............. 1,443
----------------------------------------------------------
5
<PAGE>
FUND INVESTMENTS
Principal Investment Strategies and Risks
Q What is the Fund's principal investment strategy?
A The Fund's principal investment strategy is to normally invest at least
80% of the Fund's assets in a broad range of U.S. dollar-denominated
high-yield securities, including bonds, convertible securities, or
preferred stocks, with an emphasis on non-investment-grade debt
securities.
The Fund may invest the remainder of its assets in common stocks,
defaulted securities, non-dollar-denominated foreign securities, trade
claims, and certain derivatives, such as futures and options.
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 may purchase and sell securities without regard to the length of time
held. The Fund's portfolio turnover rate will vary from year to year,
depending on market conditions, and it may exceed 100%. A high turnover
rate increases transaction costs and may increase taxable capital gain
distributions.
Q What are considered high-yield securities?
A We consider high-yield securities to include a broad range of securities
that produce high current income. Although the Fund has no limits on the
credit quality and maturity of its investments, its strategy typically
leads to lower-quality, fixed-income securities rated below the four
highest credit grades by a public rating agency (or of equivalent
quality if not publicly rated). These "non-investment-grade" securities
are considered speculative and are subject to significant credit risk.
They are sometimes referred to as "junk" since they are believed to
represent a greater risk of default than more creditworthy
"investment-grade" securities.
High-yield securities may be issued by corporations, governmental
bodies, and other issuers. These issuers might
6
<PAGE>
be small or obscure, just getting started, or even large, well-known
leveraged entities. They are typically more vulnerable to financial
setbacks and recession than more creditworthy issuers and may be unable
to make timely dividend, interest, and principal payments if economic
conditions weaken.
Q How is this Fund different from a Fund that invests primarily in
investment-grade bonds?
A Because of the types of securities the Fund intends to invest in, we
anticipate that it will generate significantly higher income than
investment-grade bond funds and may have a greater potential for capital
appreciation. Additionally, high-yield securities are more sensitive to
changes in economic conditions than investment-grade bonds. The Fund may
underperform investment-grade bond funds when the outlook for the
economy is negative. Conversely, the Fund may outperform when the
economic outlook turns positive.
Q What is a credit rating?
A A credit rating is an evaluation reflecting the possibility that an
issuer will default on a security. Rating agencies such as Moody's
Investors Services (Moody's), Standard & Poor's Ratings Group (S&P), and
Fitch Information, Inc. (Fitch), analyze the financial strength of an
issuer, whether the issuer is a corporation or government body. The
highest ratings are assigned to those issuers perceived to have the
least credit risk. Ratings may range from AAA (highly unlikely to
default) to D (in default). If a security is not rated by these
agencies, we will assign an equivalent rating. The table shown in
APPENDIX B on page 27 illustrates these ratings and the risk associated
with each.
[CAUTION LIGHT GRAPHIC]
CREDIT RISK. The securities in the Fund's portfolio are subject to credit risk.
Credit risk is the possibility that an issuer will be unable to make timely
dividend, interest, or principal payments or meet other terms of its financial
obligations. Many issuers of high-yield securities have characteristics
(including, but not limited to, high levels of debt, an untested business plan,
significant competitive and technological challenges, legal, and political
risks), which cast doubt on their ability to honor their financial obligations.
They may be unable to pay dividends, interest when due, or return all of the
principal amount of their debt obligations at maturity.
7
<PAGE>
When evaluating potential investments for the Fund, our analysts assess credit
risk and its impact on the Fund's portfolio. In addition, the public rating
agencies may provide estimates of the credit quality of the securities. The
ratings may not take into account every risk that dividends, interest, or
principal will be repaid on a timely basis.
[CAUTION LIGHT GRAPHIC]
INTEREST RATE RISK. As a mutual fund generally investing in income-producing
securities, the Fund is subject to the risk that the market value of the
securities will decline due to rising interest rates. The prices of
income-producing securities are linked to the prevailing market interest rates.
In general, when interest rates rise, the prices of income-producing securities
fall and when interest rates fall, the prices of income-producing securities
rise. The price volatility of an income-producing security also depends on its
maturity. Generally, the longer the maturity, the greater its sensitivity to
interest rates. To compensate investors for this higher risk, securities with
longer maturities generally offer higher yields than securities with shorter
maturities.
[CAUTION LIGHT GRAPHIC]
MARKET ILLIQUIDITY. The market for lower-quality issues is generally less
liquid than the market for higher-quality issues. Therefore, large purchases or
sales could cause sudden and significant price changes in these securities.
Many lower-quality issues do not trade frequently; however, when they do trade,
the price may be substantially higher or lower than expected.
Q What are the credit quality characteristics of the Fund's holdings?
A The following chart illustrates the quality ratings of the Fund's
investment portfolio as of July 31, 2000.
------------------------------------------------------------------------
PERCENTAGE OF
INVESTMENT FUND'S NET ASSETS
------------------------------------------------------------------------
Baa2 1.0%
Ba2 11.8%
Ba3 7.1%
B1 12.5%
B2 23.6%
B3 23.3%
Caa1 7.7%
Caa2 0.8%
------------------------------------------------------------------------
8
<PAGE>
Q What are the principal types of securities in which the Fund may invest?
A The Fund's portfolio will primarily consist of the following U.S.
dollar-denominated securities:
* corporate debt securities such as notes, bonds, (including zero-
coupon and pay-in-kind bonds) loans, and commercial paper;
* bank obligations, including certificates of deposit and banker's
acceptances;
* obligations of state and local governments and their agencies and
instrumentalities;
* mortgage-backed securities;
* asset-backed securities;
* equity and debt securities of real estate investment trusts;
* Eurodollar and Yankee obligations;
* convertible securities; and
* preferred stocks.
For a further description of these securities, see APPENDIX A on page 22.
Q May the Fund's assets be invested in foreign securities?
A Yes. We may invest up to 20% of the Fund's assets in foreign
non-dollar-denominated securities traded outside the United States. We
may also invest the Fund's assets, without limitation, in
dollar-denominated securities of foreign issuers. These foreign holdings
may include securities issued in emerging markets as well as securities
issued in established markets.
[CAUTION LIGHT GRAPHIC]
FOREIGN INVESTING RISK. Investing in foreign securities poses unique risks:
currency-exchange-rate fluctuations; foreign-market illiquidity;
increased-price volatility; exchange-control regulations; foreign-ownership
limits; different accounting, reporting, and disclosure requirements; and
difficulties in obtaining legal judgments; and foreign withholding taxes. In
the past, equity and debt instruments of foreign markets have been more
volatile than equity and debt instruments of U.S. securities markets.
9
<PAGE>
Q How are the decisions to buy and sell securities made?
A We search for securities that represent an attractive value given
current market conditions. Recognizing value is the result of
simultaneously analyzing the risks and rewards of ownership among the
securities available in the market. In general, we focus on securities
that offer high income. We will also explore opportunities for capital
appreciation.
We will sell a security if it no longer represents value. This can occur
through an increase in risk, an increase in price, or a combination of
the two. We will also sell a security if we find a more compelling value
in the market.
For additional information about securities in which we may invest the Fund's
assets, see APPENDIX A on page 22.
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. As of the date of
this prospectus, we had approximately $42 billion in total assets under
management. Our mailing address is 9800 Fredericksburg Road, San Antonio, TX
78288.
We provide management services to the Fund pursuant to an Advisory Agreement.
We are responsible for managing the Fund's portfolio (including placement of
brokerage orders) and its business affairs, subject to the authority of and
supervision by the Fund's Board of Directors. For our services, the Fund pays
us an annual fee. The fee is computed at one-half of one percent (.50%) of
average net assets. The fee received for the fiscal year ended July 31, 2000,
after we made reimbursements to the Fund, was equal to .06% 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 December 1, 2001, to waive our annual management fee to
the extent that total expenses of the Fund exceed .75% of the Fund's average
annual net assets. Under the Advisory Agreement, the Fund is required to pay us
back the amount waived in subsequent years through August 2, 2002, but only if
the additional payments do not cause the Fund's total expenses to exceed .75%
of the Fund's average annual net assets.
10
<PAGE>
Portfolio Manager
[PHOTOGRAPH]
R. MATTHEW FREUND
R. Matthew Freund, assistant vice president of Fixed Income Investments, has
managed the Fund since its inception in August 1999. Mr. Freund has 11 years'
investment management experience and has worked for us for six years. He earned
the Chartered Financial Analyst designation in 1992 and is a member of the
Association for Investment Management and Research and the San Antonio
Financial Analysts Society, Inc. He holds an MBA from Indiana University and a
BA from Franklin & Marshall College.
USING MUTUAL FUNDS IN AN INVESTMENT PROGRAM
I. 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.
II. Using Funds in an Investment Program
In choosing a mutual fund as an investment vehicle, you are giving up some
investment decisions, but must still make others. The decisions you don't have
to make are those involved with choosing individual securities. We will perform
that function. In addition, we will arrange for the safekeeping of securities,
auditing the annual financial statements, and daily valuation of the Fund, as
well as other functions.
You, however, retain at least part of the responsibility for an equally
important decision. This decision involves determining a portfolio of mutual
funds that balances your investment goals with your tolerance for risk. It is
likely that this decision may include the use of more than one fund of the USAA
family of funds.
11
<PAGE>
For example, assume you wish to invest in a widely diversified portfolio. You
could combine an investment in the High-Yield Opportunities Fund with
investments in other mutual funds that invest in stocks of large and small
companies and high-dividend stocks. This is just one way you could combine
funds to fit your own risk and reward goals.
III. USAA's Family of Funds
We offer you another alternative with our asset strategy funds listed in
APPENDIX C under asset allocation on page 28. 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 C on page 28 for a
complete list of the USAA family of no-load mutual funds.
HOW TO INVEST
Purchase of Shares
OPENING AN ACCOUNT
You may open an account and make an investment as described below by mail, in
person, bank wire, 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.
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
12
<PAGE>
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
[MONEY GRAPHIC]
* $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 PURCHASES
* $50 per transaction, per account.
HOW TO PURCHASE BY . . .
MAIL
[ENVELOPE GRAPHIC]
* 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 in the
business reply envelope that accompanies your Fund's transaction
confirmation to the transfer agent:
USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, TX 78288
IN PERSON
[HANDSHAKE GRAPHIC]
* To open an account, bring your application and check to our San Antonio
investment sales and service office at:
USAA Federal Savings Bank
10750 Robert F. McDermott Freeway
San Antonio, TX 78288
13
<PAGE>
BANK WIRE
[WIRE GRAPHIC]
* 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 High-Yield Opportunities Fund
USAA Account Number: 69384998
Shareholder(s) Name(s)__________________________________
Shareholder(s) Mutual Fund Account Number ______________
ELECTRONIC FUNDS TRANSFER (EFT)
[CALENDAR GRAPHIC]
* Additional purchases on a regular basis can be deducted from a bank
account, paycheck, income-producing investment, or USAA money market fund
account. Sign up for these services when opening an account or call
1-800-531-8448 to add these services.
PHONE 1-800-531-8448 (IN SAN ANTONIO, 456-7202)
[TELEPHONE GRAPHIC]
* If you have an existing USAA mutual fund account and would like to open a
new account or exchange to another USAA Fund, call for instructions. To
open an account by phone, the new account must have the same registration
as your existing account.
USAA TOUCHLINE(R)1-800-531-8777 (IN SAN ANTONIO, 498-8777)
[TOUCHLINE GRAPHIC]
* 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
[COMPUTER GRAPHIC]
* 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.
14
<PAGE>
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
[FAX MACHINE GRAPHIC]
* 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.
* 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,
15
<PAGE>
(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
[INVESTORS GUIDE]
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).
Short-Term Trading Fee
Because the Fund can experience substantial price fluctuations, it is intended
for the long-term investor. It is not designed for those short-term investors
whose frequent purchases, redemptions, or exchanges can unnecessarily disrupt
the Fund's investment strategy and increase the Fund's transaction costs. For
these reasons, the Fund charges a 1% short-term trading fee on redemptions and
exchanges of Fund shares held less than six months. The fee will be paid
directly to the Fund to help reduce transaction costs. We will use the
"first-in, first-out" (FIFO) method of determining the holding period. The Fund
is currently waiving the fee but reserves the right to begin charging the fee
at any time without prior notice to shareholders.
16
<PAGE>
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 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);
* 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 order, 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 Fund has undertaken certain procedures regarding telephone transactions as
described on page 15.
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
17
<PAGE>
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
[SIDE BAR]
NAV PER SHARE
EQUALS
TOTAL ASSETS
MINUS
LIABILITIES
DIVIDED BY
# OF SHARES
OUTSTANDING
The price at which you purchase and redeem Fund shares is equal to the net
asset value (NAV) per share determined on the effective date of the purchase or
redemption. You may buy and sell Fund shares at the NAV per share without a
sales charge. The Fund's NAV per share is calculated at the close of the
regular trading session of the NYSE, which is usually 4 p.m. Eastern Time.
Portfolio securities, except as otherwise noted, traded primarily on a domestic
securities exchange are valued at the last sales price on that exchange.
Portfolio securities traded primarily on foreign securities exchanges are
generally valued at the closing values of such securities on the exchange where
primarily traded. If no sale is reported, the average of the bid and asked
prices is generally used.
Securities trading in various foreign markets may take place on days when the
NYSE is closed. Further, when the NYSE is open, the foreign markets may be
closed. 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 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
18
<PAGE>
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 monthly. 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.
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.
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.
19
<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 the 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.
20
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the Fund's
financial performance since inception. Certain information reflects financial
results for a single Fund share. The total returns in the table represent the
rate that an investor would have earned (or lost) on an investment in the Fund
(assuming reinvestment of all dividends and distributions). This information
has been audited by KPMG LLP, whose report, along with the Fund's financial
statements, are included in the annual report, which is available upon request.
Period Ended
July 31, 2000*
----------------
Net asset value at
beginning of period $ 10.00
Net investment income 1.08a
Net realized and unrealized loss (.33)
Distributions from net
investment income (.97)
---------------
Net asset value at end of period $ 9.78
===============
Total return (%) ** 7.80
Net assets at end of period (000) $ 44,907
Ratio of expenses to average
net assets (%) .75
Ratio of expenses to average net assets,
excluding reimbursement (%) 1.19
Ratio of net investment loss to
average net assets (%) 10.30
Portfolio turnover (%) 51.88
--------------
* Fund commenced operations on August 2, 1999.
** Assumes reinvestment of all dividend income during the period.
(a) Calculated using weighted average shares.
21
<PAGE>
APPENDIX A
THE FOLLOWING ARE DESCRIPTIONS OF THE PRINCIPAL TYPES OF SECURITIES
IN WHICH THE FUND'S ASSETS MAY BE INVESTED:
BONDS
A bond is an interest-bearing security - an IOU - issued by companies or
governmental units. The issuer has a contractual obligation to pay interest at
a stated rate on specific dates and to repay principal (the bond's face value)
on a specified date. An issuer may have the right to redeem or "call" a bond
before maturity, and the investor may have to reinvest the proceeds at lower
market rates.
A bond's annual interest income, set by its coupon rate, is usually fixed for
the life of the bond. Its yield (income as a percent of current price) will
fluctuate to reflect changes in interest rate levels. A bond's price usually
rises when interest rates fall, and vice versa, so its yield stays current.
Lower-quality bond prices are less directly responsive to interest rate changes
than investment-grade issues and may not always follow this pattern.
Bonds may be unsecured (backed by the issuer's general creditworthiness only)
or secured (also backed by specified collateral). Most high-yield "junk" bonds
are unsecured.
Bonds may be designated as senior or subordinated obligations. Senior
obligations generally have the first claim on a corporation's earnings and
assets and, in the event of liquidation, are paid before subordinated debt.
BOND RATINGS AND HIGH-YIELD BONDS
Larger bond issues are evaluated by rating agencies such as Moody's and
Standard & Poor's on the basis of the issuer's ability to meet all required
interest and principal payments. The highest ratings are assigned to issuers
perceived to be the best credit risks. Our research analysts also evaluate all
portfolio holdings, including those rated by an outside agency. Other things
being equal, lower-rated bonds have higher yields due to greater risk.
High-yield bonds, also called "junk" bonds, are those rated below BBB.
ZERO-COUPON AND PAY-IN-KIND BONDS
A zero-coupon bond is a security that is sold at a deep discount from its face
value, makes no periodic interest payments, and is redeemed at face value when
it matures. Pay-in-kind bonds allow the issuer, at its option, to make current
interest payments on the bonds either in cash or in additional bonds. Both
allow the issuer to avoid the need to generate cash to meet current interest
payments. Therefore, the value of these bonds are subject to greater
fluctuation in response to changes in interest rates and may involve greater
credit risks than bonds paying interest in cash currently.
NOTES, LOAN PARTICIPATIONS, AND ASSIGNMENTS
The Fund may invest in a company through the purchase or execution of a
privately negotiated note representing the equivalent of a loan to the company.
Larger loans to corporations or governments, including governments of less
developed countries (LDCs), may be shared or syndicated among several lenders,
usually banks. The Fund could participate in such syndicates, or could buy part
of a loan, becoming a direct lender.
22
<PAGE>
These loans may often be obligations of companies in financial distress or in
default. These investments involve special types of risk, including those of
being a lender, reduced liquidity, and in the case of LDC investments,
increased credit risk and volatility.
PUT BONDS
The Fund may invest in securities (including securities with variable interest
rates) that may be redeemed or sold back (put) to the issuer of the security or
a third party prior to stated maturity (put bonds). Such securities will
normally trade as if maturity is the earlier put date, even though stated
maturity is longer.
MORTGAGE-BACKED AND ASSET-BACKED SECURITIES
Mortgage-backed securities include, but are not limited to, securities issued
by the Government National Mortgage Association (Ginnie Mae), the Federal
National Mortgage Association (Fannie Mae), and the Federal Home Loan Mortgage
Corporation (Freddie Mac). These securities represent ownership in a pool of
mortgage loans. They differ from conventional bonds in that principal is paid
back to the investor as payments are made on the underlying mortgages in the
pool. Accordingly, the Fund receives monthly scheduled payments of principal
and interest along with any unscheduled principal prepayments on the underlying
mortgages. Because these scheduled and unscheduled principal payments must be
reinvested at prevailing interest rates, mortgage-backed securities do not
provide an effective means of locking in long-term interest rates for the
investor. Like other fixed income securities, when interest rates rise, the
value of a mortgage-backed security generally will decline; however, when
interest rates are declining, the value of mortgage-backed securities with
prepayment features may not increase as much as other fixed income securities.
Mortgage-backed securities also include collateralized mortgage obligations
(CMOs). CMOs are obligations fully collateralized by a portfolio of mortgages
or mortgage-related securities. CMOs are divided into pieces (tranches) with
varying maturities. The cash flow from the underlying mortgages is used to pay
off each tranche separately. CMOs are designed to provide investors with more
predictable maturities than regular mortgage securities but such maturities can
be difficult to predict because of the effect of prepayments. Failure to
accurately predict prepayments can adversely affect the Fund's return on these
investments. CMOs may also be less marketable than other securities.
Asset-backed securities represent a participation in, or are secured by and
payable from, a stream of payments generated by particular assets, such as
credit card, motor vehicle, or trade receivables. They may be pass-through
certificates, which have characteristics very similar to mortgage-backed
securities, discussed above. They may also be in the form of asset-backed
commercial paper, which is issued by a special purpose entity, organized solely
to issue the commercial paper and to purchase interests in the assets. The
credit quality of these securities depends primarily upon the quality of the
underlying assets and the level of credit support and enhancement provided.
The weighted average life of such securities is likely to be substantially
shorter than their stated final maturity as a result of scheduled principal
payments and unscheduled principal prepayments.
23
<PAGE>
MUNICIPAL LEASE OBLIGATIONS
The Fund may invest in a variety of instruments referred to as municipal lease
obligations, including leases, installment purchase contracts, and certificates
of participation in such leases and contracts.
VARIABLE RATE SECURITIES
Variable rate securities bear interest at rates which are adjusted periodically
to market rates.
* These interest rate adjustments can both raise and lower the income
generated by such securities. These changes will have the same effect on
the income earned by the Fund depending on the proportion of such
securities held.
* Because the interest rates of variable rate securities are periodically
adjusted to reflect current market rates, their market value is less
affected by changes in prevailing interest rates than the market value of
securities with fixed interest rates.
* The market value of a variable rate security usually tends toward par (100%
of face value) at interest rate adjustment time.
EURODOLLAR AND YANKEE OBLIGATIONS
The Fund may invest in dollar-denominated instruments that have been issued
outside the U.S. capital markets by foreign corporations and financial
institutions and by foreign branches of U.S. corporations and financial
institutions (Eurodollar obligations) as well as dollar-denominated instruments
that have been issued by foreign issuers in the U.S. capital markets (Yankee
obligations).
WHEN-ISSUED SECURITIES
The Fund may invest its assets in new issues of debt securities offered on a
when-issued basis.
* Delivery and payment take place after the date of the commitment to
purchase, normally within 45 days. Both price and interest rate are fixed
at the time of commitment.
* The Fund does not earn interest on the securities until settlement, and the
market value of the securities may fluctuate between purchase and
settlement.
* Such securities can be sold before settlement date.
PRIVATE PLACEMENTS
Private placements are sold directly to a small number of investors, usually
institutions. Unlike public offerings, such securities are not registered with
the SEC. Although certain of these securities may be readily sold, for example,
under Rule 144A, others may be illiquid, and their sale may involve substantial
delays and additional costs.
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,
24
<PAGE>
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.
EQUITY AND DEBT SECURITIES OF INVESTMENTS
IN REAL ESTATE INVESTMENT TRUSTS (REITS)
The Fund may invest its assets in equity securities of REITs and is therefore
subject to certain risks associated with direct investments in REITs. In
addition, the Fund may also invest its assets in debt securities of REITs and
may be subject to certain other risks, such as credit risk, associated with
investment in the debt securities of REITs. REITs may be affected by changes in
the value of their underlying properties and by defaults by borrowers or
tenants. Furthermore, REITs are dependent upon specialized management skills of
their managers and may have limited geographic diversification, thereby,
subjecting them to risks inherent in financing a limited number of projects.
REITs depend generally on their ability to generate cash flow to make
distributions to shareholders, and certain REITs have self-liquidation
provisions by which mortgages held may be paid in full and distributions of
capital returns may be made at any time.
PREFERRED STOCKS
Stocks represent shares of ownership in a company. Generally, preferred stock
has a specified dividend and ranks after bonds and before common stocks in its
claim on income for dividend payments and on assets should the company be
liquidated. After other claims are satisfied, common stockholders participate
in company profits on a pro-rata basis; profits may be paid out in dividends or
reinvested in the company to help it grow. Increases and decreases in earnings
are usually reflected in a company's stock price, so common stocks generally
have the greatest appreciation and depreciation potential of all corporate
securities. While most preferred stocks pay a dividend, the fund may purchase
preferred stock where the issuer has omitted, or is in danger of omitting,
payment of its dividend. Such investments would be made primarily for their
capital appreciation potential.
DEFERRABLE SUBORDINATED SECURITIES
Recently, securities have been issued that have long maturities and are deeply
subordinated in the issuer's capital structure. They generally have 30-year
maturities and permit the issuer to defer distributions for up to five years.
These characteristics give the issuer more financial flexibility than is
typically the case with traditional bonds. As a result, the securities may be
viewed as possessing certain "equity-like" features by rating agencies and bank
regulators. However, the securities are treated as debt securities by market
participants, and the Fund intends to treat them as such as well. These
securities may offer a mandatory put or remarketing option that creates an
effective maturity date significantly shorter than the stated one. The Fund
will invest in these securities to the extent their yield, credit, and maturity
characteristics are consistent with the Fund's investment objective and
program.
25
<PAGE>
ILLIQUID SECURITIES
The Fund may invest up to 15% of its 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.
DERIVATIVES
A Fund can use various techniques to increase or decrease its exposure to
changing security prices, interest rates, currency exchange rates, commodity
prices, or other factors that affect security values. These methods may involve
derivative transactions such as buying and selling options and futures
contracts, entering into currency exchange contracts or swap agreements,
purchasing indexed securities, and selling securities short.
We may use these practices to adjust the risk and return characteristics of the
Fund's portfolio of investments. If we judge market conditions incorrectly or
employ a strategy that does not correlate well with the Fund's investments,
these methods could result in a loss, regardless of whether the intent was to
reduce risk or increase return. These methods may increase the volatility of
the Fund and may involve a small investment of cash relative to the magnitude
of the risk assumed. In addition, these methods could result in a loss if the
counterparty to the transaction does not perform as promised.
26
<PAGE>
APPENDIX B
===============================================================================
RATINGS OF CORPORATE DEBT SECURITIES
LONG TERM
Moody's Standard
Investors & Poor's Fitch
Services Corporation Information, Inc. Definition
-------------------------------------------------------------------------------
Aaa AAA AAA Highest quality
Aa AA AA High quality
A A A Upper-medium grade
Baa BBB BBB Medium grade
Ba BB BB Speculative
B B B Highly speculative
Caa CCC,CC CCC,CC Vulnerable to default
Ca C C Default is imminent
C D DDD,DD,D Probably in default
-------------------------------------------------------------------------------
SHORT TERM
Moody's S&P Fitch
-------------------------------------------------------------------------------
A-1+ Extremely strong F-1+ Exceptionally strong
P-1 Superior quality A-1 Strong quality F-1 Highest credit quality
P-2 Strong quality A-2 Satisfactory quality F-2 Good credit quality
P-3 Acceptable quality A-3 Adequate quality F-3 Fair credit quality
NP Not Prime B Speculative quality B Speculative
C Doubtful quality C High default risk
D Default D Default
===============================================================================
27
<PAGE>
APPENDIX C
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
-------------------------------------------------------------------------------
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 INDEX(SM)" 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.
28
<PAGE>
FUND TYPE/NAME (CONTINUED) RISK
-------------------------------------------------------------------------------
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
-------------------------------------------------------------------------------
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.
29
<PAGE>
NOTES
<PAGE>
NOTES
<PAGE>
If you would like more information about the Fund, you may call 1-800-531-8181
to request a free copy of the Fund's statement of additional information (SAI),
annual or semiannual report, or to ask other questions about the Fund. The SAI
has been filed with the Securities and Exchange Commission (SEC) and is legally
a part of this prospectus. In the Fund's annual report, you will find a
discussion of the market conditions and investment strategies that
significantly affected the Fund's performance during the last fiscal year.
To view these documents, along with other related documents, you can visit the
EDGAR database on 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 paying 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.
INVESTMENT ADVISER, UNDERWRITER, AND DISTRIBUTOR
USAA Investment Management Company
9800 Fredericksburg Road
San Antonio, Texas 78288
----------------------------------------------------------------
TRANSFER AGENT CUSTODIAN
USAA Shareholder Account Services State Street Bank and Trust Company
9800 Fredericksburg Road P.O. Box 1713
San Antonio, Texas 78288 Boston, Massachusetts 02105
----------------------------------------------------------------
TELEPHONE ASSISTANCE HOURS
Call toll free - Central Time
Monday - Friday 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>
USAA SMALL CAP
STOCK FUND
PROSPECTUS
DECEMBER 1, 2000
As with other mutual funds, the Securities and Exchange Commission has not
approved or disapproved of this Fund's shares or determined whether this
prospectus is accurate or complete. Anyone who tells you otherwise is
committing a crime.
TABLE OF CONTENTS
What Is the Fund's Investment Objective and Main Strategy?............. 2
What Are the Main Risks of Investing in This Fund?..................... 2
Is This Fund for You?.................................................. 3
Could the Value of Your Investment in This Fund Fluctuate?............. 3
Fees and Expenses...................................................... 4
Fund Investments....................................................... 5
Fund Management........................................................ 7
Using Mutual Funds in an Investment Program............................ 8
How to Invest.......................................................... 9
How to Redeem.......................................................... 12
Important Information About Purchases and Redemptions.................. 13
Exchanges.............................................................. 14
Shareholder Information................................................ 15
Financial Highlights................................................... 18
Appendix A............................................................. 19
<PAGE>
USAA Investment Management Company manages this Fund. For easier reading, USAA
Investment Management Company will be referred to as "we" or "us" throughout
the prospectus.
WHAT IS THE FUND'S INVESTMENT OBJECTIVE AND MAIN STRATEGY?
The Fund's investment objective is long-term growth of capital. We will attempt
to achieve this objective by investing the Fund's assets primarily in equity
securities of companies with small market capitalizations.
The Fund's Board of Directors may change the Fund's investment objective
without shareholder approval.
Because any investment involves risk, there is no assurance that the Fund's
objective will be achieved. See FUND INVESTMENTS on page 5 for more
information.
WHAT ARE THE MAIN RISKS OF INVESTING IN THIS FUND?
The primary risks of investing in this Fund are market risk and the risk of
investing in companies with small market capitalizations.
[SIDE BAR]
MARKET CAPITALIZATION IS THE TOTAL MARKET VALUE OF A COMPANY'S
OUTSTANDING SHARES OF COMMON STOCK.
o 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 the company's operations.
o SMALL-CAP COMPANY RISK involves the greater risk of investing in smaller,
less well-known companies, especially those which have a narrow product
line or are traded infrequently, compared to investing in established
companies with proven track records.
As with other mutual funds, losing money is also a risk of investing in this
Fund.
As you consider an investment in this Fund, you should also take into account
your tolerance for the daily fluctuations of the financial markets and whether
you can afford to leave your money in the investment for long periods of time
to ride out down periods.
An investment in this Fund is not a deposit of USAA Federal Savings Bank, or
any other bank, and is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency.
Look for this symbol [CAUTION LIGHT] throughout the prospectus. We use it to
mark more detailed information about the risks you will face as a Fund
shareholder.
2
<PAGE>
IS THIS FUND FOR YOU?
This Fund might be appropriate as part of your investment portfolio if . . .
o You are willing to accept very high risk.
o You are looking for a long-term investment.
o You are focusing on small capitalization stocks in search of
above-average returns.
This Fund MAY NOT be appropriate as part of your investment portfolio if . . .
o You are unwilling to take greater risk for long-term goals.
o You need an investment that provides steady income.
o You need an investment that provides tax-efficient returns.
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.
Performance history for this Fund will be available in the prospectus after the
Fund has been in operation for one full calendar year. You may obtain the most
current price and return information for this Fund through our usaa.com Web
site once you have established Internet access. See page 11 for information on
establishing Internet access. You may also obtain this information by calling
USAA TouchLine(R) at 1-800-531-8777. Press 1 for the Mutual Fund Menu, press 1
again for prices and returns. Then, press 81# when asked for the fund code.
[SIDE BAR]
[TELEPHONE GRAPHIC]
TOUCHLINE(R)
1-800-531-8777
PRESS
(1)
THEN
(1)
THEN
(8) (1) (#)
You may see the Fund's total return quoted in advertisements and reports. All
mutual funds must use the same formula to calculate total return. Total return
measures the price change in a share assuming the reinvestment of all dividend
income and capital gain distributions. You may also see a comparison of the
Fund's performance to that of other mutual funds with similar investment
objectives and to stock or relevant indexes.
Additionally, you may find the most current price of your shares in the
business section of your newspaper in the mutual fund section under the heading
"USAA Group" and the symbol "SmCpStk." If you prefer to obtain this information
from an online computer service, you can do so by using the ticker symbol
"USCAX."
[SIDE BAR]
NEWSPAPER
SYMBOL
SmCpStk
TICKER
SYMBOL
USCAX
3
<PAGE>
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" include expenses such as custodian
and transfer agent fees. The figures below show actual expenses during the past
fiscal year ended July 31, 2000, and are calculated as a percentage of average
net assets.
[SIDE BAR]
12b-1 FEES - SOME MUTUAL FUNDS CHARGE THESE FEES TO PAY FOR
ADVERTISING AND OTHER COSTS OF SELLING FUND SHARES.
-----------------------------------------------------
Management Fees .75%
Distribution (12b-1) Fees None
Other Expenses .68%
----
Total Annual Fund Operating Expenses 1.43%
=====
-----------------------------------------------------
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............. $ 146
3 years............ 452
5 years............ 782
10 years............ 1,713
==============================
4
<PAGE>
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 small market capitalizations.
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 may purchase and sell Fund securities without regard to the length of
time held. The Fund's portfolio turnover rate will vary from year to year
depending on market conditions, and it may exceed 100%. Because a high
turnover rate increases transaction costs and may increase taxable capital
gains, we will carefully weigh the anticipated benefits of trading.
[CAUTION LIGHT]
MARKET RISK. Because this Fund invests in equity securities, it is subject to
stock market risk. Stock prices in general may decline over short or even
extended periods, regardless of the success or failure of 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.
Q What defines small cap stocks?
A Small cap stocks are those of companies that have a market capitalization
equal to or lower than that of the largest market capitalization stock in
the S&P SmallCap 600 Index at the time of purchase. As of September 30,
2000, the S&P SmallCap 600 Index included companies with market
capitalizations between $34 million and $5.2 billion. Keep in mind that
the market capitalization of the companies listed in the index may change
with market conditions and the composition of the index.
5
<PAGE>
Q Will the Fund continue to hold these securities if their market
capitalization no longer meets this definition?
A For purposes of this Fund's investment strategy, companies whose market
capitalizations no longer fall within the above definition will continue
to be considered small cap; and the Fund may continue to hold the
security.
[CAUTION LIGHT]
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 illiquid securities?
A Yes. We may invest up to 15% of the Fund's net assets in securities that
are illiquid. Illiquid securities are those securities which cannot be
disposed of in the ordinary course of business, seven days or less, at
approximately the same value at which the Fund has valued the securities.
Q How are the decisions to buy and sell securities made?
A We will invest the Fund's assets in a diversified group of small-cap
stocks. We consider a number of factors in that decision such as:
o small-cap companies that have the potential to become large-cap
companies,
o attractive stock valuation,
o good management, and
o unique products or services.
We will sell a security when we perceive that one or more of these
factors has changed.
For additional information about other securities in which we may invest the
Fund's assets, such as convertible securities, foreign securities, and real
estate investment trusts, see INVESTMENT POLICIES in the Fund's statement of
additional information.
6
<PAGE>
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. As of the date of
this prospectus, we had approximately $42 billion in total assets under
management. Our mailing address is 9800 Fredericksburg Road, San Antonio, TX
78288.
We provide management services to the Fund pursuant to an Advisory Agreement.
We are responsible for managing the Fund's portfolio (including placement of
brokerage orders) and its business affairs, subject to the authority of and
supervision by the Fund's Board of Directors. For our services, the Fund pays
us an annual fee. The fee was computed and paid at three-fourths of one percent
(.75%) of average net assets for the fiscal year ended July 31, 2000. We also
provide services related to selling the Fund's shares and receive no
compensation for those services.
Portfolio Managers
[PHOTOGRAPH]
Eric M. Efron and John K. Cabell, Jr.
Eric M. Efron and John K. Cabell, Jr., assistant vice presidents of Equity
Investments, have managed the Fund since its inception in August 1999.
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.
7
<PAGE>
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.
USING MUTUAL FUNDS IN AN INVESTMENT PROGRAM
I. 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.
II. Using Funds in an Investment Program
In choosing a mutual fund as an investment vehicle, you are giving up some
investment decisions, but must still make others. The decisions you don't have
to make are those involved with choosing individual securities. We will perform
that function. In addition, we will arrange for the safekeeping of securities,
auditing the annual financial statements, and daily valuation of the Fund, as
well as other functions.
You, however, retain at least part of the responsibility for an equally
important decision. This decision involves determining a portfolio of mutual
funds that balances your investment goals with your tolerance for risk. It is
likely that this decision may include the use of more than one fund of the USAA
family of funds.
For example, assume you wish to invest in a widely diversified portfolio. You
could combine an investment in the Small Cap Stock Fund with investments in
other mutual funds that invest in stocks of large and small companies and
high-dividend stocks. This is just one way you could combine funds to fit your
own risk and reward goals.
8
<PAGE>
III. USAA's Family of Funds
We offer you another alternative with our asset strategy funds listed in
APPENDIX A under asset allocation on page 19. These unique mutual funds provide
a professionally managed, diversified investment portfolio within a mutual
fund. Designed for the individual who prefers to delegate the asset allocation
process to an investment manager, their structure achieves diversification
across a number of investment categories.
Whether you prefer to create your own mix of mutual funds or use a USAA asset
strategy fund, the USAA family of funds provides a broad range of choices
covering just about any investor's investment objectives. Our 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 A on page 19 for a
complete list of the USAA family of no-load mutual funds.
HOW TO INVEST
Purchase of Shares
OPENING AN ACCOUNT
You may open an account and make an investment as described below by mail, in
person, bank wire, 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.
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.
9
<PAGE>
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
[MONEY GRAPHIC]
o $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 PURCHASES
o $50 per transaction, per account.
HOW TO PURCHASE BY . . .
MAIL
[ENVELOPE GRAPHIC]
o To open an account, send your application and check to:
USAA Investment Management Company
9800 Fredericksburg Road
San Antonio, TX 78288 (FOR OVERNIGHT MAIL, USE ZIP CODE 78240)
o To add to your account, send your check and the deposit stub in the
business reply envelope that accompanies your Fund's transaction
confirmation to the transfer agent:
USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, TX 78288
IN PERSON
[HANDSHAKE GRAPHIC]
o 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
10
<PAGE>
BANK WIRE
[WIRE GRAPHIC]
o 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 Small Cap Stock Fund
USAA Account Number: 69384998
Shareholder(s) Name(s)___________________________
Shareholder(s) Mutual Fund Account Number_________________________
ELECTRONIC FUNDS TRANSFER (EFT)
[CALENDAR GRAPHIC]
o Additional purchases on a regular basis can be deducted from a bank
account, paycheck, income-producing investment, or USAA money market fund
account. Sign up for these services when opening an account or call
1-800-531-8448 to add these services.
PHONE 1-800-531-8448 (IN SAN ANTONIO, 456-7202)
[TELEPHONE GRAPHIC]
o 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)
[TOUCHLINE GRAPHIC]
o 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
[COMPUTER GRAPHIC]
o 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.
11
<PAGE>
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
[FAX MACHINE GRAPHIC]
o Send your written instructions to:
USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, TX 78288 (FOR OVERNIGHT MAIL, USE ZIP CODE 78240)
o Visit a member service representative at our San Antonio investment sales
and service office at USAA Federal Savings Bank.
o Send a signed fax to 1-800-292-8177, or send a telegram to USAA Shareholder
Account Services.
o Call toll free 1-800-531-8448 (in San Antonio, 456-7202) to speak with a
member service representative.
o Call toll free 1-800-531-8777 (in San Antonio, 498-8777) to access our
24-hour USAA TouchLine(R) service.
o 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)
12
<PAGE>
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 GRAPHIC]
INVESTOR'S GUIDE to USAA Mutual Fund Services
Upon your initial investment with us, you will receive the INVESTOR'S GUIDE to
help you get the most out of your USAA mutual fund account and to assist you in
your role as an investor. In the INVESTOR'S GUIDE, you will find additional
information on purchases, redemptions, and methods of payment. You will also
find in-depth information on automatic investment plans, shareholder statements
and reports, and other useful information.
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:
o reject purchase or exchange orders when in the best interest of the Fund;
o limit or discontinue the offering of shares of the Fund without notice to
the shareholders;
o impose a redemption charge of up to 1% of the net asset value of shares
redeemed if circumstances indicate a charge is necessary for the protection
of remaining investors (for example, if excessive market-timing share
activity unfairly burdens long-term investors); however, this 1% charge
will not be imposed upon shareholders
13
<PAGE>
unless authorized by the Fund's Board of Directors and the required notice
has been given to shareholders;
o require a signature guarantee for transactions or changes in account
information in those instances where the appropriateness of a signature
authorization is in question (the statement of additional information
contains information on acceptable guarantors);
o redeem an account with less than 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 Fund has undertaken certain procedures regarding telephone transactions as
described on page 12.
Exchange Limitations, Excessive Trading
To minimize Fund costs and to protect the Funds and their shareholders from
unfair expense burdens, the Funds restrict excessive exchanges. The limit on
exchanges out of any Fund in the USAA family of funds for each account is six
per calendar year (except there is no limitation on exchanges out of the Tax
Exempt Short-Term Fund, Short-Term Bond Fund, or any of the money market funds
in the USAA family of funds). 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.
14
<PAGE>
SHAREHOLDER INFORMATION
[SIDE BAR]
NAV PER SHARE
EQUALS
TOTAL ASSETS
MINUS
LIABILITIES
DIVIDED BY
NUMBER OF SHARES
OUTSTANDING
Share Price Calculation
The price at which you purchase and redeem Fund shares is equal to the net
asset value (NAV) per share determined on the effective date of the purchase or
redemption. You may buy and sell Fund shares at the NAV per share without a
sales charge. The 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.
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.
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.
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.
15
<PAGE>
We will invest any dividend or distribution payment returned to us in your
account at the then-current NAV per share. Dividend and distribution checks
become void six months from the date on the check. The amount of the voided
check will be invested in your account at the then-current NAV per share.
Federal Taxes
This tax information is quite general and refers to the federal income tax
provisions in effect as of the date of this prospectus. Note that the Taxpayer
Relief Act of 1997 and the technical provisions adopted by the IRS
Restructuring and Reform Act of 1998 may affect the status and treatment of
certain distributions shareholders receive from the Fund. 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.
Regardless of the length of time you have held the Fund shares, distributions
of net long-term capital gains are taxable as long-term capital gains whether
received in cash or reinvested in additional shares.
WITHHOLDING - Federal law requires the Fund to withhold and remit to the U.S.
Treasury a portion of the income dividends and capital gain distributions and
proceeds of redemptions paid to any non-corporate shareholder who:
o fails to furnish the Fund with a correct tax identification number,
o underreports dividend or interest income, or
o fails to certify that he or she is not subject to withholding.
To avoid this withholding requirement, you must certify on your application or
on a separate Form W-9 supplied by the Fund's transfer agent, that your tax
identification number is correct and you are not currently subject to backup
withholding.
REPORTING - The Fund will report information to you annually concerning the tax
status of dividends and distributions for federal income tax purposes.
16
<PAGE>
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.
17
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the Funds
financial performance since inception. Certain information reflects financial
results for a single Fund share. The total returns in the table represent the
rate that an investor would have earned (or lost) on an investment in this Fund
(assuming reinvestment of all dividends and distributions). This information
has been audited by KPMG LLP, whose report, along with the Funds financial
statements, are included in the annual report, which is available upon request.
Period Ended
July 31, 2000*
--------------
Net asset value at beginning of period $ 10.00
Net investment loss (.10)a
Net realized and unrealized gain 3.27
--------------
Net asset value at end of period $ 13.17
==============
Total return (%) 31.70
Net assets at end of period (000) $ 100,980
Ratio of expenses to average net assets (%) 1.43
Ratio of net investment loss to average net assets(%) (.77)
Portfolio turnover (%) 36.73
--------------------
* Fund commenced operations on August 2, 1999.
(a) Calculated using weighted average shares.
18
<PAGE>
APPENDIX A
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
-------------------------------------------------------------------------------
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 INDEX(SM)" 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.
19
<PAGE>
APPENDIX A (CONTINUED)
FUND TYPE/NAME (CONTINUED) RISK
-------------------------------------------------------------------------------
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
-------------------------------------------------------------------------------
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.
20
<PAGE>
If you would like more information about the Fund, you may call 1-800-531-8181
to request a free copy of the Fund's statement of additional information (SAI),
annual or semiannual report, or to ask other questions about the Fund. The SAI
has been filed with the Securities and Exchange Commission (SEC) and is legally
a part of this prospectus. In the Fund's annual report, you will find a
discussion of the market conditions and investment strategies that
significantly affected the Fund's performance during the last fiscal year.
To view these documents, along with other related documents, you can visit the
EDGAR database on 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 paying 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 CUSTODIAN
USAA Shareholder Account Services State Street Bank and Trust Company
9800 Fredericksburg Road P.O. Box 1713
San Antonio, Texas 78288 Boston, Massachusetts 02105
----------------------------------------------------------------
TELEPHONE ASSISTANCE HOURS
Call toll free - Central Time
Monday - Friday 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 No. 811-2429
<PAGE>
USAA USAA STATEMENT OF
EAGLE MUTUAL ADDITIONAL INFORMATION
LOGO FUND, INC. DECEMBER 1, 2000
-------------------------------------------------------------------------------
USAA MUTUAL FUND, INC.
USAA MUTUAL FUND, INC. (the Company) is a registered investment company
offering shares of seventeen no-load mutual funds, twelve of which are
described in this statement of additional information (SAI): the Aggressive
Growth Fund, Growth Fund, Growth & Income Fund, Income Stock Fund, Income Fund,
Short-Term Bond Fund, Money Market Fund, Science & Technology Fund, First Start
Growth Fund, Intermediate-Term Bond Fund, High-Yield Opportunities Fund, and
Small Cap Stock Fund (collectively, the Funds). Each Fund is classified as
diversified.
You may obtain a free copy of a prospectus dated December 1, 2000, for any Fund
by writing to USAA Mutual Fund, Inc., 9800 Fredericksburg Road, San Antonio, TX
78288, or by calling toll free 1-800-531-8181. The prospectus provides the
basic information you should know before investing in the Funds. This SAI is
not a prospectus and contains information in addition to and more detailed than
that set forth in each Fund's prospectus. It is intended to provide you with
additional information regarding the activities and operations of the Company
and the Funds and should be read in conjunction with each Fund's prospectus.
The financial statements of the Funds and the Independent Auditors' Report
thereon for the fiscal year ended July 31, 2000, 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
12 Investment Restrictions
14 Portfolio Transactions
17 Description of Shares
17 Tax Considerations
18 Directors and Officers of the Company
21 The Company's Manager
23 General Information
23 Calculation of Performance Data
24 Appendix A - Long-Term and Short-Term Debt Ratings
28 Appendix B - Comparison of Portfolio Performance
30 Appendix C - Dollar-Cost Averaging
<PAGE>
VALUATION OF SECURITIES
Shares of each Fund are offered on a continuing, best-efforts basis through
USAA Investment Management Company (IMCO or the Manager). The offering price
for shares of each Fund is equal to the current net asset value (NAV) per
share. The NAV per share of each Fund is calculated by adding the value of all
its portfolio securities and other assets, deducting its liabilities, and
dividing by the number of shares outstanding.
A Fund's NAV per share is calculated each day, Monday through Friday,
except days on which the New York Stock Exchange (NYSE) is closed. The NYSE is
currently scheduled to be closed on New Year's Day, Martin Luther King, Jr.
Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving, and Christmas, and on the preceding Friday or subsequent Monday
when one of these holidays falls on a Saturday or Sunday, respectively.
The value of the securities of the Aggressive Growth, Growth, Growth &
Income, Income Stock, Income, Short-Term Bond, Science & Technology, First
Start Growth, Intermediate-Term Bond, High-Yield Opportunities, and Small Cap
Stock Funds is determined by one or more of the following methods:
(1) Portfolio securities, except as otherwise noted, traded primarily on a
domestic securities exchange are valued at the last sales price on that
exchange. Portfolio securities traded primarily on foreign securities
exchanges are valued at the last quoted sales price, or the most
recently determined closing price calculated according to local market
convention, available at the time a Fund is valued. 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.
The value of the Money Market Fund's securities is stated at amortized
cost, which approximates market value. This involves valuing a security at its
cost and thereafter assuming a constant amortization to maturity of any
discount or premium, regardless of the impact of fluctuating interest rates.
While this method provides certainty in valuation, it may result in periods
during which the value of an instrument, as determined by amortized cost, is
higher or lower than the price the Fund would receive upon the sale of the
instrument.
The valuation of the Money Market Fund's portfolio instruments based upon
their amortized cost is subject to the Fund's adherence to certain procedures
and conditions. Consistent with regulatory requirements, the Manager will only
purchase securities with remaining maturities of 397 days or less and will
maintain a dollar-weighted average portfolio maturity of no more than 90 days.
The Manager will invest only in securities that have been determined to present
minimal credit risk and that satisfy the quality and diversification
requirements of applicable rules and regulations of the Securities and Exchange
Commission (SEC).
The Board of Directors has established procedures designed to stabilize
the Money Market Fund's price per share, as computed for the purpose of sales
and redemptions, at $1. There can be no assurance, however, that the Fund will
at all times be able to maintain a constant $1 NAV per share. Such procedures
include review of the Fund's holdings at such intervals as is deemed
appropriate to determine whether the Fund's NAV, calculated by using available
market quotations, deviates from $1 per share and, if so, whether such
deviation may result in material dilution or is otherwise unfair to existing
shareholders. In the event that it is determined that such a deviation exists,
the Board of Directors will take such corrective
2
<PAGE>
action as it regards as necessary and appropriate. Such action may include
selling portfolio instruments prior to maturity to realize capital gains or
losses or to shorten average portfolio maturity, withholding dividends, or
establishing an NAV per share by using available market quotations.
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 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 ten shares of the Aggressive Growth, Growth, Growth &
Income, Income Stock, Income, Short-Term Bond, Science & Technology, First
Start Growth, High-Yield Opportunities, Intermediate-Term Bond, or Small Cap
Stock Funds and less than 500 shares of the Money Market Fund provided (1) the
value of the account has been reduced, for reasons other than market action,
below the minimum initial investment in such Fund at the time the account was
established, (2) the account has remained below the minimum level for six
months, and (3) 60 days' prior written notice of the proposed redemption has
been sent to you. Shares will be redeemed at the NAV on the date fixed for
redemption by the Board of Directors. Prompt payment will be made by mail to
your last known address.
The Company reserves the right to suspend the right of redemption or
postpone the date of payment (1) for any periods during which the NYSE is
closed, (2) when trading in the markets the Company normally utilizes is
restricted, or an emergency exists as determined by the SEC so that disposal of
the Company's investments or determination of its net asset value is not
reasonably practicable, or (3) for such other periods as the SEC by order may
permit for protection of the Company's shareholders.
For the mutual protection of the investor and the Funds, the Company may
require a signature guarantee. If required, EACH signature on the account
registration must be guaranteed. Signature guarantees are acceptable from FDIC
member banks, brokers, dealers, municipal securities dealers, municipal
securities brokers, government securities dealers, government securities
brokers, credit unions, national securities exchanges, registered securities
associations, clearing agencies, and savings associations. A signature
guarantee for active duty military personnel stationed abroad may be provided
by an officer of the United States Embassy or Consulate, a staff officer of the
Judge Advocate General, or an individual's commanding officer.
REDEMPTION BY CHECK
Shareholders in the Short-Term Bond Fund or Money Market Fund may request that
checks be issued for their accounts. Checks must be written in amounts of at
least $250.
Checks issued to shareholders of either Fund will be sent only to the
person whose name the account is registered. The checks must be manually signed
by the registered owner(s) exactly as the account is registered. For joint
accounts the signature of either or both joint owner(s) will be required on the
check, according to the election made on the signature card. You will continue
to earn dividends until the shares are redeemed by the presentation of a check.
When a check is presented to the Transfer Agent for payment, a sufficient
number of full and fractional shares from your account will be redeemed to
cover the amount of the check. If the account balance is not adequate to cover
the
3
<PAGE>
amount of a check, the check will be returned unpaid. A check drawn on an
account in the Short-Term Bond Fund may be returned for insufficient funds if
the NAV per share of that Fund declines over the time between the date the
check was written and the date it was presented for payment. Because the value
of the account in either the Short-Term Bond Fund or Money Market Fund changes
as dividends are accrued on a daily basis, checks may not be used to close an
account.
The checkwriting privilege is subject to the customary rules and
regulations of State Street Bank and Trust Company (State Street Bank or the
Custodian) governing checking accounts. There is no charge to you for the use
of the checks or for subsequent reorders of checks.
The Company reserves the right to assess a processing fee against your
account for any redemption check not honored by a clearing or paying agent.
Currently, this fee is $25 and is subject to change at any time. Some examples
of such dishonor are improper endorsement, checks written for an amount less
than the minimum check amount, and insufficient or uncollectible funds.
The Company, the Transfer Agent, and State Street Bank each reserve the
right to change or suspend the checkwriting privilege upon 30 days' written
notice to participating shareholders.
You may request that the Transfer Agent stop payment on a check. The
Transfer Agent will use its best efforts to execute stop payment instructions,
but does not guarantee that such efforts will be effective. The Transfer Agent
will charge you $20 for each stop payment you request.
INVESTMENT PLANS
The Company makes available the following investment plans to shareholders of
all the Funds. At the time you sign up for any of the following investment
plans that utilize the electronic funds transfer service, you will choose the
day of the month (the effective date) on which you would like to regularly
purchase shares. When this day falls on a weekend or holiday, the electronic
transfer will take place on the last business day before the effective date.
You may terminate your participation in a plan at any time. Please call the
Manager for details and necessary forms or applications.
AUTOMATIC PURCHASE OF SHARES
INVESTART(R) - A no initial investment purchase plan. With this plan the
regular minimum initial investment amount is waived if you make monthly
additions of at least $50 through electronic funds transfer from a checking or
savings account.
INVESTRONIC(R) - The regular purchase of additional shares through electronic
funds transfer from a checking or savings account. You may invest as little as
$50 per month.
DIRECT PURCHASE SERVICE - The periodic purchase of shares through electronic
funds transfer from a non-governmental employer, an income-producing
investment, or an account with a participating financial institution.
DIRECT DEPOSIT PROGRAM - The monthly transfer of certain federal benefits to
directly purchase shares of a USAA mutual fund. Eligible federal benefits
include: Social Security, Supplemental Security Income, Veterans Compensation
and Pension, Civil Service Retirement Annuity, and Civil Service Survivor
Annuity.
GOVERNMENT ALLOTMENT - The transfer of military pay by the U.S. Government
Finance Center for the purchase of USAA mutual fund shares.
AUTOMATIC PURCHASE PLAN - The periodic transfer of funds from a USAA money
market fund to purchase shares in another non-money market USAA mutual fund.
There is a minimum investment required for this program of $5,000 in the money
market fund, with a monthly transaction minimum of $50.
BUY/SELL SERVICE - The intermittent purchase or redemption of shares through
electronic funds transfer to or from a checking or savings account. You may
initiate a "buy" or "sell" whenever you choose.
DIRECTED DIVIDENDS - If you own shares in more than one of the Funds in the
USAA family of funds, you may direct that dividends and/or capital gain
distributions earned in one Fund be used to purchase shares automatically in
another fund.
Participation in these automatic purchase plans will permit you to engage
in dollar-cost averaging. For additional information concerning the benefits of
dollar-cost averaging, see APPENDIX C.
SYSTEMATIC WITHDRAWAL PLAN
If you own shares having a 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 their bank or
other financial institution. You may also elect to have checks mailed to a
designated address.
4
<PAGE>
This plan may be initiated by depositing shares worth at least $5,000 with
the Transfer Agent and by completing a Systematic Withdrawal Plan application,
which may be requested from the Manager. You may terminate participation in the
plan at any time. You are not charged for withdrawals under the Systematic
Withdrawal Plan. The Company will not bear any expenses in administering the
plan beyond the regular transfer agent and custodian costs of issuing and
redeeming shares. The Manager will bear any additional expenses of
administering the plan.
Withdrawals will be made by redeeming full and fractional shares on the
date you select at the time the plan is established. Withdrawal payments made
under this plan may exceed dividends and distributions and, to this extent,
will involve the use of principal and could reduce the dollar value of your
investment and eventually exhaust the account. Reinvesting dividends and
distributions helps replenish the account. Because share values and net
investment income can fluctuate, you should not expect withdrawals to be offset
by rising income or share value gains.
Each redemption of shares may result in a gain or loss, which must be
reported on your income tax return. Therefore, you should keep an accurate
record of any gain or loss on each withdrawal.
TAX-DEFERRED RETIREMENT PLANS
Federal taxes on current income may be deferred if you qualify for certain
types of retirement programs. For your convenience, the Manager offers
403(b)(7) accounts and various forms of IRAs. You may make investments in one
or any combination of the portfolios described in the prospectus of each Fund
of USAA Mutual Fund, Inc. and USAA Investment Trust (not available in the
Growth and Tax Strategy Fund).
Retirement plan applications for the IRA and 403(b)(7) programs should be
sent directly to USAA Shareholder Account Services, 9800 Fredericksburg Road,
San Antonio, TX 78288. USAA Federal Savings Bank serves as Custodian for these
tax-deferred retirement plans under the programs made available by the Manager.
Applications for these retirement plans received by the Manager will be
forwarded to the Custodian for acceptance.
An administrative fee of $20 is deducted from the money sent to you after
closing an account. Exceptions to the fee are: partial distributions, total
transfer within USAA, and distributions due to disability or death. This charge
is subject to change as provided in the various agreements. There may be
additional charges, as mutually agreed upon between you and the Custodian, for
further services requested of the Custodian.
Each employer or individual establishing a tax-deferred retirement plan is
advised to consult with a tax adviser before establishing the plan. You may
obtain detailed information about the plans from the Manager.
INVESTMENT POLICIES
The sections captioned WHAT IS THE FUND'S INVESTMENT OBJECTIVE AND MAIN
STRATEGY? and FUND INVESTMENTS in each Fund's prospectus describe the
investment objective(s) and the investment policies applicable to each Fund.
There can, of course, be no assurance that each Fund will achieve its
investment objective. Each Fund's objective(s) cannot be changed without
shareholder approval, except for the High-Yield Opportunities Fund,
Intermediate-Term Bond Fund, and Small Cap Stock Fund, which is not a
fundamental policy and may be changed upon notice to, but without the approval
of, the Funds' shareholders. If there is a change in the investment objective
of the High-Yield Opportunities, Intermediate-Term Bond, or Small Cap Stock
Fund, the Fund's shareholders should consider whether the Fund remains an
appropriate investment in light of then-current needs. The following is
provided as additional information.
TAX-EXEMPT SECURITIES
These securities include general obligation bonds, which are secured by the
issuer's pledge of its faith, credit, and taxing power for the payment of
principal and interest; revenue bonds, which are payable from the revenue
derived from a particular facility or class of facilities or, in some cases,
from the proceeds of a special excise tax or other specific revenue source, but
not from the general taxing power; and certain types of industrial development
bonds issued by or on behalf of public authorities to obtain funds for
privately-operated facilities, provided that the interest paid on such
securities qualifies as exempt from federal income taxes.
SECTION 4(2) COMMERCIAL PAPER AND RULE 144A SECURITIES
Each Fund may invest in commercial paper issued in reliance on the "private
placement" exemption from registration afforded by Section 4(2) of the
Securities Act of 1933 (Section 4(2) Commercial Paper). Section 4(2) Commercial
Paper is restricted as to disposition under the federal securities laws;
therefore, any resale of Section 4(2) Commercial Paper must be effected in a
transaction exempt from registration under the Securities Act of 1933 (1933
Act). Section 4(2) Commercial Paper is normally resold to other investors
through or with the assistance of the issuer or investment dealers who make a
market in Section 4(2) Commercial Paper, thus providing liquidity.
Each Fund may also purchase restricted securities eligible for resale to
"qualified institutional buyers" pursuant to Rule 144A under the 1933 Act (Rule
144A Securities). Rule 144A provides a non-exclusive safe harbor from the
registration requirements of the 1933 Act for resales of certain securities to
institutional investors.
5
<PAGE>
MUNICIPAL LEASE OBLIGATIONS
The Income, Short-Term Bond, Money Market, Intermediate-Term Bond, and
High-Yield Opportunities Funds may invest in municipal lease obligations and
certificates of participation in such obligations (collectively, lease
obligations). A lease obligation does not constitute a general obligation of
the municipality for which the municipality's taxing power is pledged, although
the lease obligation is ordinarily backed by the municipality's covenant to
budget for the payments due under the lease obligation.
Certain lease obligations contain "non-appropriation" clauses which
provide that the municipality has no obligation to make lease obligation
payments in future years unless money is appropriated for such purpose on a
yearly basis. Although "non-appropriation" lease obligations are secured by the
leased property, disposition of the property in the event of foreclosure might
prove difficult. In evaluating a potential investment in such a lease
obligation, the Manager will consider: (1) the credit quality of the obligor,
(2) whether the underlying property is essential to a governmental function,
and (3) whether the lease obligation contains covenants prohibiting the obligor
from substituting similar property if the obligor fails to make appropriations
for the lease obligation.
LIQUIDITY DETERMINATIONS
The Board of Directors has established guidelines pursuant to which Municipal
Lease Obligations, Section 4(2) Commercial Paper, Rule 144A Securities, and
certain restricted debt securities that are subject to unconditional put or
demand features exercisable within seven days (Restricted Put Bonds) may be
determined to be liquid for purposes of complying with SEC limitations
applicable to each Fund's investments in illiquid securities. In determining
the liquidity of Municipal Lease Obligations, Section 4(2) Commercial Paper,
and Rule 144A Securities, the Manager will consider the following factors,
among others, established by the Board of Directors: (1) the frequency of
trades and quotes for the security; (2) the number of dealers willing to
purchase or sell the security and the number of other potential purchasers; (3)
dealer undertakings to make a market in the security; and (4) the nature of the
security and the nature of the marketplace trades, including the time needed to
dispose of the security, the method of soliciting offers, and the mechanics of
transfer. Additional factors considered by the Manager in determining the
liquidity of a Municipal Lease Obligation are: (1) whether the lease obligation
is of a size that will be attractive to institutional investors, (2) whether
the lease obligation contains a non-appropriation clause and the likelihood
that the obligor will fail to make an appropriation therefor, and (3) such
other factors as the Manager may determine to be relevant to such
determination. In determining the liquidity of Restricted Put Bonds, the
Manager will evaluate the credit quality of the party (the Put Provider)
issuing (or unconditionally guaranteeing performance on) the unconditional put
or demand feature of the Restricted Put Bond. In evaluating the credit quality
of the Put Provider, the Manager will consider all factors that it deems
indicative of the capacity of the Put Provider to meet its obligations under
the Restricted Put Bond based upon a review of the Put Provider's outstanding
debt and financial statements and general economic conditions.
Certain foreign securities (including Eurodollar obligations) may be
eligible for resale pursuant to Rule 144A in the United States and may also
trade without restriction in one or more foreign markets. Such securities may
be determined to be liquid based upon these foreign markets without regard to
their eligibility for resale pursuant to Rule 144A. In such cases, these
securities will not be treated as Rule 144A Securities for purposes of the
liquidity guidelines established by the Board of Directors.
CALCULATION OF PORTFOLIO WEIGHTED AVERAGE MATURITY
Weighted average maturity is derived by multiplying the value of each
investment by the number of days remaining to its maturity, adding these
calculations, and then dividing the total by the value of the Fund's portfolio.
An obligation's maturity is typically determined on a stated final maturity
basis, although there are some exceptions to this rule.
With respect to obligations held by the Funds, if it is probable that the
issuer of an instrument will take advantage of a maturity-shortening device,
such as a call, refunding, or redemption provision, the date on which the
instrument will probably be called, refunded, or redeemed may be considered to
be its maturity date. Also, the maturities of mortgage-backed securities, some
asset-backed securities, and securities subject to sinking fund arrangements
are determined on a weighted average life basis, which is the average time for
principal to be repaid. For mortgage-backed and some asset-backed securities,
this average time is calculated by assuming a constant prepayment rate (CPR)
for the life of the mortgages or assets backing the security. The CPR for a
security can vary depending upon the level and volatility of interest rates.
This, in turn, can affect the weighted average life of the security. The
weighted average lives of these securities will be shorter than their stated
final maturities. In addition, for purposes of the Fund's investment policies,
an instrument will be treated as having a maturity earlier than its stated
maturity date if the instrument has technical features such as puts or demand
features that, in the judgment of the Manager, will result in the instrument
being valued in the market as though it has the earlier maturity.
The Money Market Fund will determine the maturity of an obligation in its
portfolio in accordance with Rule 2a-7 under the Investment Company Act of
1940, as amended (1940 Act).
6
<PAGE>
FOREIGN SECURITIES
The Aggressive Growth, High-Yield Opportunities, and Small Cap Stock Funds may
invest their 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 Aggressive Growth, Science & Technology, First Start Growth, High-Yield
Opportunities and Small Cap Stock Funds may enter into forward currency
contracts in order to protect against uncertainty in the level of future
foreign exchange rates.
A forward contract involves an agreement to purchase or sell a specific
currency at a specified future date or over a specified time period at a price
set at the time of the contract. These contracts are usually traded directly
between currency traders (usually large commercial banks) and their customers.
A forward contract generally has no deposit requirements, and no commissions
are charged.
Each Fund may enter into forward currency contracts under two
circumstances. First, when each Fund enters into a contract for the purchase or
sale of a security denominated in a foreign currency, it may desire to "lock
in" the U.S. dollar price of the security until settlement. By entering into
such a contract, each Fund will be able to protect itself against a possible
loss resulting from an adverse change in the relationship between the U.S.
dollar and the foreign currency from the date the security is purchased or sold
to the date on which payment is made or received. Second, when management of
each Fund believes that the currency of a specific country may deteriorate
relative to the U.S. dollar, it may enter into a forward contract to sell that
currency. Each Fund may not hedge with respect to a particular currency for an
amount greater than the aggregate market value (determined at the time of
making any sale of forward currency) of the securities held in its portfolio
denominated or quoted in, or bearing a substantial correlation to, such
currency.
The use of forward contracts involves certain risks. The precise matching
of contract amounts and the value of securities involved generally will not be
possible since the future value of such securities in currencies more than
likely will change between the date the contract is entered into and the date
it matures. The projection of short-term currency market movements is extremely
difficult and successful execution of a short-term hedging strategy is
uncertain. Under normal circumstances, consideration of the prospect for
currency parities will be incorporated into the longer term investment
strategies. The Manager believes it is important, however, to have the
flexibility to enter into such contracts when it determines it is in the best
interest of each Fund to do so. It is impossible to forecast what the market
value of portfolio securities will be at the expiration of a contract.
Accordingly, it may be necessary for each Fund to purchase additional currency
(and bear the expense of such purchase) if the market value of the security is
less than the amount of currency each Fund is obligated to deliver and if a
decision is made to sell the security and make delivery of the currency.
Conversely, it may be necessary to sell some of the foreign currency received
on the sale of the portfolio security if its market value exceeds the amount of
currency each Fund is obligated to deliver.
Each Fund is not required to enter into such transactions and will not do
so unless deemed appropriate by the Manager.
Although each Fund values its assets each business day in terms of U.S.
dollars, it does not intend to convert its foreign currencies into U.S. dollars
on a daily basis. It will do so from time to time, and you should be aware of
currency conversion costs. Although foreign exchange dealers do not charge a
fee for conversion, they do realize a profit based on the difference (spread)
between the prices at which they are buying and selling various currencies.
Thus, a dealer may offer to sell a foreign currency to each Fund at one rate,
while offering a lesser rate of exchange should the Fund desire to resell that
WRITING COVERED CALL OPTIONS
The Income Stock Fund may write (sell) covered call options and purchase
options to close out options previously written by the Fund. The purpose of
writing covered call options is to generate additional premium income for the
Fund. This premium income will serve to enhance the Fund's total return and
will reduce the effect of any price decline of the security involved in the
option. Covered call options will generally be written on securities that, in
the Manager's opinion, are not expected to make any major price moves in the
near future but which, over the long term, are deemed to be attractive
investments for the Fund.
A call option gives the holder (buyer) the right to purchase a security at
a specified price (the exercise price) at any time until a certain date (the
expiration date). So long as the obligation of the writer of a call option
continues, he may be assigned an exercise notice by the broker-dealer through
whom such option was sold, requiring him to deliver the
7
<PAGE>
underlying security against payment of the exercise price. This obligation
terminates upon the expiration of the call option, or such earlier time at
which the writer effects a closing purchase transaction by repurchasing the
option that he previously sold. To secure his obligation to deliver the
underlying security in the case of a call option, a writer is required to
deposit in escrow the underlying security or other assets in accordance with
the rules of the particular clearing corporations and of the exchanges. The
Fund will write only covered call options. This means that the Fund will only
write a call option on a security that the Fund already owns. The Fund will not
write call options on when-issued securities. The Fund will write covered call
options in standard contracts that may be quoted on NASDAQ or on national
securities exchanges. To comply with the requirements of the securities laws in
several states, the Fund will not write a covered call option if, as a result,
the aggregate market value of all portfolio securities covering call options
exceeds 5% of the market value of the Fund's total assets.
Portfolio securities on which call options may be written will be
purchased solely on the basis of investment considerations consistent with the
Fund's investment objectives. The writing of covered call options is a
conservative investment technique believed to involve relatively little risk
(in contrast to the writing of naked or uncovered options, which the Fund will
not do), but capable of enhancing the Fund's total return. When writing a
covered call option, the Fund, in return for the premium, gives up the
opportunity for profit from a price increase in the underlying security above
the exercise price, but conversely retains the risk of loss should the price of
the security decline. Unlike one who owns securities not subject to an option,
the Fund has no control over when it may be required to sell the underlying
securities, since it may be assigned an exercise notice at any time prior to
the expiration of its obligation as a writer. If a call option that the Fund
has written expires, the Fund will realize a gain in the amount of the premium;
however, such gain may be offset by a decline in the market value of the
underlying security during the option period. If the call option is exercised,
the Fund will realize a gain or loss from the sale of the underlying security.
The security covering the call will be maintained in a segregated account of
the Fund's custodian. The Fund does not consider a security covered by a call
to be pledged as that term is used in the Fund's policy which limits the
pledging or mortgaging of its assets.
The premium received is the market value of an option. The premium the
Fund will receive from writing a call option will reflect, among other things,
the current market price of the underlying security, the relationship of the
exercise price to such market price, the historical price volatility of the
underlying security, and the length of the option period. In determining
whether a particular call option should be written on a particular security,
the Manager will consider the reasonableness of the anticipated premium and the
likelihood that a liquid secondary market will exist for those options. The
premium received by the Fund for writing covered call options will be recorded
as a liability in the Fund's statement of assets and liabilities. This
liability will be adjusted daily to the option's current market value, which
will be the latest sale price at the time at which the NAV per share of the
Fund is computed (close of the NYSE), or in the absence of such sale, the
latest asked price. The liability will be extinguished upon expiration of the
option, the purchase of an identical option in a closing transaction, or
delivery of the underlying security upon the exercise of the option.
Closing transactions may be effected to realize a profit on an outstanding
call option, to prevent an underlying security from being called, or to permit
the sale of the underlying security. Furthermore, effecting a closing
transaction will permit the Fund to write another call option on the underlying
security with either a different exercise price or expiration date or both.
If the Fund desires to sell a particular security from its portfolio on
which it has written a call option, it will seek to effect a closing
transaction prior to, or concurrently with, the sale of the security. There is,
of course, no assurance that the Fund will be able to effect such closing
transactions at a favorable price. If the Fund cannot enter into such a
transaction, it may be required to hold a security that it might otherwise have
sold, in which case it would continue to be at market risk on the security.
This could result in higher transaction costs, including brokerage commissions.
The Fund will pay brokerage commissions in connection with the writing of
options to close out previously written options. Such brokerage commissions are
normally higher than those applicable to purchases and sales of portfolio
securities.
Call options written by the Fund will normally have expiration dates of
less than nine months from the date written. The exercise price of the options
may be below, equal to, or above the current market values of the underlying
securities at the time the options are written. From time to time, the Fund may
purchase an underlying security for delivery in accordance with an exercise
notice of a call option assigned to it, rather than delivering such security
from its portfolio. In such cases, additional brokerage commissions will be
incurred.
The Fund will realize a profit or loss from a closing purchase transaction
if the cost of the transaction is less or more than the premium received from
the writing of the option. Because increases in the market price of a call
option will generally reflect increases in the market price of the underlying
security, any loss resulting from the repurchase of a call option is likely to
be offset in whole or in part by appreciation of the underlying security owned
by the Fund.
INVESTMENTS IN REAL ESTATE INVESTMENT TRUSTS (REITS)
Because the Aggressive Growth, Growth, Growth & Income, Income, Income Stock,
Science & Technology, First Start Growth, High-Yield Opportunities and Small
Cap Stock Funds may invest their assets in equity securities of REITs, these
8
<PAGE>
Funds may also be subject to certain risks associated with direct investments
in REITs. In addition, the Short-Term Bond, Income, High-Yield Opportunities,
and Intermediate-Term Bond Funds may invest their assets in the debt securities
of REITs and, therefore, may be subject to certain other risks, such as credit
risk, associated with investment in the debt securities of REITs. REITs may be
affected by changes in the value of their underlying properties and by defaults
by borrowers or tenants. Furthermore, REITs are dependent upon specialized
management skills of their managers and may have limited geographic
diversification, thereby, subjecting them to risks inherent in financing a
limited number of projects. REITs depend generally on their ability to generate
cash flow to make distributions to shareholders, and certain REITs have
self-liquidation provisions by which mortgages held may be paid in full and
distributions of capital returns may be made at any time.
PREFERRED STOCKS
Stocks represent shares of ownership in a company. Generally, preferred stock
has a specified dividend and ranks after bonds and before common stocks in its
claim on income for dividend payments and on assets should the company be
liquidated. After other claims are satisfied, common stockholders participate
in company profits on a pro-rata basis; profits may be paid out in dividends or
reinvested in the company to help it grow. Increases and decreases in earnings
are usually reflected in a company's stock price, so common stocks generally
have the greatest appreciation and depreciation potential of all corporate
securities. While most preferred stocks pay a dividend, the High-Yield
Opportunities Fund may purchase preferred stock where the issuer has omitted,
or is in danger of omitting, payment of its dividend. Such investments would be
made primarily for their capital appreciation potential.
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 Funds will invest (except the
Income, Short-Term Bond, and Intermediate-Term Bond Funds) 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. The Fund's
ability to timely and accurately value and dispose of lower-quality securities
may also be affected by the absence or periodic discontinuance of liquid
trading markets.
HYBRID INSTRUMENTS
Hybrid instruments (a type of potentially high-risk derivative) can combine the
characteristics of securities, futures, and options. For example, the principal
amount or interest rate of a hybrid could be tied (positively or negatively) to
the price of some commodity, currency, or securities index or another interest
rate (each a "benchmark"). Hybrids can be used as an efficient means of
pursuing a variety of investment goals, including currency hedging, duration
management, and increased total return. Hybrids may not bear interest or pay
dividends. The value of a hybrid or its interest rate may be a multiple of a
benchmark and, as a result, may be leveraged and move (up or down) more steeply
and rapidly than the benchmark. These benchmarks may be sensitive to economic
and political events, such as commodity shortages and currency devaluations,
which cannot be readily foreseen by the purchaser of a hybrid. Under certain
conditions, the redemption value of a hybrid could be zero. Thus, an investment
in a hybrid may entail significant market risks that are not associated with a
similar investment in a traditional, U.S. dollar-denominated bond that has a
fixed principal amount and pays a fixed rate or floating rate of interest. The
purchase of hybrids also exposes the High-Yield Opportunities Fund to the
credit risk of the issuer of the hybrid. These risks may cause significant
fluctuations in the net asset value of the Fund.
DERIVATIVES
The High-Yield Opportunities Fund may buy and sell certain types of
derivatives, such as options, futures contracts, options on futures contracts,
and swaps under circumstances in which such instruments are expected by the
Manager to aid in achieving the Fund's investment objective. The Fund may also
purchase instruments with characteristics of both futures and securities (e.g.,
debt instruments with interest and principal payments determined by reference
to the value of a commodity or a currency at a future time) and which,
therefore, possess the risks of both futures and securities investments.
Derivatives, such as options, futures contracts, options on futures
contracts, and swaps enable the Fund to take both "short" positions (positions
which anticipate a decline in the market value of a particular asset or index)
and "long" positions
9
<PAGE>
(positions which anticipate an increase in the market value of a particular
asset or index). The Fund may also use strategies which involve simultaneous
short and long positions in response to specific market conditions, such as
where the Manager anticipates unusually high or low market volatility.
The Manager may enter into derivative positions for the Fund for either
hedging or non-hedging purposes. The term hedging is applied to defensive
strategies designed to protect the Fund from an expected decline in the market
value of an asset or group of assets that the Fund owns (in the case of a short
hedge) or to protect the Fund from an expected rise in the market value of an
asset or group of assets which it intends to acquire in the future (in the case
of a long or "anticipatory" hedge). Non-hedging strategies include strategies
designed to produce incremental income (such as the option writing strategy
described below) or "speculative" strategies, which are undertaken to profit
from (i) an expected decline in the market value of an asset or group of assets
which the Fund does not own or (ii) expected increases in the market value of
an asset which it does not plan to acquire. Information about specific types of
instruments is provided below.
FUTURES CONTRACTS
Futures contracts are publicly traded contracts to buy or sell an underlying
asset or group of assets, such as a currency or an index of securities, at a
future time at a specified price. A contract to buy establishes a long position
while a contract to sell establishes a short position.
The purchase of a futures contract on an equity security or an index of
equity securities normally enables a buyer to participate in the market
movement of the underlying asset or index after paying a transaction charge and
posting margin in an amount equal to a small percentage of the value of the
underlying asset or index. The High-Yield Opportunities Fund will initially be
required to deposit with the Company's custodian or the futures commission
merchant effecting the futures transaction an amount of "initial margin" in
cash or securities, as permitted under applicable regulatory policies.
Initial margin in futures transactions is different from margin in
securities transactions in that the former does not involve the borrowing of
funds by the customer to finance the transaction. Rather, the initial margin is
like a performance bond or good faith deposit on the contract. Subsequent
payments (called "maintenance margin") to and from the broker will be made on a
daily basis as the price of the underlying asset fluctuates. This process is
known as "marking to market." For example, when the Fund has taken a long
position in a futures contract and the value of the underlying asset has risen,
that position will have increased in value and the Fund will receive from the
broker a maintenance margin payment equal to the increase in value of the
underlying asset. Conversely, when the Fund has taken a long position in a
futures contract and the value of the underlying instrument has declined, the
position would be less valuable, and the Fund would be required to make a
maintenance margin payment to the broker.
At any time prior to expiration of the futures contract, the Fund may
elect to close the position by taking an opposite position that will terminate
the Fund's position in the futures contract. A final determination of
maintenance margin is then made, additional cash is required to be paid by or
released to the Fund, and the Fund realizes a loss or a gain. While futures
contracts with respect to securities do provide for the delivery and acceptance
of such securities, such delivery and acceptance are seldom made.
In transactions establishing a long position in a futures contract, assets
equal to the face value of the futures contract will be identified by the Fund
to the Company's custodian for maintenance in a separate account to insure that
the use of such futures contracts is unleveraged. Similarly, assets having a
value equal to the aggregate face value of the futures contract will be
identified with respect to each short position. The Fund will utilize such
assets and methods of cover as appropriate under applicable exchange and
regulatory policies.
OPTIONS
The High-Yield Opportunities Fund may use options to implement its investment
strategy. There are two basic types of options: "puts" and "calls." Each type
of option can establish either a long or a short position, depending upon
whether the Fund is the purchaser or the writer of the option. A call option on
a security, for example, gives the purchaser of the option the right to buy,
and the writer the obligation to sell, the underlying asset at the exercise
price during the option period. Conversely, a put option on a security gives
the purchaser the right to sell, and the writer the obligation to buy, the
underlying asset at the exercise price during the option period.
Purchased options have defined risk, that is, the premium paid for the
option, no matter how adversely the price of the underlying asset moves, while
affording an opportunity for gain corresponding to the increase or decrease in
the value of the optioned asset. In general, a purchased put increases in value
as the value of the underlying security falls and a purchased call increases in
value as the value of the underlying security rises.
The principal reason to write options is to generate extra income (the
premium paid by the buyer). Written options have varying degrees of risk. An
uncovered written call option theoretically carries unlimited risk, as the
market price of the underlying asset could rise far above the exercise price
before its expiration. This risk is tempered when the call option is covered,
that is, when the option writer owns the underlying asset. In this case, the
writer runs the risk of the lost opportunity to participate in the appreciation
in value of the asset rather than the risk of an out-of-pocket loss. A written
put option has
10
<PAGE>
defined risk, that is, the difference between the agreed-upon price that the
Fund must pay to the buyer upon exercise of the put and the value, which could
be zero, of the asset at the time of exercise.
The obligation of the writer of an option continues until the writer
effects a closing purchase transaction or until the option expires. To secure
its obligation to deliver the underlying asset in the case of a call option, or
to pay for the underlying asset in the case of a put option, a covered writer
is required to deposit in escrow the underlying security or other assets in
accordance with the rules of the applicable clearing corporation and exchanges.
Among the options that the Fund may enter are options on securities
indices. In general, options on indices of securities are similar to options on
the securities themselves except that delivery requirements are different. For
example, a put option on an index of securities does not give the holder the
right to make actual delivery of a basket of securities but instead gives the
holder the right to receive an amount of cash upon exercise of the option if
the value of the underlying index has fallen below the exercise price. The
amount of cash received will be equal to the difference between the closing
price of the index and the exercise price of the option expressed in dollars
times a specified multiple. As with options on equity securities, or futures
contracts, the Fund may offset its position in index options prior to
expiration by entering into a closing transaction on an exchange or it may let
the option expire unexercised.
A securities index assigns relative values to the securities included in
the index and the index options are based on a broad market index. In
connection with the use of such options, the Fund may cover its position by
identifying assets having a value equal to the aggregate face value of the
option position taken.
OPTIONS ON FUTURES CONTRACTS
An option on a futures contract gives the purchaser the right, in return for
the premium paid, to assume a position in a futures contract (a long position
if the option is a call and a short position if the option is a put) at a
specified exercise price at any time during the period of the option.
LIMITATIONS AND RISKS OF OPTIONS AND FUTURES ACTIVITY
The High-Yield Opportunities Fund may not establish a position in a futures
contract or purchase or sell an option on a futures contract for other than
bona fide hedging purposes if, immediately thereafter, the sum of the amount of
initial margin deposits and premiums required to establish such positions for
such non-hedging purposes would exceed 5% of the market value of the Fund's net
assets.
As noted above, the Fund may engage in both hedging and non hedging
strategies. Although effective hedging can generally capture the bulk of a
desired risk adjustment, no hedge is completely effective. The Fund's ability
to hedge effectively through transactions in futures and options depends on the
degree to which price movements in its holdings correlate with price movements
of the futures and options.
Non hedging strategies typically involve special risks. The profitability
of the Fund's non hedging strategies will depend on the ability of the Manager
to analyze both the applicable derivatives market and the market for the
underlying asset or group of assets. Derivatives markets are often more
volatile than corresponding securities markets and a relatively small change in
the price of the underlying asset or group of assets can have a magnified
effect upon the price of a related derivative instrument.
Derivatives markets also are often less liquid than the market for the
underlying asset or group of assets. Some positions in futures and options may
be closed out only on an exchange that provides a secondary market therefor.
There can be no assurance that a liquid secondary market will exist for any
particular futures contract or option at any specific time. Thus, it may not be
possible to close such an option or futures position prior to maturity. The
inability to close options and futures positions also could have an adverse
impact on the Fund's ability to effectively carry out its derivative strategies
and might, in some cases, require the Fund to deposit cash to meet applicable
margin requirements. The Fund will enter into an option or futures position
only if it appears to be a liquid investment.
SWAP ARRANGEMENTS
The High-Yield Opportunities Fund may enter into various forms of swap
arrangements with counterparties with respect to interest rates, currency rates
or indices, including purchase of caps, floors and collars as described below.
In an interest rate swap the Fund could agree for a specified period to pay a
bank or investment banker the floating rate of interest on a so-called notional
principal amount (i.e., an assumed figure selected by the parties for this
purpose) in exchange for agreement by the bank or investment banker to pay the
Fund a fixed rate of interest on the notional principal amount. In a currency
swap the Fund would agree with the other party to exchange cash flows based on
the relative differences in values of a notional amount of two (or more)
currencies; in an index swap, the Fund would agree to exchange cash flows on a
notional amount based on changes in the values of the selected indices.
Purchase of a cap entitles the purchaser to receive payments from the seller on
a notional amount to the extent that the selected index exceeds an agreed upon
interest rate or amount whereas purchase of a floor entitles the purchaser to
receive such payments to the extent the selected index falls below an agreed
upon interest rate or amount. A collar combines a cap and a floor.
11
<PAGE>
The Fund may enter credit protection swap arrangements involving the sale
by the Fund of a put option on a debt security which is exercisable by the
buyer upon certain events, such as a default by the referenced creditor on the
underlying debt or a bankruptcy event of the creditor.
Most swaps entered into by the Fund will be on a net basis; for example,
in an interest rate swap, amounts generated by application of the fixed rate
and the floating rate to the notional principal amount would first offset one
another, with the Fund either receiving or paying the difference between such
amounts. In order to be in a position to meet any obligations resulting from
swaps, the Fund will set up a segregated custodial account to hold appropriate
liquid assets, including cash; for swaps entered into on a net basis, assets
will be segregated having a daily net asset value equal to any excess of the
Fund's accrued obligations over the accrued obligations of the other party,
while for swaps on other than a net basis assets will be segregated having a
value equal to the total amount of the Fund's obligations.
These arrangements will be made primarily for hedging purposes, to
preserve the return on an investment or on a portion of the Fund's portfolio.
However, the Fund may, as noted above, enter into such arrangements for income
purposes to the extent permitted by the Commodities Futures Trading Commission
for entities that are not commodity pool operators, such as the Fund. In
entering a swap arrangement, the Fund is dependent upon the creditworthiness
and good faith of the counterparty. The Fund attempts to reduce the risks of
nonperformance by the counterparty by dealing only with established, reputable
institutions. The swap market is still relatively new and emerging; positions
in swap arrangements may become illiquid to the extent that nonstandard
arrangements with one counterparty are not readily transferable to another
counterparty or if a market for the transfer of swap positions does not
develop. The use of interest rate swaps is a highly specialized activity that
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. If the Manager is incorrect in its
forecasts of market values, interest rates and other applicable factors, the
investment performance of the Fund would diminish compared with what it would
have been if these investment techniques were not used. Moreover, even if the
Manager is correct in its forecasts, there is a risk that the swap position may
correlate imperfectly with the price of the asset or liability being hedged.
REPURCHASE AGREEMENTS
Each 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
Each Fund may on a temporary basis because of market, economic, political, or
other conditions, invest up to 100% of its assets in investment-grade,
short-term debt instruments. Such securities may consist of obligations of the
U.S. government, its agencies or instrumentalities, and repurchase agreements
secured by such instruments; certificates of deposit of domestic banks having
capital, surplus, and undivided profits in excess of $100 million; banker's
acceptances of similar banks; commercial paper and other corporate debt
obligations.
INVESTMENT RESTRICTIONS
The following investment restrictions have been adopted by the Company for and
are applicable to each Fund except the Science & Technology, First Start
Growth, Intermediate-Term Bond Fund, High-Yield Opportunities Fund, and Small
Cap Stock Funds, which are listed separately below. Except with respect to the
Growth & Income Fund, Income Stock Fund, Short-Term Bond Fund, these
restrictions may not be changed for any given Fund without approval by the
lesser of (1) 67% or more of the voting securities present at a meeting of the
Fund if more than 50% of the outstanding voting securities of the Fund are
present or represented by proxy or (2) more than 50% of the Fund's outstanding
voting securities. With respect to the Growth & Income Fund, Income Stock Fund,
and Short-Term Bond Fund, only restrictions 3, 4, 6, 7, 10, 13, 16, and 17 may
not be changed without approval of shareholders, as defined herein. The
investment restrictions of one Fund may be changed without affecting those of
any other Fund.
12
<PAGE>
A Fund may not:
(1) Purchase or retain securities of any issuer if any officer or Director
of the Company or its Manager own individually more than one-half of one
percent (1/2%) of the securities of that issuer, and collectively the
officers and Directors of the Company and Manager together own more than
5% of the securities of that issuer.
(2) Purchase from or sell to any officer or Director of the Company or its
Manager any securities other than shares of the capital stock of the
Funds.
(3) Underwrite securities of other issuers, except that the Company may be
deemed to be a statutory underwriter in the distribution of any
restricted securities or not readily marketable securities.
(4) Borrow money, except for temporary or emergency purposes in an amount
not exceeding 33 1/3% of its total assets (including the amount borrowed)
less liabilities (other than borrowings).
(5) Invest in companies for the purpose of exercising control or management.
(6) With respect to 75% of its total assets, purchase the securities of any
issuer (except Government Securities, as such term is defined in the
1940 Act) if, as a result, the Fund would own more than 10% of the
outstanding voting securities of such issuer or the Fund would have more
than 5% of the value of its total assets invested in the securities of
such issuer.
(7) Lend any securities or make any loan if, as a result, more than 33 1/3%
of its total assets would be lent to other parties, except that this
limitation does not apply to purchases of debt securities or to
repurchase agreements.
(8) Invest in warrants more than 2% of the value of its assets, taken at the
lower of cost or market value. Warrants initially attached to securities
and acquired by the Fund upon original issuance thereof shall be deemed
to be without value.
(9) Mortgage, pledge, or hypothecate any of its assets, except for the
Income Stock Fund. A security covered by a call is not considered
pledged.
(10) Concentrate its investments in any one industry although it may invest
up to 25% of the value of its total assets in any one industry. Banks
are not considered a single industry for purposes of this policy (solely
with respect to the Money Market Fund), nor shall this limitation apply
to securities issued or guaranteed by the U.S. government or its
corporate instrumentalities.
(11) Acquire securities of other open-end investment companies, except in
connection with a merger, consolidation, or acquisition of assets
approved by the shareholders.
(12) Invest more than 5% of the value of its total assets in any closed-end
investment company and will not hold more than 3% of the outstanding
voting stock of any closed-end investment company.
(13) Purchase or sell commodities, commodity contracts, or real estate,
although a Fund may invest in the securities of real estate investment
trusts.
(14) Engage in margin transactions or arbitrage or short sales, or in put,
call, straddle, or spread activities, except the Income Stock Fund may
write covered call options as described under INVESTMENT POLICIES in
this statement of additional information.
(15) Allow its Manager or officers or Directors of itself or its Manager to
take long or short positions in shares of a Fund, except that such
persons may purchase shares for their own account for investment
purposes only at the price available to the public at the moment of such
purchase.
(16) Change the nature of its business so as to cease to be an investment
company.
(17) Issue senior securities, as defined in the Investment Company Act of
1940, as amended (the 1940 Act), except as permitted by Section 18(f)(2)
and rules thereunder.
In addition, with respect to the Money Market Fund's exclusion of
investment in banks for purposes of industry concentration limits contained in
investment restriction 10, certificates of deposit, time deposits, banker's
acceptances, and other similar money market instruments issued by domestic
banks may be excluded from the industry concentration limits set forth in that
restriction.
Each of the Science & Technology, First Start Growth, Intermediate-Term Bond,
High-Yield Opportunities, and Small Cap Stock Funds may not:
(1) With respect to 75% of its total assets, purchase the securities of any
issuer (except U.S. government securities, as such term is defined in
the 1940 Act) if, as a result, it would own more than 10% of the
outstanding voting securities of such issuer or it would have more than
5% of the value of its total assets invested in the securities of such
issuer.
(2) Borrow money, except for temporary or emergency purposes in an amount not
exceeding 33 1/3% of its total assets (including the amount borrowed)
less liabilities (other than borrowings).
13
<PAGE>
(3) Invest 25% or more of the value of its total assets in any one industry;
provided, this limitation does not apply to securities issued or
guaranteed by the U.S. government and its agencies or instrumentalities.
(4) Issue senior securities, except as permitted under the 1940 Act.
(5) Underwrite securities of other issuers, except to the extent that it may
be deemed to act as a statutory underwriter in the distribution of any
restricted securities or not readily marketable securities.
(6) Lend any securities or make any loan if, as a result, more than 33 1/3%
of its total assets would be lent to other parties, except that this
limitation does not apply to purchases of debt securities or to
repurchase agreements.
(7) Purchase or sell commodities, except that each Fund may invest in
financial futures contracts, options thereon, and similar instruments.
(8) Purchase or sell real estate unless acquired as a result of ownership of
securities or other instruments, except that each Fund may invest in
securities or other instruments backed by real estate or securities of
companies that deal in real estate or are engaged in the real estate
business.
With respect to each Fund's concentration policies as described above, the
Manager uses industry classifications for industries based on categories
established by Standard & Poor's Corporation (Standard & Poor's) for the
Standard & Poor's 500 Composite Index, with certain modifications. Because the
Manager has determined that certain categories within, or in addition to, those
set forth by Standard & Poor's have unique investment characteristics,
additional industries are included as industry classifications. The Manager
classifies municipal obligations by projects with similar characteristics, such
as toll road revenue bonds, housing revenue bonds, or higher education revenue
bonds.
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.
ICIM BOND INSURANCE
The Company has purchased (together with other investment companies within
the USAA family of funds), a money market fund bond (the Bond) from the ICIM
Reinsurance Company. The Bond provides insurance to the Money Market Fund (and
other money market funds within the USAA family of funds) for losses incurred
by the Fund that result from a default in the payment of interest or principal
on a security held by the Fund or from the occurrence of a bankruptcy or
similar insolvency proceeding involving an issuer or guarantor of a security
held by the Fund. The Bond has an aggregate limitation of liability in the
amount of $100 million. Claims under the Bond are subject to a deductible in
the amount of .10 of 1% of the net asset value of the Fund and are subject to a
variety of terms and conditions that may limit the ability of the Fund to
recover under the Bond in certain circumstances or may delay the timing of any
recovery. Furthermore, the Bond does not cover losses resulting from a decline
in the market value of a security attributable to changes in interest rates or
the financial condition of an issuer in the absence a default on the security
or an insolvency involving the issuer. Accordingly, although the Bond provides
additional protection for the Fund, there can be no assurance that the Fund
will be able to maintain a stable net asset value per share of $1 at all times.
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 Funds will have no obligation to deal with any particular broker or
group of brokers in the execution of portfolio transactions. The Funds
contemplate that, consistent with obtaining the best overall terms available,
brokerage transactions may be effected through USAA Brokerage Services, a
discount brokerage service of the Manager. The Company's Board of Directors has
adopted procedures in conformity with Rule 17e-1 under the 1940 Act designed to
ensure that all brokerage commissions paid to USAA Brokerage Services are
reasonable and fair. The Company's Board of Directors has authorized the
Manager, as a member of the Chicago Stock Exchange, to effect portfolio
transactions for
14
<PAGE>
the Funds on such exchange and to retain compensation in connection with such
transactions. Any such transactions will be effected and related compensation
paid only in accordance with applicable SEC regulations.
In the allocation of brokerage business, preference may be given to those
broker-dealers who provide research or other services to the Manager as long as
there is no sacrifice in obtaining the best overall terms available. Such
research and other services may include, for example: advice concerning the
value of securities; the advisability of investing in, purchasing or selling
securities, and the availability of securities or the purchasers or sellers of
securities; analyses and reports concerning issuers, industries, securities,
economic factors and trends, portfolio strategy, and performance of accounts;
and various functions incidental to effecting securities transactions, such as
clearance and settlement. In return for such services, a Fund may pay to those
brokers a higher commission than may be charged by other brokers, provided that
the Manager determines in good faith that such commission is reasonable in
terms of either that particular transaction or of the overall responsibility of
the Manager to the Funds and its other clients. The receipt of research from
broker-dealers that execute transactions on behalf of the Company may be useful
to the Manager in rendering investment management services to other clients
(including affiliates of the Manager); and conversely, such research provided
by broker-dealers who have executed transaction orders on behalf of other
clients may be useful to the Manager in carrying out its obligations to the
Company. While such research is available to and may be used by the Manager in
providing investment advice to all its clients (including affiliates of the
Manager), not all of such research may be used by the Manager for the benefit
of the Company. Such research and services will be in addition to and not in
lieu of research and services provided by the Manager, and the expenses of the
Manager will not necessarily be reduced by the receipt of such supplemental
research. See THE COMPANY'S MANAGER.
Securities of the same issuer may be purchased, held, or sold at the same
time by the Company for any or all of its Funds or other accounts or companies
for which the Manager acts as the investment adviser (including affiliates of
the Manager). On occasions when the Manager deems the purchase or sale of a
security to be in the best interest of the Company, as well as the Manager's
other clients, the Manager, to the extent permitted by applicable laws and
regulations, may aggregate such securities to be sold or purchased for the
Company with those to be sold or purchased for other customers in order to
obtain best execution and lower brokerage commissions, if any. In such event,
allocation of the securities so purchased or sold, as well as the expenses
incurred in the transaction, will be made by the Manager in the manner it
considers to be most equitable and consistent with its fiduciary obligations to
all such customers, including the Company. In some instances, this procedure
may impact the price and size of the position obtainable for the Company.
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.
During the fiscal year ended July 31, 2000, the Funds purchased securities
of the following regular broker-dealers (the ten largest broker-dealers through
whom the Funds purchased securities) or the parents of regular broker-dealers.
Value of Securities
Regular Broker-Dealer as of July 31, 2000
--------------------- -------------------
Citigroup Inc.
Growth $ 46,188
Growth & Income $ 20,816
Income Stock $ 52,922
Merrill Lynch & Co.
Income $ 18,683
Short-Term Bond $ 4,856
Intermediate-Term Bond $ 907
BROKERAGE COMMISSIONS
During the last three fiscal years, the Funds paid the following brokerage
fees:
FUND 1998 1999 2000
---- ---- ---- ----
Aggressive Growth $ 663,760 $ 190,996 $ 248,423
Growth $ 1,372,786 $ 1,029,699 $ 3,086,121*
Growth & Income $ 818,620 $ 599,038 $ 629,977
Income Stock $ 1,277,682 $ 2,123,999 $ 1,261,046
Income $ 204,200 -- $ 11,500
Science & Technology $ 126,610 $ 120,627 $ 331,755**
First Start Growth $ 49,219 $ 98,042 $ 206,720**
High-Yield Opportunities $ n/a $ n/a $ 2,800
Small Cap Stock $ n/a $ n/a $ 47,090
15
<PAGE>
---------
* The Fund changed portfolio managers in March 2000. This change resulted in
a repositioning of the portfolio. The repositioning led to an increase
in trading and portfolio turnover.
** The Fund's brokerage commissions increased as a result of increased net
assets and a return to normal portfolio turnover ratio.
During the last three fiscal years, the Funds paid the following brokerage
fees to USAA Brokerage Services, a discount brokerage service of the Manager:
FUND 1998 1999 2000*
---- ---- ---- -----
Aggressive Growth $ 1,800 $ -- $ --
Growth $ 159,936 $ 124,015 $ 20,706
Growth & Income $ 33,400 $ 50,188 $ 4,397
Income Stock $ 139,527 $ 71,644 $ --
Income $ 19,200 $ -- $ --
Science & Technology $ 12,435 $ 29,992 $ 9,990
First Start Growth $ 6,159 $ 34,492 $ 8,910
Small Cap Stock $ n/a $ n/a $ 2,053
--------
* These amounts are 0%, .67%, .70%, 0%, 0%, 3.01%, 4.31%, and 4.36%,
respectively, of brokerage fees paid by each Fund.
For the year ended July 31, 2000, 1.18%, 1.52%, 4.24%, 5.95%, and 5.64% of
the aggregate dollar amounts of transactions involving the payment of
commissions by the Growth, Growth & Income, Science & Technology, First Start
Growth, and Small Cap Stock Funds, respectively, were effected through USAA
Brokerage Services.
The Manager directed a portion of the Fund's brokerage transactions to
certain broker-dealers that provided the Manager with research, analysis,
advice, and similar services. Such transactions amounted to $1,055,353,759,
$139,442,911, $293,179,676, $2,988,888,825, $698,823, $111,105,885,
$50,083,390, $299,636, and $370,440, and the related brokerage commissions or
underwriting commissions were $1,014,785, $171,615, $281,166, $11,625, $1,925,
$125,845, $57,749, $1,175, and $715 for the Growth, Growth & Income, Income
Stock, Income, Short-Term Bond, Science & Technology, First Start Growth,
Intermediate-Term Bond, and Small Cap Stock Funds, respectively for the year
ended July 31, 2000.
PORTFOLIO TURNOVER RATES
The rate of portfolio turnover will not be a limiting factor when the Manager
deems changes in the Aggressive Growth, Growth, Growth & Income, Income Stock,
Income, Short-Term Bond, Science & Technology, First Start Growth,
Intermediate-Term Bond, High-Yield Opportunities, and Small Cap Stock Funds'
portfolios appropriate in view of each Fund's investment objectives. Although
no Fund will purchase or sell securities solely to achieve short-term trading
profits, a Fund may sell portfolio securities without regard to the length of
time held if consistent with the Fund's investment objective(s). A higher
degree of portfolio activity will increase brokerage costs to a Fund.
The portfolio turnover rate is computed by dividing the dollar amount of
securities purchased or sold (whichever is smaller) by the average value of
securities owned during the year. Short-term investments such as commercial
paper, short-term U.S. government securities, and variable rate securities
(those securities with put date intervals of less than one year) are not
considered when computing the turnover rate.
For the last two fiscal years, the Funds' portfolio turnover rates were as
follows:
FUND 1999 2000
---- ---- ----
Aggressive Growth 35.18% 33.07%
Growth* 39.60% 133.43%
Growth & Income 24.53% 22.90%
Income Stock 34.20% 13.34%
Income 54.02% 24.68%
Short-Term Bond 11.53% 23.68%
Science & Technology 44.39% 69.21%
First Start Growth 26.64% 52.58%
Intermediate-Term Bond n/a 8.60%
High-Yield Opportunities n/a 51.88%
Small Cap Stock n/a 36.73%
----------
* The Fund changed portfolio managers in March 2000. This change resulted
in a repositioning of the portfolio. The repositioning led to an increase
in trading and portfolio turnover.
16
<PAGE>
DESCRIPTION OF SHARES
The Funds are a series of the Company and are diversified. The Company is an
open-end management investment company incorporated under the laws of the state
of Maryland on October 14, 1980. The Company is authorized to issue shares in
separate series or Funds. There are seventeen mutual funds in the Company,
twelve of which are described in this SAI. Under the Articles of Incorporation,
the Board of Directors is authorized to create new Funds in addition to those
already existing without shareholder approval. The Growth, Income, and Money
Market Funds were established in the Fall of 1980 and commenced public offering
of their shares on February 2, 1981. The Aggressive Growth Fund was established
by the Board of Directors on July 8, 1981, and commenced public offering of its
shares on October 19, 1981. The Income Stock Fund was established by the Board
of Directors on January 23, 1987, and commenced public offering of its shares
on May 4, 1987. The Growth & Income and Short-Term Bond Funds were established
by the Board of Directors on March 23, 1993, and commenced public offering of
their shares on June 1, 1993. The Science & Technology and First Start Growth
Funds were established by the Board of Directors on May 9, 1997, and commenced
public offering of their shares on August 4, 1997. The Intermediate-Term Bond,
High-Yield Opportunities, and Small Cap Stock Funds were established by the
Board of Directors on May 6, 1999, and commenced public offering of their
shares on August 2, 1999.
Each Fund's assets and all income, earnings, profits, and proceeds
thereof, subject only to the rights of creditors, are specifically allocated to
such Fund. They constitute the underlying assets of each Fund, are required to
be segregated on the books of account, and are to be charged with the expenses
of such Fund. Any general expenses of the Company not readily identifiable as
belonging to a particular Fund are allocated on the basis of the Funds'
relative net assets during the fiscal year or in such other manner as the Board
determines to be fair and equitable. Each share of each Fund represents an
equal proportionate interest in that Fund with every other share and is
entitled to such dividends and distributions out of the net income and capital
gains belonging to that Fund when declared by the Board.
Under the provisions of the Bylaws of the Company, no annual meeting of
shareholders is required. Thus, there will ordinarily be no shareholder meeting
unless required by the 1940 Act. Under certain circumstances, however,
shareholders may apply for shareholder information to obtain signatures to
request a special shareholder meeting. The Company may fill vacancies on the
Board or appoint new Directors if the result is that at least two-thirds of the
Directors have still been elected by shareholders. Moreover, pursuant to the
Bylaws of the Company, any Director may be removed by the affirmative vote of a
majority of the outstanding Company shares; and holders of 10% or more of the
outstanding shares of the Company can require Directors to call a meeting of
shareholders for the purpose of voting on the removal of one or more Directors.
The Company will assist in communicating to other shareholders about the
meeting. On any matter submitted to the shareholders, the holder of each Fund
share is entitled to one vote per share (with proportionate voting for
fractional shares) regardless of the relative net asset values of the Funds'
shares. However, on matters affecting an individual Fund, a separate vote of
the shareholders of that Fund is required. Shareholders of a Fund are not
entitled to vote on any matter 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, each Fund's shares are fully
paid and nonassessable, have no pre-emptive or subscription rights, and are
fully transferable. There are no conversion rights.
TAX CONSIDERATIONS
Each Fund intends to qualify as a regulated investment company under Subchapter
M of the Internal Revenue Code of 1986, as amended (the Code). Accordingly,
each Fund will not be liable for federal income taxes on its taxable net
investment income and net capital gains (capital gains in excess of capital
losses) that are distributed to shareholders, provided that each Fund
distributes at least 90% of its net investment income and net short-term
capital gain for the taxable year.
To qualify as a regulated investment company, each Fund must, among other
things, (1) derive in each taxable year at least 90% of its gross income from
dividends, interest, payments with respect to securities loans, gains from the
sale or other disposition of stock, securities or foreign currencies, or other
income derived with respect to its business of investing in such stock,
securities, or currencies (the 90% test) and (2) satisfy certain
diversification requirements, at the close of each quarter of the Fund's
taxable year.
17
<PAGE>
The Code imposes a nondeductible 4% excise tax on a regulated investment
company that fails to distribute during each calendar year an amount at least
equal to the sum of (1) 98% of its taxable net investment income for the
calendar year, (2) 98% of its capital gain net income for the twelve-month
period ending on October 31, and (3) any prior amounts not distributed. Each
Fund intends to make such distributions as are necessary to avoid imposition of
the excise tax.
Taxable distributions are generally included in a shareholder's gross
income for the taxable year in which they are received. Dividends declared in
October, November, or December and made payable to shareholders of record in
such a month will be deemed to have been received on December 31, if the Fund
pays the dividend during the following January. If a shareholder of a Fund
receives a distribution taxable as long-term capital gain with respect to
shares of a Fund and redeems or exchanges the shares before he 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: 54
President and Chief Executive Officer of United Services Automobile Association
(USAA) (4/00-present); President and Chief Operating Officer of USAA
(6/99-3/00); 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); and President and Chief
Executive Officer, Banc One Credit Corporation (12/95-6/96); Mr. Davis serves
as a Trustee/Director and Chairman of the Boards of Trustees/Directors 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
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, 2, 4
Director and Vice President
Age: 61
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). Mrs. Dreeben serves as a
Director/Trustee of each of the remaining funds within the USAA family of
funds.
18
<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 (2/79-9/98). Dr.
Mason serves as a Director/Trustee of each of the remaining funds within the
USAA family of funds.
Richard A. Zucker 3, 4, 5
407 Arch Bluff
San Antonio, TX 78216
Director
Age: 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.
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 of Austin (9/94-9/96). Dr. Starks serves as a
Trustee/Director 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.
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
19
<PAGE>
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 & Support, 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 (7/93-6/98). 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 which have been delegated
to it by the Board. The Audit Committee of the Board of Directors reviews the
financial statements and the auditors' reports and undertakes certain studies
and analyses as directed by the Board. The Corporate Governance Committee of
the Board of Directors maintains oversight of the organization, performance,
and effectiveness of the Board and independent Directors.
In addition to the previously listed Directors and/or officers of the
Company who also serve as Directors and/or officers of the Manager, the
following individuals are executive officers of the Manager: Christopher Claus,
Senior Vice President, Investment Sales & 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 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 (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)
Jack W. Saunders, Jr. (c) None (a) None (a)
Laura T. Starks $ 3,500 $ 14,000
Richard A. Zucker $ 9,875 $ 39,500
--------
(a) Robert G. Davis, Michael J.C. Roth, Jack 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.
20
<PAGE>
(b) At 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
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 October 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 October 31, 2000, USAA and its affiliates owned 2,382,218 shares
(.1%) of the Money Market Fund; 2,830,411 shares (8.8%) of the Short-Term Bond
Fund; 2,000,000 shares (13.%) of the First Start Growth Fund; 571,157 shares
(8.5%) of the Intermediate Term Bond Fund; 1,586,518 shares (32.6%) of the
High-Yield Opportunities Fund; 10 shares (0%) of the Small Cap Stock Fund; and
no shares of the Aggressive Growth Fund, Growth Fund, Growth & Income Fund,
Income Fund, Income Stock Fund, and Science & Technology Fund.
The Company knows of no other persons who, as of October 31, 2000, held of
record or owned beneficially 5% or more of any Fund's shares.
THE COMPANY'S MANAGER
As described in each Fund's prospectus, USAA Investment Management Company is
the Manager and investment adviser, providing services under the Advisory
Agreement. The Manager, 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 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, each Fund
pays all other expenses incurred in its operation. Expenses for which each Fund
is responsible includes taxes (if any); brokerage commissions on portfolio
transactions (if any); expenses of issuance and redemption of shares; charges
of transfer agents, custodians, and dividend disbursing agents; costs of
preparing and distributing proxy material; costs of printing and engraving
stock certificates; auditing and legal expenses; certain expenses of
registering and qualifying shares for sale; fees of Directors who are not
interested persons (not affiliated) of the Manager; costs of printing and
mailing the prospectus, SAI, and periodic reports
21
<PAGE>
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, 2001, for each
Fund and will continue in effect from year to year thereafter for each such
Fund as long as it is approved at least annually by a vote of the outstanding
voting securities of such Fund (as defined by the 1940 Act) or by the Board of
Directors (on behalf of such Fund) including a majority of the Directors who
are not interested persons of the Manager or (otherwise than as Directors) of
the Company, at a meeting called for the purpose of voting on such approval.
The Advisory Agreement may be terminated at any time by either the Company or
the Manager on 60 days' written notice. It will automatically terminate in the
event of its assignment (as defined in the 1940 Act).
From time to time the Manager may, without prior notice to shareholders,
waive all or any portion of fees or agree to reimburse expenses incurred by a
Fund. The Manager has voluntarily agreed to continue to limit the annual
expenses of the Short-Term Bond Fund to .50%, the First Start Growth Fund to
1.65%, the Intermediate-Term Bond Fund to .65%, and the High-Yield
Opportunities Fund to .75% of each Fund's ANA, respectively, until December 1,
2001, and will reimburse the Funds for all expenses in excess of such
limitations. After December 1, 2001, any such waiver or reimbursement may be
terminated by the Manager at any time without prior notice to the shareholders.
In addition to any amounts otherwise payable to the Manager as an advisory
fee for current services under the Advisory Agreement, the Company shall be
obligated to pay the Manager all amounts previously waived by the Manager with
respect to a Fund, provided that such additional payments are made not later
than three years from August 2, 1999, 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 Intermediate-Term Bond Fund, .65% of the average
net assets of the Fund or, in the case of the High-Yield Opportunities Fund,
.75% of the average net assets of the Fund.
For the last three fiscal years, management fees were as follows:
FUND 1998 1999 2000
---- ---- ---- ----
Aggressive Growth $ 2,947,204 $ 3,095,002 $ 5,822,616
Growth $ 11,074,009 $ 11,433,812 $ 13,497,972
Growth & Income $ 5,971,874 $ 6,299,648 $ 6,705,641
Income Stock $ 12,163,664 $ 12,182,422 $ 10,829,542
Income $ 4,108,452 $ 4,013,234 $ 3,164,580
Short-Term Bond $ 369,691 $ 513,263 $ 631,655
Money Market $ 5,238,418 $ 6,708,986 $ 7,744,657
Science & Technology $ 521,514 $ 1,286,597 $ 3,451,959
First Start Growth $ 207,083 $ 684,564 $ 1,554,077
Intermediate-Term Bond $ n/a $ n/a $ 218,710
High-Yield Opportunities $ n/a $ n/a $ 174,126
Small Cap Stock $ n/a $ n/a $ 523,977
As a result of the Short-Term Bond, Money Market, First Start Growth,
Intermediate-Term Bond, and High-Yield Opportunities Funds' expenses exceeding
the expense limitations, the Manager did not receive fees to which it would
have been entitled as follows:
FUND 1998 1999 2000
---- ---- ---- ----
Short-Term Bond $ 90,735 $ 56,660 $ --
Money Market $ 756,515 $ 763,829 $ 586,154
First Start Growth $ n/a $ 212,370 $ 614,885
Intermediate-Term Bond $ n/a $ n/a $ 166,334
High-Yield Opportunities $ n/a $ n/a $ 155,528
UNDERWRITER
The Company has an agreement with the Manager for exclusive underwriting and
distribution of each Fund's shares on a continuing, best-efforts basis. This
agreement provides that the Manager will receive no fee or other compensation
for such distribution services.
TRANSFER AGENT
The Transfer Agent performs transfer agent services for the Company under a
Transfer Agency Agreement. Services include maintenance of shareholder account
records, handling of communications with shareholders, distribution of Fund
22
<PAGE>
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 to
$28.50 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.
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 each Fund and reporting thereon.
CALCULATION OF PERFORMANCE DATA
Information regarding the total return and yield of each Fund is provided under
COULD THE VALUE OF YOUR INVESTMENT IN THE FUND FLUCTUATE? in its prospectus.
See VALUATION OF SECURITIES herein for a discussion of the manner in which the
Funds' price per share is calculated.
YIELD - MONEY MARKET FUND
When the Money Market Fund quotes a current annualized yield, it is based on a
specified recent seven-calendar-day period. It is computed by (1) determining
the net change, exclusive of capital changes and income other than investment
income, in the value of a hypothetical preexisting account having a balance of
one share at the beginning of the period; (2) dividing the net change in
account value by the value of the account at the beginning of the base period
to obtain the base return; then (3) multiplying the base period return by 52.14
(365/7). The resulting yield figure is carried to the nearest hundredth of one
percent.
The calculation includes (1) the value of additional shares purchased with
dividends on the original share, and dividends declared on both the original
share and any such additional shares, and (2) any fees charged to all
shareholder accounts, in proportion to the length of the base period and the
Fund's average account size.
The capital changes excluded from the calculation are realized capital
gains and losses from the sale of securities and unrealized appreciation and
depreciation. The Fund's effective (compounded) yield will be computed by
dividing the seven-day annualized yield as defined above by 365, adding 1 to
the quotient, raising the sum to the 365th power, and subtracting 1 from the
result.
Current and effective yields fluctuate daily and will vary with factors
such as interest rates and the quality, length of maturities, and type of
investments in the portfolio.
Yield For 7-day Period ended July 31, 2000, was 6.25%.
Effective Yield For 7-day Period ended July 31, 2000, was 6.45%.
YIELD - INCOME FUND, SHORT-TERM BOND FUND, INTERMEDIATE-TERM BOND FUND
AND HIGH-YIELD OPPORTUNITIES FUND
The Funds may advertise performance in terms of a 30-day yield quotation. The
30-day yield quotation is computed by dividing the net investment income per
share earned during the period by the maximum offering price per share on the
last day of the period, according to the following formula:
Yield = 2[((a-b)/(cd)+1)^6 -1]
23
<PAGE>
Where: a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursement)
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends
d = the maximum offering price per share on the last day of
the period
The 30-day yields for the period ended July 31, 2000, for the Income Fund,
Short-Term Bond Fund, Intermediate-Term Bond Fund and High-Yield Opportunities
Fund were 7.35%,7.58%, 7.94%, and 11.68%, respectively.
TOTAL RETURN
The Funds may advertise performance in terms of average annual total return for
1-, 5-, and 10-year periods, or for such lesser periods as the Funds have been
in existence. Average annual total return is computed by finding the average
annual compounded rates of return over the periods that would equate the
initial amount invested to the ending redeemable value, according to the
following formula:
P(1 + T)N = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment
made at the beginning of the 1-, 5-, or 10-year periods
at the end of the year or period
The calculation assumes any charges are deducted from the initial $1,000
payment and assumes all dividends and distributions by the Fund are reinvested
at the price stated in the prospectus on the reinvestment dates during the
period and includes all recurring fees that are charged to all shareholder
accounts.
Average Annual Total Returns
For Periods Ended July 31, 2000
1 5 10 From
FUND year years years Inception*
---- ---- ----- ----- ----------
Aggressive Growth 56.71 27.65 21.03 15.64
Growth 14.13 16.78 14.89 9.50
Growth & Income .99 15.56 -- 14.38
Income Stock (3.85) 12.88 12.82 12.08
Income 6.11 6.76 8.19 9.77
Short-Term Bond 6.18 6.07 -- 5.69
Science & Technology 40.73 -- -- 28.79
First Start Growth 11.58 -- -- 20.19
Intermediate-Term Bond -- -- -- 5.56
High-Yield Opportunities -- -- -- 7.80
Small Cap Stock -- -- -- 31.70
------------
* Data from inception is shown for Funds that are less than ten years old.
Growth & Income and Short-Term Bond Funds commenced operations on June 1,
1993. Science & Technology and First Start Growth Funds commenced operations
on August 1, 1997. Intermediate-Term Bond, High-Yield Opportunities, and
Small Cap Stock Funds commenced operations on August 2, 1999.
APPENDIX A - LONG-TERM AND SHORT-TERM DEBT RATINGS
1. LONG-TERM DEBT RATINGS:
MOODY'S INVESTOR SERVICE
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
24
<PAGE>
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.
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.
Obligations rated "BB," "B," "CCC," "CC," and "C" are regarded as
having significant speculative characteristics. "BB" indicates the
least degree of speculation and "C" the highest. While such
obligations will likely have some quality and protective
characteristics, these may be outweighed by large uncertainties or
major exposures to adverse conditions.
BB An obligation rated "BB" is LESS VULNERABLE to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which
could lead to the obligor's inadequate capacity to meet its financial
commitment on the obligation.
B An obligation rated "B" is MORE VULNERABLE to nonpayment than
obligations rated "BB," but the obligor currently has the capacity to
meet its financial commitment on the obligation. Adverse business,
financial, or economic conditions will likely impair the obligor's
capacity or willingness to meet its financial commitment on the
obligation.
CCC An obligation rated "CCC" is CURRENTLY VULNERABLE to nonpayment, and
is dependent upon favorable business, financial, and economic
conditions for the obligor to meet its financial commitment on the
obligation. In the event of adverse business, financial, or economic
conditions, the obligor is not likely to have the capacity to meet its
financial commitment on the obligation.
CC An obligation rated "C" is CURRENTLY HIGHLY VULNERABLE to nonpayment.
25
<PAGE>
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.
BB Speculative. "BB" ratings indicate that there is a possibility of
credit risk developing, particularly as the result of adverse economic
change over time; however, business or financial alternatives may be
available to allow financial commitments to be met. Securities rated
in this category are not investment grade.
B Highly speculative. "B" ratings indicate that significant credit risk
is present, but a limited margin of safety remains. Financial
commitments are currently being met; however, capacity for continued
payment is contingent upon a sustained, favorable business and
economic environment.
CCC High default risk. "CCC" ratings indicate that default is a real
possibility. Capacity for meeting financial commitment is solely
reliant upon sustained, favorable business or economic developments.
CC High default risk. "CC" ratings indicates that default of some kind
appears probable.
C High default risk. "C" ratings signal imminent default
DDD Default. Securities are not meeting current obligations and are
extremely speculative. "DDD" designates the highest potential for
recovery of amounts outstanding on any securities involved. For U.S.
corporates, for example.
DD Default. "DD" indicates expected recovery of 50% - 90% of such
outstandings.
D Default. "D" the lowest recovery potential, i.e. below 50%.
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.
26
<PAGE>
Prime-3 Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayment of senior short-term obligations.
The effect of industry characteristics and market compositions may
be more pronounced. Variability in earnings and profitability may
result in changes in the level of debt protection measurements and
may require relatively high financial leverage. Adequate alternate
liquidity is maintained.
MOODY'S MUNICIPAL
MIG 1/VMIG 1 This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity
support, or demonstrated 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.
MIG 3/VMIG 3 This designation denotes favorable quality. All security
elements are accounted for but there is lacking the undeniable
strength of the preceding grades. Liquidity and cash flow
protection may be narrow and market access for refinancing is
likely to be less well established.
MIG 4/VMIG 4 This designation denotes adequate quality. Protection commonly
regarded as required of an investment security is present and
although not distinctly or predominantly speculative, there is
specific risk.
S&P CORPORATE AND GOVERNMENT
A-1 This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely
strong safety characteristics are denoted with a plus (+) sign
designation.
A-2 Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as
for issued designated A-1.
A-3 Issues carrying this designation have adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher
designations.
B A short-term obligation rated "B" is regarded as having significant
speculative characteristics. The obligor currently has the capacity to
meet its financial commitment on the obligation; however, it faces
major ongoing uncertainties which could lead to the obligor's
inadequate capacity to meet its financial commitment on the
obligation.
C A short-term obligation rated "C" 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.
D A short-term 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.
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.
SP-3 Speculative capacity to pay principal and interest.
FITCH INFORMATION, INC.
F1 Highest credit quality. Indicates the strongest capacity for timely
payment of financial commitments; may have an added "+" to denote any
exceptionally strong credit feature.
F2 Good credit quality. A satisfactory capacity for timely payment of
financial commitments, but the margin of safety is not as great as in
the case of the higher ratings.
F3 Fair credit quality. The capacity for timely payment of financial
commitments is adequate; however, near-term adverse changes could
result in a reduction to non-investment grade.
B Speculative. Minimal capacity for timely payment of financial
commitments, plus vulnerability to near-term adverse changes in
financial and economic conditions.
C High default risk. Default is a real possibility. Capacity for meeting
financial commitments is solely reliant upon a sustained, favorable
business and economic environment.
D Default. Denotes actual or imminent payment default
27
<PAGE>
APPENDIX B - COMPARISON OF PORTFOLIO 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 indexes of
comparable securities. Evaluations of Fund performance made by independent
sources may also be used in advertisements concerning the Fund, including
reprints of, or selections from, editorials or articles about the Fund. Each
Fund or its performance may also be compared to products and services not
constituting securities subject to registration under the 1933 Act such as, but
not limited to, certificates of deposit and money market accounts. Sources for
performance information and articles about each Fund may include but are not
restricted to the following:
AAII JOURNAL, a monthly association magazine for members of the American
Association of Individual Investors.
ARIZONA REPUBLIC, a newspaper 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 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.
28
<PAGE>
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.)
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.
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 toward the novice investor.
In addition to the sources above, performance of our Funds may also be
tracked by Lipper, A Reuter's Company, and Morningstar, Inc. A Fund will be
compared to Lipper's or Morningstar's appropriate fund category according to
its objective and portfolio holdings. Footnotes in advertisements and other
sales literature will include the time period applicable for any rankings used.
For comparative purposes, unmanaged indexes of comparable securities or
economic data may be cited. Examples include the following:
- Ibbotson Associates, Inc., Stocks, Bonds, Bills, and Inflation Yearbook.
- Lehman Brothers 1-3 year Government/Corporate Index is an unmanaged index of
all the government, agency, and corporate bonds longer than one year and less
than three years.
- Lehman Brothers Aggregate Bond Index, is an unmanaged index of the
Government/Corporate Index, the Mortgage-Backed Securities Index, and the
Asset-Backed Securities Index.
- NASDAQ Industrials, a composite index of approximately 3000 unmanaged
securities of industrial corporations traded over the counter.
- Russell 2000(R) Index is an index that consists of the 2,000 smallest
companies in the Russell 3000(R) Index, a widely recognized small cap index.
- S&P 500 Index, a broad-based composite unmanaged index that represents the
weighted average performance of a group of 500 widely held, publicly traded
stocks.
29
<PAGE>
- S&P SmallCap 600 Index is an unmanaged market-value weighted index
consisting of 600 domestic stocks chosen for market size, liquidity, and
industry group representation.
- Credit Suisse First Boston Global High Yield Index is an unmanaged, trader
priced portfolio constructed to mirror the high yield debt market.
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.
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.
===============================================================================
30
<PAGE>
[THIS PAGE LEFT BLANK INTENTIONALLY]
31
<PAGE>
06143-1200
