As filed with the Securities and Exchange Commission on September 24, 1997.
1933 Act File No. 2-91069
1940 Act File No. 811-4019
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 X
Pre-Effective Amendment No.
Post-Effective Amendment No. 25
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 X
Amendment No. 27
USAA INVESTMENT TRUST
(Exact Name of Registrant as Specified in Charter)
9800 FREDERICKSBURG RD., SAN ANTONIO, TX 78288
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code (210) 498-0600
Michael D. Wagner, Secretary
USAA INVESTMENT TRUST
9800 Fredericksburg Rd.
SAN ANTONIO, TX 78288-0227
(Name and Address of Agent for Service)
Approximate Date of Proposed Public Offering: As soon as practicable after the
effective date of this Registration Statement.
It is proposed that this filing will become effective under Rule 485
___ immediately upon filing pursuant to paragraph (b)
_X_ on October 1, 1997 pursuant to paragraph (b)
___ 60 days after filing pursuant to paragraph (a)(1)
___ on (date) pursuant to paragraph (a)(1)
___ 75 days after filing pursuant to paragraph (a)(2)
___ on (date) pursuant to paragraph (a)(2)
If appropriate, check the following box:
___ This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
DECLARATION PURSUANT TO RULE 24f-2
The Registrant has heretofore registered an indefinite number of shares of the
Income Strategy Fund, Growth and Tax Strategy Fund, Balanced Strategy Fund,
Cornerstone Strategy Fund, Growth Strategy Fund, Emerging Markets Fund, Gold
Fund, International Fund, World Growth Fund, GNMA Trust, and Treasury Money
Market Trust pursuant to Rule 24f-2 under the Investment Company Act of 1940.
The Registrant filed its Rule 24f-2 notice for the Income Strategy Fund, Growth
and Tax Strategy Fund, Balanced Strategy Fund, Cornerstone Strategy Fund, Growth
Strategy Fund, Emerging Markets Fund, Gold Fund, International Fund, World
Growth Fund, GNMA Trust, and Treasury Money Market Trust for the fiscal year
ended May 31, 1997 on July 25, 1997.
Exhibit Index on Pages 298 - 300
Page 1 of 369
<PAGE>
USAA INVESTMENT TRUST
CROSS REFERENCE SHEET
PART A
FORM N-1A ITEM NO. SECTION IN PROSPECTUS
1. Cover Page.......................... Same
2. Synopsis............................ Fees and Expenses
3. Condensed Financial
Information........................ Financial Highlights
Performance Information
4. General Description
of Registrant...................... Investment Objectives and Policies
Description of Shares
5. Management of the Fund.............. Management of the Trust
Service Providers
6. Capital Stock and Other
Securities......................... Dividends, Distributions and Taxes
Description of Shares
7. Purchase of Securities
Being Offered.................... Purchase of Shares
Conditions of Purchase and Redemption
Exchanges
Other Services
Share Price Calculation
8. Redemption or Repurchase............ Redemption of Shares
Conditions of Purchase and Redemption
Exchanges
Other Services
9. Legal Proceedings................... Not Applicable
<PAGE>
USAA INVESTMENT TRUST
CROSS REFERENCE SHEET
PART B
FORM N-1A ITEM NO. SECTION IN STATEMENT OF ADDITIONAL
INFORMATION
10. Cover Page......................... Same
11. Table of Contents.................. Same
12. General Information and History.... Not Applicable
13. Investment Objectives and Policies. Investment Policies
Special Risk Considerations
Investment Restrictions
Portfolio Transactions
14. Management of the Registrant....... Trustees and Officers of the Trust
15. Control Persons and Principal
Holders of Securities............. Trustees and Officers of the Trust
16. Investment Advisory and
Other Services.................... Trustees and Officers of the Trust
The Trust's Manager
General Information
17. Brokerage Allocation and
Other Practices................... Portfolio Transactions
18. Capital Stock and Other
Securities........................ Further Description of Shares
19. Purchase, Redemption and
Pricing of Securities
Being Offered..................... Valuation of Securities
Conditions of Purchase and Redemption
Additional Information Regarding
Redemption of Shares
Investment Plans
20. Tax Status......................... Tax Considerations
21. Underwriters....................... The Trust's Manager
22. Calculation of Performance
Data.............................. Calculation of Performance Data
23. Financial Statements............... General Information
<PAGE>
Part A
Prospectuses for the
Income Strategy, Balanced Strategy, Cornerstone Strategy,
Growth Strategy, Emerging Markets, Gold, International,
and World Growth Funds, GNMA Trust and
Treasury Money Market Trust
are included herein
Not included in this Post-Effective Amendment
is the Prospectus for the Growth and Tax Strategy Fund
<PAGE>
Part A
Prospectus for the
Income Strategy Fund
is included herein
<PAGE>
USAA INCOME STRATEGY FUND
OCTOBER 1, 1997 PROSPECTUS
USAA INCOME STRATEGY FUND (the Fund) is one of eleven no-load mutual funds
offered by USAA Investment Trust (the Trust). The Fund is managed by USAA
Investment Management Company (the Manager).
WHAT IS THE INVESTMENT OBJECTIVE?
The Fund's investment objective is to seek high current return, with reduced
risk over time, through an asset allocation strategy which emphasizes income and
gives secondary emphasis to long-term growth of capital. Page 9.
HOW DO YOU BUY?
Fund shares are sold on a continuous basis at the net asset value per share
without a sales charge. Make your initial investment directly with the Manager
by mail, in person, or in certain instances, by telephone. Page 15.
HOW DO YOU SELL?
You may redeem Fund shares by mail, telephone, fax, or telegraph on any day
that the net asset value is calculated. Page 17.
This Prospectus, which should be read and retained for future reference,
provides information regarding the Trust and the Fund that you should know
before investing.
SHARES OF THE USAA INCOME STRATEGY FUND ARE NOT DEPOSITS OR OTHER
OBLIGATIONS OF, OR GUARANTEED BY, THE USAA FEDERAL SAVINGS BANK, ARE NOT INSURED
BY THE FDIC OR ANY OTHER GOVERNMENT AGENCY, ARE SUBJECT TO INVESTMENT RISKS, AND
MAY LOSE VALUE.
If you would like more information about the Fund, you may call
1-800-531-8181 to request a free copy of the most recent financial report and/or
the Fund's Statement of Additional Information (SAI), dated October 1, 1997. The
SAI has been filed with the Securities and Exchange Commission (SEC) and is
incorporated by reference into this Prospectus (meaning it is legally a part of
the Prospectus).
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
PAGE
SUMMARY DATA
Fees and Expenses............................................. 3
Financial Highlights.......................................... 4
Performance Information....................................... 5
USING MUTUAL FUNDS
USAA Family of No-Load Mutual Funds........................... 6
Using Mutual Funds in an Asset Allocation Program............. 7
INVESTMENT PORTFOLIO INFORMATION
Investment Objective and Policies............................. 9
SHAREHOLDER INFORMATION
Purchase of Shares............................................ 15
Redemption of Shares.......................................... 17
Conditions of Purchase and Redemption......................... 18
Exchanges..................................................... 19
Other Services................................................ 20
Share Price Calculation....................................... 21
Dividends, Distributions and Taxes............................ 22
Management of the Trust....................................... 23
Description of Shares......................................... 24
Service Providers............................................. 25
Telephone Assistance Numbers.................................. 25
- --------------------------------------------------------------------------------
2
<PAGE>
FEES AND EXPENSES
The following summary, which is based on actual expenses and average net assets
(ANA) of the Fund for the year ended May 31, 1997, is provided to assist you in
understanding the expenses you will bear directly or indirectly as a Fund
investor.
SHAREHOLDER TRANSACTION EXPENSES
- --------------------------------------------------------------------------------
Sales Load Imposed on Purchases.................................... None
Sales Load Imposed on Reinvested Dividends......................... None
Deferred Sales Load................................................ None
Redemption Fee*.................................................... None
Exchange Fee....................................................... None
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF ANA)
- --------------------------------------------------------------------------------
Management Fees, net of reimbursements........................ .00%
12b-1 Fees.................................................... None
Other Expenses, net of reimbursements
Transfer Agent Fees........................................ .12%
Custodian Fees............................................. .38%
All Other Expenses......................................... .50%
---
Total Other Expenses.......................................... 1.00%
----
Total Fund Operating Expenses, net of reimbursements.......... 1.00%
====
- ---------------------------
* A shareholder who requests delivery of redemption proceeds by wire transfer
will be subject to a $10 fee. See REDEMPTION OF SHARES - BANK WIRE.
During the year, the Manager voluntarily limited the annual expenses of the
Fund to 1.00% of its ANA and reimbursed the Fund for all expenses in excess of
this limitation. The Management Fees, Other Expenses, and Total Fund Operating
Expenses reflect all such expense reimbursements by the Manager. Absent such
reimbursements, the amount of the Management Fees, Other Expenses, and Total
Fund Operating Expenses as a percentage of the Fund's ANA would have been .50%,
1.01%, and 1.51%, respectively. The Manager has voluntarily agreed to continue
to limit the Fund's annual expenses until October 1, 1998, to 1.00% of its ANA
and will reimburse the Fund for all expenses in excess of the limitation.
EXAMPLE OF EFFECT OF FUND EXPENSES
- --------------------------------------------------------------------------------
You would pay the following expenses on a $1,000 investment in the Fund,
assuming (1) 5% annual return and (2) redemption at the end of the periods
shown.
1 year - $ 10
3 years - $ 32
5 years - $ 55
10 years - $ 122
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
3
<PAGE>
FINANCIAL HIGHLIGHTS
The following financial highlights for a share outstanding throughout each of
the periods in the two-year period ended May 31, 1997, have been audited by KPMG
Peat Marwick LLP. This table should be read in conjunction with the Fund's
financial statements for the year ended May 31, 1997, and the independent
auditors' report thereon, that appear in the Fund's Annual Report. Further
performance information is contained in the Annual Report and is available upon
request without charge.
YEAR ENDED NINE-MONTH
MAY 31, PERIOD ENDED
1997 MAY 31, 1996*
---- ------------
Net asset value at
beginning of period $ 10.06 $ 10.00
Net investment income .50 .39(b)
Net realized and
unrealized gain (loss) .83 (.06)
Distributions from net
investment income (.50) (.22)
Distributions of realized
capital gains (.05) (.05)
------- -------
Net asset value at
end of period $ 10.84 $ 10.06
======= =======
Total return (%)** 13.59 3.23
Net assets at end of
period (000) $13,878 $12,173
Ratio of expenses to
average net assets (%) 1.00(c) 1.00(a)(c)
Ratio of net investment
income to average net
assets (%) 4.80(c) 4.71(a)(c)
Portfolio turnover (%) 64.71 78.60
Average commission rate
paid per share *** $ .0478 $ .0496
- ------------------------
* Fund commenced operations September 1, 1995.
** Assumes reinvestment of all dividend income and capital gain distributions
during the period.
*** Calculated by aggregating all commissions paid on the purchase and sale of
securities and dividing by the actual number of shares purchased or sold
for which commissions were charged.
(a) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
(b) Calculated using weighted average shares.
(c) The information contained in this table is based on actual expenses for the
period, after giving effect to reimbursement of expenses by the Manager.
Absent such reimbursement the Fund's ratios would have been:
NINE-MONTH
YEAR ENDED PERIOD ENDED
MAY 31, 1997 MAY 31, 1996*
------------ -------------
Ratio of expenses to average
net assets (%) 1.51 1.78(a)
Ratio of net investment income
to average net assets (%) 4.29 3.93(a)
4
<PAGE>
PERFORMANCE INFORMATION
Performance information should be considered in light of the Fund's investment
objective and policies and market conditions during the time periods for which
it is reported. Historical performance should not be considered as
representative of the future performance of the Fund.
The Trust may quote the Fund's total return or yield in advertisements and
reports to shareholders or prospective investors. The Fund's performance may
also be compared to that of other mutual funds with a similar investment
objective and to stock or relevant indexes that are referenced in APPENDIX B to
the SAI. Standard total return and yield results reported by the Fund do not
take into account recurring and nonrecurring charges for optional services which
only certain shareholders elect and which involve nominal fees, such as the $10
fee for a delivery of redemption proceeds by wire transfer.
The Fund's average annual total return is computed by determining the
average annual compounded rate of return for a specific period which, when
applied to a hypothetical $1,000 investment in the Fund at the beginning of the
period, would produce the redeemable value of that investment at the end of the
period, assuming reinvestment of all dividends and distributions during the
period.
The Fund may advertise performance in terms of a 30-day yield quotation.
The yield quotation is computed by dividing the net investment income per share
earned during the period by the offering price per share on the last day of the
period. This income is then annualized.
Further information concerning the Fund's yield and total return is
included in the SAI.
5
<PAGE>
USAA FAMILY OF NO-LOAD MUTUAL FUNDS
The USAA Family of No-Load Mutual Funds includes a variety of Funds, each with
different objectives and policies. In combination, these Funds are designed to
provide investors with the opportunity to formulate their own investment
program. You may exchange any shares you hold in any one USAA Fund for shares in
any other USAA Fund. For more complete information about the Funds in the USAA
Family of Funds, including charges and expenses, call the Manager for a
Prospectus. Read it carefully before you invest or send money.
USAA INVESTMENT TRUST
Income Strategy Fund
Growth and Tax Strategy Fund
Balanced Strategy Fund
Cornerstone Strategy Fund
Growth Strategy Fund
Emerging Markets Fund
Gold Fund
International Fund
World Growth Fund
GNMA Trust
Treasury Money Market Trust
USAA MUTUAL FUND, INC.
Aggressive Growth Fund
Science & Technology Fund
Growth Fund
First Start Growth Fund
S&P 500 Index Fund**
Growth & Income Fund
Income Stock Fund
Income Fund
Short-Term Bond Fund
Money Market Fund
USAA TAX EXEMPT FUND, INC.
Long-Term Fund
Intermediate-Term Fund
Short-Term Fund
Tax Exempt Money Market Fund
California Bond Fund*
California Money Market Fund*
New York Bond Fund*
New York Money Market Fund*
Virginia Bond Fund*
Virginia Money Market Fund*
USAA STATE TAX-FREE TRUST
Florida Tax-Free Income Fund*
Florida Tax-Free Money Market Fund*
Texas Tax-Free Income Fund*
Texas Tax-Free Money Market Fund*
* Offered only to residents of these specific states.
** S&P 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.
6
<PAGE>
USING MUTUAL FUNDS IN AN ASSET ALLOCATION PROGRAM
I. THE IDEA BEHIND ASSET ALLOCATION
If you have money to invest and hear that stocks may be a good investment, is it
a wise idea to use your entire savings to buy one stock? Most people wouldn't it
would be fortunate if it works, but this strategy holds a great deal of risk.
Surprising news could be reported tomorrow on your stock, and its price could
soar or plummet.
Careful investors understand this concept of risk and lower that risk by
diversifying their holdings among a number of securities. That way bad news for
one security may be counterbalanced by good news regarding other securities. But
there is still a question of risk here. History tells us that stocks are
generally more volatile than bonds and that long-term bonds are generally more
volatile than short-term bonds. History also tells us that over many years
investments having higher risks tend to have higher returns than investments
that carry lower risks. And past performance doesn't necessarily guarantee
future results. From these observations comes the idea of asset allocation.
Asset allocation is a straightforward concept that involves dividing your
money among several different types of investments - for example, stocks, bonds
and short-term investments such as money market instruments - and keeping that
allocation until your objectives or the financial markets significantly change.
That way you're not pinning all your financial success on the fortunes of one
kind of investment. Money spread across different investment categories can help
you reduce market risk and likely will provide more stability to your total
return.
Asset allocation can work because different kinds of investments generally
follow different up-and-down cycles. With a variety of investments in your
portfolio, some are probably doing well, even when others are struggling.
II. USING ASSET ALLOCATION IN AN INVESTMENT PROGRAM
Most investors understand the concept of diversification, but asset allocation
goes beyond diversifying your portfolio; it's much more of an active process.
You must evaluate your lifestyle, finances, circumstances, long- and short-term
financial goals and tolerance for investment risk. Once you have structured your
allocation, you'll need to review it regularly since your objectives will change
over time.
III. USAA'S SERIES OF ASSET STRATEGY FUNDS
USAA's series of asset allocation funds, our Asset Strategy Funds, are designed
for the long-term investor and are in line with the Manager's investment
philosophy for its customers, specifically "don't try to time the market," and
"buy and hold for the long-term." As shown on the next page, each of USAA's
Asset Strategy Funds has its own different mix of assets and objectives.
7
<PAGE>
Fund Investment Objective Invests In
- --------------------------------------------------------------------------------
Income Seek high current return, with Bonds and stocks
Strategy reduced risk over time, through an
Fund asset allocation strategy which
emphasizes income and gives
secondary emphasis to long-term
growth of capital.
Growth and Tax Seek a conservative balance between Tax exempt bonds and
Strategy Fund income,the majority of which is tax- blue chip stocks
exempt, and the potential for long-term
growth of capital to preserve purchasing
power. This objective is to be achieved
through an asset allocation strategy.
Balanced Seek high total return, with reduced Stocks and bonds
Strategy risk over time, through an asset
Fund allocation strategy that seeks a
combination of long-term growth of
capital and current income.
Cornerstone Achieve a positive inflation-adjusted Foreign & basic value
Strategy rate of return and a reasonably stable stocks, government
Fund value of Fund shares, thereby securities, real
preserving purchasing power of estate stocks and gold
shareholders' capital. This objective stocks
is to be achieved through an asset
allocation strategy.
Growth Seek high total return, with reduced Small & large cap
Strategy risk over time, through an asset stocks, bonds, and
Fund allocation strategy which emphasizes international stocks
capital appreciation and gives
secondary emphasis to income.
- --------------------------------------------------------------------------------
An important feature of USAA's Asset Strategy Funds is the quarterly rebalancing
of each portfolio. In this asset allocation technique, the Funds' Managers buy
or sell securities each quarter so that the investment categories of each Fund
are brought within their target ranges. For example, if a portfolio holds 80% of
its securities in bonds, 15% in stocks, and 5% in money market instruments at
the beginning of a quarter, then due to market returns holds 90% of its
securities in bonds, 5% in stocks, and 5% in money market instruments at the end
of a quarter, the Manager would rebalance the portfolio by increasing its
holdings of stocks and reducing its holdings of bonds to return the portfolio's
investments in stocks and bonds into the target ranges. See INVESTMENT OBJECTIVE
AND POLICIES - INVESTMENT POLICIES, TECHNIQUES AND RISK FACTORS for further
information on the Fund's target ranges.
For more complete information about the other USAA Asset Strategy Funds,
including charges and expenses, call the Manager for a Prospectus. Read it
carefully before you invest or send money.
8
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
INVESTMENT OBJECTIVE
The Fund's investment objective is to seek high current return, with reduced
risk over time, through an asset allocation strategy which emphasizes income and
gives secondary emphasis to long-term growth of capital.
The investment objective of the Fund cannot be changed without shareholder
approval. In view of the risks inherent in all investments in securities, there
is no assurance that this objective will be achieved.
The investment policies and techniques used to pursue the Fund's objective
may be changed without shareholder approval, except as otherwise noted. Further
information regarding the Fund's investment policies, restrictions and risks is
provided in the SAI.
INVESTMENT POLICIES, TECHNIQUES AND RISK FACTORS
The Fund provides a professionally managed, diversified investment program
within one mutual fund. The Manager seeks to attain the objective by investing
the Fund's assets in each of the following investment categories within the
indicated ranges:
PERCENTAGE
TARGET RANGE
INVESTMENT CATEGORY OF NET ASSETS
Bonds............................ 75 - 85%
Stocks........................... 15 - 25%
Money Market Instruments......... 0 - 10%
The target ranges may be revised by the Board of Trustees upon 60 days'
prior written notice to shareholders. However, the Manager reserves the right,
without shareholder notification, to revise the ranges on a temporary defensive
basis when, in its opinion, such changes are believed to be in the best interest
of the Fund and its shareholders.
The ranges allow for a variance in each investment category. Should market
action cause investment categories to move outside the ranges, the Manager will
make adjustments to rebalance the portfolio. In general, the Manager will
rebalance the portfolio at least once during each quarter to bring each category
within its range. These portfolio adjustments may cause the Fund to sell
securities in investment categories which have appreciated in value and to buy
securities in investment categories which have depreciated in value. Such
adjustments may also cause the Fund to incur a higher proportion of short-term
capital gains than a fund that does not have a similar policy.
As a temporary defensive measure, the Manager may invest up to 100% of the
Fund's assets in high quality, short-term debt instruments.
Although the Fund's portfolio turnover rate is not expected to exceed 100%,
it will not be a limiting factor when the Manager deems changes in the Fund's
portfolio appropriate in view of its investment objective.
Characteristics and associated risks of each investment category are as follows:
BONDS - In this category, investments will consist of U.S. dollar-denominated
securities selected for their high yields relative to the risk involved.
Consistent with this policy, in periods of rising interest rates, a greater
portion of the portfolio may be invested in securities the value of which is
believed to be less sensitive to interest rate changes. Generally, the longer a
bond's maturity, the higher the yield and the greater the price volatility due
to increased interest rate risk.
Investments in this category may consist of obligations of the U.S.
Government, its agencies and instrumentalities; mortgage-
9
<PAGE>
backed securities; corporate debt securities such as notes and bonds;
obligations of state and local governments and their agencies and
instrumentalities; asset-backed securities; master demand notes; Eurodollar
obligations; Yankee obligations; and other debt securities.
The debt securities in the Fund must be investment grade at the time of
purchase. Investment grade securities are those issued or guaranteed by the U.S.
Government, its agencies and instrumentalities, those rated at least Baa by
Moody's Investors Service, BBB by Standard & Poor's Ratings Group, BBB by Fitch
Investors Service, or BBB by Duff and Phelps, or those judged to be of
equivalent quality by the Manager if not rated. Securities rated in the lowest
level of investment grade have speculative characteristics since adverse
economic conditions and changing circumstances are more likely to have an
adverse impact on such securities.
If the rating of a security is downgraded below investment grade, the
Manager will determine whether it is in the best interest of the Fund's
shareholders to continue to hold such security in the Fund's portfolio. Unless
otherwise directed by the Board of Trustees, if downgrades result in more than
5% of the Fund's net assets being invested in securities that are less than
investment grade quality, the Manager will take immediate action to reduce the
Fund's holdings in such securities to 5% or less of the Fund's net assets. For a
more complete description of debt ratings, see APPENDIX A to the SAI.
STOCKS - In this category, investments will consist primarily of dividend paying
common stocks or securities convertible into common stocks or securities which
carry the right to buy common stocks. Investments may also include foreign
securities. For a discussion of the risks associated with investments in foreign
issuers, see SPECIAL RISK CONSIDERATIONS.
The Fund may also invest in real estate investment trusts (REITs). The
Fund's investments in REITs may subject the Fund to many of the same risks
associated with the direct ownership of real estate. In addition, REITs are
dependent upon the capabilities of the REIT manager(s) and have limited
diversification.
MONEY MARKET INSTRUMENTS - In this category, investments will consist of high
quality U.S. dollar-denominated debt securities that have remaining maturities
of one year or less. Such securities may include U.S. Government obligations,
commercial paper and other short-term corporate obligations, repurchase
agreements collateralized with U.S. Government securities, and certificates of
deposit, bankers' acceptances, bank deposits, and other financial institution
obligations. These securities may carry fixed or variable interest rates.
REPURCHASE AGREEMENTS - The Fund may invest in repurchase agreements which are
collateralized by obligations backed by the full faith and credit of the U.S.
Government or by its agencies or instrumentalities. A repurchase agreement is a
transaction in which a security is purchased with a simultaneous commitment to
sell the security back to the seller (a commercial bank or recognized securities
dealer) at an agreed upon price on an agreed upon date, 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 the 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
10
<PAGE>
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.
WHEN-ISSUED SECURITIES - The Fund may invest in new issues of debt securities
offered on a when-issued basis; that is, 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.
Cash or high quality liquid debt securities equal to the amount of the
when-issued commitments are segregated at the Fund's custodian bank. The
segregated securities are valued at market, and daily adjustments are made to
keep the value of the cash and segregated securities at least equal to the
amount of such commitments by the Fund. On the settlement date, the Fund will
meet its obligations from then available cash, sale of segregated securities,
sale of other securities, or sale of the when-issued securities themselves.
VARIABLE RATE SECURITIES - The Fund may invest in securities that bear interest
at rates which are adjusted periodically to market rates. These interest rate
adjustments can both raise and lower the income generated by such securities.
These changes will have the same effect on the income earned by the Fund
depending on the proportion of such securities held.
The market value of fixed coupon securities fluctuates with changes in
prevailing interest rates, increasing in value when interest rates decline and
decreasing in value when interest rates rise. The value of variable rate
securities, however, is less affected by changes in prevailing interest rates
because of the periodic adjustment of their coupons to a market rate. The
shorter the period between adjustments, the smaller the impact of interest rate
fluctuations on the value of these securities. The market value of variable rate
securities usually tends toward par (100% of face value) at interest rate
adjustment time.
MORTGAGE-BACKED AND ASSET-BACKED SECURITIES - The Fund may invest 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
11
<PAGE>
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.
MUNICIPAL LEASE OBLIGATIONS - The Fund 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. In evaluating a potential
investment in 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.
MASTER DEMAND NOTES - The Fund may invest in variable rate master demand notes
(master demand notes). Master demand notes 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. Therefore, where master demand notes are not secured by
bank letters of credit or other credit support arrangements, the Fund's right to
redeem depends on the ability of the borrower to pay principal and interest on
demand. In connection with master demand note arrangements, the Fund will
continuously monitor the earning power, cash flow, and other liquidity ratios of
the issuer, and the borrower's ability to pay principal and interest on demand.
Master demand notes, as such, are not typically rated by credit rating agencies.
The Fund will invest in master demand notes only if the Board of Trustees or its
delegate has determined that they are of credit quality comparable to the debt
securities in which the Fund generally may invest.
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EURODOLLAR AND YANKEE OBLIGATIONS - The Fund may invest in Eurodollar and Yankee
obligations. Eurodollar obligations are dollar-denominated instruments issued
outside the U.S. capital markets by foreign corporations and financial
institutions and by foreign branches of U.S. corporations and financial
institutions. Yankee obligations are dollar-denominated instruments issued by
foreign issuers in the U.S. capital markets. While investments in Eurodollar and
Yankee obligations are intended to reduce risk by providing further
diversification, such investments involve sovereign risk in addition to credit
and market risk. Sovereign risk includes local, political, or economic
developments, potential nationalization, and withholding taxes on dividend or
interest payments.
In addition, the Fund may invest in Eurodollar and Yankee obligations of
investment grade emerging market countries. An emerging market country can be
considered to be a country which is in the initial stages of its industrial
cycle. Investments in emerging market countries involve exposure to economic
structures that are generally less diverse and mature than in the United States,
and to political systems which may be less stable. In the past, markets of
emerging market countries have been more volatile than the markets of developed
countries. See SPECIAL RISK CONSIDERATIONS for a discussion of other risks
associated with foreign investments.
PUT BONDS - The Fund may invest in securities (including securities with
variable interest rates) which may be redeemed or sold back (put) to the issuer
of the security or a third party prior to stated maturity (put bonds). Such
securities will normally trade as if maturity is the earlier put date, even
though stated maturity is longer.
CONVERTIBLE SECURITIES - The Fund may invest in convertible securities.
Convertible securities are bonds, preferred stocks, and other securities that
pay interest or dividends and offer the buyer the option of converting 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 may also change based on the
price of the common stock.
FORWARD CURRENCY CONTRACTS - The Fund may hold securities denominated in foreign
currencies. As a result, the value of the securities will be affected by changes
in the exchange rate between the dollar and foreign currencies. In managing the
currency exposure, the Fund 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.
The Fund may enter into forward currency contracts under two circumstances.
First, when the 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. Second, when management of the 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. The Fund may not
hedge with respect to a particular currency for an amount greater than the
aggregate market value (determined at the time of making any sale of forward
currency) of the securities held in its portfolio denominated or quoted in, or
bearing a substantial correlation to, such currency.
The use of forward currency contracts to protect the value of the Fund's
assets against a decline in the value of a currency does not eliminate
fluctuations in the value of the Fund's underlying security holdings. In
addition, although the use of forward currency contracts can minimize the risk
of
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loss due to a decline in value of the foreign currency, the use of such
contracts will tend to limit any potential gain resulting from an increase in
the relative value of the foreign currency to the U.S. dollar. Under certain
circumstances, a fund that has entered into forward currency contracts to hedge
its currency risks may be in a less favorable position than a fund that had not
entered into such contracts. The projection of short-term currency market
movements is extremely difficult and successful execution of a short-term
hedging strategy is highly uncertain.
LIQUIDITY - The Fund may not invest more than 15% of the market value of its net
assets in securities which are illiquid or not readily marketable. Commercial
paper and certain put bonds that are subject to restrictions on transfer,
securities that may be resold pursuant to Rule 144A under the Securities Act of
1933, and lease obligations may be determined to be liquid in accordance with
guidelines established by the Board of Trustees.
INVESTMENT RESTRICTIONS
The following restrictions may not be changed without shareholder approval:
(1) With respect to 75% of its total assets, the Fund may not purchase
securities of any issuer (except U.S. Government Securities, as such term
is defined in the Investment Company Act of 1940, as amended (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) The Fund may not borrow money, except for temporary or emergency purposes
in an amount not exceeding 33 1/3% of its total assets (including the
amount borrowed) less liabilities (other than borrowings).
(3) The Fund may not concentrate its investments in any one industry although
it may invest up to 25% of the value of its total assets in any one
industry; provided, this limitation does not apply to securities issued or
guaranteed by the U.S. Government and its agencies or instrumentalities.
(4) The Fund may not 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.
SPECIAL RISK CONSIDERATIONS
INVESTMENT IN FOREIGN SECURITIES - The Fund may purchase foreign securities in
foreign or U.S. markets or it may purchase American Depositary Receipts (ADRs),
Global Depositary Receipts (GDRs), or similar forms of ownership interests in
securities of foreign issuers deposited with a depositary. Investing in foreign
securities presents certain risks not present in domestic investments. Such
risks may include currency exchange rate fluctuations; foreign market
illiquidity; increased price volatility; exchange control regulations; different
accounting, reporting, and disclosure requirements; political or social
instability; and difficulties in obtaining judgments or effecting collections
thereon. Brokerage commissions and custodial services may be more costly, and
stock trade settlements may be more lengthy, more costly and more difficult than
in domestic markets. These investments may be subject to foreign withholding
taxes which may reduce the effective rates of return. The Fund values its
securities and other assets in U.S. dollars.
Information which may impact the market value of securities of a foreign
issuer may not be available to the Manager on a timely basis. The Manager will
endeavor to ascertain such information on as timely a basis as is practicable,
however, any impact on the net asset value will be deemed to have occurred upon
authentication by the Manager.
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PURCHASE OF SHARES
OPENING AN ACCOUNT
You may open an account and make an investment by any of the following methods.
A complete, signed application is required together with a check for each new
account.
TAX ID NUMBER
We require that each shareholder named on the account provide the Trust with a
social security number or tax identification number to avoid possible tax
withholding requirements.
EFFECTIVE DATE
When you make a purchase, your purchase price will be the net asset value (NAV)
per share next determined after the Fund receives your request in proper form.
The NAV of the Fund is determined at the close of the regular trading session of
the New York Stock Exchange (NYSE) each day the NYSE is open. If the Fund
receives your request prior to that time, your purchase price will be the NAV
per share determined for that day. If the Fund receives your request after the
NAV per share is calculated, the purchase will be effective on the next business
day.
Because of the more lengthy clearing process and the need to convert
foreign currency, a check drawn on a foreign bank will not be deemed received
for the purchase of shares until such time as the check has cleared and the
Manager has received good funds, which may take up to four to six weeks.
Furthermore, a bank charge may be assessed in the clearing process, which will
be deducted from the amount of the purchase. To avoid a delay in the effective
date of your purchase, the Manager suggests that you convert your foreign check
to U.S. dollars prior to investment in the Fund.
PURCHASE OF SHARES
MINIMUM INVESTMENTS
Initial Purchase: $3,000 [$500 for Uniform Gifts/Transfers to Minors Act
(UGMA/UTMA) accounts and $250 for IRAs] or no initial
investment if you elect to have monthly electronic
investments of at least $50 each.
Additional Purchases: $50
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HOW TO PURCHASE:
MAIL o To open an account, send your application and check to:
USAA Investment Management Company
9800 Fredericksburg Rd., San Antonio, TX 78288
o To add to your account, send your check and the "Invest by
Mail" stub that accompanies your fund's transaction
confirmation to the Transfer Agent:
USAA Shareholder Account Services
9800 Fredericksburg Rd., San Antonio, TX 78288
IN PERSON o To open an account, bring your application and check to:
USAA Investment Management Company
USAA Federal Savings Bank
10750 Robert F. McDermott Freeway, San Antonio
AUTOMATICALLY o Additional purchases on a regular basis can be deducted from
VIA a bank account,paycheck, income-producing investment or from a
ELECTRONIC USAA money market account. Sign up for these services when
FUNDS opening an account or call 1-800-531-8448 to add these
TRANSFER (EFT) services.
o Purchases through payroll deduction ($25 minimum each pay period
with no initial investment) can be made by any employee of USAA
or any of its affiliated companies.
BANK WIRE o To add to an 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 Strategy Fund
USAA AC-69384998
Shareholder(s) Name(s)_________________
Shareholder(s) Account Number___________________
PHONE o If you have an existing USAA account and would like to open a
1-800-531-8448 new account or if you would like to 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.
o To add to an account, intermittent (as-needed) purchases can be
deducted from your bank account through our Buy/Sell Service.
Call for instructions.
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REDEMPTION OF SHARES
You may redeem shares of the Fund by any of the following methods on any day the
NAV per share is calculated. Redemptions will be effective on the day
instructions are received in accordance with the requirements set forth below.
However, if instructions are received after the NAV per share calculation,
redemption will be effective on the next business day.
REDEMPTION PROCEEDS
Redemption proceeds are distributed within seven days after the effective date
of redemption. Payment for redemption of shares purchased by check or electronic
funds transfer will not be disbursed until the purchase check or electronic
funds transfer has cleared, which could take up to 15 days from the purchase
date. If you are considering redeeming shares soon after purchase, you should
purchase by bank wire or certified check to avoid delay.
In addition, the Trust may elect to suspend the redemption of shares or
postpone the date of payment during any period that the NYSE is closed, or
trading in the markets the Trust normally utilizes is restricted, or during any
period that redemption is otherwise permitted to be suspended by the SEC.
HOW TO REDEEM:
WRITTEN, o Send your written instructions to:
FAX, OR USAA Shareholder Account Services
TELEGRAPH 9800 Fredericksburg Rd., San Antonio, TX 78288
o Send a signed fax to 1-800-292-8177, or send a telegraph to
USAA Shareholder Account Services.
Written redemption requests must include the following: (1) a letter of
instruction or stock assignment, and stock certificate (if issued), specifying
the Fund and the number of shares or dollar amount to be redeemed; (2)
signatures of all owners of the shares exactly as their names appear on the
account; (3) other supporting legal documents, if required, as in the case of
estates, trusts, guardianships, custodianships, partnerships, corporations, and
pension and profit-sharing plans; and (4) method of payment.
PHONE o Call toll free 1-800-531-8448, in San Antonio, 456-7202.
Telephone redemption is automatically established when you complete your
application. The Fund will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine; and if it does not, it may
be liable for any losses due to unauthorized or fraudulent instructions.
Information is obtained prior to any discussion regarding an account including:
(1) USAA number or account number, (2) the name(s) on the account registration,
and (3) social security number or tax identification number for the account
registration. In addition, all telephone communications with a shareholder are
recorded, and confirmations of all account transactions are sent to the address
of record.
Redemption by telephone, fax, or telegraph is not available for shares
represented by stock certificates.
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METHODS OF PAYMENT:
BANK WIRE o Allows redemptions to be sent directly to your bank account.
Establish this service when you apply for your account, or later upon
request. Please obtain precise wiring instructions from your financial
institution. USAA Shareholder Account Services (Transfer Agent) deducts a wire
fee from the account for the redemption by wire. The fee as of the date of this
Prospectus is $10 ($25 for wires to a foreign bank) and is subject to change at
any time. The fee is paid to State Street Bank and Trust Company and the
Transfer Agent for their services in connection with the wire redemption. Your
financial institution may also charge a fee for receiving funds by wire.
AUTOMATICALLY o Systematic (regular) or intermittent (as-needed) redemptions
VIA EFT can be credited to your bank account.
Establish any of our electronic investing services when you apply for your
account, or later upon request.
CHECK o A check payable to the registered shareholder(s) will be mailed
REDEMPTION to the address of record.
This check redemption privilege is automatically established when your
application is completed and accepted. There is a 15-day waiting period before a
check redemption can be processed following a telephone address change. Should
you wish to redeem shares within the 15 days following a telephone address
change, you may do so by providing written instructions by mail or facsimile.
CONDITIONS OF PURCHASE AND REDEMPTION
NONPAYMENT
If any order to purchase shares is cancelled due to nonpayment or if the Trust
does not receive good funds either by check or electronic funds transfer, the
Transfer Agent will treat the cancellation as a redemption of shares purchased,
and you will be responsible for any resulting loss incurred by the Fund or the
Manager. If you are a shareholder, the Transfer Agent can redeem shares from any
of your account(s) as reimbursement for all losses. In addition, you may be
prohibited or restricted from making future purchases in any of the USAA Family
of Funds. A $15 fee is charged for all returned items, including checks and
electronic funds transfers.
TRANSFER OF SHARES
You may transfer Fund shares to another person by sending written instructions
to the Transfer Agent. The account must be clearly identified, and you must
include the number of shares to be transferred, the signatures of all registered
owners, and all stock certificates, if any, which are the subject of transfer.
You also need to send written instructions signed by all registered owners and
supporting documents to change an account registration due to events such as
divorce, marriage, or death. If a new account needs to be established, you must
complete and return an application to the Transfer Agent.
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ACCOUNT BALANCE
Beginning in September 1998, and occurring each September thereafter, the
Transfer Agent will assess a small balance account fee of $12 to each
shareholder account with a balance, at the time of assessment, of less than
$2,000. The fee will be used to reduce total transfer agency fees paid by the
Fund to the Transfer Agent. 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 or 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.
TRUST RIGHTS
The Trust reserves the right to:
(1) reject purchase or exchange orders when in the best interest of the Trust;
(2) limit or discontinue the offering of shares of any portfolio of the Trust
without notice to the shareholders;
(3) require a signature guarantee for purchases, redemptions, or changes in
account information in those instances where the appropriateness of a
signature authorization is in question. The section ADDITIONAL INFORMATION
REGARDING REDEMPTION OF SHARES in the SAI contains information on acceptable
guarantors;
(4) redeem an account with less than $900, subject to certain limitations
described in ADDITIONAL INFORMATION REGARDING REDEMPTION OF SHARES in the
SAI.
EXCHANGES
EXCHANGE PRIVILEGE
The Exchange Privilege is automatically established 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 that the
shares to be acquired are offered in your state of residence. Exchange
redemptions and purchases will be processed simultaneously at the share prices
next determined after the exchange order is received. For federal income tax
purposes, an exchange between Funds is a taxable event. Accordingly, when
exchanging shares, you may realize a capital gain or loss.
The Fund has undertaken certain procedures regarding telephone
transactions. See REDEMPTION OF SHARES - PHONE.
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. Exchanges out of
any Fund in the USAA Family of Funds are limited for each account to six per
calendar year except that 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.
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OTHER SERVICES
INVESTMENT PLANS
AUTOMATIC INVESTMENT PLANS - You may establish an automatic investment plan by
completing the appropriate forms, if any. 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. Call the Manager to obtain instructions. More information about
these preauthorized plans is contained in the SAI.
O INVESTART(R) - A no initial investment purchase plan. With this plan the
regular minimum initial investment amount is waived if you make subsequent
monthly additions of at least $50 through electronic funds transfer from a
checking or savings account. The Manager may periodically offer programs that
reduce the minimum amounts for monthly electronic investments.
O 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.
O DIRECT PURCHASE SERVICE - The periodic purchase of shares through electronic
funds transfer from an employer (including government allotments), an
income-producing investment, or an account with a participating financial
institution.
O 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.
O BUY/SELL SERVICE - The intermittent purchase or redemption of shares through
electronic funds transfer to or from a checking or savings account.
O SYSTEMATIC WITHDRAWAL PLAN - The periodic redemption of shares from one of
your accounts permitting you to receive a fixed amount of money monthly or
quarterly.
O RETIREMENT PLANS - Plans are available for various forms of IRAs and for
403(b)(7) accounts. Federal taxes on current income may be deferred if an
investor qualifies.
O 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.
SHAREHOLDER STATEMENTS AND REPORTS
You will receive a confirmation after each transaction in your account except:
(1) a reinvested dividend;
(2) a payment you make under the InveStart(R), InvesTronic(R), Direct Purchase
Service, Automatic Purchase Plan, or Directed Dividends investment plans;
or
(3) a redemption you make under the Systematic Withdrawal Plan.
At the end of each quarter, you will receive a consolidated statement for
all of your mutual fund accounts, regardless of account activity. The fourth
quarter consolidated statement will reflect all account activity for the prior
tax year. There will be a $10 fee charged for copies of historical statements
for other than the prior
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tax year for any one account. You will receive the Fund's financial statements
with a summary of its investments and performance at least semiannually.
In an effort to reduce expenses and respond to shareholders' requests to
reduce mail, the Trust intends to consolidate mailings of Annual and Semiannual
Reports to households having multiple accounts with the same address of record.
One copy of each report will be furnished to that address. You may request
additional reports by notifying the Trust.
TELEPHONE ASSISTANCE
Call our telephone assistance numbers for specific forms, a copy of the SAI, the
most recent Annual Report and/or Semiannual Report, or if you have any questions
concerning any of the services offered.
SHARE PRICE CALCULATION
The price at which shares of the Fund are purchased and redeemed by shareholders
is equal to the NAV per share determined on the effective date of the purchase
or redemption.
WHEN
The NAV per share for the Fund is calculated at the close of the regular trading
session of the NYSE, which is usually 4:00 p.m. Eastern time. You may buy and
sell Fund shares at the NAV per share without a sales charge.
HOW
The NAV per share is calculated by adding the value of all securities and other
assets in the Fund, deducting liabilities, and dividing by the number of shares
outstanding. Portfolio securities, except as otherwise noted, traded primarily
on a domestic securities exchange are valued at the last sales price on that
exchange. Portfolio securities traded primarily on foreign securities exchanges
are 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 Board of Trustees. Securities which cannot be valued by
the methods set forth above, and all other assets, are valued in good faith at
fair value using methods determined by the Manager under the general supervision
of the Board of Trustees.
For additional information, see VALUATION OF SECURITIES in the SAI.
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DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
Net investment income will be distributed to shareholders quarterly. Net capital
gains, if any, generally will be distributed at least annually. The Fund intends
to make such additional distributions as may be necessary to avoid the
imposition of any federal income or excise tax.
All income dividends and capital gain distributions are automatically
reinvested, unless the shareholder specifies otherwise. The share price will be
the net asset value of the Fund shares computed on the ex-dividend date. Any
income dividend or capital gain distributions paid by the Fund will reduce the
NAV per share by the amount of the dividend or distribution. An investor should
consider carefully the effects of purchasing shares of the Fund shortly before
any dividend or distribution. Although in effect a return of capital, these
distributions are subject to taxes.
Any dividend or distribution payment returned to the Manager as not
deliverable will be invested in the shareholder's Fund account at the
then-current NAV per share. If any check for the payment of dividends or
distributions is not cashed within six months from the date on the check, it
becomes void. The amount of the check will then be invested in the shareholder's
Fund account at the then-current NAV per share.
FEDERAL TAXES
The following discussion relates only to generally applicable federal income tax
provisions in effect as of the date of this Prospectus. Note that the recently
enacted Taxpayer Relief Act of 1997 and regulations that will likely be created
to implement the Act may affect the status and treatment of certain
distributions shareholders receive from the Fund. Shareholders are urged to
consult their own tax advisers about the status of distributions from the Fund
in their own states and localities.
FUND - The Fund intends to qualify as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended (the Code). By
complying with the applicable provisions of the Code, the Fund will not be
subject to federal income tax on its net investment income and net capital gains
(capital gains in excess of capital losses) distributed to shareholders.
SHAREHOLDER - Dividends from taxable net investment income and distributions of
net short-term capital gains are taxable to shareholders as ordinary income,
whether received in cash or reinvested in additional shares. A portion of these
dividends may qualify for the 70% dividends received deduction available to
corporations.
Distributions of net long-term capital gains are taxable as long-term
capital gains whether received in cash or reinvested in additional shares, and
regardless of the length of time the investor has held the shares of the Fund.
Redemptions, including exchanges, are subject to income tax, based on the
difference between the cost of shares when purchased and the price received upon
redemption or exchange.
WITHHOLDING - The Fund is required by federal law 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, who underreports
dividend or interest income, or who fails to certify that he 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 Transfer Agent, that your
tax identification number is correct and that you are not currently subject to
backup withholding.
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REPORTING - Information concerning the status of dividends and distributions for
federal income tax purposes will be mailed to shareholders annually.
MANAGEMENT OF THE TRUST
The business affairs of the Trust are subject to the supervision of the Board of
Trustees.
The Manager, USAA Investment Management Company (IMCO), was organized in May
1970 and is an affiliate of United Services Automobile Association (USAA), a
large diversified financial services institution. As of the date of this
Prospectus, the Manager had approximately $36 billion in total assets under
management. The Manager's mailing address is 9800 Fredericksburg Rd., San
Antonio, TX 78288.
Officers and employees of the Manager are permitted to engage in personal
securities transactions subject to restrictions and procedures set forth in the
Joint Code of Ethics adopted by the Trust and the Manager. Such restrictions and
procedures include substantially all of the recommendations of the Advisory
Group of the Investment Company Institute and comply with SEC rules and
regulations.
ADVISORY AGREEMENT
The Manager serves as the manager and investment adviser of the Trust, providing
services under an Advisory Agreement. Under the Advisory Agreement, the Manager
is responsible for the management of the business affairs, investment
portfolios, and placement of brokerage orders, subject to the authority of and
supervision by the Board of Trustees.
For its services under the Advisory Agreement, the Fund pays the Manager an
annual fee which is computed as a percentage of the Fund's ANA, accrued daily
and paid monthly. The Fund's management fees are computed at one-half of one
percent (.50%) of ANA. For the fiscal year ended May 31, 1997, the Manager
waived the advisory fee for the Fund.
OPERATING EXPENSES
For the fiscal year ended May 31, 1997, the Manager limited total annual
operating expenses to 1.00% of the Fund's ANA. The Manager reimbursed the Fund
$66,382 for expenses in excess of the limitation. The Manager has voluntarily
agreed to continue to limit the Fund's annual expenses until October 1, 1998, to
1.00% of its ANA and will reimburse the Fund for all expenses in excess of the
limitation.
PORTFOLIO TRANSACTIONS
Purchases and sales of equity securities for the Fund's portfolio may be
accomplished through USAA Brokerage Services, a discount brokerage service of
the Manager. The Board of Trustees has adopted procedures to ensure that any
commissions paid to USAA Brokerage Services are reasonable and fair.
PORTFOLIO MANAGERS
The following individuals are primarily responsible for managing the Fund.
John W. Saunders, Jr., Senior Vice President of Fixed Income Investments
since October 1985, is the asset allocation manager of the Fund and has managed
the Bonds investment category since September 1995. Mr. Saunders has 28 years
investment management experience and has worked for IMCO for 27 years. Mr.
Saunders earned the Chartered Financial Analyst (CFA) designation in 1976 and is
a member of the Association for Investment Management and Research (AIMR) and
the San Antonio Financial Analysts Society, Inc. (SAFAS). He holds a BS from
Portland State University, Oregon.
23
<PAGE>
R. David Ullom, Assistant Vice President of Equity Investments since
September 1994, has managed the Stocks investment category since September 1995.
Mr. Ullom has 22 years investment management experience and has worked for IMCO
for 11 years. Mr. Ullom earned the CFA designation in 1980 and also is a member
of AIMR and SAFAS. He holds an MBA from Washington University, Missouri, and a
BS from Oklahoma State University.
Pamela K. Bledsoe, Executive Director of Money Market Funds since June
1995, has managed the Money Market Instruments investment category since May
1996. Ms. Bledsoe has nine years investment management experience and has worked
for IMCO for six years. Ms. Bledsoe earned the CFA designation in 1992 and is a
member of AIMR and SAFAS. She holds an MBA from Texas Christian University and a
BS from Louisiana Tech University.
DESCRIPTION OF SHARES
MASTER TRUST AGREEMENT
The Trust is an open-end management investment company established as a business
trust under the laws of the Commonwealth of Massachusetts pursuant to the First
Amended and Restated Master Trust Agreement (Master Trust Agreement) dated June
2, 1995, as amended. The Trust is authorized to issue an unlimited number of
shares of beneficial interest of separate portfolios, without par value. Eleven
such portfolios have been established, one of which is described in this
Prospectus. The Fund is classified as diversified. Under the Master Trust
Agreement, the Trustees are authorized to create new portfolios in addition to
those already existing without shareholder approval.
Under the Master Trust Agreement, no annual or regular meeting of
shareholders is required. Ordinarily, no shareholder meeting will be held unless
required by the 1940 Act. The Trustees may fill vacancies on the Board or
appoint new Trustees provided that immediately after such action at least
two-thirds of the Trustees have been elected by shareholders. Shareholders are
entitled to one vote per share (with proportionate voting for fractional shares)
irrespective of the relative net asset value of the shares. For matters
affecting an individual portfolio, a separate vote of the shareholders of that
portfolio is required. Shareholders holding an aggregate of at least 10% of the
outstanding shares of the Trust may request a meeting of shareholders at any
time for the purpose of voting to remove one or more of the Trustees, and the
Trust will assist shareholders in communicating with other shareholders in
connection with such a meeting. As of August 31, 1997, USAA and its affiliates
owned approximately 32.2% of the Fund's shares.
Under Massachusetts law, shareholders of any portfolio could, under certain
circumstances, be held personally liable for the obligations of the Trust.
However, the Master Trust Agreement disclaims shareholder liability for acts or
obligations of the Trust and requires that notice of such disclaimer be given in
each agreement, obligation, or instrument entered into or executed by the Trust
or the Trustees. The Master Trust Agreement provides for indemnification out of
the Trust's property for all losses and expenses of any shareholder held
personally liable for the obligations of the Trust. Thus, the possibility of a
shareholder incurring financial loss on account of shareholder liability is
remote.
24
<PAGE>
SERVICE PROVIDERS
UNDERWRITER/ USAA Investment Management Company
DISTRIBUTOR 9800 Fredericksburg Rd., San Antonio, Texas 78288.
TRANSFER USAA Shareholder Account Services
AGENT 9800 Fredericksburg Rd., San Antonio, Texas 78288.
CUSTODIAN State Street Bank and Trust Company
P.O. Box 1713, Boston, Massachusetts 02105.
LEGAL Goodwin, Procter & Hoar LLP
COUNSEL Exchange Place, Boston, Massachusetts 02109.
INDEPENDENT KPMG Peat Marwick LLP
AUDITORS 112 East Pecan, Suite 2400, San Antonio, Texas 78205.
- --------------------------------------------------------------------------------
TELEPHONE ASSISTANCE
(Call toll free - Central Time)
Monday-Friday 8:00 a.m. to 8:00 p.m.
Saturday 8:30 a.m. to 5:00 p.m.
For further information on mutual funds:
1-800-531-8181
In San Antonio 456-7211
For account servicing, exchanges or redemptions:
1-800-531-8448
In San Antonio 456-7202
RECORDED 24 HOUR SERVICE
MUTUAL FUND PRICE QUOTES
(From any phone)
1-800-531-8066
In San Antonio 498-8066
MUTUAL FUND TOUCHLINE(R)
(From Touchtone phones only)
For account balance, last transaction or fund prices:
1-800-531-8777
In San Antonio 498-8777
- --------------------------------------------------------------------------------
25
<PAGE>
Part A
Prospectus for the
Balanced Strategy Fund
is included herein
<PAGE>
USAA BALANCED STRATEGY FUND
OCTOBER 1, 1997 PROSPECTUS
USAA BALANCED STRATEGY FUND (the Fund) is one of eleven no-load mutual funds
offered by USAA Investment Trust (the Trust). The Fund is managed by USAA
Investment Management Company (the Manager).
WHAT IS THE INVESTMENT OBJECTIVE?
The Fund's investment objective is to seek high total return, with reduced risk
over time, through an asset allocation strategy that seeks a combination of
long-term growth of capital and current income. Page 9.
HOW DO YOU BUY?
Fund shares are sold on a continuous basis at the net asset value per share
without a sales charge. Make your initial investment directly with the Manager
by mail, in person, or in certain instances, by telephone. Page 15.
HOW DO YOU SELL?
You may redeem Fund shares by mail, telephone, fax, or telegraph on any day
that the net asset value is calculated. Page 17.
This Prospectus, which should be read and retained for future reference,
provides information regarding the Trust and the Fund that you should know
before investing.
SHARES OF THE USAA BALANCED STRATEGY FUND ARE NOT DEPOSITS OR OTHER
OBLIGATIONS OF, OR GUARANTEED BY, THE USAA FEDERAL SAVINGS BANK, ARE NOT INSURED
BY THE FDIC OR ANY OTHER GOVERNMENT AGENCY, ARE SUBJECT TO INVESTMENT RISKS, AND
MAY LOSE VALUE. BECAUSE THIS FUND MAY INVEST IN FOREIGN SECURITIES, IT INVOLVES
A HIGHER DEGREE OF RISK AND MAY NOT BE APPROPRIATE FOR SOME INVESTORS. SEE
SPECIAL RISK CONSIDERATIONS, PAGE 14.
If you would like more information about the Fund, you may call
1-800-531-8181 to request a free copy of the most recent financial report and/or
the Fund's Statement of Additional Information (SAI), dated October 1, 1997. The
SAI has been filed with the Securities and Exchange Commission (SEC) and is
incorporated by reference into this Prospectus (meaning it is legally a part of
the Prospectus).
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
PAGE
SUMMARY DATA
Fees and Expenses............................................. 3
Financial Highlights.......................................... 4
Performance Information....................................... 5
USING MUTUAL FUNDS
USAA Family of No-Load Mutual Funds........................... 6
Using Mutual Funds in an Asset Allocation Program............. 7
INVESTMENT PORTFOLIO INFORMATION
Investment Objective and Policies............................. 9
SHAREHOLDER INFORMATION
Purchase of Shares............................................ 15
Redemption of Shares.......................................... 17
Conditions of Purchase and Redemption......................... 18
Exchanges..................................................... 19
Other Services................................................ 20
Share Price Calculation....................................... 21
Dividends, Distributions and Taxes............................ 22
Management of the Trust....................................... 23
Description of Shares......................................... 24
Service Providers............................................. 25
Telephone Assistance Numbers.................................. 25
- --------------------------------------------------------------------------------
2
<PAGE>
FEES AND EXPENSES
The following summary, which is based on actual expenses and average net assets
(ANA) of the Fund for the year ended May 31, 1997, is provided to assist you in
understanding the expenses you will bear directly or indirectly as a Fund
investor.
SHAREHOLDER TRANSACTION EXPENSES
- --------------------------------------------------------------------------------
Sales Load Imposed on Purchases............................ None
Sales Load Imposed on Reinvested Dividends................. None
Deferred Sales Load........................................ None
Redemption Fee*............................................ None
Exchange Fee............................................... None
- ---------------------------
* A shareholder who requests delivery of redemption proceeds by wire transfer
will be subject to a $10 fee. See REDEMPTION OF SHARES - BANK WIRE.
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF ANA)
- --------------------------------------------------------------------------------
Management Fees, net of reimbursements..................... .61%
12b-1 Fees................................................. None
Other Expenses
Transfer Agent Fees...................................... .18%
Custodian Fees........................................... .21%
All Other Expenses....................................... .25%
---
Total Other Expenses....................................... .64%
Total Fund Operating Expenses, net of reimbursements....... 1.25%
====
During the year, the Manager voluntarily limited the annual expenses of the
Fund to 1.25% of its ANA and reimbursed the Fund for all expenses in excess of
this limitation. The Management Fees and Total Fund Operating Expenses reflect
all such expense reimbursements by the Manager. Absent such reimbursements, the
amount of the Management Fees and Total Fund Operating Expenses as a percentage
of the Fund's ANA would have been .75% and 1.39%, respectively. The Manager has
voluntarily agreed to continue to limit the Fund's annual expenses until October
1, 1998, to 1.25% of its ANA and will reimburse the Fund for all expenses in
excess of the limitation.
EXAMPLE OF EFFECT OF FUND EXPENSES
- --------------------------------------------------------------------------------
You would pay the following expenses on a $1,000 investment in the Fund,
assuming (1) 5% annual return and (2) redemption at the end of the periods
shown.
1 year - $ 13
3 years - $ 40
5 years - $ 69
10 years - $ 151
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
3
<PAGE>
FINANCIAL HIGHLIGHTS
The following financial highlights for a share outstanding throughout each of
the periods in the two-year period ended May 31, 1997, have been audited by KPMG
Peat Marwick LLP. This table should be read in conjunction with the Fund's
financial statements for the year ended May 31, 1997, and the independent
auditors' report thereon, that appear in the Fund's Annual Report. Further
performance information is contained in the Annual Report and is available upon
request without charge.
YEAR ENDED NINE-MONTH
MAY 31, PERIOD ENDED
1997 MAY 31, 1996*
---- ------------
Net asset value at
beginning of period $ 10.49 $ 10.00
Net investment income .33 .26(b)
Net realized and
unrealized gain 1.65 .37
Distributions from net
investment income (.33) (.14)
Distributions of realized
capital gains (.03) -
------- -------
Net asset value at
end of period $ 12.11 $ 10.49
======= =======
Total return (%)** 19.26 6.37
Net assets at end of
period (000) $34,601 $19,258
Ratio of expenses to
average net assets (%) 1.25(c) 1.25(a)(c)
Ratio of net investment
income to average net
assets (%) 3.16(c) 3.31(a)(c)
Portfolio turnover (%) 28.06 26.53
Average commission rate
paid per share *** $ .0486 $ .0489
- ------------------------
* Fund commenced operations September 1, 1995.
** Assumes reinvestment of all dividend income and capital gain distributions
during the period.
*** Calculated by aggregating all commissions paid on the purchase and sale of
securities and dividing by the actual number of shares purchased or sold
for which commissions were charged.
(a) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
(b) Calculated using weighted average shares.
(c) The information contained in this table is based on actual expenses for the
period, after giving effect to reimbursement of expenses by the Manager.
Absent such reimbursement the Fund's ratios would have been:
NINE-MONTH
YEAR ENDED PERIOD ENDED
MAY 31, 1997 MAY 31, 1996*
------------ -------------
Ratio of expenses to average
net assets (%) 1.39 2.00(a)
Ratio of net investment income
to average net assets (%) 3.02 2.56(a)
4
<PAGE>
PERFORMANCE INFORMATION
Performance information should be considered in light of the Fund's investment
objective and policies and market conditions during the time periods for which
it is reported. Historical performance should not be considered as
representative of the future performance of the Fund.
The Trust may quote the Fund's total return in advertisements and reports
to shareholders or prospective investors. The Fund's performance may also be
compared to that of other mutual funds with a similar investment objective and
to stock or relevant indexes that are referenced in APPENDIX B to the SAI.
Standard total return results reported by the Fund do not take into account
recurring and nonrecurring charges for optional services which only certain
shareholders elect and which involve nominal fees, such as the $10 fee for a
delivery of redemption proceeds by wire transfer.
The Fund's average annual total return is computed by determining the
average annual compounded rate of return for a specified period which, when
applied to a hypothetical $1,000 investment in the Fund at the beginning of the
period, would produce the redeemable value of that investment at the end of the
period, assuming reinvestment of all dividends and distributions during the
period.
Further information concerning the Fund's total return is included in the
SAI.
5
<PAGE>
USAA FAMILY OF NO-LOAD MUTUAL FUNDS
The USAA Family of No-Load Mutual Funds includes a variety of Funds, each with
different objectives and policies. In combination, these Funds are designed to
provide investors with the opportunity to formulate their own investment
program. You may exchange any shares you hold in any one USAA Fund for shares in
any other USAA Fund. For more complete information about the Funds in the USAA
Family of Funds, including charges and expenses, call the Manager for a
Prospectus. Read it carefully before you invest or send money.
USAA INVESTMENT TRUST
Income Strategy Fund
Growth and Tax Strategy Fund
Balanced Strategy Fund
Cornerstone Strategy Fund
Growth Strategy Fund
Emerging Markets Fund
Gold Fund
International Fund
World Growth Fund
GNMA Trust
Treasury Money Market Trust
USAA MUTUAL FUND, INC.
Aggressive Growth Fund
Science & Technology Fund
Growth Fund
First Start Growth Fund
S&P 500 Index Fund**
Growth & Income Fund
Income Stock Fund
Income Fund
Short-Term Bond Fund
Money Market Fund
USAA TAX EXEMPT FUND, INC.
Long-Term Fund
Intermediate-Term Fund
Short-Term Fund
Tax Exempt Money Market Fund
California Bond Fund*
California Money Market Fund*
New York Bond Fund*
New York Money Market Fund*
Virginia Bond Fund*
Virginia Money Market Fund*
USAA STATE TAX-FREE TRUST
Florida Tax-Free Income Fund*
Florida Tax-Free Money Market Fund*
Texas Tax-Free Income Fund*
Texas Tax-Free Money Market Fund*
* Offered only to residents of these specific states.
** S&P 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.
6
<PAGE>
USING MUTUAL FUNDS IN AN ASSET ALLOCATION PROGRAM
I. THE IDEA BEHIND ASSET ALLOCATION
If you have money to invest and hear that stocks may be a good investment, is it
a wise idea to use your entire savings to buy one stock? Most people wouldn't -
it would be fortunate if it works, but this strategy holds a great deal of risk.
Surprising news could be reported tomorrow on your stock, and its price could
soar or plummet.
Careful investors understand this concept of risk and lower that risk by
diversifying their holdings among a number of securities. That way bad news for
one security may be counterbalanced by good news regarding other securities. But
there is still a question of risk here. History tells us that stocks are
generally more volatile than bonds and that long-term bonds are generally more
volatile than short-term bonds. History also tells us that over many years
investments having higher risks tend to have higher returns than investments
that carry lower risks. And past performance doesn't necessarily guarantee
future results. From these observations comes the idea of asset allocation.
Asset allocation is a straightforward concept that involves dividing your
money among several different types of investments - for example, stocks, bonds
and short-term investments such as money market instruments - and keeping that
allocation until your objectives or the financial markets significantly change.
That way you're not pinning all your financial success on the fortunes of one
kind of investment. Money spread across different investment categories can help
you reduce market risk and likely will provide more stability to your total
return.
Asset allocation can work because different kinds of investments generally
follow different up-and-down cycles. With a variety of investments in your
portfolio, some are probably doing well, even when others are struggling.
II. USING ASSET ALLOCATION IN AN INVESTMENT PROGRAM
Most investors understand the concept of diversification, but asset allocation
goes beyond diversifying your portfolio; it's much more of an active process.
You must evaluate your lifestyle, finances, circumstances, long- and short-term
financial goals and tolerance for investment risk. Once you have structured your
allocation, you'll need to review it regularly since your objectives will change
over time.
III. USAA'S SERIES OF ASSET STRATEGY FUNDS
USAA's series of asset allocation funds, our Asset Strategy Funds, are designed
for the long-term investor and are in line with the Manager's investment
philosophy for its customers, specifically "don't try to time the market," and
"buy and hold for the long-term." As shown on the next page, each of USAA's
Asset Strategy Funds has its own different mix of assets and objectives.
7
<PAGE>
Fund Investment Objective Invests In
- --------------------------------------------------------------------------------
Income Seek high current return, with Bonds and stocks
Strategy reduced risk over time, through an
Fund asset allocation strategy which
emphasizes income and gives
secondary emphasis to long-term
growth of capital.
Growth and Tax Seek a conservative balance between Tax exempt bonds and
Strategy Fund income, the majority of which is tax- blue chip stocks
exempt, and the potential for long-term
growth of capital to preserve purchasing
power. This objective is to be achieved
through an asset allocation strategy.
Balanced Seek high total return, with reduced Stocks and bonds
Strategy risk over time, through an asset
Fund allocation strategy that seeks a
combination of long-term growth of
capital and current income.
Cornerstone Achieve a positive inflation-adjusted Foreign & basic value
Strategy rate of return and a reasonably stable stocks, government
Fund value of Fund shares, thereby securities, real
preserving purchasing power of estate stocks and
shareholders' capital. This objective gold stocks
is to be achieved through an asset
allocation strategy.
Growth Seek high total return, with reduced Small & large cap
Strategy risk over time, through an asset stocks, bonds, and
Fund allocation strategy which emphasizes international stocks
capital appreciation and gives
secondary emphasis to income.
- --------------------------------------------------------------------------------
An important feature of USAA's Asset Strategy Funds is the quarterly rebalancing
of each portfolio. In this asset allocation technique, the Funds' Managers buy
or sell securities each quarter so that the investment categories of each Fund
are brought within their target ranges. For example, if a portfolio holds 65% of
its securities in stocks, 30% in bonds, and 5% in money market instruments at
the beginning of a quarter, then due to market returns holds 75% of its
securities in stocks, 20% in bonds, and 5% in money market instruments at the
end of a quarter, the Manager would rebalance the portfolio by reducing its
holdings of stocks and increasing its holdings of bonds to return the
portfolio's investments in stocks and bonds into the target ranges. See
INVESTMENT OBJECTIVE AND POLICIES - INVESTMENT POLICIES, TECHNIQUES AND RISK
FACTORS for further information on the Fund's target ranges.
For more complete information about the other USAA Asset Strategy Funds,
including charges and expenses, call the Manager for a Prospectus. Read it
carefully before you invest or send money.
8
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
INVESTMENT OBJECTIVE
The Fund's investment objective is to seek high total return, with reduced risk
over time, through an asset allocation strategy that seeks a combination of
long-term growth of capital and current income.
The investment objective of the Fund cannot be changed without shareholder
approval. In view of the risks inherent in all investments in securities, there
is no assurance that this objective will be achieved.
The investment policies and techniques used to pursue the Fund's objective
may be changed without shareholder approval, except as otherwise noted. Further
information regarding the Fund's investment policies, restrictions and risks is
provided in the SAI.
INVESTMENT POLICIES, TECHNIQUES AND RISK FACTORS
The Fund provides a professionally managed, diversified investment program
within one mutual fund. The Manager seeks to attain the objective by allocating
the Fund's assets in each of the following investment categories within the
indicated ranges:
PERCENTAGE
TARGET RANGE
INVESTMENT CATEGORY OF NET ASSETS
Stocks........................... 50 - 70%
Bonds............................ 30 - 50%
Money Market Instruments......... 0 - 10%
The target ranges may be revised by the Board of Trustees upon 60 days'
prior written notice to shareholders. However, the Manager reserves the right,
without shareholder notification, to revise the ranges on a temporary defensive
basis when, in its opinion, such changes are believed to be in the best interest
of the Fund and its shareholders.
The ranges allow for a variance in each investment category. Should market
action cause investment categories to move outside the ranges, the Manager will
make adjustments to rebalance the portfolio. In general, the Manager will
rebalance the portfolio at least once during each quarter to bring each category
within its range. These portfolio adjustments may cause the Fund to sell
securities in investment categories which have appreciated in value and to buy
securities in investment categories which have depreciated in value. Such
adjustments may also cause the Fund to incur a higher proportion of short-term
capital gains than a fund that does not have a similar policy.
As a temporary defensive measure, the Manager may invest up to 100% of the
Fund's assets in high quality, short-term debt instruments.
Although the Fund's portfolio turnover rate is not expected to exceed 100%,
it will not be a limiting factor when the Manager deems changes in the Fund's
portfolio appropriate in view of its investment objective.
Characteristics and associated risks of each investment category are as follows:
STOCKS - In this category, investments will consist primarily of common stocks
or securities convertible into common stocks or securities which carry the right
to buy common stocks. Investments may also include foreign securities. For a
discussion of the risks associated with investments in foreign issuers, see
SPECIAL RISK CONSIDERATIONS.
The Fund may also invest in real estate investment trusts (REITs). The
Fund's investments in REITs may subject the Fund to many of the same risks
associated with the direct ownership of real estate. In addition, REITs are
dependent upon the capabilities of the REIT manager(s) and have limited
diversification.
9
<PAGE>
BONDS - In this category, investments will consist of U.S. dollar-denominated
securities selected for their high yields relative to the risk involved.
Consistent with this policy, in periods of rising interest rates, a greater
portion of the portfolio may be invested in securities the value of which is
believed to be less sensitive to interest rate changes.
Investments in this category may consist of obligations of the U.S.
Government, its agencies and instrumentalities; mortgage-backed securities;
corporate debt securities such as notes and bonds; obligations of state and
local governments and their agencies and instrumentalities; asset-backed
securities; master demand notes; Eurodollar obligations; Yankee obligations; and
other debt securities.
The debt securities in the Fund must be investment grade at the time of
purchase. Investment grade securities are those issued or guaranteed by the U.S.
Government, its agencies and instrumentalities, those rated at least Baa by
Moody's Investors Service, BBB by Standard & Poor's Ratings Group, BBB by Fitch
Investors Service, or BBB by Duff and Phelps, or those judged to be of
equivalent quality by the Manager if not rated. Securities rated in the lowest
level of investment grade have speculative characteristics since adverse
economic conditions and changing circumstances are more likely to have an
adverse impact on such securities.
If the rating of a security is downgraded below investment grade, the
Manager will determine whether it is in the best interest of the Fund's
shareholders to continue to hold such security in the Fund's portfolio. Unless
otherwise directed by the Board of Trustees, if downgrades result in more than
5% of the Fund's net assets being invested in securities that are less than
investment grade quality, the Manager will take immediate action to reduce the
Fund's holdings in such securities to 5% or less of the Fund's net assets. For a
more complete description of debt ratings, see APPENDIX A to the SAI.
MONEY MARKET INSTRUMENTS - In this category, investments will consist of high
quality U.S. dollar-denominated debt securities that have remaining maturities
of one year or less. Such securities may include U.S. Government obligations,
commercial paper and other short-term corporate obligations, repurchase
agreements collateralized with U.S. Government securities, and certificates of
deposit, bankers' acceptances, bank deposits, and other financial institution
obligations. These securities may carry fixed or variable interest rates.
CONVERTIBLE SECURITIES - The Fund may invest in convertible securities.
Convertible securities are bonds, preferred stocks, and other securities that
pay interest or dividends and offer the buyer the option of converting 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 may also change based on the
price of the common stock.
FORWARD CURRENCY CONTRACTS - The Fund may hold securities denominated in foreign
currencies. As a result, the value of the securities will be affected by changes
in the exchange rate between the dollar and foreign currencies. In managing the
currency exposure, the Fund 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.
The Fund may enter into forward currency contracts under two circumstances.
First, when the 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
10
<PAGE>
security. Second, when management of the 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. The Fund may not hedge with respect to
a particular currency for an amount greater than the aggregate market value
(determined at the time of making any sale of forward currency) of the
securities held in its portfolio denominated or quoted in, or bearing a
substantial correlation to, such currency.
The use of forward currency contracts to protect the value of the Fund's
assets against a decline in the value of a currency does not eliminate
fluctuations in the value of the Fund's underlying security holdings. In
addition, although the use of forward currency contracts can minimize the risk
of loss due to a decline in value of the foreign currency, the use of such
contracts will tend to limit any potential gain resulting from an increase in
the relative value of the foreign currency to the U.S. dollar. Under certain
circumstances, a fund that has entered into forward currency contracts to hedge
its currency risks may be in a less favorable position than a fund that had not
entered into such contracts. The projection of short-term currency market
movements is extremely difficult and successful execution of a short-term
hedging strategy is highly uncertain.
REPURCHASE AGREEMENTS - The Fund may invest in repurchase agreements which are
collateralized by obligations backed by the full faith and credit of the U.S.
Government or by its agencies or instrumentalities. A repurchase agreement is a
transaction in which a security is purchased with a simultaneous commitment to
sell the security back to the seller (a commercial bank or recognized securities
dealer) at an agreed upon price on an agreed upon date, 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 the 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.
WHEN-ISSUED SECURITIES - The Fund may invest in new issues of debt securities
offered on a when-issued basis; that is, 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.
Cash or high quality liquid debt securities equal to the amount of the
when-issued commitments are segregated at the Fund's custodian bank. The
segregated securities are valued at market, and daily adjustments are made to
keep the value of the cash and segregated securities at least equal to the
amount of such commitments by the Fund. On the settlement date, the Fund will
meet its obligations from then available cash, sale of segregated securities,
sale of other securities, or sale of the when-issued securities themselves.
11
<PAGE>
VARIABLE RATE SECURITIES - The Fund may invest in securities that bear interest
at rates which are adjusted periodically to market rates. These interest rate
adjustments can both raise and lower the income generated by such securities.
These changes will have the same effect on the income earned by the Fund
depending on the proportion of such securities held.
The market value of fixed coupon securities fluctuates with changes in
prevailing interest rates, increasing in value when interest rates decline and
decreasing in value when interest rates rise. The value of variable rate
securities, however, is less affected by changes in prevailing interest rates
because of the periodic adjustment of their coupons to a market rate. The
shorter the period between adjustments, the smaller the impact of interest rate
fluctuations on the value of these securities. The market value of variable rate
securities usually tends toward par (100% of face value) at interest rate
adjustment time.
MORTGAGE-BACKED AND ASSET-BACKED SECURITIES - The Fund may invest 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.
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MUNICIPAL LEASE OBLIGATIONS - The Fund 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. In evaluating a potential
investment in 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.
MASTER DEMAND NOTES - The Fund may invest in variable rate master demand notes
(master demand notes). Master demand notes 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. Therefore, where master demand notes are not secured by
bank letters of credit or other credit support arrangements, the Fund's right to
redeem depends on the ability of the borrower to pay principal and interest on
demand. In connection with master demand note arrangements, the Fund will
continuously monitor the earning power, cash flow, and other liquidity ratios of
the issuer, and the borrower's ability to pay principal and interest on demand.
Master demand notes, as such, are not typically rated by credit rating agencies.
The Fund will invest in master demand notes only if the Board of Trustees or its
delegate has determined that they are of credit quality comparable to the debt
securities in which the Fund generally may invest.
EURODOLLAR AND YANKEE OBLIGATIONS - The Fund may invest in Eurodollar and Yankee
obligations. Eurodollar obligations are dollar-denominated instruments issued
outside the U.S. capital markets by foreign corporations and financial
institutions and by foreign branches of U.S. corporations and financial
institutions. Yankee obligations are dollar-denominated instruments issued by
foreign issuers in the U.S. capital markets. While investments in Eurodollar and
Yankee obligations are intended to reduce risk by providing further
diversification, such investments involve sovereign risk in addition to credit
and market risk. Sovereign risk includes local, political, or economic
developments, potential nationalization, and withholding taxes on dividend or
interest payments.
In addition, the Fund may invest in Eurodollar and Yankee obligations of
investment grade emerging market countries. An emerging market country can be
considered to be a country which is in the initial stages of its industrial
cycle. Investments in emerging market countries involve exposure to economic
structures that are generally less diverse and mature than in the United States,
and to political systems which may be less stable. In the past, markets of
emerging market countries have been more volatile than the markets of
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developed countries. See SPECIAL RISK CONSIDERATIONS for a discussion of other
risks associated with foreign investments.
PUT BONDS - The Fund may invest in securities (including securities with
variable interest rates) which may be redeemed or sold back (put) to the issuer
of the security or a third party prior to stated maturity (put bonds). Such
securities will normally trade as if maturity is the earlier put date, even
though stated maturity is longer.
LIQUIDITY - The Fund may not invest more than 15% of the market value of its net
assets in securities which are illiquid or not readily marketable. Commercial
paper and certain put bonds that are subject to restrictions on transfer,
securities that may be resold pursuant to Rule 144A under the Securities Act of
1933, and lease obligations may be determined to be liquid in accordance with
guidelines established by the Board of Trustees.
INVESTMENT RESTRICTIONS
The following restrictions may not be changed without shareholder approval:
(1) With respect to 75% of its total assets, the Fund may not purchase
securities of any issuer (except U.S. Government Securities, as such term
is defined in the Investment Company Act of 1940, as amended (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) The Fund may not borrow money, except for temporary or emergency purposes
in an amount not exceeding 33 1/3% of its total assets (including the
amount borrowed) less liabilities (other than borrowings).
(3) The Fund may not concentrate its investments in any one industry although
it may invest up to 25% of the value of its total assets in any one
industry; provided, this limitation does not apply to securities issued or
guaranteed by the U.S. Government and its agencies or instrumentalities.
(4) The Fund may not 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.
SPECIAL RISK CONSIDERATIONS
INVESTMENT IN FOREIGN SECURITIES - The Fund may purchase foreign securities in
foreign or U.S. markets or it may purchase American Depositary Receipts (ADRs),
Global Depositary Receipts (GDRs), or similar forms of ownership interests in
securities of foreign issuers deposited with a depositary. Investing in foreign
securities presents certain risks not present in domestic investments. Such
risks may include currency exchange rate fluctuations; foreign market
illiquidity; increased price volatility; exchange control regulations; different
accounting, reporting, and disclosure requirements; political or social
instability; and difficulties in obtaining judgments or effecting collections
thereon. Brokerage commissions and custodial services may be more costly, and
stock trade settlements may be more lengthy, more costly and more difficult than
in domestic markets. These investments may be subject to foreign withholding
taxes which may reduce the effective rates of return. The Fund values its
securities and other assets in U.S. dollars.
Information which may impact the market value of securities of a foreign
issuer may not be available to the Manager on a timely basis. The Manager will
endeavor to ascertain such information on as timely a basis as is practicable,
however, any impact on the net asset value will be deemed to have occurred upon
authentication by the Manager.
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PURCHASE OF SHARES
OPENING AN ACCOUNT
You may open an account and make an investment by any of the following methods.
A complete, signed application is required together with a check for each new
account.
TAX ID NUMBER
We require that each shareholder named on the account provide the Trust with a
social security number or tax identification number to avoid possible tax
withholding requirements.
EFFECTIVE DATE
When you make a purchase, your purchase price will be the net asset value (NAV)
per share next determined after the Fund receives your request in proper form.
The NAV of the Fund is determined at the close of the regular trading session of
the New York Stock Exchange (NYSE) each day the NYSE is open. If the Fund
receives your request prior to that time, your purchase price will be the NAV
per share determined for that day. If the Fund receives your request after the
NAV per share is calculated, the purchase will be effective on the next business
day.
Because of the more lengthy clearing process and the need to convert
foreign currency, a check drawn on a foreign bank will not be deemed received
for the purchase of shares until such time as the check has cleared and the
Manager has received good funds, which may take up to four to six weeks.
Furthermore, a bank charge may be assessed in the clearing process, which will
be deducted from the amount of the purchase. To avoid a delay in the effective
date of your purchase, the Manager suggests that you convert your foreign check
to U.S. dollars prior to investment in the Fund.
PURCHASE OF SHARES
MINIMUM INVESTMENTS
Initial Purchase: $3,000 [$500 for Uniform Gifts/Transfers to Minors Act
(UGMA/UTMA) accounts and $250 for IRAs] or no initial
investment if you elect to have monthly electronic
investments of at least $50 each.
Additional Purchases: $50
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HOW TO PURCHASE:
MAIL o To open an account, send your application and check to:
USAA Investment Management Company
9800 Fredericksburg Rd., San Antonio, TX 78288
o To add to your account, send your check and the "Invest by Mail"
stub that accompanies your fund's transaction confirmation to
the Transfer Agent:
USAA Shareholder Account Services
9800 Fredericksburg Rd., San Antonio, TX 78288
IN PERSON o To open an account, bring your application and check to:
USAA Investment Management Company
USAA Federal Savings Bank
10750 Robert F. McDermott Freeway, San Antonio
AUTOMATICALLY o Additional purchases on a regular basis can be deducted from
VIA a bank account, paycheck, income-producing investment or from a
ELECTRONIC USAA money market account. Sign up for these services when
FUNDS opening an account or call 1-800-531-8448 to add these
TRANSFER (EFT) services.
o Purchases through payroll deduction ($25 minimum each pay period
with no initial investment) can be made by any employee of USAA
or any of its affiliated companies.
BANK WIRE o To add to an 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 Balanced Strategy Fund
USAA AC-69384998
Shareholder(s) Name(s)_________________
Shareholder(s) Account Number___________________
PHONE o If you have an existing USAA account and would like to open a
1-800-531-8448 new account or if you would like to 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.
o To add to an account, intermittent (as-needed) purchases can be
deducted from your bank account through our Buy/Sell Service.
Call for instructions.
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REDEMPTION OF SHARES
You may redeem shares of the Fund by any of the following methods on any day the
NAV per share is calculated. Redemptions will be effective on the day
instructions are received in accordance with the requirements set forth below.
However, if instructions are received after the NAV per share calculation,
redemption will be effective on the next business day.
REDEMPTION PROCEEDS
Redemption proceeds are distributed within seven days after the effective date
of redemption. Payment for redemption of shares purchased by check or electronic
funds transfer will not be disbursed until the purchase check or electronic
funds transfer has cleared, which could take up to 15 days from the purchase
date. If you are considering redeeming shares soon after purchase, you should
purchase by bank wire or certified check to avoid delay.
In addition, the Trust may elect to suspend the redemption of shares or
postpone the date of payment during any period that the NYSE is closed, or
trading in the markets the Trust normally utilizes is restricted, or during any
period that redemption is otherwise permitted to be suspended by the SEC.
HOW TO REDEEM:
WRITTEN, o Send your written instructions to:
FAX, OR USAA Shareholder Account Services
TELEGRAPH 9800 Fredericksburg Rd., San Antonio, TX 78288
o Send a signed fax to 1-800-292-8177, or send a telegraph to
USAA Shareholder Account Services.
Written redemption requests must include the following: (1) a letter of
instruction or stock assignment, and stock certificate (if issued), specifying
the Fund and the number of shares or dollar amount to be redeemed; (2)
signatures of all owners of the shares exactly as their names appear on the
account; (3) other supporting legal documents, if required, as in the case of
estates, trusts, guardianships, custodianships, partnerships, corporations, and
pension and profit-sharing plans; and (4) method of payment.
PHONE o Call toll free 1-800-531-8448, in San Antonio, 456-7202.
Telephone redemption is automatically established when you complete your
application. The Fund will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine; and if it does not, it may
be liable for any losses due to unauthorized or fraudulent instructions.
Information is obtained prior to any discussion regarding an account including:
(1) USAA number or account number, (2) the name(s) on the account registration,
and (3) social security number or tax identification number for the account
registration. In addition, all telephone communications with a shareholder are
recorded, and confirmations of all account transactions are sent to the address
of record.
Redemption by telephone, fax, or telegraph is not available for shares
represented by stock certificates.
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METHODS OF PAYMENT:
BANK WIRE o Allows redemptions to be sent directly to your bank account.
Establish this service when you apply for your account, or later upon
request. Please obtain precise wiring instructions from your financial
institution. USAA Shareholder Account Services (Transfer Agent) deducts a wire
fee from the account for the redemption by wire. The fee as of the date of this
Prospectus is $10 ($25 for wires to a foreign bank) and is subject to change at
any time. The fee is paid to State Street Bank and Trust Company and the
Transfer Agent for their services in connection with the wire redemption. Your
financial institution may also charge a fee for receiving funds by wire.
AUTOMATICALLY o Systematic (regular) or intermittent (as-needed) redemptions can
VIA EFT be credited to your bank account.
Establish any of our electronic investing services when you apply for your
account, or later upon request.
CHECK o A check payable to the registered shareholder(s) will be mailed
REDEMPTION to the address of record.
This check redemption privilege is automatically established when your
application is completed and accepted. There is a 15-day waiting period before a
check redemption can be processed following a telephone address change. Should
you wish to redeem shares within the 15 days following a telephone address
change, you may do so by providing written instructions by mail or facsimile.
CONDITIONS OF PURCHASE AND REDEMPTION
NONPAYMENT
If any order to purchase shares is cancelled due to nonpayment or if the Trust
does not receive good funds either by check or electronic funds transfer, the
Transfer Agent will treat the cancellation as a redemption of shares purchased,
and you will be responsible for any resulting loss incurred by the Fund or the
Manager. If you are a shareholder, the Transfer Agent can redeem shares from any
of your account(s) as reimbursement for all losses. In addition, you may be
prohibited or restricted from making future purchases in any of the USAA Family
of Funds. A $15 fee is charged for all returned items, including checks and
electronic funds transfers.
TRANSFER OF SHARES
You may transfer Fund shares to another person by sending written instructions
to the Transfer Agent. The account must be clearly identified, and you must
include the number of shares to be transferred, the signatures of all registered
owners, and all stock certificates, if any, which are the subject of transfer.
You also need to send written instructions signed by all registered owners and
supporting documents to change an account registration due to events such as
divorce, marriage, or death. If a new account needs to be established, you must
complete and return an application to the Transfer Agent.
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ACCOUNT BALANCE
Beginning in September 1998, and occurring each September thereafter, the
Transfer Agent will assess a small balance account fee of $12 to each
shareholder account with a balance, at the time of assessment, of less than
$2,000. The fee will be used to reduce total transfer agency fees paid by the
Fund to the Transfer Agent. 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 or 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).
TRUST RIGHTS
The Trust reserves the right to:
(1) reject purchase or exchange orders when in the best interest of the Trust;
(2) limit or discontinue the offering of shares of any portfolio of the Trust
without notice to the shareholders;
(3) require a signature guarantee for purchases, redemptions, or changes in
account information in those instances where the appropriateness of a
signature authorization is in question. The section ADDITIONAL INFORMATION
REGARDING REDEMPTION OF SHARES in the SAI contains information on
acceptable guarantors;
(4) redeem an account with less than $900, subject to certain limitations
described in ADDITIONAL INFORMATION REGARDING REDEMPTION OF SHARES in the
SAI.
EXCHANGES
EXCHANGE PRIVILEGE
The Exchange Privilege is automatically established 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 that the
shares to be acquired are offered in your state of residence. Exchange
redemptions and purchases will be processed simultaneously at the share prices
next determined after the exchange order is received. For federal income tax
purposes, an exchange between Funds is a taxable event. Accordingly, when
exchanging shares, you may realize a capital gain or loss.
The Fund has undertaken certain procedures regarding telephone
transactions. See REDEMPTION OF SHARES - PHONE.
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. Exchanges out of
any Fund in the USAA Family of Funds are limited for each account to six per
calendar year except that 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.
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OTHER SERVICES
INVESTMENT PLANS
AUTOMATIC INVESTMENT PLANS - You may establish an automatic investment plan by
completing the appropriate forms, if any. 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. Call the Manager to obtain instructions. More information about
these preauthorized plans is contained in the SAI.
O INVESTART(R) - A no initial investment purchase plan. With this plan the
regular minimum initial investment amount is waived if you make subsequent
monthly additions of at least $50 through electronic funds transfer from a
checking or savings account. The Manager may periodically offer programs that
reduce the minimum amounts for monthly electronic investments.
O 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.
O DIRECT PURCHASE SERVICE - The periodic purchase of shares through electronic
funds transfer from an employer (including government allotments), an
income-producing investment, or an account with a participating financial
institution.
O 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. O
BUY/SELL SERVICE - The intermittent purchase or redemption of shares through
electronic funds transfer to or from a checking or savings account.
O SYSTEMATIC WITHDRAWAL PLAN - The periodic redemption of shares from one of
your accounts permitting you to receive a fixed amount of money monthly or
quarterly.
O RETIREMENT PLANS - Plans are available for various forms of IRAs and for
403(b)(7) accounts. Federal taxes on current income may be deferred if an
investor qualifies.
O 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.
SHAREHOLDER STATEMENTS AND REPORTS
You will receive a confirmation after each transaction in your account except:
(1) a reinvested dividend;
(2) a payment you make under the InveStart(R), InvesTronic(R), Direct Purchase
Service, Automatic Purchase Plan, or Directed Dividends investment plans;
or
(3) a redemption you make under the Systematic Withdrawal Plan.
At the end of each quarter, you will receive a consolidated statement for
all of your mutual fund accounts, regardless of account activity. The fourth
quarter consolidated statement will reflect all account activity for the prior
tax year. There will be a $10 fee charged for copies of historical statements
for other than the prior
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tax year for any one account. You will receive the Fund's financial statements
with a summary of its investments and performance at least semiannually.
In an effort to reduce expenses and respond to shareholders' requests to
reduce mail, the Trust intends to consolidate mailings of Annual and Semiannual
Reports to households having multiple accounts with the same address of record.
One copy of each report will be furnished to that address. You may request
additional reports by notifying the Trust.
TELEPHONE ASSISTANCE
Call our telephone assistance numbers for specific forms, a copy of the SAI, the
most recent Annual Report and/or Semiannual Report, or if you have any questions
concerning any of the services offered.
SHARE PRICE CALCULATION
The price at which shares of the Fund are purchased and redeemed by shareholders
is equal to the NAV per share determined on the effective date of the purchase
or redemption.
WHEN
The NAV per share for the Fund is calculated at the close of the regular trading
session of the NYSE, which is usually 4:00 p.m. Eastern time. You may buy and
sell Fund shares at the NAV per share without a sales charge.
HOW
The NAV per share is calculated by adding the value of all securities and other
assets in the Fund, deducting liabilities, and dividing by the number of shares
outstanding. Portfolio securities, except as otherwise noted, traded primarily
on a domestic securities exchange are valued at the last sales price on that
exchange. Portfolio securities traded primarily on foreign securities exchanges
are 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 Board of Trustees. Securities which cannot be valued by
the methods set forth above, and all other assets, are valued in good faith at
fair value using methods determined by the Manager under the general supervision
of the Board of Trustees.
For additional information, see VALUATION OF SECURITIES in the SAI.
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DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
Net investment income will be distributed to shareholders quarterly. Net capital
gains, if any, generally will be distributed at least annually. The Fund intends
to make such additional distributions as may be necessary to avoid the
imposition of any federal income or excise tax.
All income dividends and capital gain distributions are automatically
reinvested, unless the shareholder specifies otherwise. The share price will be
the net asset value of the Fund shares computed on the ex- dividend date. Any
income dividend or capital gain distributions paid by the Fund will reduce the
NAV per share by the amount of the dividend or distribution. An investor should
consider carefully the effects of purchasing shares of the Fund shortly before
any dividend or distribution. Although in effect a return of capital, these
distributions are subject to taxes.
Any dividend or distribution payment returned to the Manager as not
deliverable will be invested in the shareholder's Fund account at the
then-current NAV per share. If any check for the payment of dividends or
distributions is not cashed within six months from the date on the check, it
becomes void. The amount of the check will then be invested in the shareholder's
Fund account at the then-current NAV per share.
FEDERAL TAXES
The following discussion relates only to generally applicable federal income tax
provisions in effect as of the date of this Prospectus. Note that the recently
enacted Taxpayer Relief Act of 1997 and regulations that will likely be created
to implement the Act may affect the status and treatment of certain
distributions shareholders receive from the Fund. Shareholders are urged to
consult their own tax advisers about the status of distributions from the Fund
in their own states and localities.
FUND - The Fund intends to qualify as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended (the Code). By
complying with the applicable provisions of the Code, the Fund will not be
subject to federal income tax on its net investment income and net capital gains
(capital gains in excess of capital losses) distributed to shareholders.
SHAREHOLDER - Dividends from taxable net investment income and distributions of
net short-term capital gains are taxable to shareholders as ordinary income,
whether received in cash or reinvested in additional shares. A portion of these
dividends may qualify for the 70% dividends received deduction available to
corporations.
Distributions of net long-term capital gains are taxable as long-term
capital gains whether received in cash or reinvested in additional shares, and
regardless of the length of time the investor has held the shares of the Fund.
Redemptions, including exchanges, are subject to income tax, based on the
difference between the cost of shares when purchased and the price received upon
redemption or exchange.
WITHHOLDING - The Fund is required by federal law 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, who underreports
dividend or interest income, or who fails to certify that he 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 Transfer Agent, that your
tax identification number is correct and that you are not currently subject to
backup withholding.
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REPORTING - Information concerning the status of dividends and distributions for
federal income tax purposes will be mailed to shareholders annually.
MANAGEMENT OF THE TRUST
The business affairs of the Trust are subject to the supervision of the Board of
Trustees.
The Manager, USAA Investment Management Company (IMCO), was organized in
May 1970 and is an affiliate of United Services Automobile Association (USAA), a
large diversified financial services institution. As of the date of this
Prospectus, the Manager had approximately $36 billion in total assets under
management. The Manager's mailing address is 9800 Fredericksburg Rd., San
Antonio, TX 78288.
Officers and employees of the Manager are permitted to engage in personal
securities transactions subject to restrictions and procedures set forth in the
Joint Code of Ethics adopted by the Trust and the Manager. Such restrictions and
procedures include substantially all of the recommendations of the Advisory
Group of the Investment Company Institute and comply with SEC rules and
regulations.
ADVISORY AGREEMENT
The Manager serves as the manager and investment adviser of the Trust, providing
services under an Advisory Agreement. Under the Advisory Agreement, the Manager
is responsible for the management of the business affairs, investment
portfolios, and placement of brokerage orders, subject to the authority of and
supervision by the Board of Trustees.
For its services under the Advisory Agreement, the Fund pays the Manager an
annual fee which is computed as a percentage of the Fund's ANA, accrued daily
and paid monthly. The Fund's management fees are computed at three-fourths of
one percent (.75%) of ANA. For the fiscal year ended May 31, 1997, the fees paid
to the Manager, net of the reimbursement, were .61% of ANA.
OPERATING EXPENSES
For the fiscal year ended May 31, 1997, the Manager limited total annual
operating expenses to 1.25% of the Fund's ANA. The Manager reimbursed the Fund
$37,577 for expenses in excess of the limitation. The Manager has voluntarily
agreed to continue to limit the Fund's annual expenses until October 1, 1998, to
1.25% of its ANA and will reimburse the Fund for all expenses in excess of the
limitation.
PORTFOLIO TRANSACTIONS
Purchases and sales of equity securities for the Fund's portfolio may be
accomplished through USAA Brokerage Services, a discount brokerage service of
the Manager. The Board of Trustees has adopted procedures to ensure that any
commissions paid to USAA Brokerage Services are reasonable and fair.
PORTFOLIO MANAGERS
The following individuals are primarily responsible for managing the Fund.
R. David Ullom, Assistant Vice President of Equity Investments since
September 1994, is the asset allocation manager for the Fund and has managed the
Stocks investment category since September 1995. Mr. Ullom has 22 years
investment management experience and has worked for IMCO for 11 years. Mr. Ullom
earned the Chartered Financial Analyst (CFA) designation in 1980 and is a member
of the Association for Investment Management and Research (AIMR) and the San
Antonio Financial Analysts Society, Inc. (SAFAS). He holds an MBA from
Washington University, Missouri and a BS from Oklahoma State University.
23
<PAGE>
Paul H. Lundmark, Assistant Vice President of Fixed Income Investments
since December 1996, has managed the Bonds investment category since September
1995. Mr. Lundmark has 11 years investment management experience and has worked
for IMCO for five years. Mr. Lundmark earned the CFA designation in 1989 and
also is a member of AIMR and SAFAS. He holds an MBA and BSB from the University
of Minnesota.
Pamela K. Bledsoe, Executive Director of Money Market Funds since June
1995, has managed the Money Market Instruments investment category since May
1996. Ms. Bledsoe has nine years investment management experience and has worked
for IMCO for six years. Ms. Bledsoe earned the CFA designation in 1992 and is a
member of AIMR and SAFAS. She holds an MBA from Texas Christian University and a
BS from Louisiana Tech University.
DESCRIPTION OF SHARES
MASTER TRUST AGREEMENT
The Trust is an open-end management investment company established as a business
trust under the laws of the Commonwealth of Massachusetts pursuant to the First
Amended and Restated Master Trust Agreement (Master Trust Agreement) dated June
2, 1995, as amended. The Trust is authorized to issue an unlimited number of
shares of beneficial interest of separate portfolios, without par value. Eleven
such portfolios have been established, one of which is described in this
Prospectus. The Fund is classified as diversified. Under the Master Trust
Agreement, the Trustees are authorized to create new portfolios in addition to
those already existing without shareholder approval.
Under the Master Trust Agreement, no annual or regular meeting of
shareholders is required. Ordinarily, no shareholder meeting will be held unless
required by the 1940 Act. The Trustees may fill vacancies on the Board or
appoint new Trustees provided that immediately after such action at least
two-thirds of the Trustees have been elected by shareholders. Shareholders are
entitled to one vote per share (with proportionate voting for fractional shares)
irrespective of the relative net asset value of the shares. For matters
affecting an individual portfolio, a separate vote of the shareholders of that
portfolio is required. Shareholders holding an aggregate of at least 10% of the
outstanding shares of the Trust may request a meeting of shareholders at any
time for the purpose of voting to remove one or more of the Trustees, and the
Trust will assist shareholders in communicating with other shareholders in
connection with such a meeting.
Under Massachusetts law, shareholders of any portfolio could, under certain
circumstances, be held personally liable for the obligations of the Trust.
However, the Master Trust Agreement disclaims shareholder liability for acts or
obligations of the Trust and requires that notice of such disclaimer be given in
each agreement, obligation, or instrument entered into or executed by the Trust
or the Trustees. The Master Trust Agreement provides for indemnification out of
the Trust's property for all losses and expenses of any shareholder held
personally liable for the obligations of the Trust. Thus, the possibility of a
shareholder incurring financial loss on account of shareholder liability is
remote.
24
<PAGE>
SERVICE PROVIDERS
UNDERWRITER/ USAA Investment Management Company
DISTRIBUTOR 9800 Fredericksburg Rd., San Antonio, Texas 78288.
TRANSFER USAA Shareholder Account Services
AGENT 9800 Fredericksburg Rd., San Antonio, Texas 78288.
CUSTODIAN State Street Bank and Trust Company
P.O. Box 1713, Boston, Massachusetts 02105.
LEGAL Goodwin, Procter & Hoar LLP
COUNSEL Exchange Place, Boston, Massachusetts 02109.
INDEPENDENT KPMG Peat Marwick LLP
AUDITORS 112 East Pecan, Suite 2400, San Antonio, Texas 78205.
- --------------------------------------------------------------------------------
TELEPHONE ASSISTANCE
(Call toll free - Central Time)
Monday-Friday 8:00 a.m. to 8:00 p.m.
Saturday 8:30 a.m. to 5:00 p.m.
For further information on mutual funds:
1-800-531-8181
In San Antonio 456-7211
For account servicing, exchanges or redemptions:
1-800-531-8448
In San Antonio 456-7202
RECORDED 24 HOUR SERVICE
MUTUAL FUND PRICE QUOTES
(From any phone)
1-800-531-8066
In San Antonio 498-8066
MUTUAL FUND TOUCHLINE(R)
(From Touchtone phones only)
For account balance, last transaction or fund prices:
1-800-531-8777
In San Antonio 498-8777
- --------------------------------------------------------------------------------
25
<PAGE>
Part A
Prospectus for the
Cornerstone Strategy Fund
is included herein
<PAGE>
USAA CORNERSTONE STRATEGY FUND
October 1, 1997 PROSPECTUS
USAA CORNERSTONE STRATEGY FUND (the Fund) is one of eleven no-load mutual funds
offered by USAA Investment Trust (the Trust). The Fund is managed by USAA
Investment Management Company (the Manager).
WHAT IS THE INVESTMENT OBJECTIVE?
The Fund's investment objective is to achieve a positive, inflation-adjusted
rate of return and a reasonably stable value of Fund shares, thereby preserving
purchasing power of shareholders' capital. This objective is to be achieved
through an asset allocation strategy. Page 10.
HOW DO YOU BUY?
Fund shares are sold on a continuous basis at the net asset value per share
without a sales charge. Make your initial investment directly with the Manager
by mail, in person, or in certain instances, by telephone. Page 15.
HOW DO YOU SELL?
You may redeem Fund shares by mail, telephone, fax, or telegraph on any day
that the net asset value is calculated. Page 17.
This Prospectus, which should be read and retained for future reference,
provides information regarding the Trust and the Fund that you should know
before investing.
SHARES OF THE USAA CORNERSTONE STRATEGY FUND ARE NOT DEPOSITS OR OTHER
OBLIGATIONS OF, OR GUARANTEED BY, THE USAA FEDERAL SAVINGS BANK, ARE NOT INSURED
BY THE FDIC OR ANY OTHER GOVERNMENT AGENCY, ARE SUBJECT TO INVESTMENT RISKS, AND
MAY LOSE VALUE. BECAUSE THIS FUND INVESTS IN FOREIGN SECURITIES, IT INVOLVES A
HIGHER DEGREE OF RISK AND MAY NOT BE APPROPRIATE FOR SOME INVESTORS. SEE SPECIAL
RISK CONSIDERATIONS, PAGE 14.
If you would like more information about the Fund, you may call
1-800-531-8181 to request a free copy of the most recent financial report and/or
the Fund's Statement of Additional Information (SAI), dated October 1, 1997. The
SAI has been filed with the Securities and Exchange Commission (SEC) and is
incorporated by reference into this Prospectus (meaning it is legally a part of
the Prospectus).
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
Page
SUMMARY DATA
Fees and Expenses............................................. 3
Financial Highlights.......................................... 4
Performance Information....................................... 6
USING MUTUAL FUNDS
USAA Family of No-Load Mutual Funds........................... 7
Using Mutual Funds in an Asset Allocation Program............. 8
INVESTMENT PORTFOLIO INFORMATION
Investment Objective and Policies............................. 10
SHAREHOLDER INFORMATION
Purchase of Shares............................................ 15
Redemption of Shares.......................................... 17
Conditions of Purchase and Redemption......................... 18
Exchanges..................................................... 19
Other Services................................................ 20
Share Price Calculation....................................... 21
Dividends, Distributions and Taxes............................ 22
Management of the Trust....................................... 23
Description of Shares......................................... 25
Service Providers............................................. 26
Telephone Assistance Numbers.................................. 26
- --------------------------------------------------------------------------------
2
<PAGE>
FEES AND EXPENSES
The following summary, which is based on actual expenses and average net assets
(ANA) of the Fund for the year ended May 31, 1997, is provided to assist you in
understanding the expenses you will bear directly or indirectly as a Fund
investor.
Shareholder Transaction Expenses
- --------------------------------------------------------------------------------
Sales Load Imposed on Purchases............................... None
Sales Load Imposed on Reinvested Dividends.................... None
Deferred Sales Load........................................... None
Redemption Fee*............................................... None
Exchange Fee.................................................. None
Annual Fund Operating Expenses (as a percentage of ANA)
- --------------------------------------------------------------------------------
Management Fees............................................... .75%
12b-1 Fees.................................................... None
Other Expenses
Transfer Agent Fees........................................ .22%
Custodian Fees............................................. .05%
All Other Expenses......................................... .04%
---
Total Other Expenses.......................................... .31%
---
Total Fund Operating Expenses................................. 1.06%
====
- --------------------------
* A shareholder who requests delivery of redemption proceeds by wire transfer
will be subject to a $10 fee. See REDEMPTION OF SHARES - BANK WIRE.
Example of Effect of Fund Expenses
- --------------------------------------------------------------------------------
You would pay the following expenses on a $1,000 investment in the Fund,
assuming (1) 5% annual return and (2) redemption at the end of the periods
shown.
1 year - $ 11
3 years - $ 34
5 years - $ 58
10 years - $ 129
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
3
<PAGE>
FINANCIAL HIGHLIGHTS
The following financial highlights for a share outstanding throughout each of
the periods in the ten-year period ended May 31, 1997, have been audited by KPMG
Peat Marwick LLP. This table should be read in conjunction with the Fund's
financial statements for the year ended May 31, 1997, and the independent
auditors' report thereon, that appear in the Fund's Annual Report. Further
performance information is contained in the Annual Report and is available upon
request without charge.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
EIGHT-MONTH YEAR
PERIOD ENDED ENDED
YEAR ENDED MAY 31, MAY 31, SEPTEMBER 30,
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Net asset value at
beginning of period $ 25.47 $ 22.63 $ 23.24 $ 23.43 $ 19.94
Net investment income .74 .73 .68 .40 .60
Net realized and
unrealized gain (loss) 3.37 3.18 .67 .29 3.52
Distributions from net
investment income (.78) (.74) (.58) (.59) (.63)
Distributions of realized
capital gains (.84) (.33) (1.38) (.29) -
---------- ---------- -------- -------- -------
Net asset value at
end of period $ 27.96 $ 25.47 $ 22.63 $ 23.24 $ 23.43
========== ========== ======== ======== ========
Total return (%)* 16.94 17.79 6.43 3.00 21.35
Net assets at end of
period (000) $1,263,355 $1,035,844 $874,587 $814,869 $707,795
Ratio of expenses to
average net assets (%) 1.06 1.15 1.13 1.11(a) 1.18
Ratio of net investment
income to average net
assets (%) 2.88 3.06 3.16 2.68(a) 2.92
Portfolio turnover (%) 35.14 36.15 33.17 30.87 45.18
Average commission rate
paid per share ** $ .0299 $ .0039
- ----------------------
</TABLE>
* Assumes reinvestment of all dividend income and capital gain distributions
during the period.
** Calculated by aggregating all commissions paid on the purchase and sale of
securities and dividing by the actual number of shares purchased or sold
for which commissions were charged.
(a) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
4
<PAGE>
FINANCIAL HIGHLIGHTS cont.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
YEAR ENDED SEPTEMBER 30,
------------------------
1992 1991 1990 1989 1988
---- ---- ---- ---- ----
Net asset value at
beginning of period $ 18.62 $ 17.19 $ 19.31 $ 16.71 $ 19.76
Net investment income .65 .65 .63 .69 .59
Net realized and
unrealized gain (loss) 1.26 1.43 (2.04) 2.57 (3.26)
Distributions from net
investment income (.59) (.65) (.71) (.66) (.36)
Distributions of realized
capital gains - - - - (.02)
-------- -------- -------- -------- --------
Net asset value at
end of period $ 19.94 $ 18.62 $ 17.19 $ 19.31 $ 16.71
======== ======== ======== ======== ========
Total return (%)* 10.53 12.61 (7.64) 20.17 (13.39)
Net assets at end of
period (000) $567,212 $580,088 $535,308 $522,031 $544,118
Ratio of expenses to
average net assets (%) 1.18 1.18 1.21 1.21 1.21
Ratio of net investment
income to average net
assets (%) 3.25 3.58 3.50 3.57 3.54
Portfolio turnover (%) 32.71 28.02 40.89 33.19 27.78
</TABLE>
5
<PAGE>
PERFORMANCE INFORMATION
Performance information should be considered in light of the Fund's investment
objective and policies and market conditions during the time periods for which
it is reported. Historical performance should not be considered as
representative of the future performance of the Fund.
The Trust may quote the Fund's total return in advertisements and reports
to shareholders or prospective investors. The Fund's performance may also be
compared to that of other mutual funds with a similar investment objective and
to stock or relevant indexes that are referenced in APPENDIX B to the SAI.
Standard total return results reported by the Fund do not take into account
recurring and nonrecurring charges for optional services which only certain
shareholders elect and which involve nominal fees, such as the $10 fee for a
delivery of redemption proceeds by wire transfer.
The Fund's average annual total return is computed by determining the
average annual compounded rate of return for a specified period which, when
applied to a hypothetical $1,000 investment in the Fund at the beginning of the
period, would produce the redeemable value of that investment at the end of the
period, assuming reinvestment of all dividends and distributions during the
period.
Further information concerning the Fund's total return is included in the
SAI.
6
<PAGE>
USAA FAMILY OF NO-LOAD MUTUAL FUNDS
The USAA Family of No-Load Mutual Funds includes a variety of Funds, each with
different objectives and policies. In combination, these Funds are designed to
provide investors with the opportunity to formulate their own investment
program. You may exchange any shares you hold in any one USAA Fund for shares in
any other USAA Fund. For more complete information about the Funds in the USAA
Family of Funds, including charges and expenses, call the Manager for a
Prospectus. Read it carefully before you invest or send money.
USAA INVESTMENT TRUST
Income Strategy Fund
Growth and Tax Strategy Fund
Balanced Strategy Fund
Cornerstone Strategy Fund
Growth Strategy Fund
Emerging Markets Fund
Gold Fund
International Fund
World Growth Fund
GNMA Trust
Treasury Money Market Trust
USAA MUTUAL FUND, INC.
Aggressive Growth Fund
Science & Technology Fund
Growth Fund
First Start Growth Fund
S&P 500 Index Fund**
Growth & Income Fund
Income Stock Fund
Income Fund
Short-Term Bond Fund
Money Market Fund
USAA TAX EXEMPT FUND, INC.
Long-Term Fund
Intermediate-Term Fund
Short-Term Fund
Tax Exempt Money Market Fund
California Bond Fund*
California Money Market Fund*
New York Bond Fund*
New York Money Market Fund*
Virginia Bond Fund*
Virginia Money Market Fund*
USAA STATE TAX-FREE TRUST
Florida Tax-Free Income Fund*
Florida Tax-Free Money Market Fund*
Texas Tax-Free Income Fund*
Texas Tax-Free Money Market Fund*
* Offered only to residents of these specific states.
** S&P 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.
7
<PAGE>
USING MUTUAL FUNDS IN AN ASSET ALLOCATION PROGRAM
I. THE IDEA BEHIND ASSET ALLOCATION
If you have money to invest and hear that stocks may be a good investment, is it
a wise idea to use your entire savings to buy one stock? Most people wouldn't -
it would be fortunate if it works, but this strategy holds a great deal of risk.
Surprising news could be reported tomorrow on your stock, and its price could
soar or plummet.
Careful investors understand this concept of risk and lower that risk by
diversifying their holdings among a number of securities. That way bad news for
one security may be counterbalanced by good news regarding other securities. But
there is still a question of risk here. History tells us that stocks are
generally more volatile than bonds and that long-term bonds are generally more
volatile than short-term bonds. History also tells us that over many years
investments having higher risks tend to have higher returns than investments
that carry lower risks. And past performance doesn't necessarily guarantee
future results. From these observations comes the idea of asset allocation.
Asset allocation is a straightforward concept that involves dividing your
money among several different types of investments - for example, stocks, bonds
and short-term investments such as money market instruments - and keeping that
allocation until your objectives or the financial markets significantly change.
That way you're not pinning all your financial success on the fortunes of one
kind of investment. Money spread across different investment categories can help
you reduce market risk and likely will provide more stability to your total
return.
Asset allocation can work because different kinds of investments generally
follow different up-and-down cycles. With a variety of investments in your
portfolio, some are probably doing well, even when others are struggling.
II. USING ASSET ALLOCATION IN AN INVESTMENT PROGRAM
Most investors understand the concept of diversification, but asset allocation
goes beyond diversifying your portfolio; it's much more of an active process.
You must evaluate your lifestyle, finances, circumstances, long- and short-term
financial goals and tolerance for investment risk. Once you have structured your
allocation, you'll need to review it regularly since your objectives will change
over time.
III. USAA'S SERIES OF ASSET STRATEGY FUNDS
USAA's series of asset allocation funds, our Asset Strategy Funds, are designed
for the long-term investor and are in line with the Manager's investment
philosophy for its customers, specifically "don't try to time the market," and
"buy and hold for the long-term." As shown on the next page, each of USAA's
Asset Strategy Funds has its own different mix of assets and objectives.
8
<PAGE>
Fund Investment Objective Invests In
- --------------------------------------------------------------------------------
Income Seek high current return, with Bonds and stocks
Strategy reduced risk over time, through an
Fund asset allocation strategy which
emphasizes income and gives
secondary emphasis to long-term
growth of capital.
Growth and Tax Seek a conservative balance between Tax exempt bonds and
Strategy Fund income, the majority of which is tax- blue chip stocks
exempt, and the potential for long-term
growth of capital to preserve purchasing
power. This objective is to be achieved
through an asset allocation strategy.
Balanced Seek high total return, with reduced Stocks and bonds
Strategy risk over time, through an asset
Fund allocation strategy that seeks a
combination of long-term growth of
capital and current income.
Cornerstone Achieve a positive inflation-adjusted Foreign & basic value
Strategy rate of return and a reasonably stable stocks, government
Fund value of Fund shares, thereby securities, real
preserving purchasing power of estate stocks and
shareholders' capital. This objective gold stocks
is to be achieved through an asset
allocation strategy.
Growth Seek high total return, with reduced Small & large cap,
Strategy risk over time, through an asset stocks, bonds, and
Fund allocation strategy which emphasizes international stocks
capital appreciation and gives
secondary emphasis to income.
- --------------------------------------------------------------------------------
An important feature of USAA's Asset Strategy Funds is the quarterly rebalancing
of each portfolio. In this asset allocation technique, the Funds' Managers buy
or sell securities each quarter so that the investment categories of each Fund
are brought within their target ranges. For example, if a portfolio holds 75% of
its securities in stocks, 20% in bonds, and 5% in money market instruments at
the beginning of a quarter, then due to market returns holds 85% of its
securities in stocks, 10% in bonds, and 5% in money market instruments at the
end of a quarter, the Manager would rebalance the portfolio by reducing its
holdings of stocks and increasing its holdings of bonds to return the
portfolio's investments in stocks and bonds into the target ranges. See
Investment Objective and Policies - Investment Policies, Techniques and Risk
Factors for further information on the Fund's target ranges.
For more complete information about the other USAA Asset Strategy Funds,
including charges and expenses, call the Manager for a Prospectus. Read it
carefully before you invest or send money.
9
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
INVESTMENT OBJECTIVE
The Fund's investment objective is to achieve a positive, inflation-adjusted
rate of return and a reasonably stable value of Fund shares, thereby preserving
purchasing power of shareholders' capital. This objective is to be achieved
through an asset allocation strategy. Inflation is measured by the Consumer
Price Index.
The investment objective of the Fund cannot be changed without shareholder
approval. In view of the risks inherent in all investments in securities, there
is no assurance that this objective will be achieved.
The investment policies and techniques used to pursue the Fund's objective
may be changed without shareholder approval, except as otherwise noted. Further
information regarding the Fund's investment policies, restrictions and risks is
provided in the SAI.
INVESTMENT POLICIES, TECHNIQUES AND RISK FACTORS
The Fund provides a professionally managed, diversified investment program
within one mutual fund. The Manager seeks to attain the objective by allocating
the Fund's assets in each of the following investment categories within the
indicated ranges:
PERCENTAGE
TARGET RANGE
INVESTMENT CATEGORY OF NET ASSETS
Basic Value Stocks............... 22 - 28%
U.S. Government Securities....... 22 - 28%
Foreign Stocks................... 22 - 28%
Real Estate Stocks............... 22 - 28%
Gold Stocks...................... 0 - 10%
The target ranges may be revised by the Board of Trustees upon 60 days'
prior written notice to shareholders. However, the Manager reserves the right,
without shareholder notification, to revise the ranges on a temporary defensive
basis when, in its opinion, such changes are believed to be in the best interest
of the Fund and its shareholders.
The ranges allow for a variance in each investment category. Should market
action cause investment categories to move outside the ranges, the Manager will
make adjustments to rebalance the portfolio. In general, the Manager will
rebalance the portfolio at least once during each quarter to bring each category
within its range. These portfolio adjustments may cause the Fund to sell
securities in investment categories which have appreciated in value and to buy
securities in investment categories which have depreciated in value. Such
adjustments may also cause the Fund to incur a higher proportion of short-term
capital gains than a fund that does not have a similar policy.
The Basic Value Stocks category was selected to provide appreciation during
rising stock market conditions and to stabilize the value of the Fund during
adverse market conditions. The U.S. Government Securities category was selected
to provide safety of principal in periods of deflation. The Foreign Stocks
category was selected to provide the potential for appreciation during periods
of adverse economic and market conditions in the United States. The Real Estate
and Gold Stocks categories were selected to provide a positive total return
during inflationary periods.
Characteristics and associated risks of each investment category are as follows:
BASIC VALUE STOCKS - In this category, investments will consist of common
stocks, preferred stocks or securities which are convertible into or which carry
the right to buy common stocks of U.S. companies which the Manager believes are
undervalued in relation to such factors as the company's assets and current or
prospective earnings. In most cases, these securities will be listed on the New
York Stock Exchange (NYSE).
10
<PAGE>
The Basic Value Stocks category will include common stocks of companies
with one or more of the following characteristics when purchased: (1) the price
earnings ratio is lower than the price earnings ratio of the S&P 500; (2) the
price per share is lower than the book value per share; (3) the dividend yield
is higher than the dividend yield of the S&P 500; or (4) the company has assets
with a perceived market value in excess of book value. Loss of these
characteristics will not necessarily result in the sale of securities in this
investment category.
U.S. GOVERNMENT SECURITIES - In this category, investments will consist of
securities, without specific maturity requirements or limits, issued or
guaranteed as to both principal and interest by the U.S. Government or by its
agencies or instrumentalities. Examples of these securities are Treasury bills,
notes and bonds, and securities issued by the Federal Farm Credit Banks, Federal
Home Loan Mortgage Corporation, Federal National Mortgage Association, and
Government National Mortgage Association.
Within this investment category, the Fund may also invest in repurchase
agreements collateralized by securities of the U.S. Government or by its
agencies or instrumentalities.
The U.S. Government Securities investment category is intended to provide
both liquidity and interest income with limited risk. Changes in interest rates
may affect the value of investments within this category. In periods of rising
interest rates, fixed coupon securities will generally decline in market value.
To minimize such changes in value, the Manager may shorten maturities in periods
of rising interest rates, although there is no assurance that this action will
totally protect principal from erosion. Conversely, the Manager may extend
maturities in periods of declining interest rates to capitalize on the resulting
impact on principal. Foreign Stocks - In this category, investments will consist
of common stocks, preferred stocks or securities which are convertible into or
which carry the right to buy common stocks of foreign companies. A company is
deemed to be a foreign company if:
(1) it is organized under the laws of a foreign country; and either
(2) (a) the principal trading market for the stock is in a foreign country; or
(b) at least 50% of its revenues or profits are derived from operations
within a foreign country; or
(c) at least 50% of its assets are located within a foreign country.
The Manager believes that international diversification may have a
balancing impact with regard to investments in the United States. For a
discussion of the risks associated with investments in foreign issuers, see
Special Risk Considerations.
REAL ESTATE STOCKS - In this category, investments will consist of common
stocks, preferred stocks or securities which are convertible into or which carry
the right to buy common stocks of real estate investment trusts (REITs) and U.S.
companies which operate as real estate corporations or which have a significant
portion of their assets in real estate. The Manager will evaluate the nature of
a company's real estate holdings in determining whether the Fund's investment in
the company's common stock will be included in this category. The Fund's
investments in REITs may subject the Fund to many of the same risks associated
with the direct ownership of real estate. In addition, REITs are dependent upon
the capabilities of the REIT manager(s) and have limited diversification. The
Fund will not acquire any direct ownership of real estate.
The Manager believes that diversified investments linked to real estate are
a good hedge during an inflationary environment.
11
<PAGE>
GOLD STOCKS - In this category, at least 80% of the investments will consist of
common stocks, preferred stocks or securities which are convertible into or
which carry the right to buy common stocks of companies principally engaged in
gold exploration, mining, or processing. The remaining investments in this
category will consist of common stocks, preferred stocks or securities which are
convertible into or which carry the right to buy common stocks of companies
similarly engaged in other precious metals and minerals. Gold stocks have been
selected for their perceived potential to increase in value during inflationary
periods. For a discussion of risks associated with investments in this category,
see Special Risk Considerations.
FORWARD CURRENCY CONTRACTS - The Fund may hold securities denominated in foreign
currencies. As a result, the value of the securities will be affected by changes
in the exchange rate between the dollar and foreign currencies. In managing the
currency exposure, the Fund 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.
The Fund may enter into forward currency contracts under two circumstances.
First, when the 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. Second, when management of the 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. The Fund may not
hedge with respect to a particular currency for an amount greater than the
aggregate market value (determined at the time of making any sale of forward
currency) of the securities held in its portfolio denominated or quoted in, or
bearing a substantial correlation to, such currency.
The use of forward currency contracts to protect the value of the Fund's
assets against a decline in the value of a currency does not eliminate
fluctuations in the value of the Fund's underlying security holdings. In
addition, although the use of forward currency contracts can minimize the risk
of loss due to a decline in value of the foreign currency, the use of such
contracts will tend to limit any potential gain resulting from an increase in
the relative value of the foreign currency to the U.S. dollar. Under certain
circumstances, a fund that has entered into forward currency contracts to hedge
its currency risks may be in a less favorable position than a fund that had not
entered into such contracts. The projection of short-term currency market
movements is extremely difficult and successful execution of a short-term
hedging strategy is highly uncertain.
REPURCHASE AGREEMENTS - The Fund may invest in repurchase agreements which are
collateralized by obligations backed by the full faith and credit of the U.S.
Government or by its agencies or instrumentalities. A repurchase agreement is a
transaction in which a security is purchased with a simultaneous commitment to
sell the security back to the seller (a commercial bank or recognized securities
dealer) at an agreed upon price on an agreed upon date, 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 the 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
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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.
WHEN-ISSUED SECURITIES - The Fund may invest in new issues of debt securities
offered on a when-issued basis; that is, 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.
Cash or high quality liquid debt securities equal to the amount of the
when-issued commitments are segregated at the Fund's custodian bank. The
segregated securities are valued at market, and daily adjustments are made to
keep the value of the cash and segregated securities at least equal to the
amount of such commitments by the Fund. On the settlement date, the Fund will
meet its obligations from then available cash, sale of segregated securities,
sale of other securities, or sale of the when-issued securities themselves.
VARIABLE RATE SECURITIES - The Fund may invest in securities that bear interest
at rates which are adjusted periodically to market rates. These interest rate
adjustments can both raise and lower the income generated by such securities.
These changes will have the same effect on the income earned by the Fund
depending on the proportion of such securities held.
The market value of fixed coupon securities fluctuates with changes in
prevailing interest rates, increasing in value when interest rates decline and
decreasing in value when interest rates rise. The value of variable rate
securities, however, is less affected by changes in prevailing interest rates
because of the periodic adjustment of their coupons to a market rate. The
shorter the period between adjustments, the smaller the impact of interest rate
fluctuations on the value of these securities. The market value of variable rate
securities usually tends toward par (100% of face value) at interest rate
adjustment time.
LIQUIDITY - The Fund may not invest more than 15% of the market value of its
total assets in securities which are illiquid or not readily marketable. Rule
144A Securities may be determined to be liquid in accordance with guidelines
established by the Board of Trustees.
INVESTMENT RESTRICTIONS
The following restrictions may not be changed without shareholder approval:
(1) The Fund may not invest more than 25% of its total assets in one industry.
The Foreign Stocks, U.S. Government Securities, and Basic Value Stocks
investment categories are not considered industries for this purpose.
(2) The Fund may not, 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 Investment Company Act of 1940, as amended (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.
(3) The Fund may not 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).
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SPECIAL RISK CONSIDERATIONS
INVESTMENT IN FOREIGN SECURITIES - The Fund may purchase foreign securities in
foreign or U.S. markets or it may purchase American Depositary Receipts (ADRs),
Global Depositary Receipts (GDRs), or similar forms of ownership interest in
securities of foreign issuers deposited with a depositary. Investing in foreign
securities presents certain risks not present in domestic investments. Such
risks may include currency exchange rate fluctuations; foreign market
illiquidity; increased price volatility; exchange control regulations; different
accounting, reporting, and disclosure requirements; political or social
instability; and difficulties in obtaining judgments or effecting collections
thereon. Brokerage commissions and custodial services may be more costly, and
stock trade settlements may be more lengthy, more costly and more difficult than
in domestic markets. These investments may be subject to foreign withholding
taxes which may reduce the effective rates of return. The Fund values its
securities and other assets in U.S. dollars.
Information which may impact the market value of securities of a foreign
issuer may not be available to the Manager on a timely basis. The Manager will
endeavor to ascertain such information on as timely a basis as is practicable,
however, any impact on the net asset value will be deemed to have occurred upon
authentication by the Manager.
A developing country can be considered to be a country which is in the
initial stages of its industrialization cycle. Investments in developing
countries involve exposure to economic structures that are generally less
diverse and mature than in the United States, and to political systems which may
be less stable. Due to illiquidity and lack of hedging instruments, it is
presently difficult or in some cases impossible to hedge the currency risk in
these markets. In the past, markets of developing countries have been more
volatile than the markets of developed countries.
Political risk includes a greater potential for coup d'etats, insurrections
and expropriation by governmental organizations. For example, the Fund may
invest in Eastern Europe and former states of the Soviet Union (also known as
the CIS or the Commonwealth of Independent States). These countries were under
communist systems which had nationalized private industry. There is no guarantee
that nationalization may not occur again in this region or others in which the
Fund invests, in which case the Fund may lose all or part of its investment in
that country's issuers.
VOLATILITY OF MINING STOCKS - Gold mining stocks involve additional risk because
of gold's price volatility and the increased impact such volatility has on the
profitability of gold mining companies. However, since the market action of such
securities has tended to move independently of the broader financial markets,
the addition of gold mining stocks to an investor's portfolio may reduce overall
fluctuations in portfolio value.
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PURCHASE OF SHARES
OPENING AN ACCOUNT
You may open an account and make an investment by any of the following methods.
A complete, signed application is required together with a check for each new
account.
TAX ID NUMBER
We require that each shareholder named on the account provide the Trust with a
social security number or tax identification number to avoid possible tax
withholding requirements.
EFFECTIVE DATE
When you make a purchase, your purchase price will be the net asset value (NAV)
per share next determined after the Fund receives your request in proper form.
The NAV of the Fund is determined at the close of the regular trading session of
the NYSE each day the NYSE is open. If the Fund receives your request prior to
that time, your purchase price will be the NAV per share determined for that
day. If the Fund receives your request after the NAV per share is calculated,
the purchase will be effective on the next business day.
Because of the more lengthy clearing process and the need to convert
foreign currency, a check drawn on a foreign bank will not be deemed received
for the purchase of shares until such time as the check has cleared and the
Manager has received good funds, which may take up to four to six weeks.
Furthermore, a bank charge may be assessed in the clearing process, which will
be deducted from the amount of the purchase. To avoid a delay in the effective
date of your purchase, the Manager suggests that you convert your foreign check
to U.S. dollars prior to investment in the Fund.
PURCHASE OF SHARES
MINIMUM INVESTMENTS
Initial Purchase: $3,000 [$500 for Uniform Gifts/Transfers to Minors Act
(UGMA/UTMA) accounts and $250 for IRAs] or no initial
investment if you elect to have monthly electronic
investments of at least $50 each.
Additional Purchases: $50
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HOW TO PURCHASE:
MAIL o To open an account, send your application and check to:
USAA Investment Management Company
9800 Fredericksburg Rd., San Antonio, TX 78288
o To add to your account, send your check and the "Invest by
Mail" stub that accompanies your fund's transaction
confirmation to the Transfer Agent:
USAA Shareholder Account Services
9800 Fredericksburg Rd., San Antonio, TX 78288
IN PERSON o To open an account, bring your application and check to:
USAA Investment Management Company
USAA Federal Savings Bank
10750 Robert F. McDermott Freeway, San Antonio
AUTOMATICALLY o Additional purchases on a regular basis can be deducted from a
VIA bank account, paycheck, income-producing investment or from a
ELECTRONIC USAA money market account. Sign up for these services when
FUNDS opening an account or call 1-800-531-8448 to add these
TRANSFER (EFT) services.
o Purchases through payroll deduction ($25 minimum each pay period
with no initial investment) can be made by any employee of USAA
or any of its affiliated companies.
BANK WIRE o To add to an 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 Cornerstone Strategy Fund
USAA AC-69384998
Shareholder(s) Name(s)_________________
Shareholder(s) Account Number___________________
PHONE o If you have an existing USAA account and would like to open a
1-800-531-8448 new account or if you would like to 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.
o To add to an account, intermittent (as-needed) purchases can be
deducted from your bank account through our Buy/Sell Service.
Call for instructions.
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REDEMPTION OF SHARES
You may redeem shares of the Fund by any of the following methods on any day the
NAV per share is calculated. Redemptions will be effective on the day
instructions are received in accordance with the requirements set forth below.
However, if instructions are received after the NAV per share calculation,
redemption will be effective on the next business day.
REDEMPTION PROCEEDS
Redemption proceeds are distributed within seven days after the effective date
of redemption. Payment for redemption of shares purchased by check or electronic
funds transfer will not be disbursed until the purchase check or electronic
funds transfer has cleared, which could take up to 15 days from the purchase
date. If you are considering redeeming shares soon after purchase, you should
purchase by bank wire or certified check to avoid delay.
In addition, the Trust may elect to suspend the redemption of shares or
postpone the date of payment during any period that the NYSE is closed, or
trading in the markets the Trust normally utilizes is restricted, or during any
period that redemption is otherwise permitted to be suspended by the SEC.
HOW TO REDEEM:
WRITTEN, o Send your written instructions to:
FAX, OR USAA Shareholder Account Services
TELEGRAPH 9800 Fredericksburg Rd., San Antonio, TX 78288
o Send a signed fax to 1-800-292-8177, or send a telegraph to
USAA Shareholder Account Services.
Written redemption requests must include the following: (1) a letter of
instruction or stock assignment, and stock certificate (if issued), specifying
the Fund and the number of shares or dollar amount to be redeemed; (2)
signatures of all owners of the shares exactly as their names appear on the
account; (3) other supporting legal documents, if required, as in the case of
estates, trusts, guardianships, custodianships, partnerships, corporations, and
pension and profit-sharing plans; and (4) method of payment.
PHONE o Call toll free 1-800-531-8448, in San Antonio, 456-7202.
Telephone redemption is automatically established when you complete your
application. The Fund will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine; and if it does not, it may
be liable for any losses due to unauthorized or fraudulent instructions.
Information is obtained prior to any discussion regarding an account including:
(1) USAA number or account number, (2) the name(s) on the account registration,
and (3) social security number or tax identification number for the account
registration. In addition, all telephone communications with a shareholder are
recorded, and confirmations of all account transactions are sent to the address
of record.
Redemption by telephone, fax, or telegraph is not available for shares
represented by stock certificates.
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METHODS OF PAYMENT:
BANK WIRE o Allows redemptions to be sent directly to your bank account.
Establish this service when you apply for your account, or later upon
request. Please obtain precise wiring instructions from your financial
institution. USAA Shareholder Account Services (Transfer Agent) deducts a wire
fee from the account for the redemption by wire. The fee as of the date of this
Prospectus is $10 ($25 for wires to a foreign bank) and is subject to change at
any time. The fee is paid to State Street Bank and Trust Company and the
Transfer Agent for their services in connection with the wire redemption. Your
financial institution may also charge a fee for receiving funds by wire.
AUTOMATICALLY o Systematic (regular) or intermittent (as-needed) redemptions can
VIA EFT be credited to your bank account.
Establish any of our electronic investing services when you apply for your
account, or later upon request.
CHECK o A check payable to the registered shareholder(s) will be mailed
REDEMPTION to the address of record.
This check redemption privilege is automatically established when your
application is completed and accepted. There is a 15-day waiting period before a
check redemption can be processed following a telephone address change. Should
you wish to redeem shares within the 15 days following a telephone address
change, you may do so by providing written instructions by mail or facsimile.
CONDITIONS OF PURCHASE AND REDEMPTION
NONPAYMENT
If any order to purchase shares is cancelled due to nonpayment or if the Trust
does not receive good funds either by check or electronic funds transfer, the
Transfer Agent will treat the cancellation as a redemption of shares purchased,
and you will be responsible for any resulting loss incurred by the Fund or the
Manager. If you are a shareholder, the Transfer Agent can redeem shares from any
of your account(s) as reimbursement for all losses. In addition, you may be
prohibited or restricted from making future purchases in any of the USAA Family
of Funds. A $15 fee is charged for all returned items, including checks and
electronic funds transfers.
TRANSFER OF SHARES
You may transfer Fund shares to another person by sending written instructions
to the Transfer Agent. The account must be clearly identified, and you must
include the number of shares to be transferred, the signatures of all registered
owners, and all stock certificates, if any, which are the subject of transfer.
You also need to send written instructions signed by all registered owners and
supporting documents to change an account registration due to events such as
divorce, marriage, or death. If a new account needs to be established, you must
complete and return an application to the Transfer Agent.
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ACCOUNT BALANCE
Beginning in September 1998, and occurring each September thereafter, the
Transfer Agent will assess a small balance account fee of $12 to each
shareholder account with a balance, at the time of assessment, of less than
$2,000. The fee will be used to reduce total transfer agency fees paid by the
Fund to the Transfer Agent. 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 or 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).
TRUST RIGHTS
The Trust reserves the right to:
(1) reject purchase or exchange orders when in the best interest of the Trust;
(2) limit or discontinue the offering of shares of any portfolio of the Trust
without notice to the shareholders;
(3) require a signature guarantee for purchases, redemptions, or changes in
account information in those instances where the appropriateness of a
signature authorization is in question. The section ADDITIONAL INFORMATION
REGARDING REDEMPTION OF SHARES in the SAI contains information on
acceptable guarantors;
(4) redeem an account with less than $900, subject to certain limitations
described in ADDITIONAL INFORMATION REGARDING REDEMPTION OF SHARES in the
SAI.
EXCHANGES
EXCHANGE PRIVILEGE
The Exchange Privilege is automatically established 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 that the
shares to be acquired are offered in your state of residence. Exchange
redemptions and purchases will be processed simultaneously at the share prices
next determined after the exchange order is received. For federal income tax
purposes, an exchange between Funds is a taxable event. Accordingly, when
exchanging shares, you may realize a capital gain or loss.
The Fund has undertaken certain procedures regarding telephone
transactions. See REDEMPTION OF SHARES - PHONE.
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. Exchanges out of
any Fund in the USAA Family of Funds are limited for each account to six per
calendar year except that 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.
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OTHER SERVICES
INVESTMENT PLANS
AUTOMATIC INVESTMENT PLANS - You may establish an automatic investment plan by
completing the appropriate forms, if any. 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. Call the Manager to obtain instructions. More information about
these preauthorized plans is contained in the SAI.
o INVESTART(R) - A no initial investment purchase plan. With this plan the
regular minimum initial investment amount is waived if you make subsequent
monthly additions of at least $50 through electronic funds transfer from a
checking or savings account. The Manager may periodically offer programs that
reduce the minimum amounts for monthly electronic investments.
o 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.
o DIRECT PURCHASE SERVICE - The periodic purchase of shares through electronic
funds transfer from an employer (including government allotments), an
income-producing investment, or an account with a participating financial
institution.
o 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.
o BUY/SELL SERVICE - The intermittent purchase or redemption of shares through
electronic funds transfer to or from a checking or savings account.
o SYSTEMATIC WITHDRAWAL PLAN - The periodic redemption of shares from one of
your accounts permitting you to receive a fixed amount of money monthly or
quarterly.
o RETIREMENT PLANS - Plans are available for various forms of IRAs and for
403(b)(7) accounts. Federal taxes on current income may be deferred if an
investor qualifies.
o 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.
SHAREHOLDER STATEMENTS AND REPORTS
You will receive a confirmation after each transaction in your account except:
(1) a payment you make under the InveStart(R), InvesTronic(R), Automatic
Purchase Plan, or Direct Purchase Service investment plans; or
(2) a redemption you make under the Systematic Withdrawal Plan.
At the end of each quarter, you will receive a consolidated statement for
all of your mutual fund accounts, regardless of account activity. The fourth
quarter consolidated statement will reflect all account activity for the prior
tax year. There will be a $10 fee charged for copies of historical statements
for other than the prior tax year for any one account. You will receive the
Fund's financial statements with
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a summary of its investments and performance at least semiannually.
In an effort to reduce expenses and respond to shareholders' requests to
reduce mail, the Trust intends to consolidate mailings of Annual and Semiannual
Reports to households having multiple accounts with the same address of record.
One copy of each report will be furnished to that address. You may request
additional reports by notifying the Trust.
TELEPHONE ASSISTANCE
Call our telephone assistance numbers for specific forms, a copy of the SAI, the
most recent Annual Report and/or Semiannual Report, or if you have any questions
concerning any of the services offered.
SHARE PRICE CALCULATION
The price at which shares of the Fund are purchased and redeemed by shareholders
is equal to the NAV per share determined on the effective date of the purchase
or redemption.
WHEN
The NAV per share for the Fund is calculated at the close of the regular trading
session of the NYSE, which is usually 4:00 p.m. Eastern time. You may buy and
sell Fund shares at the NAV per share without a sales charge.
HOW
The NAV per share is calculated by adding the value of all securities and other
assets in the Fund, deducting liabilities, and dividing by the number of shares
outstanding. Portfolio securities, except as otherwise noted, traded primarily
on a domestic securities exchange are valued at the last sales price on that
exchange. Portfolio securities traded primarily on foreign securities exchanges
are 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 Board of Trustees. Securities which cannot be valued by
the methods set forth above, and all other assets, are valued in good faith at
fair value using methods determined by the Manager under the general supervision
of the Board of Trustees.
For additional information, see VALUATION OF SECURITIES in the SAI.
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DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
Net investment income will be distributed to shareholders annually. Net capital
gains, if any, generally will be distributed at least annually. The Fund intends
to make such additional distributions as may be necessary to avoid the
imposition of any federal income or excise tax.
All income dividends and capital gain distributions are automatically
reinvested, unless the shareholder specifies otherwise. The share price will be
the net asset value of the Fund shares computed on the ex-dividend date. Any
income dividend or capital gain distributions paid by the Fund will reduce the
NAV per share by the amount of the dividend or distribution. An investor should
consider carefully the effects of purchasing shares of the Fund shortly before
any dividend or distribution. Although in effect a return of capital, these
distributions are subject to taxes.
Any dividend or distribution payment returned to the Manager as not
deliverable will be invested in the shareholder's Fund account at the
then-current NAV per share. If any check for the payment of dividends or
distributions is not cashed within six months from the date on the check, it
becomes void. The amount of the check will then be invested in the shareholder's
Fund account at the then-current NAV per share.
FEDERAL TAXES
The following discussion relates only to generally applicable federal income tax
provisions in effect as of the date of this Prospectus. Note that the recently
enacted Taxpayer Relief Act of 1997 and regulations that will likely be created
to implement the Act may affect the status and treatment of certain
distributions shareholders receive from the Fund. Shareholders are urged to
consult their own tax advisers about the status of distributions from the Fund
in their own states and localities.
FUND - The Fund intends to qualify as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended (the Code). By
complying with the applicable provisions of the Code, the Fund will not be
subject to federal income tax on its net investment income and net capital gains
(capital gains in excess of capital losses) distributed to shareholders.
SHAREHOLDER - Dividends from taxable net investment income and distributions of
net short-term capital gains are taxable to shareholders as ordinary income,
whether received in cash or reinvested in additional shares. A portion of these
dividends may qualify for the 70% dividends received deduction available to
corporations.
Distributions of net long-term capital gains are taxable as long-term
capital gains whether received in cash or reinvested in additional shares, and
regardless of the length of time the investor has held the shares of the Fund.
Redemptions, including exchanges, are subject to income tax, based on the
difference between the cost of shares when purchased and the price received upon
redemption or exchange.
WITHHOLDING - The Fund is required by federal law 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, who underreports
dividend or interest income, or who fails to certify that he 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 Transfer Agent, that your
tax identification number is correct and that you are not currently subject to
backup withholding.
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REPORTING - Information concerning the status of dividends and distributions for
federal income tax purposes will be mailed to shareholders annually.
MANAGEMENT OF THE TRUST
The business affairs of the Trust are subject to the supervision of the Board of
Trustees.
The Manager, USAA Investment Management Company (IMCO), was organized in
May 1970 and is an affiliate of United Services Automobile Association (USAA), a
large diversified financial services institution. As of the date of this
Prospectus, the Manager had approximately $36 billion in total assets under
management. The Manager's mailing address is 9800 Fredericksburg Rd., San
Antonio, TX 78288.
Officers and employees of the Manager are permitted to engage in personal
securities transactions subject to restrictions and procedures set forth in the
Joint Code of Ethics adopted by the Trust and the Manager. Such restrictions and
procedures include substantially all of the recommendations of the Advisory
Group of the Investment Company Institute and comply with SEC rules and
regulations.
ADVISORY AGREEMENT
The Manager serves as the manager and investment adviser of the Trust,
providing services under an Advisory Agreement. Under the Advisory Agreement,
the Manager is responsible for the management of the business affairs,
investment portfolios, and placement of brokerage orders, subject to the
authority of and supervision by the Board of Trustees.
For its services under the Advisory Agreement, the Fund pays the Manager an
annual fee which is computed as a percentage of the Fund's ANA, accrued daily
and paid monthly. The Fund's management fees were computed and paid at
three-fourths of one percent (.75%) of ANA for the fiscal year ended May 31,
1997.
OPERATING EXPENSES
For the fiscal year ended May 31, 1997, the total operating expenses for the
Fund as a percentage of the Fund's ANA equaled 1.06%.
PORTFOLIO TRANSACTIONS
Purchases and sales of equity securities for the Fund's portfolio may be
accomplished through USAA Brokerage Services, a discount brokerage service of
the Manager. The Board of Trustees has adopted procedures to ensure that any
commissions paid to USAA Brokerage Services are reasonable and fair.
PORTFOLIO MANAGERS
The following individuals are primarily responsible for managing the Fund.
Harry W. Miller, Senior Vice President of Equity Investments since October
1987, is the asset allocation manager for the Fund. He has been the portfolio
manager for the Basic Value Stocks investment category since February 1995. Mr.
Miller has 40 years of experience in investment management and has worked for
IMCO for 23 years. Mr. Miller earned the Chartered Financial Analyst (CFA)
designation in 1968 and is a member of the Association for Investment Management
and Research (AIMR) and the San Antonio Financial Analysts Society, Inc.
(SAFAS). He holds an MBA from the University of Southern California and a BS
from Rider University, New Jersey.
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John W. Saunders, Jr., Senior Vice President of Fixed Income Investments
since October 1985, has managed the U.S. Government Securities investment
category since October 1985. Mr. Saunders has 28 years investment management
experience and has worked for IMCO for 27 years. Mr. Saunders earned the CFA
designation in 1976 and is a member of AIMR and SAFAS. He holds a BS from
Portland State University, Oregon.
David G. Peebles, Vice President of Equity Investments since February 1988,
has managed or co-managed the Foreign Stocks investment category since December
1994. He has 31 years investment management experience and has worked for IMCO
13 years. Mr. Peebles earned the CFA designation in 1971 and is a member of
AIMR, SAFAS and the International Society of Financial Analysts (ISFA). He holds
an MBA and BS from Texas Christian University.
Albert C. Sebastian and W. Travis Selmier, II, co-manage the Foreign Stocks
investment category with Mr. Peebles. Mr. Peebles coordinates the activities of
the managers.
Albert C. Sebastian, Assistant Vice President of Equity Investments since
September 1996, has co-managed the Foreign Stocks investment category since
October 1996. He has 13 years investment management experience and has worked
for IMCO for six years. Mr. Sebastian earned the CFA designation in 1989 and is
a member of AIMR, SAFAS and ISFA. He holds an MBA from the University of
Michigan and a BA from Holy Cross College, Massachusetts.
W. Travis Selmier, II, Assistant Vice President of Equity Investments since
September 1996, has co-managed the Foreign Stocks investment category since
October 1996. He has 10 years investment management experience and has worked
for IMCO for six years. Mr. Selmier earned the CFA designation in 1990 and is a
member of AIMR, SAFAS and ISFA. He holds an MBA from Indiana University, a
Certificate of Proficiency from Sophia University Japanese Language Institute,
Japan, and a BA from the University of California at Santa Barbara.
Mark W. Johnson, Assistant Vice President of Equity Investments since March
1995, has managed the Gold Stocks and Real Estate Stocks investment categories
since January 1994. He has 23 years investment management experience and has
worked for IMCO for nine years. Mr. Johnson earned the CFA designation in 1978
and is a member of AIMR and SAFAS. He holds an MBA and a BBA from the University
of Michigan.
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DESCRIPTION OF SHARES
MASTER TRUST AGREEMENT
The Trust is an open-end management investment company established as a business
trust under the laws of the Commonwealth of Massachusetts pursuant to the First
Amended and Restated Master Trust Agreement (Master Trust Agreement) dated June
2, 1995, as amended. The Trust is authorized to issue an unlimited number of
shares of beneficial interest of separate portfolios, without par value. Eleven
such portfolios have been established, one of which is described in this
Prospectus. The Fund is classified as diversified. Under the Master Trust
Agreement, the Trustees are authorized to create new portfolios in addition to
those already existing without shareholder approval.
Under the Master Trust Agreement, no annual or regular meeting of
shareholders is required. Ordinarily, no shareholder meeting will be held unless
required by the 1940 Act. The Trustees may fill vacancies on the Board or
appoint new Trustees provided that immediately after such action at least
two-thirds of the Trustees have been elected by shareholders. Shareholders are
entitled to one vote per share (with proportionate voting for fractional shares)
irrespective of the relative net asset value of the shares. For matters
affecting an individual portfolio, a separate vote of the shareholders of that
portfolio is required. Shareholders holding an aggregate of at least 10% of the
outstanding shares of the Trust may request a meeting of shareholders at any
time for the purpose of voting to remove one or more of the Trustees, and the
Trust will assist shareholders in communicating with other shareholders in
connection with such a meeting.
Under Massachusetts law, shareholders of any portfolio could, under certain
circumstances, be held personally liable for the obligations of the Trust.
However, the Master Trust Agreement disclaims shareholder liability for acts or
obligations of the Trust and requires that notice of such disclaimer be given in
each agreement, obligation, or instrument entered into or executed by the Trust
or the Trustees. The Master Trust Agreement provides for indemnification out of
the Trust's property for all losses and expenses of any shareholder held
personally liable for the obligations of the Trust. Thus, the possibility of a
shareholder incurring financial loss on account of shareholder liability is
remote.
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SERVICE PROVIDERS
UNDERWRITER/ USAA Investment Management Company
DISTRIBUTOR 9800 Fredericksburg Rd., San Antonio, Texas 78288.
TRANSFER USAA Shareholder Account Services
AGENT 9800 Fredericksburg Rd., San Antonio, Texas 78288.
CUSTODIAN State Street Bank and Trust Company
P.O. Box 1713, Boston, Massachusetts 02105.
LEGAL Goodwin, Procter & Hoar LLP
COUNSEL Exchange Place, Boston, Massachusetts 02109.
INDEPENDENT KPMG Peat Marwick LLP
AUDITORS 112 East Pecan, Suite 2400, San Antonio, Texas 78205.
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TELEPHONE ASSISTANCE
(Call toll free - Central Time)
Monday-Friday 8:00 a.m. to 8:00 p.m.
Saturday 8:30 a.m. to 5:00 p.m.
For further information on mutual funds:
1-800-531-8181
In San Antonio 456-7211
For account servicing, exchanges or redemptions:
1-800-531-8448
In San Antonio 456-7202
RECORDED 24 HOUR SERVICE
MUTUAL FUND PRICE QUOTES
(From any phone)
1-800-531-8066
In San Antonio 498-8066
MUTUAL FUND TOUCHLINE(R)
(From Touchtone phones only)
For account balance, last transaction or fund prices:
1-800-531-8777
In San Antonio 498-8777
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Part A
Prospectus for the
Growth Strategy Fund
is included herein
<PAGE>
USAA GROWTH STRATEGY FUND
October 1, 1997 PROSPECTUS
USAA GROWTH STRATEGY FUND (the Fund) is one of eleven no-load mutual funds
offered by USAA Investment Trust (the Trust). The Fund is managed by USAA
Investment Management Company (the Manager).
WHAT IS THE INVESTMENT OBJECTIVE?
The Fund's investment objective is to seek high total return, with reduced risk
over time, through an asset allocation strategy which emphasizes capital
appreciation and gives secondary emphasis to income. Page 9.
HOW DO YOU BUY?
Fund shares are sold on a continuous basis at the net asset value per share
without a sales charge. Make your initial investment directly with the Manager
by mail, in person, or in certain instances, by telephone. Page 16.
HOW DO YOU SELL?
You may redeem Fund shares by mail, telephone, fax, or telegraph on any day
that the net asset value is calculated. Page 18.
This Prospectus, which should be read and retained for future reference,
provides information regarding the Trust and the Fund that you should know
before investing.
SHARES OF THE USAA GROWTH STRATEGY FUND ARE NOT DEPOSITS OR OTHER
OBLIGATIONS OF, OR GUARANTEED BY, THE USAA FEDERAL SAVINGS BANK, ARE NOT INSURED
BY THE FDIC OR ANY OTHER GOVERNMENT AGENCY, ARE SUBJECT TO INVESTMENT RISKS, AND
MAY LOSE VALUE. BECAUSE THIS FUND INVESTS IN FOREIGN SECURITIES, IT INVOLVES A
HIGHER DEGREE OF RISK AND MAY NOT BE APPROPRIATE FOR SOME INVESTORS. SEE SPECIAL
RISK CONSIDERATIONS, PAGE 15.
If you would like more information about the Fund, you may call 1-800-531-8181
to request a free copy of the most recent financial report and/or the Fund's
Statement of Additional Information (SAI), dated October 1, 1997. The SAI has
been filed with the Securities and Exchange Commission (SEC) and is incorporated
by reference into this Prospectus (meaning it is legally a part of the
Prospectus).
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
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TABLE OF CONTENTS
Page
SUMMARY DATA
Fees and Expenses............................................. 3
Financial Highlights.......................................... 4
Performance Information....................................... 5
USING MUTUAL FUNDS
USAA Family of No-Load Mutual Funds........................... 6
Using Mutual Funds in an Asset Allocation Program............. 7
INVESTMENT PORTFOLIO INFORMATION
Investment Objective and Policies............................. 9
SHAREHOLDER INFORMATION
Purchase of Shares............................................ 16
Redemption of Shares.......................................... 18
Conditions of Purchase and Redemption......................... 19
Exchanges..................................................... 20
Other Services................................................ 21
Share Price Calculation....................................... 22
Dividends, Distributions and Taxes............................ 23
Management of the Trust....................................... 24
Description of Shares......................................... 26
Service Providers............................................. 27
Telephone Assistance Numbers.................................. 27
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2
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FEES AND EXPENSES
The following summary, which is based on actual expenses and average net assets
(ANA) of the Fund for the year ended May 31, 1997, is provided to assist you in
understanding the expenses you will bear directly or indirectly as a Fund
investor.
Shareholder Transaction Expenses
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Sales Load Imposed on Purchases............................. None
Sales Load Imposed on Reinvested Dividends.................. None
Deferred Sales Load......................................... None
Redemption Fee*............................................. None
Exchange Fee................................................ None
Annual Fund Operating Expenses (as a percentage of ANA)
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Management Fees............................................. .75%
12b-1 Fees.................................................. None
Other Expenses
Transfer Agent Fees..................................... .30%
Custodian Fees.......................................... .17%
All Other Expenses...................................... .09%
---
Total Other Expenses........................................ .56%
---
Total Fund Operating Expenses............................... 1.31%
====
- --------------------------
* A shareholder who requests delivery of redemption proceeds by wire transfer
will be subject to a $10 fee. See REDEMPTION OF SHARES - BANK WIRE.
Example of Effect of Fund Expenses
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You would pay the following expenses on a $1,000 investment in the Fund,
assuming (1) 5% annual return and (2) redemption at the end of the periods
shown.
1 year - $ 13
3 years - $ 42
5 years - $ 72
10 years - $ 158
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
3
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FINANCIAL HIGHLIGHTS
The following financial highlights for a share outstanding throughout each of
the periods in the two-year period ended May 31, 1997, have been audited by KPMG
Peat Marwick LLP. This table should be read in conjunction with the Fund's
financial statements for the year ended May 31, 1997, and the independent
auditors' report thereon, that appear in the Fund's Annual Report. Further
performance information is contained in the Annual Report and is available upon
request without charge.
YEAR ENDED NINE-MONTH
MAY 31, PERIOD ENDED
1997 MAY 31, 1996*
---- -------------
Net asset value at
beginning of period $ 12.74 $ 10.00
Net investment income .15 .11(b)
Net realized and
unrealized gain .77 2.66
Distributions from net
investment income (.12) (.03)
Distributions of realized
capital gains (.44) -
------- -------
Net asset value at
end of period $ 13.10 $ 12.74
======== =======
Total return (%)** 7.73 27.76
Net assets at end of
period (000) $193,921 $87,188
Ratio of expenses to
average net assets (%) 1.31 1.66(a)
Ratio of net investment
income to average net
assets (%) 1.46 1.34(a)
Portfolio turnover (%) 62.50 40.21
Average commission rate
paid per share *** $ .0197 $ .0072
- ------------------------
* Fund commenced operations September 1, 1995.
** Assumes reinvestment of all dividend income and capital gain
distributions during the period.
*** Calculated by aggregating all commissions paid on the purchase and sale
of securities and dividing by the actual number of shares purchased or
sold for which commissions were charged.
(a) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
(b) Calculated using weighted average shares.
4
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PERFORMANCE INFORMATION
Performance information should be considered in light of the Fund's investment
objective and policies and market conditions during the time periods for which
it is reported. Historical performance should not be considered as
representative of the future performance of the Fund.
The Trust may quote the Fund's total return in advertisements and reports
to shareholders or prospective investors. The Fund's performance may also be
compared to that of other mutual funds with a similar investment objective and
to stock or relevant indexes that are referenced in Appendix B to the SAI.
Standard total return results reported by the Fund do not take into account
recurring and nonrecurring charges for optional services which only certain
shareholders elect and which involve nominal fees, such as the $10 fee for a
delivery of redemption proceeds by wire transfer.
The Fund's average annual total return is computed by determining the
average annual compounded rate of return for a specified period which, when
applied to a hypothetical $1,000 investment in the Fund at the beginning of the
period, would produce the redeemable value of that investment at the end of the
period, assuming reinvestment of all dividends and distributions during the
period.
Further information concerning the Fund's total return is included in the
SAI.
5
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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 investors with the opportunity to formulate their own investment
program. You may exchange any shares you hold in any one USAA Fund for shares in
any other USAA Fund. For more complete information about the Funds in the USAA
Family of Funds, including charges and expenses, call the Manager for a
Prospectus. Read it carefully before you invest or send money.
USAA INVESTMENT TRUST
Income Strategy Fund
Growth and Tax Strategy Fund
Balanced Strategy Fund
Cornerstone Strategy Fund
Growth Strategy Fund
Emerging Markets Fund
Gold Fund
International Fund
World Growth Fund
GNMA Trust
Treasury Money Market Trust
USAA MUTUAL FUND, INC.
Aggressive Growth Fund
Science & Technology Fund
Growth Fund
First Start Growth Fund
S&P 500 Index Fund**
Growth & Income Fund
Income Stock Fund
Income Fund
Short-Term Bond Fund
Money Market Fund
USAA TAX EXEMPT FUND, INC.
Long-Term Fund
Intermediate-Term Fund
Short-Term Fund
Tax Exempt Money Market Fund
California Bond Fund*
California Money Market Fund*
New York Bond Fund*
New York Money Market Fund*
Virginia Bond Fund*
Virginia Money Market Fund*
USAA STATE TAX-FREE TRUST
Florida Tax-Free Income Fund*
Florida Tax-Free Money Market Fund*
Texas Tax-Free Income Fund*
Texas Tax-Free Money Market Fund*
* Offered only to residents of these specific states.
** S&P 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.
6
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USING MUTUAL FUNDS IN AN ASSET ALLOCATION PROGRAM
I. THE IDEA BEHIND ASSET ALLOCATION
If you have money to invest and hear that stocks may be a good investment, is it
a wise idea to use your entire savings to buy one stock? Most people wouldn't -
it would be fortunate if it works, but this strategy holds a great deal of risk.
Surprising news could be reported tomorrow on your stock, and its price could
soar or plummet.
Careful investors understand this concept of risk and lower that risk by
diversifying their holdings among a number of securities. That way bad news for
one security may be counterbalanced by good news regarding other securities. But
there is still a question of risk here. History tells us that stocks are
generally more volatile than bonds and that long-term bonds are generally more
volatile than short-term bonds. History also tells us that over many years
investments having higher risks tend to have higher returns than investments
that carry lower risks. And past performance doesn't necessarily guarantee
future results. From these observations comes the idea of asset allocation.
Asset allocation is a straightforward concept that involves dividing your
money among several different types of investments - for example, stocks, bonds
and short-term investments such as money market instruments - and keeping that
allocation until your objectives or the financial markets significantly change.
That way you're not pinning all your financial success on the fortunes of one
kind of investment. Money spread across different investment categories can help
you reduce market risk and likely will provide more stability to your total
return.
Asset allocation can work because different kinds of investments generally
follow different up-and-down cycles. With a variety of investments in your
portfolio, some are probably doing well, even when others are struggling.
II. USING ASSET ALLOCATION IN AN INVESTMENT PROGRAM
Most investors understand the concept of diversification, but asset allocation
goes beyond diversifying your portfolio; it's much more of an active process.
You must evaluate your lifestyle, finances, circumstances, long- and short-term
financial goals and tolerance for investment risk. Once you have structured your
allocation, you'll need to review it regularly since your objectives will change
over time.
III. USAA'S SERIES OF ASSET STRATEGY FUNDS
USAA's series of asset allocation funds, our Asset Strategy Funds, are designed
for the long-term investor and are in line with the Manager's investment
philosophy for its customers, specifically "don't try to time the market," and
"buy and hold for the long-term." As shown on the next page, each of USAA's
Asset Strategy Funds has its own different mix of assets and objectives.
7
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Fund Investment Objective Invests In
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Income Seek high current return, with Bonds and stocks
Strategy reduced risk over time, through an
Fund asset allocation strategy which
emphasizes income and gives
secondary emphasis to long-term
growth of capital.
Growth and Tax Seek a conservative balance between Tax exempt bonds and
Strategy Fund income, the majority of which is tax- blue chip stocks
exempt, and the potential for long-term
growth of capital to preserve purchasing
power. This objective is to be achieved
through an asset allocation strategy.
Balanced Seek high total return, with reduced Stocks and bonds
Strategy risk over time, through an asset
Fund allocation strategy that seeks a
combination of long-term growth of
capital and current income.
Cornerstone Achieve a positive inflation-adjusted Foreign & basic value
Strategy rate of return and a reasonably stable stocks, government
Fund value of Fund shares, thereby securities, real
preserving purchasing power of estate stocks and
shareholders' capital. This objective gold stocks
is to be achieved through an asset
allocation strategy.
Growth Seek high total return, with reduced Small & large cap
Strategy risk over time, through an asset stocks, bonds, and
Fund allocation strategy which emphasizes international stocks
capital appreciation and gives
secondary emphasis to income.
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An important feature of USAA's Asset Strategy Funds is the quarterly rebalancing
of each portfolio. In this asset allocation technique, the Funds' Managers buy
or sell securities each quarter so that the investment categories of each Fund
are brought within their target ranges. For example, if a portfolio holds 80% of
its securities in stocks, 15% in bonds, and 5% in money market instruments at
the beginning of a quarter, then due to market returns holds 85% of its
securities in stocks, 10% in bonds, and 5% in money market instruments at the
end of a quarter, the Manager would rebalance the portfolio by reducing its
holdings of stocks and increasing its holdings of bonds to return the
portfolio's investments in stocks and bonds into the target ranges. See
INVESTMENT OBJECTIVE AND POLICIES - INVESTMENT POLICIES, TECHNIQUES AND RISK
FACTORS for further information on the Fund's target ranges.
For more complete information about the other USAA Asset Strategy Funds,
including charges and expenses, call the Manager for a Prospectus. Read it
carefully before you invest or send money.
8
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
INVESTMENT OBJECTIVE
The Fund's investment objective is to seek high total return, with reduced risk
over time, through an asset allocation strategy which emphasizes capital
appreciation and gives secondary emphasis to income.
The investment objective of the Fund cannot be changed without shareholder
approval. In view of the risks inherent in all investments in securities, there
is no assurance that this objective will be achieved.
The investment policies and techniques used to pursue the Fund's objective
may be changed without shareholder approval, except as otherwise noted. Further
information regarding the Fund's investment policies, restrictions and risks is
provided in the SAI.
INVESTMENT POLICIES, TECHNIQUES AND RISK FACTORS
The Fund provides a professionally managed, diversified investment program
within one mutual fund. The Manager seeks to attain the objective by allocating
the Fund's assets in each of the following investment categories within the
indicated ranges:
PERCENTAGE
TARGET RANGE
INVESTMENT CATEGORY OF NET ASSETS
Large Cap Stocks................. 25 - 35%
Small Cap Stocks................. 25 - 35%
International Stocks............. 15 - 25%
Bonds............................ 15 - 25%
Money Market Instruments......... 0 - 10%
The target ranges may be revised by the Board of Trustees upon 60 days'
prior written notice to shareholders. However, the Manager reserves the right,
without shareholder notification, to revise the ranges on a temporary defensive
basis when, in its opinion, such changes are believed to be in the best interest
of the Fund and its shareholders.
The ranges allow for a variance in each investment category. Should market
action cause investment categories to move outside the ranges, the Manager will
make adjustments to rebalance the portfolio. In general, the Manager will
rebalance the portfolio at least once during each quarter to bring each category
within its range. These portfolio adjustments may cause the Fund to sell
securities in investment categories which have appreciated in value and to buy
securities in investment categories which have depreciated in value. Such
adjustments may also cause the Fund to incur a higher proportion of short-term
capital gains than a fund that does not have a similar policy.
As a temporary defensive measure, the Manager may invest up to 100% of the
Fund's assets in high quality, short-term debt instruments.
Although the Fund's portfolio turnover rate is not expected to exceed 100%,
it will not be a limiting factor when the Manager deems changes in the Fund's
portfolio appropriate in view of its investment objective.
Characteristics and associated risks of each investment category are as follows:
LARGE CAP STOCKS - In this category, investments will consist of common stocks
of companies that have market capitalizations of $1 billion or more, at the time
the stocks were originally purchased. Investments may also include real estate
investment trusts (REITs) and securities convertible into common stocks or
securities which carry the right to buy common stocks.
The Fund may hold or purchase more of a security of a company whose market
capitalization has declined below $1 billion. Ordinarily, such a security will
continue to be treated as a Large Cap Stock, although the Manager may, in its
discretion, reclassify such a security as a Small Cap Stock or limit the Fund's
holdings in such securities if this action is determined to be in the best
interest of the Fund.
9
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SMALL CAP STOCKS - In this category, investments will consist of common stocks
of companies that have market capitalizations of less than $1 billion, at the
time the stocks were originally purchased. Investments may also include REITs
and securities convertible into common stocks or securities which carry the
right to buy common stocks.
The Fund may hold or purchase more of a security of a company whose market
capitalization has increased above $1 billion. Ordinarily, such a security will
continue to be treated as a Small Cap Stock, although the Manager may, in its
discretion, reclassify such a security as a Large Cap Stock or limit the Fund's
holdings in such securities if this action is determined to be in the best
interest of the Fund.
Investing in smaller companies, especially those that have a narrow product
line or are thinly traded, often involves greater risk than investing in
established companies with proven track records. These securities may be subject
to more price volatility than securities of larger companies.
INTERNATIONAL STOCKS - In this category, investments will consist of common
stocks or securities which are convertible into or which carry the right to buy
common stocks of foreign companies. A company is deemed to be a foreign company
if:
(1) it is organized under the laws of a foreign country; and either
(2) (a) the principal trading market for the stock is in a foreign country; or
(b) at least 50% of its revenues or profits are derived from operations
within a foreign country; or
(c) at least 50% of its assets are located within a foreign country.
The Manager believes that international diversification may have a
balancing impact with regard to investments in the United States. For a
discussion of the risks associated with investments in foreign issuers, see
SPECIAL RISK CONSIDERATIONS.
BONDS - In this category, investments will consist of U.S. dollar-denominated
securities selected for their high yields relative to the risk involved.
Consistent with this policy, in periods of rising interest rates, a greater
portion of the portfolio may be invested in securities the value of which is
believed to be less sensitive to interest rate changes.
Investments in this category may consist of obligations of the U.S.
Government, its agencies and instrumentalities; mortgage-backed securities;
corporate debt securities such as notes and bonds; obligations of state and
local governments and their agencies and instrumentalities; asset-backed
securities; master demand notes; Eurodollar obligations; Yankee obligations; and
other debt securities.
The debt securities in the Fund must be investment grade at the time of
purchase. Investment grade securities are those issued or guaranteed by the U.S.
Government, its agencies and instrumentalities, those rated at least Baa by
Moody's Investors Service, BBB by Standard & Poor's Ratings Group, BBB by Fitch
Investors Service, or BBB by Duff and Phelps, or those judged to be of
equivalent quality by the Manager if not rated. Securities rated in the lowest
level of investment grade have speculative characteristics since adverse
economic conditions and changing circumstances are more likely to have an
adverse impact on such securities.
If the rating of a security is downgraded below investment grade, the
Manager will determine whether it is in the best interest of the Fund's
shareholders to continue to hold such security in the Fund's portfolio. Unless
otherwise directed by the Board of Trustees, if downgrades result in more than
5% of the Fund's net assets being invested in securities that are less than
investment grade quality, the Manager will take immediate action to reduce the
Fund's holdings in such securities to 5% or less of the Fund's net assets. For a
more complete description of debt ratings, see APPENDIX A to the SAI.
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MONEY MARKET INSTRUMENTS - In this category, investments will consist of high
quality U.S. dollar-denominated debt securities that have remaining maturities
of one year or less. Such securities may include U.S. Government obligations,
commercial paper and other short-term corporate obligations, repurchase
agreements collateralized with U.S. Government securities, and certificates of
deposit, bankers' acceptances, bank deposits, and other financial institution
obligations. These securities may carry fixed or variable interest rates.
CONVERTIBLE SECURITIES - The Fund may invest in convertible securities.
Convertible securities are bonds, preferred stocks, and other securities that
pay interest or dividends and offer the buyer the option of converting 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 may also change based on the
price of the common stock.
FORWARD CURRENCY CONTRACTS - The Fund may hold securities denominated in foreign
currencies. As a result, the value of the securities will be affected by changes
in the exchange rate between the dollar and foreign currencies. In managing the
currency exposure, the Fund 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.
The Fund may enter into forward currency contracts under two circumstances.
First, when the 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. Second, when management of the 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. The Fund may not
hedge with respect to a particular currency for an amount greater than the
aggregate market value (determined at the time of making any sale of forward
currency) of the securities held in its portfolio denominated or quoted in, or
bearing a substantial correlation to, such currency.
The use of forward currency contracts to protect the value of the Fund's
assets against a decline in the value of a currency does not eliminate
fluctuations in the value of the Fund's underlying security holdings. In
addition, although the use of forward currency contracts can minimize the risk
of loss due to a decline in value of the foreign currency, the use of such
contracts will tend to limit any potential gain resulting from an increase in
the relative value of the foreign currency to the U.S. dollar. Under certain
circumstances, a fund that has entered into forward currency contracts to hedge
its currency risks may be in a less favorable position than a fund that had not
entered into such contracts. The projection of short-term currency market
movements is extremely difficult and successful execution of a short-term
hedging strategy is highly uncertain.
REPURCHASE AGREEMENTS - The Fund may invest in repurchase agreements which are
collateralized by obligations backed by the full faith and credit of the U.S.
Government or by its agencies or instrumentalities. A repurchase agreement is a
transaction in which a security is purchased with a simultaneous commitment to
sell the security back to the seller (a commercial bank or recognized securities
dealer) at an agreed upon price on an agreed upon date, 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
11
<PAGE>
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 the 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.
WHEN-ISSUED SECURITIES - The Fund may invest in new issues of debt securities
offered on a when-issued basis; that is, 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.
Cash or high quality liquid debt securities equal to the amount of the
when-issued commitments are segregated at the Fund's custodian bank. The
segregated securities are valued at market, and daily adjustments are made to
keep the value of the cash and segregated securities at least equal to the
amount of such commitments by the Fund. On the settlement date, the Fund will
meet its obligations from then available cash, sale of segregated securities,
sale of other securities, or sale of the when-issued securities themselves.
VARIABLE RATE SECURITIES - The Fund may invest in securities that bear interest
at rates which are adjusted periodically to market rates. These interest rate
adjustments can both raise and lower the income generated by such securities.
These changes will have the same effect on the income earned by the Fund
depending on the proportion of such securities held.
The market value of fixed coupon securities fluctuates with changes in
prevailing interest rates, increasing in value when interest rates decline and
decreasing in value when interest rates rise. The value of variable rate
securities, however, is less affected by changes in prevailing interest rates
because of the periodic adjustment of their coupons to a market rate. The
shorter the period between adjustments, the smaller the impact of interest rate
fluctuations on the value of these securities. The market value of variable rate
securities usually tends toward par (100% of face value) at interest rate
adjustment time.
MORTGAGE-BACKED AND ASSET-BACKED SECURITIES - The Fund may invest 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
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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.
MUNICIPAL LEASE OBLIGATIONS - The Fund 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. In evaluating a potential
investment in 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.
MASTER DEMAND NOTES - The Fund may invest in variable rate master demand notes
(master demand notes). Master demand notes 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. Therefore, where master demand notes are not secured by
bank letters of credit or other credit support arrangements, the Fund's right to
redeem depends on the ability of the borrower to pay principal and interest on
demand. In connection with master demand note arrangements, the Fund will
continuously monitor the earning power, cash flow, and other liquidity ratios of
the issuer, and the borrower's ability to pay
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principal and interest on demand. Master demand notes, as such, are not
typically rated by credit rating agencies. The Fund will invest in master demand
notes only if the Board of Trustees or its delegate has determined that they are
of credit quality comparable to the debt securities in which the Fund generally
may invest.
EURODOLLAR AND YANKEE OBLIGATIONS - The Fund may invest in Eurodollar and Yankee
obligations. Eurodollar obligations are dollar-denominated instruments issued
outside the U.S. capital markets by foreign corporations and financial
institutions and by foreign branches of U.S. corporations and financial
institutions. Yankee obligations are dollar-denominated instruments issued by
foreign issuers in the U.S. capital markets. While investments in Eurodollar and
Yankee obligations are intended to reduce risk by providing further
diversification, such investments involve sovereign risk in addition to credit
and market risk. Sovereign risk includes local, political, or economic
developments, potential nationalization, and withholding taxes on dividend or
interest payments.
In addition, the Fund may invest in Eurodollar and Yankee obligations of
investment grade emerging market countries. See SPECIAL RISK CONSIDERATIONS for
a discussion of other risks associated with foreign investments.
PUT BONDS - The Fund may invest in securities (including securities with
variable interest rates) which may be redeemed or sold back (put) to the issuer
of the security or a third party prior to stated maturity (put bonds). Such
securities will normally trade as if maturity is the earlier put date, even
though stated maturity is longer.
LIQUIDITY - The Fund may not invest more than 15% of the market value of its net
assets in securities which are illiquid or not readily marketable. Commercial
paper and certain put bonds that are subject to restrictions on transfer,
securities that may be resold pursuant to Rule 144A under the Securities Act of
1933, and lease obligations may be determined to be liquid in accordance with
guidelines established by the Board of Trustees.
INVESTMENT RESTRICTIONS
The following restrictions may not be changed without shareholder approval:
(1) With respect to 75% of its total assets, the Fund may not purchase
securities of any issuer (except U.S. Government Securities, as such term
is defined in the Investment Company Act of 1940, as amended (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) The Fund may not borrow money, except for temporary or emergency purposes
in an amount not exceeding 33 1/3% of its total assets (including the
amount borrowed) less liabilities (other than borrowings).
(3) The Fund may not concentrate its investments in any one industry although
it may invest up to 25% of the value of its total assets in any one
industry; provided, this limitation does not apply to securities issued or
guaranteed by the U.S. Government and its agencies or instrumentalities.
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(4) The Fund may not 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.
SPECIAL RISK CONSIDERATIONS
INVESTMENT IN FOREIGN SECURITIES - The Fund may purchase foreign securities in
foreign or U.S. markets or it may purchase American Depositary Receipts (ADRs),
Global Depositary Receipts (GDRs), or similar forms of ownership interests in
securities of foreign issuers deposited with a depositary. Investing in foreign
securities presents certain risks not present in domestic investments. Such
risks may include currency exchange rate fluctuations; foreign market
illiquidity; increased price volatility; exchange control regulations; different
accounting, reporting, and disclosure requirements; political or social
instability; and difficulties in obtaining judgments or effecting collections
thereon. Brokerage commissions and custodial services may be more costly, and
stock trade settlements may be more lengthy, more costly and more difficult than
in domestic markets. These investments may be subject to foreign withholding
taxes which may reduce the effective rates of return. The Fund values its
securities and other assets in U.S. dollars.
Information which may impact the market value of securities of a foreign
issuer may not be available to the Manager on a timely basis. The Manager will
endeavor to ascertain such information on as timely a basis as is practicable,
however, any impact on the net asset value will be deemed to have occurred upon
authentication by the Manager.
A developing country can be considered to be a country which is in the
initial stages of its industrialization cycle. Investments in developing
countries involve exposure to economic structures that are generally less
diverse and mature than in the United States, and to political systems which may
be less stable. Due to illiquidity and lack of hedging instruments, it is
presently difficult or in some cases impossible to hedge the currency risk in
these markets. In the past, markets of developing countries have been more
volatile than the markets of developed countries.
Political risk includes a greater potential for coup d'etats, insurrections
and expropriation by governmental organizations. For example, the Fund may
invest in Eastern Europe and former states of the Soviet Union (also known as
the CIS or the Commonwealth of Independent States). These countries were under
communist systems which had nationalized private industry. There is no guarantee
that nationalization may not occur again in this region or others in which the
Fund invests, in which case the Fund may lose all or part of its investment in
that country's issuers.
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PURCHASE OF SHARES
OPENING AN ACCOUNT
You may open an account and make an investment by any of the following methods.
A complete, signed application is required together with a check for each new
account.
TAX ID NUMBER
We require that each shareholder named on the account provide the Trust with a
social security number or tax identification number to avoid possible tax
withholding requirements.
EFFECTIVE DATE
When you make a purchase, your purchase price will be the net asset value (NAV)
per share next determined after the Fund receives your request in proper form.
The NAV of the Fund is determined at the close of the regular trading session of
the New York Stock Exchange (NYSE) each day the NYSE is open. If the Fund
receives your request prior to that time, your purchase price will be the NAV
per share determined for that day. If the Fund receives your request after the
NAV per share is calculated, the purchase will be effective on the next business
day.
Because of the more lengthy clearing process and the need to convert
foreign currency, a check drawn on a foreign bank will not be deemed received
for the purchase of shares until such time as the check has cleared and the
Manager has received good funds, which may take up to four to six weeks.
Furthermore, a bank charge may be assessed in the clearing process, which will
be deducted from the amount of the purchase. To avoid a delay in the effective
date of your purchase, the Manager suggests that you convert your foreign check
to U.S. dollars prior to investment in the Fund.
PURCHASE OF SHARES
MINIMUM INVESTMENTS
Initial Purchase: $3,000 [$500 for Uniform Gifts/Transfers to Minors Act
(UGMA/UTMA) accounts and $250 for IRAs] or no initial
investment if you elect to have monthly electronic
investments of at least $50 each.
Additional Purchases: $50
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HOW TO PURCHASE:
MAIL o To open an account, send your application and check to:
USAA Investment Management Company
9800 Fredericksburg Rd., San Antonio, TX 78288
o To add to your account, send your check and the "Invest by
Mail" stub that accompanies your fund's transaction
confirmation to the Transfer Agent:
USAA Shareholder Account Services
9800 Fredericksburg Rd., San Antonio, TX 78288
IN PERSON o To open an account, bring your application and check to:
USAA Investment Management Company
USAA Federal Savings Bank
10750 Robert F. McDermott Freeway, San Antonio
AUTOMATICALLY o Additional purchases on a regular basis can be deducted from a
VIA bank account, paycheck, income-producing investment or from a
ELECTRONIC USAA money market account. Sign up for these services when
FUNDS opening an account or call 1-800-531-8448 to add these
TRANSFER (EFT) services.
o Purchases through payroll deduction ($25 minimum each pay period
with no initial investment) can be made by any employee of USAA
or any of its affiliated companies.
BANK WIRE o To add to an 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 Strategy Fund
USAA AC-69384998
Shareholder(s) Name(s)_________________
Shareholder(s) Account Number___________________
PHONE o If you have an existing USAA account and would like to open a
1-800-531-8448 new account or if you would like to 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.
o To add to an account, intermittent (as-needed) purchases
can be deducted from your bank account through our Buy/Sell
Service. Call for instructions.
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REDEMPTION OF SHARES
You may redeem shares of the Fund by any of the following methods on any day the
NAV per share is calculated. Redemptions will be effective on the day
instructions are received in accordance with the requirements set forth below.
However, if instructions are received after the NAV per share calculation,
redemption will be effective on the next business day.
REDEMPTION PROCEEDS
Redemption proceeds are distributed within seven days after the effective date
of redemption. Payment for redemption of shares purchased by check or electronic
funds transfer will not be disbursed until the purchase check or electronic
funds transfer has cleared, which could take up to 15 days from the purchase
date. If you are considering redeeming shares soon after purchase, you should
purchase by bank wire or certified check to avoid delay.
In addition, the Trust may elect to suspend the redemption of shares or
postpone the date of payment during any period that the NYSE is closed, or
trading in the markets the Trust normally utilizes is restricted, or during any
period that redemption is otherwise permitted to be suspended by the SEC.
HOW TO REDEEM:
WRITTEN, o Send your written instructions to:
FAX, OR USAA Shareholder Account Services
TELEGRAPH 9800 Fredericksburg Rd., San Antonio, TX 78288
o Send a signed fax to 1-800-292-8177, or send a telegraph to
USAA Shareholder Account Services.
Written redemption requests must include the following: (1) a letter of
instruction or stock assignment, and stock certificate (if issued), specifying
the Fund and the number of shares or dollar amount to be redeemed; (2)
signatures of all owners of the shares exactly as their names appear on the
account; (3) other supporting legal documents, if required, as in the case of
estates, trusts, guardianships, custodianships, partnerships, corporations, and
pension and profit-sharing plans; and (4) method of payment.
PHONE o Call toll free 1-800-531-8448, in San Antonio, 456-7202.
Telephone redemption is automatically established when you complete your
application. The Fund will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine; and if it does not, it may
be liable for any losses due to unauthorized or fraudulent instructions.
Information is obtained prior to any discussion regarding an account including:
(1) USAA number or account number, (2) the name(s) on the account registration,
and (3) social security number or tax identification number for the account
registration. In addition, all telephone communications with a shareholder are
recorded, and confirmations of all account transactions are sent to the address
of record.
Redemption by telephone, fax, or telegraph is not available for shares
represented by stock certificates.
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METHODS OF PAYMENT:
BANK WIRE o Allows redemptions to be sent directly to your bank account.
Establish this service when you apply for your account, or later upon
request. Please obtain precise wiring instructions from your financial
institution. USAA Shareholder Account Services (Transfer Agent) deducts a wire
fee from the account for the redemption by wire. The fee as of the date of this
Prospectus is $10 ($25 for wires to a foreign bank) and is subject to change at
any time. The fee is paid to State Street Bank and Trust Company and the
Transfer Agent for their services in connection with the wire redemption. Your
financial institution may also charge a fee for receiving funds by wire.
AUTOMATICALLY o Systematic (regular) or intermittent (as-needed) redemptions can
VIA EFT be credited to your bank account.
Establish any of our electronic investing services when you apply for your
account, or later upon request.
CHECK o A check payable to the registered shareholder(s) will be mailed
REDEMPTION to the address of record.
This check redemption privilege is automatically established when your
application is completed and accepted. There is a 15-day waiting period before a
check redemption can be processed following a telephone address change. Should
you wish to redeem shares within the 15 days following a telephone address
change, you may do so by providing written instructions by mail or facsimile.
CONDITIONS OF PURCHASE AND REDEMPTION
NONPAYMENT
If any order to purchase shares is cancelled due to nonpayment or if the Trust
does not receive good funds either by check or electronic funds transfer, the
Transfer Agent will treat the cancellation as a redemption of shares purchased,
and you will be responsible for any resulting loss incurred by the Fund or the
Manager. If you are a shareholder, the Transfer Agent can redeem shares from any
of your account(s) as reimbursement for all losses. In addition, you may be
prohibited or restricted from making future purchases in any of the USAA Family
of Funds. A $15 fee is charged for all returned items, including checks and
electronic funds transfers.
TRANSFER OF SHARES
You may transfer Fund shares to another person by sending written instructions
to the Transfer Agent. The account must be clearly identified, and you must
include the number of shares to be transferred, the signatures of all registered
owners, and all stock certificates, if any, which are the subject of transfer.
You also need to send written instructions signed by all registered owners and
supporting documents to change an account registration due to events such as
divorce, marriage, or death. If a new account needs to be established, you must
complete and return an application to the Transfer Agent.
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ACCOUNT BALANCE
Beginning in September 1998, and occurring each September thereafter, the
Transfer Agent will assess a small balance account fee of $12 to each
shareholder account with a balance, at the time of assessment, of less than
$2,000. The fee will be used to reduce total transfer agency fees paid by the
Fund to the Transfer Agent. 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 or 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).
TRUST RIGHTS
The Trust reserves the right to:
(1) reject purchase or exchange orders when in the best interest of the Trust;
(2) limit or discontinue the offering of shares of any portfolio of the Trust
without notice to the shareholders;
(3) require a signature guarantee for purchases, redemptions, or changes in
account information in those instances where the appropriateness of a
signature authorization is in question. The section ADDITIONAL INFORMATION
REGARDING REDEMPTION OF SHARES in the SAI contains information on
acceptable guarantors;
(4) redeem an account with less than $900, subject to certain limitations
described in ADDITIONAL INFORMATION REGARDING REDEMPTION OF SHARES in the
SAI.
EXCHANGES
EXCHANGE PRIVILEGE
The Exchange Privilege is automatically established 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 that the
shares to be acquired are offered in your state of residence. Exchange
redemptions and purchases will be processed simultaneously at the share prices
next determined after the exchange order is received. For federal income tax
purposes, an exchange between Funds is a taxable event. Accordingly, when
exchanging shares, you may realize a capital gain or loss.
The Fund has undertaken certain procedures regarding telephone
transactions. See REDEMPTION OF SHARES - PHONE.
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. Exchanges out of
any Fund in the USAA Family of Funds are limited for each account to six per
calendar year except that 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.
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OTHER SERVICES
INVESTMENT PLANS
AUTOMATIC INVESTMENT PLANS - You may establish an automatic investment plan by
completing the appropriate forms, if any. 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. Call the Manager to obtain instructions. More information about
these preauthorized plans is contained in the SAI.
o INVESTART(R) - A no initial investment purchase plan. With this plan the
regular minimum initial investment amount is waived if you make subsequent
monthly additions of at least $50 through electronic funds transfer from a
checking or savings account. The Manager may periodically offer programs that
reduce the minimum amounts for monthly electronic investments.
o 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.
o DIRECT PURCHASE SERVICE - The periodic purchase of shares through electronic
funds transfer from an employer (including government allotments), an
income-producing investment, or an account with a participating financial
institution.
o 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.
o BUY/SELL SERVICE - The intermittent purchase or redemption of shares through
electronic funds transfer to or from a checking or savings account.
o SYSTEMATIC WITHDRAWAL PLAN - The periodic redemption of shares from one of
your accounts permitting you to receive a fixed amount of money monthly or
quarterly.
o RETIREMENT PLANS - Plans are available for various forms of IRAs and for
403(b)(7) accounts. Federal taxes on current income may be deferred if an
investor qualifies.
o 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.
SHAREHOLDER STATEMENTS AND REPORTS
You will receive a confirmation after each transaction in your account except:
(1) a payment you make under the InveStart(R), InvesTronic(R), Automatic
Purchase Plan, or Direct Purchase Service investment plans; or
(2) a redemption you make under the Systematic Withdrawal Plan.
At the end of each quarter, you will receive a consolidated statement for
all of your mutual fund accounts, regardless of account activity. The fourth
quarter consolidated statement will reflect all account activity for the prior
tax year. There will be a $10 fee charged for copies of historical statements
for other than the prior tax year for any one account. You will receive the
Fund's financial statements with
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a summary of its investments and performance at least semiannually.
In an effort to reduce expenses and respond to shareholders' requests to
reduce mail, the Trust intends to consolidate mailings of Annual and Semiannual
Reports to households having multiple accounts with the same address of record.
One copy of each report will be furnished to that address. You may request
additional reports by notifying the Trust.
TELEPHONE ASSISTANCE
Call our telephone assistance numbers for specific forms, a copy of the SAI, the
most recent Annual Report and/or Semiannual Report, or if you have any questions
concerning any of the services offered.
SHARE PRICE CALCULATION
The price at which shares of the Fund are purchased and redeemed by shareholders
is equal to the NAV per share determined on the effective date of the purchase
or redemption.
WHEN
The NAV per share for the Fund is calculated at the close of the regular trading
session of the NYSE, which is usually 4:00 p.m. Eastern time. You may buy and
sell Fund shares at the NAV per share without a sales charge.
HOW
The NAV per share is calculated by adding the value of all securities and other
assets in the Fund, deducting liabilities, and dividing by the number of shares
outstanding. Portfolio securities, except as otherwise noted, traded primarily
on a domestic securities exchange are valued at the last sales price on that
exchange. Portfolio securities traded primarily on foreign securities exchanges
are 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 Board of Trustees. Securities which cannot be valued by
the methods set forth above, and all other assets, are valued in good faith at
fair value using methods determined by the Manager under the general supervision
of the Board of Trustees.
For additional information, see VALUATION OF SECURITIES in the SAI.
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DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
Net investment income will be distributed to shareholders annually. Net capital
gains, if any, generally will be distributed at least annually. The Fund intends
to make such additional distributions as may be necessary to avoid the
imposition of any federal income or excise tax.
All income dividends and capital gain distributions are automatically
reinvested, unless the shareholder specifies otherwise. The share price will be
the net asset value of the Fund shares computed on the ex- dividend date. Any
income dividend or capital gain distributions paid by the Fund will reduce the
NAV per share by the amount of the dividend or distribution. An investor should
consider carefully the effects of purchasing shares of the Fund shortly before
any dividend or distribution. Although in effect a return of capital, these
distributions are subject to taxes.
Any dividend or distribution payment returned to the Manager as not
deliverable will be invested in the shareholder's Fund account at the
then-current NAV per share. If any check for the payment of dividends or
distributions is not cashed within six months from the date on the check, it
becomes void. The amount of the check will then be invested in the shareholder's
Fund account at the then-current NAV per share.
FEDERAL TAXES
The following discussion relates only to generally applicable federal income tax
provisions in effect as of the date of this Prospectus. Note that the recently
enacted Taxpayer Relief Act of 1997 and regulations that will likely be created
to implement the Act may affect the status and treatment of certain
distributions shareholders receive from the Fund. Shareholders are urged to
consult their own tax advisers about the status of distributions from the Fund
in their own states and localities.
FUND - The Fund intends to qualify as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended (the Code). By
complying with the applicable provisions of the Code, the Fund will not be
subject to federal income tax on its net investment income and net capital gains
(capital gains in excess of capital losses) distributed to shareholders.
SHAREHOLDER - Dividends from taxable net investment income and distributions of
net short-term capital gains are taxable to shareholders as ordinary income,
whether received in cash or reinvested in additional shares. A portion of these
dividends may qualify for the 70% dividends received deduction available to
corporations.
Distributions of net long-term capital gains are taxable as long-term
capital gains whether received in cash or reinvested in additional shares, and
regardless of the length of time the investor has held the shares of the Fund.
Redemptions, including exchanges, are subject to income tax, based on the
difference between the cost of shares when purchased and the price received upon
redemption or exchange.
WITHHOLDING - The Fund is required by federal law 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, who underreports
dividend or interest income, or who fails to certify that he 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 Transfer Agent, that your
tax identification number is correct and that you are not currently subject to
backup withholding.
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REPORTING - Information concerning the status of dividends and distributions for
federal income tax purposes will be mailed to shareholders annually.
MANAGEMENT OF THE TRUST
The business affairs of the Trust are subject to the supervision of the Board of
Trustees.
The Manager, USAA Investment Management Company (IMCO), was organized in
May 1970 and is an affiliate of United Services Automobile Association (USAA), a
large diversified financial services institution. As of the date of this
Prospectus, the Manager had approximately $36 billion in total assets under
management. The Manager's mailing address is 9800 Fredericksburg Rd., San
Antonio, TX 78288.
Officers and employees of the Manager are permitted to engage in personal
securities transactions subject to restrictions and procedures set forth in the
Joint Code of Ethics adopted by the Trust and the Manager. Such restrictions and
procedures include substantially all of the recommendations of the Advisory
Group of the Investment Company Institute and comply with SEC rules and
regulations.
ADVISORY AGREEMENT
The Manager serves as the manager and investment adviser of the Trust, providing
services under an Advisory Agreement. Under the Advisory Agreement, the Manager
is responsible for the management of the business affairs, investment
portfolios, and placement of brokerage orders, subject to the authority of and
supervision by the Board of Trustees.
For its services under the Advisory Agreement, the Fund pays the Manager an
annual fee which is computed as a percentage of the Fund's ANA, accrued daily
and paid monthly. The Fund's management fees were computed and paid at
three-fourths of one percent (.75%) of ANA for the fiscal year ended May 31,
1997.
OPERATING EXPENSES
For the fiscal year ended May 31, 1997, the total annual operating expenses for
the Fund as a percentage of the Fund's ANA equaled 1.31%.
PORTFOLIO TRANSACTIONS
Purchases and sales of equity securities for the Fund's portfolio may be
accomplished through USAA Brokerage Services, a discount brokerage service of
the Manager. The Board of Trustees has adopted procedures to ensure that any
commissions paid to USAA Brokerage Services are reasonable and fair.
PORTFOLIO MANAGERS
The following individuals are primarily responsible for managing the Fund.
David G. Parsons, Assistant Vice President of Equity Investments since
March 1995, is the asset allocation manager of the Fund and has managed the
Large Cap Stocks investment category since September 1995. Mr. Parsons has 14
years investment management experience working for IMCO. Mr. Parsons earned the
Chartered Financial Analyst (CFA) designation in 1986 and is a member of the
Association for Investment Management and Research (AIMR) and the San Antonio
Financial Analysts Society, Inc. (SAFAS). He holds an MBA from the University of
Texas, an MA from Southern Illinois University and a BA from Austin College,
Texas.
John K. Cabell, Jr. and Eric M. Efron, Assistant Vice Presidents of Equity
Investments since September 1996, have managed the Small Cap Stocks investment
category since September 1995.
24
<PAGE>
Mr. Cabell has 19 years investment management experience and has worked for
IMCO for eight years. His business experience during the past five years also
included the following position: Chief Economist for Retirement Systems of
Alabama from March 1991 to March 1994. Mr. Cabell earned the CFA designation in
1982 and is a member of AIMR and SAFAS. He holds an MA and BS from the
University of Alabama.
Mr. Efron has 22 years investment management experience and has worked for
IMCO for five years. Mr. Efron earned the CFA designation in 1983 and is also a
member of AIMR and SAFAS. He holds an MBA from New York University, an MA from
the University of Michigan, and a BA from Oberlin College, Ohio.
Albert C. Sebastian, Assistant Vice President of Equity Investments since
September 1996, has managed and co-managed the International Stocks investment
category since September 1995. Mr. Sebastian has 13 years investment management
experience and has worked six years for IMCO. Mr. Sebastian earned the CFA
designation in 1989 and is a member of AIMR, SAFAS and the International Society
of Financial Analysts (ISFA). He holds an MBA from the University of Michigan
and a BA from Holy Cross College, Massachusetts.
David G. Peebles and W. Travis Selmier, II, co-manage the International
Stocks investment category with Mr. Sebastian. Mr. Sebastian coordinates the
activities of the Managers.
David G. Peebles, Vice President of Equity Investments since February 1988,
has co-managed the International Stocks investment category since October 1996.
He has 31 years investment management experience and has worked for IMCO for 13
years. Mr. Peebles earned the CFA designation in 1971 and is a member of AIMR,
SAFAS and ISFA. He holds an MBA and a BS from Texas Christian University.
W. Travis Selmier, II, Assistant Vice President of Equity Investments since
September 1996, has co-managed the International Stocks investment category
since October 1996. He has 10 years investment management experience and has
worked for IMCO for six years. Mr. Selmier earned the CFA designation in 1990
and is a member of AIMR, SAFAS and ISFA. He holds an MBA from Indiana
University, a Certificate of Proficiency from Sophia University Japanese
Language Institute, Japan, and a BA from the University of California at Santa
Barbara.
Paul H. Lundmark, Assistant Vice President of Fixed Income Investments
since December 1996, has managed the Bonds investment category since September
1995. Mr. Lundmark has 11 years investment management experience and has worked
for IMCO for five years. Mr. Lundmark earned the CFA designation in 1989 and is
a member of AIMR and SAFAS. He holds an MBA and BSB from the University of
Minnesota.
Pamela K. Bledsoe, Executive Director of Money Market Funds since June
1995, has managed the Money Market Instruments investment category since May
1996. Ms. Bledsoe has nine years investment management experience and has worked
for IMCO for six years. Ms. Bledsoe earned the CFA designation in 1992 and is a
member of AIMR and SAFAS. She holds an MBA from Texas Christian University and a
BS from Louisiana Tech University.
25
<PAGE>
DESCRIPTION OF SHARES
MASTER TRUST AGREEMENT
The Trust is an open-end management investment company established as a business
trust under the laws of the Commonwealth of Massachusetts pursuant to the First
Amended and Restated Master Trust Agreement (Master Trust Agreement) dated June
2, 1995, as amended. The Trust is authorized to issue an unlimited number of
shares of beneficial interest of separate portfolios, without par value. Eleven
such portfolios have been established, one of which is described in this
Prospectus. The Fund is classified as diversified. Under the Master Trust
Agreement, the Trustees are authorized to create new portfolios in addition to
those already existing without shareholder approval.
Under the Master Trust Agreement, no annual or regular meeting of
shareholders is required. Ordinarily, no shareholder meeting will be held unless
required by the 1940 Act. The Trustees may fill vacancies on the Board or
appoint new Trustees provided that immediately after such action at least
two-thirds of the Trustees have been elected by shareholders. Shareholders are
entitled to one vote per share (with proportionate voting for fractional shares)
irrespective of the relative net asset value of the shares. For matters
affecting an individual portfolio, a separate vote of the shareholders of that
portfolio is required. Shareholders holding an aggregate of at least 10% of the
outstanding shares of the Trust may request a meeting of shareholders at any
time for the purpose of voting to remove one or more of the Trustees, and the
Trust will assist shareholders in communicating with other shareholders in
connection with such a meeting.
Under Massachusetts law, shareholders of any portfolio could, under certain
circumstances, be held personally liable for the obligations of the Trust.
However, the Master Trust Agreement disclaims shareholder liability for acts or
obligations of the Trust and requires that notice of such disclaimer be given in
each agreement, obligation, or instrument entered into or executed by the Trust
or the Trustees. The Master Trust Agreement provides for indemnification out of
the Trust's property for all losses and expenses of any shareholder held
personally liable for the obligations of the Trust. Thus, the possibility of a
shareholder incurring financial loss on account of shareholder liability is
remote.
26
<PAGE>
SERVICE PROVIDERS
UNDERWRITER/ USAA Investment Management Company
DISTRIBUTOR 9800 Fredericksburg Rd., San Antonio, Texas 78288.
TRANSFER USAA Shareholder Account Services
AGENT 9800 Fredericksburg Rd., San Antonio, Texas 78288.
CUSTODIAN State Street Bank and Trust Company
P.O. Box 1713, Boston, Massachusetts 02105.
LEGAL Goodwin, Procter & Hoar LLP
COUNSEL Exchange Place, Boston, Massachusetts 02109.
INDEPENDENT KPMG Peat Marwick LLP
AUDITORS 112 East Pecan, Suite 2400, San Antonio, Texas 78205.
- --------------------------------------------------------------------------------
TELEPHONE ASSISTANCE
(Call toll free - Central Time)
Monday-Friday 8:00 a.m. to 8:00 p.m.
Saturday 8:30 a.m. to 5:00 p.m.
For further information on mutual funds:
1-800-531-8181
In San Antonio 456-7211
For account servicing, exchanges or redemptions:
1-800-531-8448
In San Antonio 456-7202
RECORDED 24 HOUR SERVICE
MUTUAL FUND PRICE QUOTES
(From any phone)
1-800-531-8066
In San Antonio 498-8066
MUTUAL FUND TOUCHLINE(R)
(From Touchtone phones only)
For account balance, last transaction or fund prices:
1-800-531-8777
In San Antonio 498-8777
- --------------------------------------------------------------------------------
27
<PAGE>
[THIS PAGE LEFT BLANK INTENTIONALLY]
28
<PAGE>
Part A
Prospectus for the
Emerging Markets Fund
is included herein
<PAGE>
USAA EMERGING MARKETS FUND
October 1, 1997 PROSPECTUS
USAA EMERGING MARKETS FUND (the Fund) is one of eleven no-load mutual funds
offered by USAA Investment Trust (the Trust). The Fund is managed by USAA
Investment Management Company (the Manager).
WHAT IS THE INVESTMENT OBJECTIVE?
The Fund's investment objective is capital appreciation. Page 8.
HOW DO YOU BUY?
Fund shares are sold on a continuous basis at the net asset value per share
without a sales charge. Make your initial investment directly with the Manager
by mail, in person, or in certain instances, by telephone. Page 13.
HOW DO YOU SELL?
You may redeem Fund shares by mail, telephone, fax, or telegraph on any day
that the net asset value is calculated. Page 15.
This Prospectus, which should be read and retained for future reference,
provides information regarding the Trust and the Fund that you should know
before investing.
SHARES OF THE USAA EMERGING MARKETS FUND ARE NOT DEPOSITS OR OTHER
OBLIGATIONS OF, OR GUARANTEED BY, THE USAA FEDERAL SAVINGS BANK, ARE NOT INSURED
BY THE FDIC OR ANY OTHER GOVERNMENT AGENCY, ARE SUBJECT TO INVESTMENT RISKS, AND
MAY LOSE VALUE. BECAUSE THIS FUND INVESTS IN FOREIGN SECURITIES, IT INVOLVES A
HIGHER DEGREE OF RISK AND MAY NOT BE APPROPRIATE FOR SOME INVESTORS. SEE SPECIAL
RISK CONSIDERATIONS, PAGE 11.
If you would like more information about the Fund, you may call
1-800-531-8181 to request a free copy of the most recent financial report and/or
the Fund's Statement of Additional Information (SAI), dated October 1, 1997. The
SAI has been filed with the Securities and Exchange Commission (SEC) and is
incorporated by reference into this Prospectus (meaning it is legally a part of
the Prospectus).
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
Page
SUMMARY DATA
Fees and Expenses............................................. 3
Financial Highlights.......................................... 4
Performance Information....................................... 5
USING MUTUAL FUNDS
USAA Family of No-Load Mutual Funds........................... 6
Using Mutual Funds in an Investment Program................... 7
INVESTMENT PORTFOLIO INFORMATION
Investment Objective and Policies............................. 8
SHAREHOLDER INFORMATION
Purchase of Shares............................................ 13
Redemption of Shares.......................................... 15
Conditions of Purchase and Redemption......................... 16
Exchanges..................................................... 17
Other Services................................................ 18
Share Price Calculation....................................... 19
Dividends, Distributions and Taxes............................ 19
Management of the Trust....................................... 21
Description of Shares......................................... 22
Service Providers............................................. 23
Telephone Assistance Numbers.................................. 23
Appendix A - Corporate Ratings................................ 24
- --------------------------------------------------------------------------------
2
<PAGE>
FEES AND EXPENSES
The following summary, which is based on actual expenses and average net assets
(ANA) of the Fund for the year ended May 31, 1997, is provided to assist you in
understanding the expenses you will bear directly or indirectly as a Fund
investor.
Shareholder Transaction Expenses
- --------------------------------------------------------------------------------
Sales Load Imposed on Purchases.............................. None
Sales Load Imposed on Reinvested Dividends................... None
Deferred Sales Load.......................................... None
Redemption Fee*.............................................. None
Exchange Fee................................................. None
Annual Fund Operating Expenses (as a percentage of ANA)
- --------------------------------------------------------------------------------
Management Fees.............................................. 1.00%
12b-1 Fees................................................... None
Other Expenses
Transfer Agent Fees...................................... .39%
Custodian Fees........................................... .22%
All Other Expenses....................................... .20%
---
Total Other Expenses........................................ .81%
---
Total Fund Operating Expenses .............................. 1.81%
====
- ---------------------------
* A shareholder who requests delivery of redemption proceeds by wire transfer
will be subject to a $10 fee. See REDEMPTION OF SHARES - BANK WIRE.
Example of Effect of Fund Expenses
- --------------------------------------------------------------------------------
You would pay the following expenses on a $1,000 investment in the Fund,
assuming (1) 5% annual return and (2) redemption at the end of the periods
shown.
1 year - $ 18
3 years - $ 57
5 years - $ 98
10 years - $ 213
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
3
<PAGE>
FINANCIAL HIGHLIGHTS
The following financial highlights for a share outstanding throughout each of
the periods in the three-year period ended May 31, 1997, have been audited by
KPMG Peat Marwick LLP. This table should be read in conjunction with the Fund's
financial statements for the year ended May 31, 1997, and the independent
auditors' report thereon, that appear in the Fund's Annual Report. Further
performance information is contained in the Annual Report and is available upon
request without charge.
SEVEN-MONTH
PERIOD ENDED
YEAR ENDED MAY 31, MAY 31,
1997 1996 1995*
---- ---- ----
Net asset value at
beginning of period $ 11.13 $ 9.77 $ 10.00
Net investment income (loss) .01 (.01)(b) .03(b)
Net realized and
unrealized gain (loss) .89 1.60 (.26)
Distributions from net
investment income - (.01) -
Distributions of realized
capital gains (.50) (.22) -
------- ------- -------
Net asset value at
end of period $ 11.53 $ 11.13 $ 9.77
======= ======= =======
Total return (%)** 8.69 16.93 (2.30)
Net assets at end of
period (000) $95,644 $51,315 $22,914
Ratio of expenses to
average net assets (%) 1.81 2.27 2.50(a)(c)
Ratio of net investment
income (loss) to average
net assets (%) .03 (.08) .53(a)(c)
Portfolio turnover (%) 61.21 87.98 34.87
Average commission rate
paid per share *** $ .0041 $ .0012
- ---------------------
* Fund commenced operations November 7, 1994.
** Assumes reinvestment of all dividend income and capital gain distributions
during the period.
*** Calculated by aggregating all commissions paid on the purchase and sale of
securities and dividing by the actual number of shares purchased or sold
for which commissions were charged.
(a) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
(b) Calculated using weighted average shares.
(c) The information contained in this table is based on actual expenses for
the period, after giving effect to reimbursements of expenses by the
Manager. Absent such reimbursements the Fund's ratios would have been:
SEVEN-MONTH
PERIOD ENDED
MAY 31, 1995*
------------
Ratio of expenses to average net assets (%) 2.60(a)
Ratio of net investment income to average net assets (%) .43(a)
4
<PAGE>
PERFORMANCE INFORMATION
Performance information should be considered in light of the Fund's investment
objective and policies and market conditions during the time periods for which
it is reported. Historical performance should not be considered as
representative of the future performance of the Fund.
The Trust may quote the Fund's total return in advertisements and reports
to shareholders or prospective investors. The Fund's performance may also be
compared to that of other mutual funds with a similar investment objective and
to stock or relevant indexes that are referenced in APPENDIX B to the SAI.
Standard total return results reported by the Fund do not take into account
recurring and nonrecurring charges for optional services which only certain
shareholders elect and which involve nominal fees, such as the $10 fee for a
delivery of redemption proceeds by wire transfer.
The Fund's average annual total return is computed by determining the
average annual compounded rate of return for a specified period which, when
applied to a hypothetical $1,000 investment in the Fund at the beginning of the
period, would produce the redeemable value of that investment at the end of the
period, assuming reinvestment of all dividends and distributions during the
period.
Further information concerning the Fund's total return is included in the
SAI.
5
<PAGE>
USAA FAMILY OF NO-LOAD MUTUAL FUNDS
The USAA Family of No-Load Mutual Funds includes a variety of Funds, each with
different objectives and policies. In combination, these Funds are designed to
provide investors with the opportunity to formulate their own investment
program. You may exchange any shares you hold in any one USAA Fund for shares in
any other USAA Fund. For more complete information about the Funds in the USAA
Family of Funds, including charges and expenses, call the Manager for a
Prospectus. Read it carefully before you invest or send money.
USAA INVESTMENT TRUST
Income Strategy Fund
Growth and Tax Strategy Fund
Balanced Strategy Fund
Cornerstone Strategy Fund
Growth Strategy Fund
Emerging Markets Fund
Gold Fund
International Fund
World Growth Fund
GNMA Trust
Treasury Money Market Trust
USAA MUTUAL FUND, INC.
Aggressive Growth Fund
Science & Technology Fund
Growth Fund
First Start Growth Fund
S&P 500 Index Fund**
Growth & Income Fund
Income Stock Fund
Income Fund
Short-Term Bond Fund
Money Market Fund
USAA TAX EXEMPT FUND, INC.
Long-Term Fund
Intermediate-Term Fund
Short-Term Fund
Tax Exempt Money Market Fund
California Bond Fund*
California Money Market Fund*
New York Bond Fund*
New York Money Market Fund*
Virginia Bond Fund*
Virginia Money Market Fund*
USAA STATE TAX-FREE TRUST
Florida Tax-Free Income Fund*
Florida Tax-Free Money Market Fund*
Texas Tax-Free Income Fund*
Texas Tax-Free Money Market Fund*
* Offered only to residents of these specific states.
** S&P 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.
6
<PAGE>
USING MUTUAL FUNDS IN AN INVESTMENT PROGRAM
I. THE IDEA BEHIND MUTUAL FUNDS
Mutual funds provide small investors some of the advantages enjoyed by wealthy
investors. A relatively small investment can buy part of a widely diversified
portfolio. That portfolio is managed by investment professionals, relieving the
shareholder of the need to make individual stock or bond selections. The
investor also enjoys 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 each shareholder owns an investment that in earlier times
would have been available only to very wealthy people.
II. USING FUNDS IN AN INVESTMENT PROGRAM
In choosing a mutual fund as an investment vehicle, the shareholder is foregoing
some investment decisions, but must still make others. The decisions foregone
are those involved with choosing individual securities. The Fund Manager will
perform that function. In addition, the Manager will arrange for the safekeeping
of securities, auditing the annual financial statements, and daily valuation of
the Fund, as well as other functions.
The shareholder, however, retains at least part of the responsibility for
an equally important decision. This decision involves determining a portfolio of
mutual funds that balances the investor's investment goals with his or her
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 a shareholder wishes to diversify internationally. He
or she could do this by adding positions in the Emerging Markets, Gold,
International, or World Growth Funds to holdings in domestic funds. This would
give the investor exposure to the opportunities of investment in many foreign
countries and to currency changes. This is just one example of how an individual
could combine funds to create a portfolio tailored to his or her own risk and
reward goals.
III. USAA'S FAMILY OF FUNDS
The Manager offers investors another alternative in its asset strategy funds,
the Income Strategy, Growth and Tax Strategy, Balanced Strategy, Cornerstone
Strategy, and Growth Strategy Funds. These unique mutual funds provide a
professionally managed diversified investment portfolio within a mutual fund.
These Funds are designed for the shareholder who prefers to delegate the asset
allocation process to an investment manager. The Funds are structured to achieve
diversification across a number of investment categories.
Whether you prefer to create your own mix of mutual funds or use an asset
strategy fund, the USAA Family of Funds provides a broad range of choices
covering just about any investor's investment objectives. Our sales
representatives stand ready to assist you with your choices and to help you
craft a portfolio which meets your needs.
7
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
INVESTMENT OBJECTIVE
The Fund's investment objective is capital appreciation.
The investment objective of the Fund cannot be changed without shareholder
approval. In view of the risks inherent in all investments in securities, there
is no assurance that this objective will be achieved.
The investment policies and techniques used to pursue the Fund's objective
may be changed without shareholder approval, except as otherwise noted. Further
information regarding the Fund's investment policies, restrictions and risks is
provided in the SAI.
INVESTMENT POLICIES, TECHNIQUES AND RISK FACTORS
The Manager will pursue the objective by investing at least 65% of the Fund's
total assets in common stocks, preferred stocks or securities which are
convertible into or which carry the right to buy common stocks of emerging
market companies. An issuer is deemed to be an emerging market company if:
(1) it is organized under the laws of an emerging market country (as defined
below);
(2) the principal trading market for its stock is in an emerging market
country; or
(3) at least 50% of its revenues or profits are derived from operations within
an emerging market country or at least 50% of its assets are located within
an emerging market country.
Emerging market countries are defined for the purposes of this Prospectus
as all countries of the world excluding the following, which are referred to as
the developed countries:
ASIA: Australia, Japan, New Zealand
AMERICAS: Canada, the United States
EUROPE: Austria, Belgium, Denmark, Finland, France, Germany, Holland, Italy,
Luxembourg, Norway, Spain, Sweden, Switzerland, the United Kingdom
The economic and political systems of emerging market countries can be
described as possessing two or more of the following attributes:
(1) The countries in which these stock markets are found have a less-developed
economy than the developed countries.
(2) Economies of these countries are likely to be undergoing rapid growth or
some major structural change, such as a change in economic systems, rapid
development of an industrial or value-added economic sector, or attainment
of significantly better terms of trade for primary goods, to name a few
examples.
(3) Sustainable economic growth rates are higher, or potentially higher, than
developed countries.
(4) Economies of these countries may be benefitting from the rapid growth of
neighboring countries and/or may be significantly influenced by growth of
demand in the developed markets.
(5) Personal income levels and consumption are generally lower than those in
developed countries, but may be growing at a faster rate.
(6) The political system is likely to be or appear to be in greater flux than
the above-mentioned developed countries.
8
<PAGE>
The countries in which the Fund expects to invest or may invest include,
but are not limited to:
ASIA: China, Hong Kong, India, Indonesia, Korea, Malaysia,
Pakistan, Philippines, Singapore, Taiwan, Thailand
AMERICAS: Argentina, Brazil, Chile, Colombia, Ecuador, Mexico, Peru,
Venezuela
AFRICA/MIDDLE EAST: Egypt, Ghana, Israel, Morocco, South Africa, Turkey,
Zimbabwe
EUROPE/OTHER: Czech Republic, Greece, Hungary, Poland, Portugal, Russia,
Slovakia
The remainder of the Fund's assets may be invested in marketable debt
securities having remaining maturities of less than one year issued or
guaranteed as to both principal and interest by the U.S. Government or its
agencies or instrumentalities and in repurchase agreements collateralized by
such securities. The Fund may on a temporary defensive basis invest its assets
without limitation in such securities. The Fund may also invest part of its cash
position in short-term sovereign debt securities of emerging market countries
for the purpose of obtaining a higher yield.
In addition, the remainder may be invested in stocks of selected issuers
which have favorable growth prospects, but may not be organized or otherwise
situated in emerging markets. The Fund may also invest in public and private
sector debt and fixed income instruments of emerging market issuers, including
Brady Bonds of selected countries, which the Manager believes have the potential
for significant capital appreciation (due, for example, to the Manager's
assessment of prospects for the issuer or its domicile country), irrespective of
any interest or dividend yields payable pursuant to such securities. These
latter investments may be considered to be speculative in nature.
There are no restrictions as to the type of businesses or operations of
companies in which the Fund may invest except that the Fund may not invest 25%
or more of its total assets in one industry. The Fund's investments will be
diversified in four or more countries.
The Manager believes that attractive investment opportunities exist in many
emerging markets, and that while investing a person's assets solely in an
emerging market fund may not be suitable, inclusion of an emerging market fund
in a well-diversified portfolio may significantly enhance returns. The Fund
combines the advantages of diversified investment in emerging markets with the
convenience and liquidity of a mutual fund based in the United States. Risks are
higher in these markets than developed international markets or the United
States. For further discussion, see SPECIAL RISK CONSIDERATIONS.
FORWARD CURRENCY CONTRACTS - The Fund may hold securities denominated in foreign
currencies. As a result, the value of the securities will be affected by changes
in the exchange rate between the dollar and foreign currencies. In managing
currency exposure, the Fund 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.
The Fund may enter into forward currency contracts under two circumstances.
First, when the 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. Second, when management of the 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. The Fund may not
hedge with respect to a particular currency for an amount greater than the
aggregate
9
<PAGE>
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 currency contracts to protect the value of the Fund's
assets against a decline in the value of a currency does not eliminate
fluctuations in the value of the Fund's underlying security holdings. In
addition, although the use of forward currency contracts can minimize the risk
of loss due to a decline in value of the foreign currency, the use of such
contracts will tend to limit any potential gain resulting from an increase in
the relative value of the foreign currency to the U.S. dollar. Under certain
circumstances, a fund that has entered into forward currency contracts to hedge
its currency risks may be in a less favorable position than a fund that had not
entered into such contracts. The projection of short-term currency market
movements is extremely difficult and successful execution of a short-term
hedging strategy is highly uncertain.
REPURCHASE AGREEMENTS - The Fund may invest in repurchase agreements which are
collateralized by obligations backed by the full faith and credit of the U.S.
Government or by its agencies or instrumentalities. A repurchase agreement is a
transaction in which a security is purchased with a simultaneous commitment to
sell the security back to the seller (a commercial bank or recognized securities
dealer) at an agreed upon price on an agreed upon date, 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 the 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.
WHEN-ISSUED SECURITIES - The Fund may invest in new issues of debt securities
offered on a when-issued basis; that is, 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.
Cash or high quality liquid debt securities equal to the amount of the
when-issued commitments are segregated at the Fund's custodian bank. The
segregated securities are valued at market, and daily adjustments are made to
keep the value of the cash and segregated securities at least equal to the
amount of such commitments by the Fund. On the settlement date, the Fund will
meet its obligations from then available cash, sale of segregated securities,
sale of other securities, or sale of the when-issued securities themselves.
BRADY BONDS AND EMERGING MARKET DEBT AND FIXED INCOME INSTRUMENTS - The Fund may
invest in Brady Bonds and public and private sector debt and fixed income
instruments of emerging market issuers. Brady Bonds are securities created
through a restructuring plan introduced by former U.S. Treasury Secretary
Nicholas Brady. The Brady Plan made provisions whereby existing commercial bank
loans to both
10
<PAGE>
public and private entities in selected developing countries are exchanged for
Brady Bonds. These bonds may be denominated in other currencies, but are usually
denominated in U.S. dollars. Brady Bonds are actively traded in over-the-counter
markets. As the markets for these securities are relatively new, however, and
since they have from time to time been subject to disruption, the Manager will
monitor, on a continuous basis, the liquidity of Brady Bonds held in the Fund's
portfolio.
LIQUIDITY - The Fund may not invest more than 15% of the market value of its net
assets in securities which are illiquid or not readily marketable. Rule 144A
Securities may be determined to be liquid in accordance with guidelines
established by the Board of Trustees.
INVESTMENT RESTRICTIONS
The following restrictions may not be changed without shareholder approval:
(1) The Fund may not invest 25% or more of its total assets in one industry.
(2) With respect to 75% of its assets, the Fund may not purchase securities of
any issuer (except U.S. Government Securities, as such term is defined in
the Investment Company Act of 1940, as amended (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.
(3) The Fund may not 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), nor will it
purchase securities when its borrowings exceed 5% of its total assets.
SPECIAL RISK CONSIDERATIONS
The Fund will purchase securities of emerging market issuers in foreign or U.S.
markets or it may purchase American Depositary Receipts (ADRs), Global
Depositary Receipts (GDRs), or similar forms of ownership interests in
securities of foreign issuers deposited with a depositary.
Investing in foreign securities presents certain risks not present in
domestic investments. Such risks may include 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 judgments or
effecting collections thereon. Brokerage commissions and custodial services may
be more costly, and stock trade settlements may be more lengthy, more costly and
more difficult than in domestic markets. Some investments may be subject to
foreign withholding taxes which may reduce the effective rates of return. In the
past, equity and debt instruments of foreign markets have been more volatile
than equity and debt instruments of U.S. securities markets.
A developing country can be considered to be a country which is in the
initial stages of its industrialization cycle. Investing in emerging markets
poses additional risks beyond those noted above. Economic structures are
generally less diverse and mature than in the developed markets. Due to
illiquidity and lack of hedging instruments, it is presently difficult or in
some cases impossible to hedge the currency risk in many of the markets in which
the Fund may invest.
Political risk includes a greater potential for coup d'etats, insurrections
and expropriation by governmental organizations. For example, the Fund may
invest in Eastern Europe and former states of the Soviet Union (also known as
the CIS or the Commonwealth of Independent States).
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These countries were under communist systems which had nationalized private
industry. There is no guarantee that nationalization may not occur again in this
region or others in which the Fund invests, in which case the Fund may lose all
or part of its investment in that country's issuers.
Information which may impact the market value of securities of an emerging
market issuer may not be available to the Manager on a timely basis. The Manager
will endeavor to ascertain such information on as timely a basis as is
practicable, however, any impact on the net asset value will be deemed to have
occurred upon authentication by the Manager.
HIGH YIELD, HIGH RISK SECURITIES - All or a large portion of the Fund's
investments in emerging market public and private sector debt and fixed income
instruments may be either rated below investment grade, including securities
having the lowest ratings, as determined by nationally recognized statistical
rating organizations such as Moody's Investors Service, Inc. (Moody's) or
Standard and Poor's Ratings Group (S&P), or unrated but judged by the Fund's
Manager to be of comparable (i.e., below investment grade) quality ("high yield,
high risk securities," commonly referred to as "junk bonds"). See Appendix A.
Such securities are deemed to be predominantly speculative in terms of the
issuer's capacity to make timely payments of interest and principal. Securities
assigned the lowest credit quality ratings, or judged to be of comparable
quality, are deemed to have extremely poor prospects of ever obtaining any real
investment standing. Such securities may include those in default of the payment
of interest or repayment of principal, or presenting an imminent risk of default
with respect to such payments, at the time of their acquisition by the Fund.
Once in default, issuers of such securities may fail to resume principal as well
as interest payments, in which case the Fund may lose its entire investment. In
light of these risks, the Fund will limit its investments in defaulted
securities, at time of acquisition, to 10% of the value of its assets.
These securities present unique risk exposures in that their market
valuations are especially subject to adverse changes in general economic,
political, or social conditions or in the industries within which their issuers
operate; to adverse changes in the overall financial condition of their issuers;
and to interest rate fluctuations. During, for example, periods of general
economic downturns or rising interest rates, issuers of such securities may
experience pronounced financial difficulties which could adversely affect their
ability to make timely interest and principal payments. Such conditions would
increase the possibility of their defaulting upon these securities with the Fund
having no adequate means of effecting collection or other legal recourse. The
Fund's ability to timely and accurately value, as well as dispose of, these
securities may also be detrimentally affected by the entire absence, or periodic
discontinuance, of liquid trading markets for such securities.
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PURCHASE OF SHARES
OPENING AN ACCOUNT
You may open an account and make an investment by any of the following methods.
A complete, signed application is required together with a check for each new
account.
TAX ID NUMBER
We require that each shareholder named on the account provide the Trust with a
social security number or tax identification number to avoid possible tax
withholding requirements.
EFFECTIVE DATE
When you make a purchase, your purchase price will be the net asset value (NAV)
per share next determined after the Fund receives your request in proper form.
The NAV of the Fund is determined at the close of the regular trading session of
the New York Stock Exchange (NYSE) each day the NYSE is open. If the Fund
receives your request prior to that time, your purchase price will be the NAV
per share determined for that day. If the Fund receives your request after the
NAV per share is calculated, the purchase will be effective on the next business
day.
Because of the more lengthy clearing process and the need to convert
foreign currency, a check drawn on a foreign bank will not be deemed received
for the purchase of shares until such time as the check has cleared and the
Manager has received good funds, which may take up to four to six weeks.
Furthermore, a bank charge may be assessed in the clearing process, which will
be deducted from the amount of the purchase. To avoid a delay in the effective
date of your purchase, the Manager suggests that you convert your foreign check
to U.S. dollars prior to investment in the Fund.
PURCHASE OF SHARES
MINIMUM INVESTMENTS
Initial Purchase: $3,000 [$500 for Uniform Gifts/Transfers to Minors Act
(UGMA/UTMA) accounts and $250 for IRAs] or no initial
investment if you elect to have monthly electronic
investments of at least $50 each.
Additional Purchases: $50
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HOW TO PURCHASE:
MAIL o To open an account, send your application and check to:
USAA Investment Management Company
9800 Fredericksburg Rd., San Antonio, TX 78288
o To add to your account, send your check and the "Invest by
Mail" stub that accompanies your fund's transaction
confirmation to the Transfer Agent:
USAA Shareholder Account Services
9800 Fredericksburg Rd., San Antonio, TX 78288
IN PERSON o To open an account, bring your application and check to:
USAA Investment Management Company
USAA Federal Savings Bank
10750 Robert F. McDermott Freeway, San Antonio
AUTOMATICALLY o Additional purchases on a regular basis can be deducted from a
VIA bank account, paycheck, income-producing investment or from a
ELECTRONIC USAA money market account. Sign up for these services when
FUNDS opening an account or call 1-800-531-8448 to add these
TRANSFER (EFT) services.
o Purchases through payroll deduction ($25 minimum each pay period
with no initial investment) can be made by any employee of USAA
or any of its affiliated companies.
BANK WIRE o To add to an 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 Emerging Markets Fund
USAA AC-69384998
Shareholder(s) Name(s)_________________
Shareholder(s) Account Number___________________
PHONE o If you have an existing USAA account and would like to open a
1-800-531-8448 new account or if you would like to 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.
o To add to an account, intermittent (as-needed) purchases
can be deducted from your bank account through our Buy/Sell
Service. Call for instructions.
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REDEMPTION OF SHARES
You may redeem shares of the Fund by any of the following methods on any day the
NAV per share is calculated. Redemptions will be effective on the day
instructions are received in accordance with the requirements set forth below.
However, if instructions are received after the NAV per share calculation,
redemption will be effective on the next business day.
REDEMPTION PROCEEDS
Redemption proceeds are distributed within seven days after the effective date
of redemption. Payment for redemption of shares purchased by check or electronic
funds transfer will not be disbursed until the purchase check or electronic
funds transfer has cleared, which could take up to 15 days from the purchase
date. If you are considering redeeming shares soon after purchase, you should
purchase by bank wire or certified check to avoid delay.
In addition, the Trust may elect to suspend the redemption of shares or
postpone the date of payment during any period that the NYSE is closed, or
trading in the markets the Trust normally utilizes is restricted, or during any
period that redemption is otherwise permitted to be suspended by the SEC.
HOW TO REDEEM:
WRITTEN, o Send your written instructions to:
FAX, OR USAA Shareholder Account Services
TELEGRAPH 9800 Fredericksburg Rd., San Antonio, TX 78288
o Send a signed fax to 1-800-292-8177, or send a telegraph to
USAA Shareholder Account Services.
Written redemption requests must include the following: (1) a letter of
instruction or stock assignment, and stock certificate (if issued), specifying
the Fund and the number of shares or dollar amount to be redeemed; (2)
signatures of all owners of the shares exactly as their names appear on the
account; (3) other supporting legal documents, if required, as in the case of
estates, trusts, guardianships, custodianships, partnerships, corporations, and
pension and profit-sharing plans; and (4) method of payment.
PHONE o Call toll free 1-800-531-8448, in San Antonio, 456-7202.
Telephone redemption is automatically established when you complete your
application. The Fund will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine; and if it does not, it may
be liable for any losses due to unauthorized or fraudulent instructions.
Information is obtained prior to any discussion regarding an account including:
(1) USAA number or account number, (2) the name(s) on the account registration,
and (3) social security number or tax identification number for the account
registration. In addition, all telephone communications with a shareholder are
recorded, and confirmations of all account transactions are sent to the address
of record.
Redemption by telephone, fax, or telegraph is not available for shares
represented by stock certificates.
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METHODS OF PAYMENT:
BANK WIRE o Allows redemptions to be sent directly to your bank account.
Establish this service when you apply for your account, or later upon
request. Please obtain precise wiring instructions from your financial
institution. USAA Shareholder Account Services (Transfer Agent) deducts a wire
fee from the account for the redemption by wire. The fee as of the date of this
Prospectus is $10 ($25 for wires to a foreign bank) and is subject to change at
any time. The fee is paid to State Street Bank and Trust Company and the
Transfer Agent for their services in connection with the wire redemption. Your
financial institution may also charge a fee for receiving funds by wire.
AUTOMATICALLY o Systematic (regular) or intermittent (as-needed) redemptions can
VIA EFT be credited to your bank account.
Establish any of our electronic investing services when you apply for your
account, or later upon request.
CHECK o A check payable to the registered shareholder(s) will be mailed
REDEMPTION to the address of record.
This check redemption privilege is automatically established when your
application is completed and accepted. There is a 15-day waiting period before a
check redemption can be processed following a telephone address change. Should
you wish to redeem shares within the 15 days following a telephone address
change, you may do so by providing written instructions by mail or facsimile.
CONDITIONS OF PURCHASE AND REDEMPTION
NONPAYMENT
If any order to purchase shares is cancelled due to nonpayment or if the Trust
does not receive good funds either by check or electronic funds transfer, the
Transfer Agent will treat the cancellation as a redemption of shares purchased,
and you will be responsible for any resulting loss incurred by the Fund or the
Manager. If you are a shareholder, the Transfer Agent can redeem shares from any
of your account(s) as reimbursement for all losses. In addition, you may be
prohibited or restricted from making future purchases in any of the USAA Family
of Funds. A $15 fee is charged for all returned items, including checks and
electronic funds transfers.
TRANSFER OF SHARES
You may transfer Fund shares to another person by sending written instructions
to the Transfer Agent. The account must be clearly identified, and you must
include the number of shares to be transferred, the signatures of all registered
owners, and all stock certificates, if any, which are the subject of transfer.
You also need to send written instructions signed by all registered owners and
supporting documents to change an account registration due to events such as
divorce, marriage, or death. If a new account needs to be established, you must
complete and return an application to the Transfer Agent.
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ACCOUNT BALANCE
Beginning in September 1998, and occurring each September thereafter, the
Transfer Agent will assess a small balance account fee of $12 to each
shareholder account with a balance, at the time of assessment, of less than
$2,000. The fee will be used to reduce total transfer agency fees paid by the
Fund to the Transfer Agent. 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 or 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).
TRUST RIGHTS
The Trust reserves the right to:
(1) reject purchase or exchange orders when in the best interest of the Trust;
(2) limit or discontinue the offering of shares of any portfolio of the Trust
without notice to the shareholders;
(3) require a signature guarantee for purchases, redemptions, or changes in
account information in those instances where the appropriateness of a
signature authorization is in question. The section ADDITIONAL INFORMATION
REGARDING REDEMPTION OF SHARES in the SAI contains information on
acceptable guarantors;
(4) redeem an account with less than $900, subject to certain limitations
described in ADDITIONAL INFORMATION REGARDING REDEMPTION OF SHARES in the
SAI.
EXCHANGES
EXCHANGE PRIVILEGE
The Exchange Privilege is automatically established 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 that the
shares to be acquired are offered in your state of residence. Exchange
redemptions and purchases will be processed simultaneously at the share prices
next determined after the exchange order is received. For federal income tax
purposes, an exchange between Funds is a taxable event. Accordingly, when
exchanging shares, you may realize a capital gain or loss.
The Fund has undertaken certain procedures regarding telephone
transactions. See Redemption of Shares - Phone.
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. Exchanges out of
any Fund in the USAA Family of Funds are limited for each account to six per
calendar year except that 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.
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<PAGE>
OTHER SERVICES
INVESTMENT PLANS
AUTOMATIC INVESTMENT PLANS - You may establish an automatic investment plan by
completing the appropriate forms, if any. 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. Call the Manager to obtain instructions. More information about
these preauthorized plans is contained in the SAI.
o INVESTART(R) - A no initial investment purchase plan. With this plan the
regular minimum initial investment amount is waived if you make subsequent
monthly additions of at least $50 through electronic funds transfer from a
checking or savings account. The Manager may periodically offer programs that
reduce the minimum amounts for monthly electronic investments.
o 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.
o DIRECT PURCHASE SERVICE - The periodic purchase of shares through electronic
funds transfer from an employer (including government allotments), an
income-producing investment, or an account with a participating financial
institution.
o 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.
o BUY/SELL SERVICE - The intermittent purchase or redemption of shares through
electronic funds transfer to or from a checking or savings account.
o SYSTEMATIC WITHDRAWAL PLAN - The periodic redemption of shares from one of
your accounts permitting you to receive a fixed amount of money monthly or
quarterly.
o RETIREMENT PLANS - Plans are available for various forms of IRAs and for
403(b)(7) accounts. Federal taxes on current income may be deferred if an
investor qualifies.
o 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.
SHAREHOLDER STATEMENTS AND REPORTS
You will receive a confirmation after each transaction in your account except:
(1) a payment you make under the InveStart(R), InvesTronic(R), Automatic
Purchase Plan, or Direct Purchase Service investment plans; or
(2) a redemption you make under the Systematic Withdrawal Plan.
At the end of each quarter, you will receive a consolidated statement for
all of your mutual fund accounts, regardless of account activity. The fourth
quarter consolidated statement will reflect all account activity for the prior
tax year. There will be a $10 fee charged for copies of historical statements
for other than the prior tax year for any one account. You will receive the
Fund's financial statements with
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a summary of its investments and performance at least semiannually.
In an effort to reduce expenses and respond to shareholders' requests to
reduce mail, the Trust intends to consolidate mailings of Annual and Semiannual
Reports to households having multiple accounts with the same address of record.
One copy of each report will be furnished to that address. You may request
additional reports by notifying the Trust.
TELEPHONE ASSISTANCE
Call our telephone assistance numbers for specific forms, a copy of the SAI, the
most recent Annual Report and/or Semiannual Report, or if you have any questions
concerning any of the services offered.
SHARE PRICE CALCULATION
The price at which shares of the Fund are purchased and redeemed by shareholders
is equal to the NAV per share determined on the effective date of the purchase
or redemption.
WHEN
The NAV per share for the Fund is calculated at the close of the regular trading
session of the NYSE, which is usually 4:00 p.m. Eastern time. You may buy and
sell Fund shares at the NAV per share, without a sales charge.
HOW
The NAV per share is calculated by adding the value of all securities and other
assets in the Fund, deducting liabilities, and dividing by the number of shares
outstanding. Portfolio securities, except as otherwise noted, traded primarily
on a domestic securities exchange are valued at the last sales price on that
exchange. Portfolio securities traded primarily on foreign securities exchanges
are 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 Board of Trustees. Securities which cannot be valued by
the methods set forth above, and all other assets, are valued in good faith at
fair value using methods determined by the Manager under the general supervision
of the Board of Trustees.
For additional information, see VALUATION OF SECURITIES in the SAI.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
Net investment income will be distributed to shareholders annually. Net capital
gains, if any, generally will be distributed at least annually. The Fund intends
to make such additional distributions as may be necessary to avoid the
imposition of any federal income or excise tax.
All income dividends and capital gain distributions are automatically
reinvested, unless the shareholder specifies otherwise. The share price will be
the net asset value of the Fund shares computed on the ex-dividend date. Any
income dividend or capital gain distributions paid by the Fund will reduce the
NAV per share by the amount of the dividend or distribution. An investor should
consider carefully the effects of purchasing shares of the Fund shortly before
any dividend or distribution.
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Although in effect a return of capital, these distributions are subject to
taxes.
Any dividend or distribution payment returned to the Manager as not
deliverable will be invested in the shareholder's Fund account at the
then-current NAV per share. If any check for the payment of dividends or
distributions is not cashed within six months from the date on the check, it
becomes void. The amount of the check will then be invested in the shareholder's
Fund account at the then-current NAV per share.
FEDERAL TAXES
The following discussion relates only to generally applicable federal income tax
provisions in effect as of the date of this Prospectus. Note that the recently
enacted Taxpayer Relief Act of 1997 and regulations that will likely be created
to implement the Act may affect the status and treatment of certain
distributions shareholders receive from the Fund. Shareholders are urged to
consult their own tax advisers about the status of distributions from the Fund
in their own states and localities.
FUND - The Fund intends to qualify as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended (the Code). By
complying with the applicable provisions of the Code, the Fund will not be
subject to federal income tax on its net investment income and net capital gains
(capital gains in excess of capital losses) distributed to shareholders.
SHAREHOLDER - Dividends from taxable net investment income and distributions of
net short-term capital gains are taxable to shareholders as ordinary income,
whether received in cash or reinvested in additional shares. It is not expected
that the dividends of the Fund will qualify for the 70% corporate dividends
received deduction.
Distributions of net long-term capital gains are taxable as long-term
capital gains whether received in cash or reinvested in additional shares, and
regardless of the length of time the investor has held the shares of the Fund.
Redemptions, including exchanges, are subject to income tax, based on the
difference between the cost of shares when purchased and the price received upon
redemption or exchange.
FOREIGN TAXES - The Fund may be subject to foreign withholding or other taxes.
If more than 50% of the value of the Fund's total assets at the close of any
taxable year consists of securities of foreign corporations, the Fund may file
an election with the Internal Revenue Service (the Foreign Election) that would
permit shareholders to take a credit (or a deduction) for foreign income taxes
paid by the Fund. If the Foreign Election is made, shareholders would include in
their gross income both dividends received from the Fund and foreign income
taxes paid by the Fund. Shareholders of the Fund would be entitled to treat the
foreign income taxes withheld as a credit against their U.S. federal income
taxes, subject to the limitations set forth in the Code with respect to the
foreign tax credit generally. Alternatively, shareholders could, if to their
advantage, treat the foreign income taxes withheld as an itemized deduction in
computing taxable income rather than as a tax credit. Shareholders will not be
entitled to a foreign tax credit for taxes paid to certain countries; however,
if the Fund otherwise qualifies for the Foreign Election, a deduction for such
taxes will be available to shareholders of the Fund. It is anticipated that the
Fund will make the Foreign Election.
WITHHOLDING - The Fund is required by federal law 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
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<PAGE>
with a correct tax identification number, who underreports dividend or interest
income, or who fails to certify that he 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 Transfer Agent, that your tax identification
number is correct and that you are not currently subject to backup withholding.
REPORTING - Information concerning the status of dividends and distributions for
federal income tax purposes will be mailed to shareholders annually.
MANAGEMENT OF THE TRUST
The business affairs of the Trust are subject to the supervision of the Board of
Trustees.
The Manager, USAA Investment Management Company (IMCO), was organized in
May 1970 and is an affiliate of United Services Automobile Association (USAA), a
large diversified financial services institution. As of the date of this
Prospectus, the Manager had approximately $36 billion in total assets under
management. The Manager's mailing address is 9800 Fredericksburg Rd., San
Antonio, TX 78288.
Officers and employees of the Manager are permitted to engage in personal
securities transactions subject to restrictions and procedures set forth in the
Joint Code of Ethics adopted by the Trust and the Manager. Such restrictions and
procedures include substantially all of the recommendations of the Advisory
Group of the Investment Company Institute and comply with SEC rules and
regulations.
ADVISORY AGREEMENT
The Manager serves as the manager and investment adviser of the Trust, providing
services under an Advisory Agreement. Under the Advisory Agreement, the Manager
is responsible for the management of the business affairs, investment
portfolios, and placement of brokerage orders, subject to the authority of and
supervision by the Board of Trustees.
For its services under the Advisory Agreement, the Fund pays the Manager an
annual fee which is computed as a percentage of the Fund's ANA, accrued daily
and paid monthly. The Fund's management fees were computed and paid at one
percent (1.00%) of ANA for the fiscal year ended May 31, 1997.
OPERATING EXPENSES
For the fiscal year ended May 31, 1997, the total operating expenses for the
Fund as a percentage of the Fund's ANA equaled 1.81%.
PORTFOLIO TRANSACTIONS
Purchases and sales of equity securities for the Fund's portfolio may be
accomplished through USAA Brokerage Services, a discount brokerage service of
the Manager. The Board of Trustees has adopted procedures to ensure that any
commissions paid to USAA Brokerage Services are reasonable and fair.
PORTFOLIO MANAGER
The following individual is primarily responsible for managing the Fund.
W. Travis Selmier, II, Assistant Vice President of Equity Investments since
September 1996, has managed the Fund since its inception in November 1994. Mr.
Selmier has 10 years investment management experience and has worked for IMCO
for six years. Mr. Selmier earned the Chartered Financial Analyst designation in
1990 and is a member of the Association for Investment Management and Research,
San Antonio Financial Analysts Society, Inc. and the International Society of
Financial Analysts. He holds an MBA from Indiana University, a Certificate of
Proficiency from Sophia University Japanese Language Institute, Japan, and a BA
from the University of California at Santa Barbara.
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DESCRIPTION OF SHARES
MASTER TRUST AGREEMENT
The Trust is an open-end management investment company established as a business
trust under the laws of the Commonwealth of Massachusetts pursuant to the First
Amended and Restated Master Trust Agreement (Master Trust Agreement) dated June
2, 1995, as amended. The Trust is authorized to issue an unlimited number of
shares of beneficial interest of separate portfolios, without par value. Eleven
such portfolios have been established, one of which is described in this
Prospectus. The Fund is classified as diversified. Under the Master Trust
Agreement, the Trustees are authorized to create new portfolios in addition to
those already existing without shareholder approval.
Under the Master Trust Agreement, no annual or regular meeting of
shareholders is required. Ordinarily, no shareholder meeting will be held unless
required by the 1940 Act. The Trustees may fill vacancies on the Board or
appoint new Trustees provided that immediately after such action at least
two-thirds of the Trustees have been elected by shareholders. Shareholders are
entitled to one vote per share (with proportionate voting for fractional shares)
irrespective of the relative net asset value of the shares. For matters
affecting an individual portfolio, a separate vote of the shareholders of that
portfolio is required. Shareholders holding an aggregate of at least 10% of the
outstanding shares of the Trust may request a meeting of shareholders at any
time for the purpose of voting to remove one or more of the Trustees, and the
Trust will assist shareholders in communicating with other shareholders in
connection with such a meeting.
Under Massachusetts law, shareholders of any portfolio could, under certain
circumstances, be held personally liable for the obligations of the Trust.
However, the Master Trust Agreement disclaims shareholder liability for acts or
obligations of the Trust and requires that notice of such disclaimer be given in
each agreement, obligation, or instrument entered into or executed by the Trust
or the Trustees. The Master Trust Agreement provides for indemnification out of
the Trust's property for all losses and expenses of any shareholder held
personally liable for the obligations of the Trust. Thus, the possibility of a
shareholder incurring financial loss on account of shareholder liability is
remote.
As of August 31, 1997, USAA and its affiliates owned approximately 64.1% of
the Fund's shares and as such may be presumed to control the Fund. USAA intends
to significantly increase its investment in the Fund with periodic purchases
through the end of the second quarter of 1998. USAA has indicated an intent to
invest in excess of $500 million in the Fund. If USAA decides to redeem large
amounts at any time, it intends to provide the Fund with adequate time to sell
portfolio securities in an orderly manner to meet USAA redemptions.
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SERVICE PROVIDERS
UNDERWRITER/ USAA Investment Management Company
DISTRIBUTOR 9800 Fredericksburg Rd., San Antonio, Texas 78288.
TRANSFER USAA Shareholder Account Services
AGENT 9800 Fredericksburg Rd., San Antonio, Texas 78288.
CUSTODIAN State Street Bank and Trust Company
P.O. Box 1713, Boston, Massachusetts 02105.
LEGAL Goodwin, Procter & Hoar LLP
COUNSEL Exchange Place, Boston, Massachusetts 02109.
INDEPENDENT KPMG Peat Marwick LLP
AUDITORS 112 East Pecan, Suite 2400, San Antonio, Texas 78205.
- --------------------------------------------------------------------------------
TELEPHONE ASSISTANCE
(Call toll free - Central Time)
Monday-Friday 8:00 a.m. to 8:00 p.m.
Saturday 8:30 a.m. to 5:00 p.m.
For further information on mutual funds:
1-800-531-8181
In San Antonio 456-7211
For account servicing, exchanges or redemptions:
1-800-531-8448
In San Antonio 456-7202
RECORDED 24 HOUR SERVICE
MUTUAL FUND PRICE QUOTES
(From any phone)
1-800-531-8066
In San Antonio 498-8066
MUTUAL FUND TOUCHLINE(R)
(From Touchtone phones only)
For account balance, last transaction or fund prices:
1-800-531-8777
In San Antonio 498-8777
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23
<PAGE>
APPENDIX A - CORPORATE RATINGS
Moody's Corporate Ratings
Baa Bonds which are rated Baa are considered as medium grade obligations.
Interest payments and principal security appear adequate for the present
but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such bonds
lack outstanding investment characteristics and in fact have speculative
characteristics as well.
Ba Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate, and thereby not
well safeguarded during other good and bad times over the future.
Uncertainty of position characterizes bonds in this class.
B Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time
may be small.
Caa Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
Ca Bonds which are rated Ca represent obligations which are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.
C Bonds which are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
S&P Corporate Ratings
BBB Debt rated BBB is regarded as having adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to pay interest and repay
principal for debt in this category than in higher rated categories.
BB Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which
could lead to inadequate capacity to meet timely interest and principal
payments. This rating category is also used for debt subordinated to
senior debt that is assigned an actual or implied BBB- rating.
B Debt rated B has a greater vulnerability to default but currently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity
or willingness to pay interest and repay principal. This rating category
is also used for debt subordinated to senior debt that is assigned an
actual or implied BB or BB- rating.
24
<PAGE>
CCC Debt rated CCC has a currently identifiable vulnerability to default,
and is dependent upon favorable business, financial, and economic
conditions to meet timely payment of interest and repayment of
principal. In the event of adverse business, financial, or economic
conditions, these bonds are not likely to have the capacity to pay
interest and repay principal. The CCC rating category is also used for
debt subordinated to senior debt that is assigned an actual or implied B
or B- rating.
CC The rating CC is typically applied to debt subordinated to senior debt
that is assigned an actual or implied CCC rating.
C The rating C typically is applied to debt subordinated to senior debt
which is assigned an actual or implied CCC- debt rating. This rating may
be used to cover a situation where a bankruptcy petition has been filed,
but debt service payments are continued.
CI The rating CI is reserved for income bonds on which no interest is being
paid.
D Debt rated D is in payment default. This rating category is used when
interest payments or principal payments are not made on the date due
even if the applicable grace period has not expired, unless S&P believes
that such payments will be made during such grace period. This rating
also will be used upon the filing of a bankruptcy petition if debt
service payments are jeopardized.
PLUS (+) OR MINUS (-): THE RATINGS FROM BBB TO CCC MAY BE MODIFIED BY
THE ADDITION OF A PLUS OR MINUS SIGN TO SHOW RELATIVE STANDING WITHIN
THE MAJOR RATING CATEGORIES.
A description of ratings "A" or better assigned to debt obligations by Moody's
and S&P is included in APPENDIX A of the SAI.
25
<PAGE>
Part A
Prospectus for the
Gold Fund
is included herein
<PAGE>
USAA GOLD FUND
October 1, 1997 PROSPECTUS
USAA GOLD FUND (the Fund) is one of eleven no-load mutual funds offered by USAA
Investment Trust (the Trust). The Fund is managed by USAA Investment Management
Company (the Manager).
WHAT IS THE INVESTMENT OBJECTIVE?
The Fund's primary investment objective is to seek long-term capital
appreciation and to protect the purchasing power of shareholders' capital
against inflation. Current income is a secondary objective. Page 9.
HOW DO YOU BUY?
Fund shares are sold on a continuous basis at the net asset value per share
without a sales charge. Make your initial investment directly with the Manager
by mail, in person, or in certain instances, by telephone. Page 12.
HOW DO YOU SELL?
You may redeem Fund shares by mail, telephone, fax, or telegraph on any day
that the net asset value is calculated. Page 14.
This Prospectus, which should be read and retained for future reference,
provides information regarding the Trust and the Fund that you should know
before investing.
SHARES OF THE USAA GOLD FUND ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF, OR
GUARANTEED BY, THE USAA FEDERAL SAVINGS BANK, ARE NOT INSURED BY THE FDIC OR ANY
OTHER GOVERNMENT AGENCY, ARE SUBJECT TO INVESTMENT RISKS, AND MAY LOSE VALUE.
THIS FUND INVOLVES A HIGHER DEGREE OF RISK AND MAY NOT BE APPROPRIATE FOR SOME
INVESTORS. SEE SPECIAL RISK CONSIDERATIONS, PAGE 11.
If you would like more information about the Fund, you may call
1-800-531-8181 to request a free copy of the most recent financial report and/or
the Fund's Statement of Additional Information (SAI), dated October 1, 1997. The
SAI has been filed with the Securities and Exchange Commission (SEC) and is
incorporated by reference into this Prospectus (meaning it is legally a part of
the Prospectus).
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
Page
SUMMARY DATA
Fees and Expenses............................................. 3
Financial Highlights.......................................... 4
Performance Information....................................... 6
USING MUTUAL FUNDS
USAA Family of No-Load Mutual Funds........................... 7
Using Mutual Funds in an Investment Program................... 8
INVESTMENT PORTFOLIO INFORMATION
Investment Objective and Policies............................. 9
SHAREHOLDER INFORMATION
Purchase of Shares............................................ 12
Redemption of Shares.......................................... 14
Conditions of Purchase and Redemption......................... 15
Exchanges..................................................... 16
Other Services................................................ 17
Share Price Calculation....................................... 18
Dividends, Distributions and Taxes............................ 18
Management of the Trust....................................... 20
Description of Shares......................................... 21
Service Providers............................................. 22
Telephone Assistance Numbers.................................. 22
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2
<PAGE>
FEES AND EXPENSES
The following summary, which is based on actual expenses and average net assets
(ANA) of the Fund for the year ended May 31, 1997, is provided to assist you in
understanding the expenses you will bear directly or indirectly as a Fund
investor.
Shareholder Transaction Expenses
- --------------------------------------------------------------------------------
Sales Load Imposed on Purchases............................. None
Sales Load Imposed on Reinvested Dividends.................. None
Deferred Sales Load......................................... None
Redemption Fee*............................................. None
Exchange Fee................................................ None
Annual Fund Operating Expenses (as a percentage of ANA)
- --------------------------------------------------------------------------------
Management Fees............................................. .75%
12b-1 Fees.................................................. None
Other Expenses
Transfer Agent Fees...................................... .41%
Custodian Fees........................................... .06%
All Other Expenses....................................... .09%
---
Total Other Expenses........................................ .56%
---
Total Fund Operating Expenses............................... 1.31%
====
- ---------------------------
* A shareholder who requests delivery of redemption proceeds by wire transfer
will be subject to a $10 fee. See REDEMPTION OF SHARES - BANK WIRE.
Example of Effect of Fund Expenses
- --------------------------------------------------------------------------------
You would pay the following expenses on a $1,000 investment in the Fund,
assuming (1) 5% annual return and (2) redemption at the end of the periods
shown.
1 year - $ 13
3 years - $ 42
5 years - $ 72
10 years - $ 158
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
3
<PAGE>
FINANCIAL HIGHLIGHTS
The following financial highlights for a share outstanding throughout each of
the periods in the ten-year period ended May 31, 1997, have been audited by KPMG
Peat Marwick LLP. This table should be read in conjunction with the Fund's
financial statements for the year ended May 31, 1997, and the independent
auditors' report thereon, that appear in the Fund's Annual Report. Further
performance information is contained in the Annual Report and is available upon
request without charge.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
EIGHT-MONTH YEAR
PERIOD ENDED ENDED
YEAR ENDED MAY 31, MAY 31, SEPTEMBER 30,
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Net asset value at
beginning of period $ 11.12 $ 9.00 $ 8.83 $ 7.95 $ 6.53
Net investment income (loss) (.01)(b) (.02) .01 .01 .02
Net realized and
unrealized gain (loss) (3.02) 2.15 .17 .88 1.44
Distributions from net
investment income - (.01) (.01) (.01) (.04)
Distributions of realized
capital gains - - - - -
-------- -------- -------- -------- --------
Net asset value at
end of period $ 8.09 $ 11.12 $ 9.00 $ 8.83 $ 7.95
======== ======== ======== ======== ========
Total return (%)* (27.25) 23.66 2.05 11.19 22.53
Net assets at end of
period (000) $121,169 $167,067 $160,223 $176,527 $150,793
Ratio of expenses to
average net assets (%) 1.31 1.33 1.28 1.26(a) 1.41
Ratio of net investment
income (loss) to average
net assets (%) (.11) (.14) .10 .15(a) .25
Portfolio turnover (%) 26.40 16.48 34.76 34.75 81.08
Average commission rate
paid per share ** $ .0195 $ .0292
- ---------------------------
</TABLE>
* Assumes reinvestment of all dividend income and capital gain distributions
during the period.
** Calculated by aggregating all commissions paid on the purchase and sale of
securities and dividing by the actual number of shares purchased or sold
for which commissions were charged.
(a) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
(b) Calculated using weighted average shares.
4
<PAGE>
FINANCIAL HIGHLIGHTS cont.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
YEAR ENDED SEPTEMBER 30,
1992 1991 1990 1989 1988
---- ---- ---- ---- ----
Net asset value at
beginning of period $ 6.40 $ 8.08 $ 8.84 $ 8.21 $ 17.07
Net investment income (loss) .07 .10 .08 .17 .05
Net realized and
unrealized gain (loss) .14 (1.72) (.69) .59 (8.35)
Distributions from net
investment income (.08) (.06) (.15) (.13) (.05)
Distribution of realized
capital gains - - - - (.51)
-------- -------- -------- -------- --------
Net asset value at
end of period $ 6.53 $ 6.40 $ 8.08 $ 8.84 $ 8.21
======== ======== ======== ======== ========
Total return (%)* 3.30 (20.10) (7.16) 9.37 (48.89)
Net assets at end of
period (000) $114,073 $121,204 $156,573 $165,026 $174,380
Ratio of expenses to
average net assets (%) 1.43 1.45 1.43 1.34 1.42
Ratio of net investment
income (loss) to average
net assets (%) 1.02 1.55 .93 1.92 .50
Portfolio turnover (%) 19.01 13.38 41.91 17.49 26.83
</TABLE>
5
<PAGE>
PERFORMANCE INFORMATION
Performance information should be considered in light of the Fund's investment
objective and policies and market conditions during the time periods for which
it is reported. Historical performance should not be considered as
representative of the future performance of the Fund.
The Trust may quote the Fund's total return in advertisements and reports
to shareholders or prospective investors. The Fund's performance may also be
compared to that of other mutual funds with a similar investment objective and
to stock or relevant indexes that are referenced in APPENDIX B to the SAI.
Standard total return results reported by the Fund do not take into account
recurring and nonrecurring charges for optional services which only certain
shareholders elect and which involve nominal fees, such as the $10 fee for a
delivery of redemption proceeds by wire transfer.
The Fund's average annual total return is computed by determining the
average annual compounded rate of return for a specified period which, when
applied to a hypothetical $1,000 investment in the Fund at the beginning of the
period, would produce the redeemable value of that investment at the end of the
period, assuming reinvestment of all dividends and distributions during the
period.
Further information concerning the Fund's total return is included in the
SAI.
6
<PAGE>
USAA FAMILY OF NO-LOAD MUTUAL FUNDS
The USAA Family of No-Load Mutual Funds includes a variety of Funds, each with
different objectives and policies. In combination, these Funds are designed to
provide investors with the opportunity to formulate their own investment
program. You may exchange any shares you hold in any one USAA Fund for shares in
any other USAA Fund. For more complete information about the Funds in the USAA
Family of Funds, including charges and expenses, call the Manager for a
Prospectus. Read it carefully before you invest or send money.
USAA INVESTMENT TRUST
Income Strategy Fund
Growth and Tax Strategy Fund
Balanced Strategy Fund
Cornerstone Strategy Fund
Growth Strategy Fund
Emerging Markets Fund
Gold Fund
International Fund
World Growth Fund
GNMA Trust
Treasury Money Market Trust
USAA MUTUAL FUND, INC.
Aggressive Growth Fund
Science & Technology Fund
Growth Fund
First Start Growth Fund
S&P 500 Index Fund**
Growth & Income Fund
Income Stock Fund
Income Fund
Short-Term Bond Fund
Money Market Fund
USAA TAX EXEMPT FUND, INC.
Long-Term Fund
Intermediate-Term Fund
Short-Term Fund
Tax Exempt Money Market Fund
California Bond Fund*
California Money Market Fund*
New York Bond Fund*
New York Money Market Fund*
Virginia Bond Fund*
Virginia Money Market Fund*
USAA STATE TAX-FREE TRUST
Florida Tax-Free Income Fund*
Florida Tax-Free Money Market Fund*
Texas Tax-Free Income Fund*
Texas Tax-Free Money Market Fund*
* Offered only to residents of these specific states.
** S&P 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.
7
<PAGE>
USING MUTUAL FUNDS IN AN INVESTMENT PROGRAM
I. THE IDEA BEHIND MUTUAL FUNDS
Mutual funds provide small investors some of the advantages enjoyed by wealthy
investors. A relatively small investment can buy part of a widely diversified
portfolio. That portfolio is managed by investment professionals, relieving the
shareholder of the need to make individual stock or bond selections. The
investor also enjoys 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 each shareholder owns an investment that in earlier times
would have been available only to very wealthy people.
II. USING FUNDS IN AN INVESTMENT PROGRAM
In choosing a mutual fund as an investment vehicle, the shareholder is foregoing
some investment decisions, but must still make others. The decisions foregone
are those involved with choosing individual securities. The Fund Manager will
perform that function. In addition, the Manager will arrange for the safekeeping
of securities, auditing the annual financial statements, and daily valuation of
the Fund, as well as other functions.
The shareholder, however, retains at least part of the responsibility for
an equally important decision. This decision involves determining a portfolio of
mutual funds that balances the investor's investment goals with his or her
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 a shareholder wishes to diversify internationally. He
or she could do this by adding positions in the Emerging Markets, Gold,
International, or World Growth Funds to holdings in domestic funds. This would
give the investor exposure to the opportunities of investment in many foreign
countries and to currency changes. This is just one example of how an individual
could combine funds to create a portfolio tailored to his or her own risk and
reward goals.
III. USAA'S FAMILY OF FUNDS
The Manager offers investors another alternative in its asset strategy funds,
the Income Strategy, Growth and Tax Strategy, Balanced Strategy, Cornerstone
Strategy, and Growth Strategy Funds. These unique mutual funds provide a
professionally managed diversified investment portfolio within a mutual fund.
These Funds are designed for the shareholder who prefers to delegate the asset
allocation process to an investment manager. The Funds are structured to achieve
diversification across a number of investment categories.
Whether you prefer to create your own mix of mutual funds or use an asset
strategy fund, the USAA Family of Funds provides a broad range of choices
covering just about any investor's investment objectives. Our sales
representatives stand ready to assist you with your choices and to help you
craft a portfolio which meets your needs.
8
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
INVESTMENT OBJECTIVE
The Fund's primary investment objective is to seek long-term capital
appreciation and to protect the purchasing power of shareholders' capital
against inflation. Current income is a secondary objective.
The investment objective of the Fund cannot be changed without shareholder
approval. In view of the risks inherent in all investments in securities, there
is no assurance that this objective will be achieved.
The investment policies and techniques used to pursue the Fund's objective
may be changed without shareholder approval, except as otherwise noted. Further
information regarding the Fund's investment policies, restrictions and risks is
provided in the SAI.
INVESTMENT POLICIES, TECHNIQUES AND RISK FACTORS
The Manager will pursue the objective by investing under normal circumstances at
least 80% of the Fund's assets in common stocks, preferred stocks or securities
which are convertible into or which carry the right to buy common stocks of
companies principally engaged in gold exploration, mining, or processing.
The remainder of the Fund's assets may be invested in common stocks,
preferred stocks or securities which are convertible into or which carry the
right to buy common stocks of companies similarly engaged in other precious
metals and minerals and in marketable debt securities having maturities of less
than one year issued or guaranteed as to both principal and interest by the U.S.
Government or by its agencies or instrumentalities and in repurchase agreements
collateralized by such securities.
If the Manager believes the outlook for gold is unattractive, the Fund may
on a temporary defensive basis invest its assets without limitation in
marketable securities having remaining maturities of less than one year issued
or guaranteed as to both principal and interest by the U.S. Government or by its
agencies or instrumentalities and in repurchase agreements collateralized by
such securities.
Since the Fund will normally maintain at least 80% of its total assets in
securities of companies principally engaged in gold exploration, mining, or
processing, the Fund may be subject to greater risks and greater market
fluctuations than other funds with a portfolio of securities representing a
broader range of investment objectives. An investment in the Fund, by itself,
should not be considered a balanced investment program. See SPECIAL RISK
CONSIDERATIONS.
FORWARD CURRENCY CONTRACTS - The Fund may hold securities denominated in foreign
currencies. As a result, the value of the securities will be affected by changes
in the exchange rate between the dollar and foreign currencies. In managing the
currency exposure, the Fund 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.
The Fund may enter into forward currency contracts under two circumstances.
First, when the 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. Second, when management of the 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. The Fund may not
hedge with respect to a particular currency
9
<PAGE>
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 currency contracts to protect the value of the Fund's
assets against a decline in the value of a currency does not eliminate
fluctuations in the value of the Fund's underlying security holdings. In
addition, although the use of forward currency contracts can minimize the risk
of loss due to a decline in value of the foreign currency, the use of such
contracts will tend to limit any potential gain resulting from an increase in
the relative value of the foreign currency to the U.S. dollar. Under certain
circumstances, a fund that has entered into forward currency contracts to hedge
its currency risks may be in a less favorable position than a fund that had not
entered into such contracts. The projection of short-term currency market
movements is extremely difficult and successful execution of a short-term
hedging strategy is highly uncertain.
REPURCHASE AGREEMENTS - The Fund may invest in repurchase agreements which are
collateralized by obligations backed by the full faith and credit of the U.S.
Government or by its agencies or instrumentalities. A repurchase agreement is a
transaction in which a security is purchased with a simultaneous commitment to
sell the security back to the seller (a commercial bank or recognized securities
dealer) at an agreed upon price on an agreed upon date, 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 the 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.
WHEN-ISSUED SECURITIES - The Fund may invest in new issues of debt securities
offered on a when-issued basis; that is, 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.
Cash or high quality liquid debt securities equal to the amount of the
when-issued commitments are segregated at the Fund's custodian bank. The
segregated securities are valued at market, and daily adjustments are made to
keep the value of the cash and segregated securities at least equal to the
amount of such commitments by the Fund. On the settlement date, the Fund will
meet its obligations from then available cash, sale of segregated securities,
sale of other securities, or sale of the when-issued securities themselves.
LIQUIDITY - The Fund may not invest more than 15% of the market value of its
total assets in securities which are illiquid or not readily marketable. Rule
144A Securities may be determined to be liquid in accordance with guidelines
established by the Board of Trustees.
10
<PAGE>
INVESTMENT RESTRICTIONS
The following restrictions may not be changed without shareholder approval:
(1) The Fund may not invest more than 25% of its total assets in one industry,
except that the Fund will concentrate at least 80% of its investments in
gold mining securities.
(2) The Fund may not, 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 Investment Company Act of 1940, as amended (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.
(3) The Fund may not 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).
SPECIAL RISK CONSIDERATIONS
VOLATILITY OF MINING STOCKS - Gold mining stocks involve additional risk because
of gold's price volatility and the increased impact such volatility has on the
profitability of gold mining companies. However, since the market action of such
securities has tended to move independently of the broader financial markets,
the addition of gold mining stocks to an investor's portfolio may reduce overall
fluctuations in portfolio value.
The Fund may invest in the securities of South African issuers. The market
prices of these securities and the ability of the Fund to hold such investments
in the future could be affected by the unstable political and social conditions
in South Africa and its neighboring countries.
INVESTMENT IN FOREIGN SECURITIES - The Fund may purchase foreign securities in
foreign or U.S. markets or it may purchase American Depositary Receipts (ADRs),
Global Depositary Receipts (GDRs), or similar forms of ownership interest in
securities of foreign issuers deposited with a depositary. Investing in foreign
securities presents certain risks not present in domestic investments. Such
risks may include currency exchange rate fluctuations; foreign market
illiquidity; increased price volatility; exchange control regulations; different
accounting, reporting, and disclosure requirements; political or social
instability; and difficulties in obtaining judgments or effecting collections
thereon. Brokerage commissions and custodial services may be more costly, and
stock trade settlements may be more lengthy, more costly and more difficult than
in domestic markets. These investments may be subject to foreign withholding
taxes which may reduce the effective rates of return. The Fund values its
securities and other assets in U.S. dollars.
Information which may impact the market value of securities of a foreign
issuer may not be available to the Manager on a timely basis. The Manager will
endeavor to ascertain such information on as timely a basis as is practicable,
however, any impact on the net asset value will be deemed to have occurred upon
authentication by the Manager.
A developing country can be considered to be a country which is in the
initial stages of its industrialization cycle. Investments in developing
countries involve exposure to economic structures that are generally less
diverse and mature than in the United States, and to political systems which may
be less stable. Due to illiquidity and lack of hedging instruments, it is
presently difficult or in some cases impossible to hedge the currency risk in
these markets. In the past, markets of developing countries have been more
volatile than the markets of developed countries.
Political risk includes a greater potential for coup d'etats, insurrections
and
11
<PAGE>
expropriation by governmental organizations. For example, the Fund may invest in
Eastern Europe and former states of the Soviet Union (also known as the CIS or
the Commonwealth of Independent States). These countries were under communist
systems which had nationalized private industry. There is no guarantee that
nationalization may not occur again in this region or others in which the Fund
invests, in which case the Fund may lose all or part of its investment in that
country's issuers.
PURCHASE OF SHARES
OPENING AN ACCOUNT
You may open an account and make an investment by any of the following methods.
A complete, signed application is required together with a check for each new
account.
TAX ID NUMBER
We require that each shareholder named on the account provide the Trust with a
social security number or tax identification number to avoid possible tax
withholding requirements.
EFFECTIVE DATE
When you make a purchase, your purchase price will be the net asset value (NAV)
per share next determined after the Fund receives your request in proper form.
The NAV of the Fund is determined at the close of the regular trading session of
the New York Stock Exchange (NYSE) each day the NYSE is open. If the Fund
receives your request prior to that time, your purchase price will be the NAV
per share determined for that day. If the Fund receives your request after the
NAV per share is calculated, the purchase will be effective on the next business
day.
Because of the more lengthy clearing process and the need to convert foreign
currency, a check drawn on a foreign bank will not be deemed received for the
purchase of shares until such time as the check has cleared and the Manager has
received good funds, which may take up to four to six weeks. Furthermore, a bank
charge may be assessed in the clearing process, which will be deducted from the
amount of the purchase. To avoid a delay in the effective date of your purchase,
the Manager suggests that you convert your foreign check to U.S. dollars prior
to investment in the Fund.
PURCHASE OF SHARES
MINIMUM INVESTMENTS
Initial Purchase: $3,000 [$500 for Uniform Gifts/Transfers to Minors Act
(UGMA/UTMA) accounts and $250 for IRAs] or no initial
investment if you elect to have monthly electronic
investments of at least $50 each.
Additional Purchases: $50
12
<PAGE>
HOW TO PURCHASE:
MAIL o To open an account, send your application and check to:
USAA Investment Management Company
9800 Fredericksburg Rd., San Antonio, TX 78288
o To add to your account, send your check and the "Invest by
Mail" stub that accompanies your fund's transaction
confirmation to the Transfer Agent:
USAA Shareholder Account Services
9800 Fredericksburg Rd., San Antonio, TX 78288
IN PERSON o To open an account, bring your application and check to:
USAA Investment Management Company
USAA Federal Savings Bank
10750 Robert F. McDermott Freeway, San Antonio
AUTOMATICALLY o Additional purchases on a regular basis can be deducted from a
VIA bank account, paycheck, income-producing investment or from a
ELECTRONIC USAA money market account. Sign up for these services when
FUNDS opening an account or call 1-800-531-8448 to add these
TRANSFER (EFT) services.
o Purchases through payroll deduction ($25 minimum each pay period
with no initial investment) can be made by any employee of USAA
or any of its affiliated companies.
BANK WIRE o To add to an 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 Gold Fund
USAA AC-69384998
Shareholder(s) Name(s)_________________
Shareholder(s) Account Number___________________
PHONE o If you have an existing USAA account and would like to open a
1-800-531-8448 new account or if you would like to 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.
o To add to an account, intermittent (as-needed) purchases
can be deducted from your bank account through our Buy/Sell
Service. Call for instructions.
13
<PAGE>
REDEMPTION OF SHARES
You may redeem shares of the Fund by any of the following methods on any day the
NAV per share is calculated. Redemptions will be effective on the day
instructions are received in accordance with the requirements set forth below.
However, if instructions are received after the NAV per share calculation,
redemption will be effective on the next business day.
REDEMPTION PROCEEDS
Redemption proceeds are distributed within seven days after the effective date
of redemption. Payment for redemption of shares purchased by check or electronic
funds transfer will not be disbursed until the purchase check or electronic
funds transfer has cleared, which could take up to 15 days from the purchase
date. If you are considering redeeming shares soon after purchase, you should
purchase by bank wire or certified check to avoid delay.
In addition, the Trust may elect to suspend the redemption of shares or
postpone the date of payment during any period that the NYSE is closed, or
trading in the markets the Trust normally utilizes is restricted, or during any
period that redemption is otherwise permitted to be suspended by the SEC.
HOW TO REDEEM:
WRITTEN, o Send your written instructions to:
FAX, OR USAA Shareholder Account Services
TELEGRAPH 9800 Fredericksburg Rd., San Antonio, TX 78288
o Send a signed fax to 1-800-292-8177, or send a telegraph to
USAA Shareholder Account Services.
Written redemption requests must include the following: (1) a letter of
instruction or stock assignment, and stock certificate (if issued), specifying
the Fund and the number of shares or dollar amount to be redeemed; (2)
signatures of all owners of the shares exactly as their names appear on the
account; (3) other supporting legal documents, if required, as in the case of
estates, trusts, guardianships, custodianships, partnerships, corporations, and
pension and profit-sharing plans; and (4) method of payment.
PHONE o Call toll free 1-800-531-8448, in San Antonio, 456-7202.
Telephone redemption is automatically established when you complete your
application. The Fund will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine; and if it does not, it may
be liable for any losses due to unauthorized or fraudulent instructions.
Information is obtained prior to any discussion regarding an account including:
(1) USAA number or account number, (2) the name(s) on the account registration,
and (3) social security number or tax identification number for the account
registration. In addition, all telephone communications with a shareholder are
recorded, and confirmations of all account transactions are sent to the address
of record.
Redemption by telephone, fax, or telegraph is not available for shares
represented by stock certificates.
14
<PAGE>
METHODS OF PAYMENT:
BANK WIRE o Allows redemptions to be sent directly to your bank account.
Establish this service when you apply for your account, or later upon
request. Please obtain precise wiring instructions from your financial
institution. USAA Shareholder Account Services (Transfer Agent) deducts a wire
fee from the account for the redemption by wire. The fee as of the date of this
Prospectus is $10 ($25 for wires to a foreign bank) and is subject to change at
any time. The fee is paid to State Street Bank and Trust Company and the
Transfer Agent for their services in connection with the wire redemption. Your
financial institution may also charge a fee for receiving funds by wire.
AUTOMATICALLY o Systematic (regular) or intermittent (as-needed) redemptions can
VIA EFT be credited to your bank account.
Establish any of our electronic investing services when you apply for your
account, or later upon request.
CHECK o A check payable to the registered shareholder(s) will be mailed
REDEMPTION to the address of record.
This check redemption privilege is automatically established when your
application is completed and accepted. There is a 15-day waiting period before a
check redemption can be processed following a telephone address change. Should
you wish to redeem shares within the 15 days following a telephone address
change, you may do so by providing written instructions by mail or facsimile.
CONDITIONS OF PURCHASE AND REDEMPTION
NONPAYMENT
If any order to purchase shares is cancelled due to nonpayment or if the Trust
does not receive good funds either by check or electronic funds transfer, the
Transfer Agent will treat the cancellation as a redemption of shares purchased,
and you will be responsible for any resulting loss incurred by the Fund or the
Manager. If you are a shareholder, the Transfer Agent can redeem shares from any
of your account(s) as reimbursement for all losses. In addition, you may be
prohibited or restricted from making future purchases in any of the USAA Family
of Funds. A $15 fee is charged for all returned items, including checks and
electronic funds transfers.
TRANSFER OF SHARES
You may transfer Fund shares to another person by sending written instructions
to the Transfer Agent. The account must be clearly identified, and you must
include the number of shares to be transferred, the signatures of all registered
owners, and all stock certificates, if any, which are the subject of transfer.
You also need to send written instructions signed by all registered owners and
supporting documents to change an account registration due to events such as
divorce, marriage, or death. If a new account needs to be established, you must
complete and return an application to the Transfer Agent.
15
<PAGE>
ACCOUNT BALANCE
Beginning in September 1998, and occurring each September thereafter, the
Transfer Agent will assess a small balance account fee of $12 to each
shareholder account with a balance, at the time of assessment, of less than
$2,000. The fee will be used to reduce total transfer agency fees paid by the
Fund to the Transfer Agent. 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 or 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).
TRUST RIGHTS
The Trust reserves the right to:
(1) reject purchase or exchange orders when in the best interest of the Trust;
(2) limit or discontinue the offering of shares of any portfolio of the Trust
without notice to the shareholders;
(3) require a signature guarantee for purchases, redemptions, or changes in
account information in those instances where the appropriateness of a
signature authorization is in question. The section ADDITIONAL INFORMATION
REGARDING REDEMPTION OF SHARES in the SAI contains information on
acceptable guarantors;
(4) redeem an account with less than $900, subject to certain limitations
described in ADDITIONAL INFORMATION REGARDING REDEMPTION OF SHARES in the
SAI.
EXCHANGES
EXCHANGE PRIVILEGE
The Exchange Privilege is automatically established 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 that the
shares to be acquired are offered in your state of residence. Exchange
redemptions and purchases will be processed simultaneously at the share prices
next determined after the exchange order is received. For federal income tax
purposes, an exchange between Funds is a taxable event. Accordingly, when
exchanging shares, you may realize a capital gain or loss.
The Fund has undertaken certain procedures regarding telephone
transactions. See REDEMPTION OF SHARES - PHONE.
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. Exchanges out of
any Fund in the USAA Family of Funds are limited for each account to six per
calendar year except that 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.
16
<PAGE>
OTHER SERVICES
INVESTMENT PLANS
AUTOMATIC INVESTMENT PLANS - You may establish an automatic investment plan by
completing the appropriate forms, if any. 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. Call the Manager to obtain instructions. More information about
these preauthorized plans is contained in the SAI.
o INVESTART(R) - A no initial investment purchase plan. With this plan the
regular minimum initial investment amount is waived if you make subsequent
monthly additions of at least $50 through electronic funds transfer from a
checking or savings account. The Manager may periodically offer programs that
reduce the minimum amounts for monthly electronic investments.
o 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.
o DIRECT PURCHASE SERVICE - The periodic purchase of shares through electronic
funds transfer from an employer (including government allotments), an
income-producing investment, or an account with a participating financial
institution.
o 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.
o BUY/SELL SERVICE - The intermittent purchase or redemption of shares through
electronic funds transfer to or from a checking or savings account.
o SYSTEMATIC WITHDRAWAL PLAN - The periodic redemption of shares from one of
your accounts permitting you to receive a fixed amount of money monthly or
quarterly.
o RETIREMENT PLANS - Plans are available for various forms of IRAs and for
403(b)(7) accounts. Federal taxes on current income may be deferred if an
investor qualifies.
o 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.
SHAREHOLDER STATEMENTS AND REPORTS
You will receive a confirmation after each transaction in your account except:
(1) a payment you make under the InveStart(R), InvesTronic(R), Automatic
Purchase Plan, or Direct Purchase Service investment plans; or
(2) a redemption you make under the Systematic Withdrawal Plan.
At the end of each quarter, you will receive a consolidated statement for
all of your mutual fund accounts, regardless of account activity. The fourth
quarter consolidated statement will reflect all account activity for the prior
tax year. There will be a $10 fee charged for copies of historical statements
for other than the prior tax year for any one account. You will receive the
Fund's financial statements with
17
<PAGE>
a summary of its investments and performance at least semiannually.
In an effort to reduce expenses and respond to shareholders' requests to
reduce mail, the Trust intends to consolidate mailings of Annual and Semiannual
Reports to households having multiple accounts with the same address of record.
One copy of each report will be furnished to that address. You may request
additional reports by notifying the Trust.
TELEPHONE ASSISTANCE
Call our telephone assistance numbers for specific forms, a copy of the SAI, the
most recent Annual Report and/or Semiannual Report, or if you have any questions
concerning any of the services offered.
SHARE PRICE CALCULATION
The price at which shares of the Fund are purchased and redeemed by shareholders
is equal to the NAV per share determined on the effective date of the purchase
or redemption.
WHEN
The NAV per share for the Fund is calculated at the close of the regular trading
session of the NYSE, which is usually 4:00 p.m. Eastern time. You may buy and
sell Fund shares at the NAV per share without a sales charge.
HOW
The NAV per share is calculated by adding the value of all securities and other
assets in the Fund, deducting liabilities, and dividing by the number of shares
outstanding. Portfolio securities, except as otherwise noted, traded primarily
on a domestic securities exchange are valued at the last sales price on that
exchange. Portfolio securities traded primarily on foreign securities exchanges
are 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 Board of Trustees. Securities which cannot be valued by
the methods set forth above, and all other assets, are valued in good faith at
fair value using methods determined by the Manager under the general supervision
of the Board of Trustees.
For additional information, see VALUATION OF SECURITIES in the SAI.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
Net investment income will be distributed to shareholders annually. Net capital
gains, if any, generally will be distributed at least annually. The Fund intends
to make such additional distributions as may be necessary to avoid the
imposition of any federal income or excise tax.
All income dividends and capital gain distributions are automatically
reinvested, unless the shareholder specifies otherwise. The share price will be
the net asset value of the Fund shares computed on the ex-dividend date. Any
income dividend or capital gain distributions paid by the Fund will reduce the
NAV per share by the amount of the dividend or distribution. An investor should
consider carefully the effects of purchasing shares of the Fund shortly before
any dividend or distribution.
18
<PAGE>
Although in effect a return of capital, these distributions are subject to
taxes.
Any dividend or distribution payment returned to the Manager as not
deliverable will be invested in the shareholder's Fund account at the
then-current NAV per share. If any check for the payment of dividends or
distributions is not cashed within six months from the date on the check, it
becomes void. The amount of the check will then be invested in the shareholder's
Fund account at the then-current NAV per share.
FEDERAL TAXES
The following discussion relates only to generally applicable federal income tax
provisions in effect as of the date of this Prospectus. Note that the recently
enacted Taxpayer Relief Act of 1997 and regulations that will likely be created
to implement the Act may affect the status and treatment of certain
distributions shareholders receive from the Fund. Shareholders are urged to
consult their own tax advisers about the status of distributions from the Fund
in their own states and localities.
FUND - The Fund intends to qualify as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended (the Code). By
complying with the applicable provisions of the Code, the Fund will not be
subject to federal income tax on its net investment income and net capital gains
(capital gains in excess of capital losses) distributed to shareholders.
SHAREHOLDER - Dividends from taxable net investment income and distributions of
net short-term capital gains are taxable to shareholders as ordinary income,
whether received in cash or reinvested in additional shares. A portion of these
dividends may qualify for the 70% dividends received deduction available to
corporations.
Distributions of net long-term capital gains are taxable as long-term
capital gains whether received in cash or reinvested in additional shares, and
regardless of the length of time the investor has held the shares of the Fund.
Redemptions, including exchanges, are subject to income tax, based on the
difference between the cost of shares when purchased and the price received upon
redemption or exchange.
FOREIGN TAXES - The Fund may be subject to foreign withholding or other taxes.
If more than 50% of the value of the Fund's total assets at the close of any
taxable year consists of securities of foreign corporations, the Fund may file
an election with the Internal Revenue Service (the Foreign Election) that would
permit shareholders to take a credit (or a deduction) for foreign income taxes
paid by the Fund. If the Foreign Election is made, shareholders would include in
their gross income both dividends received from the Fund and foreign income
taxes paid by the Fund. Shareholders of the Fund would be entitled to treat the
foreign income taxes withheld as a credit against their U.S. federal income
taxes, subject to the limitations set forth in the Code with respect to the
foreign tax credit generally. Alternatively, shareholders could, if to their
advantage, treat the foreign income taxes withheld as an itemized deduction in
computing taxable income rather than as a tax credit. Shareholders will not be
entitled to a foreign tax credit for taxes paid to certain countries; however,
if the Fund otherwise qualifies for the Foreign Election, a deduction for such
taxes will be available to shareholders of the Fund. It is anticipated that the
Fund will make the Foreign Election.
WITHHOLDING - The Fund is required by federal law 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
19
<PAGE>
with a correct tax identification number, who underreports dividend or interest
income, or who fails to certify that he 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 Transfer Agent, that your tax identification
number is correct and that you are not currently subject to backup withholding.
REPORTING - Information concerning the status of dividends and distributions for
federal income tax purposes will be mailed to shareholders annually.
MANAGEMENT OF THE TRUST
The business affairs of the Trust are subject to the supervision of the Board of
Trustees.
The Manager, USAA Investment Management Company (IMCO), was organized in
May 1970 and is an affiliate of United Services Automobile Association (USAA), a
large diversified financial services institution. As of the date of this
Prospectus, the Manager had approximately $36 billion in total assets under
management. The Manager's mailing address is 9800 Fredericksburg Rd., San
Antonio, TX 78288.
Officers and employees of the Manager are permitted to engage in personal
securities transactions subject to restrictions and procedures set forth in the
Joint Code of Ethics adopted by the Trust and the Manager. Such restrictions and
procedures include substantially all of the recommendations of the Advisory
Group of the Investment Company Institute and comply with SEC rules and
regulations.
ADVISORY AGREEMENT
The Manager serves as the manager and investment adviser of the Trust, providing
services under an Advisory Agreement. Under the Advisory Agreement, the Manager
is responsible for the management of the business affairs, investment
portfolios, and placement of brokerage orders, subject to the authority of and
supervision by the Board of Trustees.
For its services under the Advisory Agreement, the Fund pays the Manager an
annual fee which is computed as a percentage of the Fund's ANA, accrued daily
and paid monthly. The Fund's management fees were computed and paid at
three-fourths of one percent (.75%) of ANA for the fiscal year ended May 31,
1997.
OPERATING EXPENSES
For the fiscal year ended May 31, 1997, the total operating expenses for the
Fund as a percentage of the Fund's ANA equaled 1.31%.
PORTFOLIO TRANSACTIONS
Purchases and sales of equity securities for the Fund's portfolio may be
accomplished through USAA Brokerage Services, a discount brokerage service of
the Manager. The Board of Trustees has adopted procedures to ensure that any
commissions paid to USAA Brokerage Services are reasonable and fair.
PORTFOLIO MANAGER
The following individual is primarily responsible for managing the Fund.
Mark W. Johnson, Assistant Vice President of Equity Investments since March
1995, has managed the Fund since January 1994. He has 23 years investment
management experience and has worked for IMCO for nine years. Mr. Johnson earned
the Chartered Financial Analyst designation in 1978 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 a BBA from the University of
Michigan.
20
<PAGE>
DESCRIPTION OF SHARES
MASTER TRUST AGREEMENT
The Trust is an open-end management investment company established as a business
trust under the laws of the Commonwealth of Massachusetts pursuant to the First
Amended and Restated Master Trust Agreement (Master Trust Agreement) dated June
2, 1995, as amended. The Trust is authorized to issue an unlimited number of
shares of beneficial interest of separate portfolios, without par value. Eleven
such portfolios have been established, one of which is described in this
Prospectus. The Fund is classified as diversified. Under the Master Trust
Agreement, the Trustees are authorized to create new portfolios in addition to
those already existing without shareholder approval.
Under the Master Trust Agreement, no annual or regular meeting of
shareholders is required. Ordinarily, no shareholder meeting will be held unless
required by the 1940 Act. The Trustees may fill vacancies on the Board or
appoint new Trustees provided that immediately after such action at least
two-thirds of the Trustees have been elected by shareholders. Shareholders are
entitled to one vote per share (with proportionate voting for fractional shares)
irrespective of the relative net asset value of the shares. For matters
affecting an individual portfolio, a separate vote of the shareholders of that
portfolio is required. Shareholders holding an aggregate of at least 10% of the
outstanding shares of the Trust may request a meeting of shareholders at any
time for the purpose of voting to remove one or more of the Trustees, and the
Trust will assist shareholders in communicating with other shareholders in
connection with such a meeting.
Under Massachusetts law, shareholders of any portfolio could, under certain
circumstances, be held personally liable for the obligations of the Trust.
However, the Master Trust Agreement disclaims shareholder liability for acts or
obligations of the Trust and requires that notice of such disclaimer be given in
each agreement, obligation, or instrument entered into or executed by the Trust
or the Trustees. The Master Trust Agreement provides for indemnification out of
the Trust's property for all losses and expenses of any shareholder held
personally liable for the obligations of the Trust. Thus, the possibility of a
shareholder incurring financial loss on account of shareholder liability is
remote.
21
<PAGE>
SERVICE PROVIDERS
UNDERWRITER/ USAA Investment Management Company
DISTRIBUTOR 9800 Fredericksburg Rd., San Antonio, Texas 78288.
TRANSFER USAA Shareholder Account Services
AGENT 9800 Fredericksburg Rd., San Antonio, Texas 78288.
CUSTODIAN State Street Bank and Trust Company
P.O. Box 1713, Boston, Massachusetts 02105.
LEGAL Goodwin, Procter & Hoar LLP
COUNSEL Exchange Place, Boston, Massachusetts 02109.
INDEPENDENT KPMG Peat Marwick LLP
AUDITORS 112 East Pecan, Suite 2400, San Antonio, Texas 78205.
- --------------------------------------------------------------------------------
TELEPHONE ASSISTANCE
(Call toll free - Central Time)
Monday-Friday 8:00 a.m. to 8:00 p.m.
Saturday 8:30 a.m. to 5:00 p.m.
For further information on mutual funds:
1-800-531-8181
In San Antonio 456-7211
For account servicing, exchanges or redemptions:
1-800-531-8448
In San Antonio 456-7202
RECORDED 24 HOUR SERVICE
MUTUAL FUND PRICE QUOTES
(From any phone)
1-800-531-8066
In San Antonio 498-8066
MUTUAL FUND TOUCHLINE(R)
(From Touchtone phones only)
For account balance, last transaction or fund prices:
1-800-531-8777
In San Antonio 498-8777
- --------------------------------------------------------------------------------
22
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23
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24
<PAGE>
Part A
Prospectus for the
International Fund
is included herein
<PAGE>
USAA INTERNATIONAL FUND
October 1, 1997 PROSPECTUS
USAA INTERNATIONAL FUND (the Fund) is one of eleven no-load mutual funds offered
by USAA Investment Trust (the Trust). The Fund is managed by USAA Investment
Management Company (the Manager).
WHAT IS THE INVESTMENT OBJECTIVE?
The Fund's primary investment objective is capital appreciation. Current income
is a secondary objective. Page 9.
HOW DO YOU BUY?
Fund shares are sold on a continuous basis at the net asset value per share
without a sales charge. Make your initial investment directly with the Manager
by mail, in person, or in certain instances, by telephone. Page 12.
HOW DO YOU SELL?
You may redeem Fund shares by mail, telephone, fax, or telegraph on any day
that the net asset value is calculated. Page 14.
This Prospectus, which should be read and retained for future reference,
provides information regarding the Trust and the Fund that you should know
before investing.
SHARES OF THE USAA INTERNATIONAL FUND ARE NOT DEPOSITS OR OTHER OBLIGATIONS
OF, OR GUARANTEED BY, THE USAA FEDERAL SAVINGS BANK, ARE NOT INSURED BY THE FDIC
OR ANY OTHER GOVERNMENT AGENCY, ARE SUBJECT TO INVESTMENT RISKS, AND MAY LOSE
VALUE. BECAUSE THIS FUND INVESTS IN FOREIGN SECURITIES, IT INVOLVES A HIGHER
DEGREE OF RISK AND MAY NOT BE APPROPRIATE FOR SOME INVESTORS. SEE SPECIAL RISK
CONSIDERATIONS, PAGE 11.
If you would like more information about the Fund, you may call
1-800-531-8181 to request a free copy of the most recent financial report and/or
the Fund's Statement of Additional Information (SAI), dated October 1, 1997. The
SAI has been filed with the Securities and Exchange Commission (SEC) and is
incorporated by reference into this Prospectus (meaning it is legally a part of
the Prospectus).
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
Page
SUMMARY DATA
Fees and Expenses............................................. 3
Financial Highlights.......................................... 4
Performance Information....................................... 6
USING MUTUAL FUNDS
USAA Family of No-Load Mutual Funds........................... 7
Using Mutual Funds in an Investment Program................... 8
INVESTMENT PORTFOLIO INFORMATION
Investment Objective and Policies............................. 9
SHAREHOLDER INFORMATION
Purchase of Shares............................................ 12
Redemption of Shares.......................................... 14
Conditions of Purchase and Redemption......................... 15
Exchanges..................................................... 16
Other Services................................................ 17
Share Price Calculation....................................... 18
Dividends, Distributions and Taxes............................ 18
Management of the Trust....................................... 20
Description of Shares......................................... 21
Service Providers............................................. 22
Telephone Assistance Numbers.................................. 22
- --------------------------------------------------------------------------------
2
<PAGE>
FEES AND EXPENSES
The following summary, which is based on actual expenses and average net assets
(ANA) of the Fund for the year ended May 31, 1997, is provided to assist you in
understanding the expenses you will bear directly or indirectly as a Fund
investor.
Shareholder Transaction Expenses
- --------------------------------------------------------------------------------
Sales Load Imposed on Purchases........................ None
Sales Load Imposed on Reinvested Dividends............. None
Deferred Sales Load.................................... None
Redemption Fee*........................................ None
Exchange Fee........................................... None
Annual Fund Operating Expenses (as a percentage of ANA)
- --------------------------------------------------------------------------------
Management Fees........................................ .75%
12b-1 Fees............................................. None
Other Expenses
Transfer Agent Fees................................. .16%
Custodian Fees...................................... .12%
All Other Expenses.................................. .06%
---
Total Other Expenses................................... .34%
---
Total Fund Operating Expenses.......................... 1.09%
====
- --------------------------
* A shareholder who requests delivery of redemption proceeds by wire transfer
will be subject to a $10 fee. See REDEMPTION OF SHARES - BANK WIRE.
Example of Effect of Fund Expenses
- --------------------------------------------------------------------------------
You would pay the following expenses on a $1,000 investment in the Fund,
assuming (1) 5% annual return and (2) redemption at the end of the periods
shown.
1 year - $ 11
3 years - $ 35
5 years - $ 60
10 years - $ 133
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
3
<PAGE>
FINANCIAL HIGHLIGHTS
The following financial highlights for a share outstanding throughout each of
the periods in the ten-year period ended May 31, 1997, have been audited by KPMG
Peat Marwick LLP. This table should be read in conjunction with the Fund's
financial statements for the year ended May 31, 1997, and the independent
auditors' report thereon, that appear in the Fund's Annual Report. Further
performance information is contained in the Annual Report and is available upon
request without charge.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
EIGHT-MONTH YEAR
PERIOD ENDED ENDED
YEAR ENDED MAY 31, MAY 31, SEPTEMBER 30,
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Net asset value at
beginning of period $ 18.71 $ 15.78 $ 16.36 $ 14.48 $ 12.09
Net investment income .15 .17 .10 - .07
Net realized and
unrealized gain (loss) 2.87 2.92 .29 2.23 2.45
Distributions from net
investment income (.20) (.07) - - (.13)
Distributions of realized
capital gains (.50) (.09) (.97) (.35) -
--------- -------- -------- -------- --------
Net asset value at
end of period $ 21.03 $ 18.71 $ 15.78 $ 16.36 $ 14.48
========= ======== ======= ========= ========
Total return (%)** 16.72 19.71 2.49 15.67 21.11
Net assets at end of
period (000) $ 616,576 $417,995 $346,033 $ 184,792 $ 88,757
Ratio of expenses to
average net assets (%) 1.09 1.19 1.17 1.31(a) 1.50
Ratio of net investment
income to average net
assets (%) .79 1.04 .81 .04(a) .72
Portfolio turnover (%) 46.03 70.01 64.30 44.39 52.52
Average commission rate
paid per share *** $ .0110 $ .0006
</TABLE>
- ------------------------
* Fund commenced operations July 11, 1988.
** Assumes reinvestment of all dividend income and capital gain
distributions during the period.
*** Calculated by aggregating all commissions paid on the purchase and sale
of securities and dividing by the actual number of shares purchased or
sold for which commissions were charged.
(a) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
4
<PAGE>
FINANCIAL HIGHLIGHTS cont.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
YEAR ENDED SEPTEMBER 30,
1992 1991 1990 1989 1988*
---- ---- ---- ---- ----
Net asset value at
beginning of period $ 11.57 $ 9.89 $ 11.74 $ 9.64 $ 10.00
Net investment income .10 .13 .07 .04 .07
Net realized and
unrealized gain (loss) .51 1.66 (1.45) 2.11 (.43)
Distributions from net
investment income (.09) (.06) (.02) (.05) -
Distributions of realized
capital gains - (.05) (.45) - -
-------- -------- -------- -------- --------
Net asset value at
end of period $ 12.09 $ 11.57 $ 9.89 $ 11.74 $ 9.64
======== ======== ======== ======== ========
Total return (%)** 5.30 18.21 (12.09) 22.38 (3.60)
Net assets at end of
period (000) $ 42,868 $ 28,931 $ 21,451 $ 13,111 $ 4,084
Ratio of expenses to
average net assets (%) 1.69 1.82 2.09 2.30 2.14(a)
Ratio of net investment
income to average net
assets (%) 1.05 1.26 .81 .48 3.16(a)
Portfolio turnover (%) 34.27 63.56 69.95 94.99 -
</TABLE>
5
<PAGE>
PERFORMANCE INFORMATION
Performance information should be considered in light of the Fund's investment
objective and policies and market conditions during the time periods for which
it is reported. Historical performance should not be considered as
representative of the future performance of the Fund.
The Trust may quote the Fund's total return in advertisements and reports
to shareholders or prospective investors. The Fund's performance may also be
compared to that of other mutual funds with a similar investment objective and
to stock or relevant indexes that are referenced in APPENDIX B to the SAI.
Standard total return results reported by the Fund do not take into account
recurring and nonrecurring charges for optional services which only certain
shareholders elect and which involve nominal fees, such as the $10 fee for a
delivery of redemption proceeds by wire transfer.
The Fund's average annual total return is computed by determining the
average annual compounded rate of return for a specified period which, when
applied to a hypothetical $1,000 investment in the Fund at the beginning of the
period, would produce the redeemable value of that investment at the end of the
period, assuming reinvestment of all dividends and distributions during the
period.
Further information concerning the Fund's total return is included in the
SAI.
6
<PAGE>
USAA FAMILY OF NO-LOAD MUTUAL FUNDS
The USAA Family of No-Load Mutual Funds includes a variety of Funds, each with
different objectives and policies. In combination, these Funds are designed to
provide investors with the opportunity to formulate their own investment
program. You may exchange any shares you hold in any one USAA Fund for shares in
any other USAA Fund. For more complete information about the Funds in the USAA
Family of Funds, including charges and expenses, call the Manager for a
Prospectus. Read it carefully before you invest or send money.
USAA INVESTMENT TRUST
Income Strategy Fund
Growth and Tax Strategy Fund
Balanced Strategy Fund
Cornerstone Strategy Fund
Growth Strategy Fund
Emerging Markets Fund
Gold Fund
International Fund
World Growth Fund
GNMA Trust
Treasury Money Market Trust
USAA MUTUAL FUND, INC.
Aggressive Growth Fund
Science & Technology Fund
Growth Fund
First Start Growth Fund
S&P 500 Index Fund**
Growth & Income Fund
Income Stock Fund
Income Fund
Short-Term Bond Fund
Money Market Fund
USAA TAX EXEMPT FUND, INC.
Long-Term Fund
Intermediate-Term Fund
Short-Term Fund
Tax Exempt Money Market Fund
California Bond Fund*
California Money Market Fund*
New York Bond Fund*
New York Money Market Fund*
Virginia Bond Fund*
Virginia Money Market Fund*
USAA STATE TAX-FREE TRUST
Florida Tax-Free Income Fund*
Florida Tax-Free Money Market Fund*
Texas Tax-Free Income Fund*
Texas Tax-Free Money Market Fund*
* Offered only to residents of these specific states.
** S&P 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.
7
<PAGE>
USING MUTUAL FUNDS IN AN INVESTMENT PROGRAM
I. THE IDEA BEHIND MUTUAL FUNDS
Mutual funds provide small investors some of the advantages enjoyed by wealthy
investors. A relatively small investment can buy part of a widely diversified
portfolio. That portfolio is managed by investment professionals, relieving the
shareholder of the need to make individual stock or bond selections. The
investor also enjoys 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 each shareholder owns an investment that in earlier times
would have been available only to very wealthy people.
II. USING FUNDS IN AN INVESTMENT PROGRAM
In choosing a mutual fund as an investment vehicle, the shareholder is foregoing
some investment decisions, but must still make others. The decisions foregone
are those involved with choosing individual securities. The Fund Manager will
perform that function. In addition, the Manager will arrange for the safekeeping
of securities, auditing the annual financial statements, and daily valuation of
the Fund, as well as other functions.
The shareholder, however, retains at least part of the responsibility for
an equally important decision. This decision involves determining a portfolio of
mutual funds that balances the investor's investment goals with his or her
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 a shareholder wishes to diversify internationally. He
or she could do this by adding positions in the Emerging Markets, Gold,
International, or World Growth Funds to holdings in domestic funds. This would
give the investor exposure to the opportunities of investment in many foreign
countries and to currency changes. This is just one example of how an individual
could combine funds to create a portfolio tailored to his or her own risk and
reward goals.
III. USAA'S FAMILY OF FUNDS
The Manager offers investors another alternative in its asset strategy funds,
the Income Strategy, Growth and Tax Strategy, Balanced Strategy, Cornerstone
Strategy, and Growth Strategy Funds. These unique mutual funds provide a
professionally managed diversified investment portfolio within a mutual fund.
These Funds are designed for the shareholder who prefers to delegate the asset
allocation process to an investment manager. The Funds are structured to achieve
diversification across a number of investment categories.
Whether you prefer to create your own mix of mutual funds or use an asset
strategy fund, the USAA Family of Funds provides a broad range of choices
covering just about any investor's investment objectives. Our sales
representatives stand ready to assist you with your choices and to help you
craft a portfolio which meets your needs.
8
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
INVESTMENT OBJECTIVE
The Fund's primary investment objective is capital appreciation with current
income as a secondary objective.
The investment objective of the Fund cannot be changed without shareholder
approval. In view of the risks inherent in all investments in securities, there
is no assurance that this objective will be achieved.
The investment policies and techniques used to pursue the Fund's objective
may be changed without shareholder approval, except as otherwise noted. Further
information regarding the Fund's investment policies, restrictions and risks is
provided in the SAI.
INVESTMENT POLICIES, TECHNIQUES AND RISK FACTORS
The Manager will pursue the objective by investing at least 80% of the Fund's
assets in common stocks, preferred stocks or securities which are convertible
into or which carry the right to buy common stocks (Equity Securities) of
foreign companies. A company is deemed to be a foreign company if:
(1) it is organized under the laws of a foreign country; and either
(2) (a) the principal trading market for the stock is in a foreign country; or
(b) at least 50% of its revenues or profits are derived from operations
within a foreign country; or
(c) at least 50% of its assets are located within a foreign country.
These investments will be diversified in four or more countries. There are
no restrictions as to the types of businesses or operations of companies in
which the Fund may invest.
The remainder of the Fund's assets may be invested in Equity Securities of
companies that meet either of the two criteria set forth above and certain
short-term instruments. These short-term instruments may include marketable
securities having remaining maturities of less than one year issued or
guaranteed as to both principal and interest by the U.S. Government or by its
agencies or instrumentalities and repurchase agreements collateralized by such
securities. However, the Fund may on a temporary defensive basis invest its
assets without limitation in such short-term instruments.
The Fund combines the advantages of investment in diversified international
markets with the convenience and liquidity of a mutual fund based in the United
States. For a discussion of risks associated with investments in foreign
issuers, see SPECIAL RISK CONSIDERATIONS.
FORWARD CURRENCY CONTRACTS - The Fund may hold securities denominated in foreign
currencies. As a result, the value of the securities will be affected by changes
in the exchange rate between the dollar and foreign currencies. In managing the
currency exposure, the Fund 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.
The Fund may enter into forward currency contracts under two circumstances.
First, when the 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. Second, when management of the 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. The Fund may not
hedge with respect to a particular currency for an amount greater than the
aggregate market value (determined at the time of making any sale of forward
currency) of the securities held in its portfolio denominated or quoted in, or
bearing a substantial correlation to, such currency.
9
<PAGE>
The use of forward currency contracts to protect the value of the Fund's
assets against a decline in the value of a currency does not eliminate
fluctuations in the value of the Fund's underlying security holdings. In
addition, although the use of forward currency contracts can minimize the risk
of loss due to a decline in value of the foreign currency, the use of such
contracts will tend to limit any potential gain resulting from an increase in
the relative value of the foreign currency to the U.S. dollar. Under certain
circumstances, a fund that has entered into forward currency contracts to hedge
its currency risks may be in a less favorable position than a fund that had not
entered into such contracts. The projection of short-term currency market
movements is extremely difficult and successful execution of a short-term
hedging strategy is highly uncertain.
REPURCHASE AGREEMENTS - The Fund may invest in repurchase agreements which are
collateralized by obligations backed by the full faith and credit of the U.S.
Government or by its agencies or instrumentalities. A repurchase agreement is a
transaction in which a security is purchased with a simultaneous commitment to
sell the security back to the seller (a commercial bank or recognized securities
dealer) at an agreed upon price on an agreed upon date, 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 the 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.
WHEN-ISSUED SECURITIES - The Fund may invest in new issues of debt securities
offered on a when-issued basis; that is, 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.
Cash or high quality liquid debt securities equal to the amount of the
when-issued commitments are segregated at the Fund's custodian bank. The
segregated securities are valued at market, and daily adjustments are made to
keep the value of the cash and segregated securities at least equal to the
amount of such commitments by the Fund. On the settlement date, the Fund will
meet its obligations from then available cash, sale of segregated securities,
sale of other securities, or sale of the when-issued securities themselves.
LIQUIDITY - The Fund may not invest more than 15% of the market value of its
total assets in securities which are illiquid or not readily marketable. Rule
144A Securities may be determined to be liquid in accordance with guidelines
established by the Board of Trustees.
INVESTMENT RESTRICTIONS
The following restrictions may not be changed without shareholder approval:
(1) The Fund may not invest more than 25% of its total assets in one industry.
(2) The Fund may not, 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
10
<PAGE>
Investment Company Act of 1940, as amended (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.
(3) The Fund may not 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).
SPECIAL RISK CONSIDERATIONS
INVESTMENT IN FOREIGN SECURITIES - The Fund may purchase foreign securities in
foreign or U.S. markets or it may purchase American Depositary Receipts (ADRs),
Global Depositary Receipts (GDRs), or similar forms of ownership interest in
securities of foreign issuers deposited with a depositary. Investing in foreign
securities presents certain risks not present in domestic investments. Such
risks may include currency exchange rate fluctuations; foreign market
illiquidity; increased price volatility; exchange control regulations; different
accounting, reporting, and disclosure requirements; political or social
instability; and difficulties in obtaining judgments or effecting collections
thereon. Brokerage commissions and custodial services may be more costly, and
stock trade settlements may be more lengthy, more costly and more difficult than
in domestic markets. These investments may be subject to foreign withholding
taxes which may reduce the effective rates of return. The Fund values its
securities and other assets in U.S. dollars.
Information which may impact the market value of securities of a foreign
issuer may not be available to the Manager on a timely basis. The Manager will
endeavor to ascertain such information on as timely a basis as is practicable,
however, any impact on the net asset value will be deemed to have occurred upon
authentication by the Manager.
A developing country can be considered to be a country which is in the
initial stages of its industrialization cycle. Investments in developing
countries involve exposure to economic structures that are generally less
diverse and mature than in the United States, and to political systems which may
be less stable. Due to illiquidity and lack of hedging instruments, it is
presently difficult or in some cases impossible to hedge the currency risk in
these markets. In the past, markets of developing countries have been more
volatile than the markets of developed countries.
Political risk includes a greater potential for coup d'etats, insurrections
and expropriation by governmental organizations. For example, the Fund may
invest in Eastern Europe and former states of the Soviet Union (also known as
the CIS or the Commonwealth of Independent States). These countries were under
communist systems which had nationalized private industry. There is no guarantee
that nationalization may not occur again in this region or others in which the
Fund invests, in which case the Fund may lose all or part of its investment in
that country's issuers.
11
<PAGE>
PURCHASE OF SHARES
OPENING AN ACCOUNT
You may open an account and make an investment by any of the following methods.
A complete, signed application is required together with a check for each new
account.
TAX ID NUMBER
We require that each shareholder named on the account provide the Trust with a
social security number or tax identification number to avoid possible tax
withholding requirements.
EFFECTIVE DATE
When you make a purchase, your purchase price will be the net asset value (NAV)
per share next determined after the Fund receives your request in proper form.
The NAV of the Fund is determined at the close of the regular trading session of
the New York Stock Exchange (NYSE) each day the NYSE is open. If the Fund
receives your request prior to that time, your purchase price will be the NAV
per share determined for that day. If the Fund receives your request after the
NAV per share is calculated, the purchase will be effective on the next business
day.
Because of the more lengthy clearing process and the need to convert
foreign currency, a check drawn on a foreign bank will not be deemed received
for the purchase of shares until such time as the check has cleared and the
Manager has received good funds, which may take up to four to six weeks.
Furthermore, a bank charge may be assessed in the clearing process, which will
be deducted from the amount of the purchase. To avoid a delay in the effective
date of your purchase, the Manager suggests that you convert your foreign check
to U.S. dollars prior to investment in the Fund.
PURCHASE OF SHARES
MINIMUM INVESTMENTS
Initial Purchase: $3,000 [$500 for Uniform Gifts/Transfers to Minors Act
(UGMA/UTMA) accounts and $250 for IRAs] or no initial
investment if you elect to have monthly electronic
investments of at least $50 each.
Additional Purchases: $50
12
<PAGE>
HOW TO PURCHASE:
MAIL o To open an account, send your application and check to:
USAA Investment Management Company
9800 Fredericksburg Rd., San Antonio, TX 78288
o To add to your account, send your check and the "Invest by
Mail" stub that accompanies your fund's transaction
confirmation to the Transfer Agent:
USAA Shareholder Account Services
9800 Fredericksburg Rd., San Antonio, TX 78288
IN PERSON o To open an account, bring your application and check to:
USAA Investment Management Company
USAA Federal Savings Bank
10750 Robert F. McDermott Freeway, San Antonio
AUTOMATICALLY o Additional purchases on a regular basis can be deducted from a
VIA bank account, paycheck, income-producing investment or from a
ELECTRONIC USAA money market account. Sign up for these services when
FUNDS opening an account or call 1-800-531-8448 to add these
TRANSFER (EFT) services.
o Purchases through payroll deduction ($25 minimum each pay period
with no initial investment) can be made by any employee of USAA
or any of its affiliated companies.
BANK WIRE o To add to an 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 International Fund
USAA AC-69384998
Shareholder(s) Name(s)_________________
Shareholder(s) Account Number___________________
PHONE o If you have an existing USAA account and would like to open a
1-800-531-8448 new account or if you would like to 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.
o To add to an account, intermittent (as-needed) purchases
can be deducted from your bank account through our Buy/Sell
Service. Call for instructions.
13
<PAGE>
REDEMPTION OF SHARES
You may redeem shares of the Fund by any of the following methods on any day the
NAV per share is calculated. Redemptions will be effective on the day
instructions are received in accordance with the requirements set forth below.
However, if instructions are received after the NAV per share calculation,
redemption will be effective on the next business day.
REDEMPTION PROCEEDS
Redemption proceeds are distributed within seven days after the effective date
of redemption. Payment for redemption of shares purchased by check or electronic
funds transfer will not be disbursed until the purchase check or electronic
funds transfer has cleared, which could take up to 15 days from the purchase
date. If you are considering redeeming shares soon after purchase, you should
purchase by bank wire or certified check to avoid delay.
In addition, the Trust may elect to suspend the redemption of shares or
postpone the date of payment during any period that the NYSE is closed, or
trading in the markets the Trust normally utilizes is restricted, or during any
period that redemption is otherwise permitted to be suspended by the SEC.
HOW TO REDEEM:
WRITTEN, o Send your written instructions to:
FAX, OR USAA Shareholder Account Services
TELEGRAPH 9800 Fredericksburg Rd., San Antonio, TX 78288
o Send a signed fax to 1-800-292-8177, or send a telegraph to
USAA Shareholder Account Services.
Written redemption requests must include the following: (1) a letter of
instruction or stock assignment, and stock certificate (if issued), specifying
the Fund and the number of shares or dollar amount to be redeemed; (2)
signatures of all owners of the shares exactly as their names appear on the
account; (3) other supporting legal documents, if required, as in the case of
estates, trusts, guardianships, custodianships, partnerships, corporations, and
pension and profit-sharing plans; and (4) method of payment.
Phone o Call toll free 1-800-531-8448, in San Antonio, 456-7202.
Telephone redemption is automatically established when you complete your
application. The Fund will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine; and if it does not, it may
be liable for any losses due to unauthorized or fraudulent instructions.
Information is obtained prior to any discussion regarding an account including:
(1) USAA number or account number, (2) the name(s) on the account registration,
and (3) social security number or tax identification number for the account
registration. In addition, all telephone communications with a shareholder are
recorded, and confirmations of all account transactions are sent to the address
of record.
Redemption by telephone, fax, or telegraph is not available for shares
represented by stock certificates.
14
<PAGE>
METHODS OF PAYMENT:
BANK WIRE o Allows redemptions to be sent directly to your bank account.
Establish this service when you apply for your account, or later upon
request. Please obtain precise wiring instructions from your financial
institution. USAA Shareholder Account Services (Transfer Agent) deducts a wire
fee from the account for the redemption by wire. The fee as of the date of this
Prospectus is $10 ($25 for wires to a foreign bank) and is subject to change at
any time. The fee is paid to State Street Bank and Trust Company and the
Transfer Agent for their services in connection with the wire redemption. Your
financial institution may also charge a fee for receiving funds by wire.
AUTOMATICALLY o Systematic (regular) or intermittent (as-needed) redemptions can
VIA EFT be credited to your bank account.
Establish any of our electronic investing services when you apply for your
account, or later upon request.
CHECK o A check payable to the registered shareholder(s) will be mailed
REDEMPTION to the address of record.
This check redemption privilege is automatically established when your
application is completed and accepted. There is a 15-day waiting period before a
check redemption can be processed following a telephone address change. Should
you wish to redeem shares within the 15 days following a telephone address
change, you may do so by providing written instructions by mail or facsimile.
CONDITIONS OF PURCHASE AND REDEMPTION
NONPAYMENT
If any order to purchase shares is cancelled due to nonpayment or if the Trust
does not receive good funds either by check or electronic funds transfer, the
Transfer Agent will treat the cancellation as a redemption of shares purchased,
and you will be responsible for any resulting loss incurred by the Fund or the
Manager. If you are a shareholder, the Transfer Agent can redeem shares from any
of your account(s) as reimbursement for all losses. In addition, you may be
prohibited or restricted from making future purchases in any of the USAA Family
of Funds. A $15 fee is charged for all returned items, including checks and
electronic funds transfers.
TRANSFER OF SHARES
You may transfer Fund shares to another person by sending written instructions
to the Transfer Agent. The account must be clearly identified, and you must
include the number of shares to be transferred, the signatures of all registered
owners, and all stock certificates, if any, which are the subject of transfer.
You also need to send written instructions signed by all registered owners and
supporting documents to change an account registration due to events such as
divorce, marriage, or death. If a new account needs to be established, you must
complete and return an application to the Transfer Agent.
15
<PAGE>
ACCOUNT BALANCE
Beginning in September 1998, and occurring each September thereafter, the
Transfer Agent will assess a small balance account fee of $12 to each
shareholder account with a balance, at the time of assessment, of less than
$2,000. The fee will be used to reduce total transfer agency fees paid by the
Fund to the Transfer Agent. 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 or 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).
TRUST RIGHTS
The Trust reserves the right to:
(1) reject purchase or exchange orders when in the best interest of the Trust;
(2) limit or discontinue the offering of shares of any portfolio of the Trust
without notice to the shareholders;
(3) require a signature guarantee for purchases, redemptions, or changes in
account information in those instances where the appropriateness of a
signature authorization is in question. The section ADDITIONAL INFORMATION
REGARDING REDEMPTION OF SHARES in the SAI contains information on
acceptable guarantors;
(4) redeem an account with less than $900, subject to certain limitations
described in ADDITIONAL INFORMATION REGARDING REDEMPTION OF SHARES in the
SAI.
EXCHANGES
EXCHANGE PRIVILEGE
The Exchange Privilege is automatically established 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 that the
shares to be acquired are offered in your state of residence. Exchange
redemptions and purchases will be processed simultaneously at the share prices
next determined after the exchange order is received. For federal income tax
purposes, an exchange between Funds is a taxable event. Accordingly, when
exchanging shares, you may realize a capital gain or loss.
The Fund has undertaken certain procedures regarding telephone transactions.
See REDEMPTION OF SHARES - PHONE.
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. Exchanges out of
any Fund in the USAA Family of Funds are limited for each account to six per
calendar year except that 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.
16
<PAGE>
OTHER SERVICES
INVESTMENT PLANS
AUTOMATIC INVESTMENT PLANS - You may establish an automatic investment plan by
completing the appropriate forms, if any. 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. Call the Manager to obtain instructions. More information about
these preauthorized plans is contained in the SAI.
o INVESTART(R) - A no initial investment purchase plan. With this plan the
regular minimum initial investment amount is waived if you make subsequent
monthly additions of at least $50 through electronic funds transfer from a
checking or savings account. The Manager may periodically offer programs that
reduce the minimum amounts for monthly electronic investments.
o 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.
o DIRECT PURCHASE SERVICE - The periodic purchase of shares through electronic
funds transfer from an employer (including government allotments), an
income-producing investment, or an account with a participating financial
institution.
o 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.
o BUY/SELL SERVICE - The intermittent purchase or redemption of shares through
electronic funds transfer to or from a checking or savings account.
o SYSTEMATIC WITHDRAWAL PLAN - The periodic redemption of shares from one of
your accounts permitting you to receive a fixed amount of money monthly or
quarterly.
o RETIREMENT PLANS - Plans are available for various forms of IRAs and for
403(b)(7) accounts. Federal taxes on current income may be deferred if an
investor qualifies.
o 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.
SHAREHOLDER STATEMENTS AND REPORTS
You will receive a confirmation after each transaction in your account except:
(1) a payment you make under the InveStart(R), InvesTronic(R), Automatic
Purchase Plan, or Direct Purchase Service investment plans; or
(2) a redemption you make under the Systematic Withdrawal Plan.
At the end of each quarter, you will receive a consolidated statement for
all of your mutual fund accounts, regardless of account activity. The fourth
quarter consolidated statement will reflect all account activity for the prior
tax year. There will be a $10 fee charged for copies of historical statements
for other than the prior tax year for any one account. You will receive the
Fund's financial statements with
17
<PAGE>
a summary of its investments and performance at least semiannually.
In an effort to reduce expenses and respond to shareholders' requests to
reduce mail, the Trust intends to consolidate mailings of Annual and Semiannual
Reports to households having multiple accounts with the same address of record.
One copy of each report will be furnished to that address. You may request
additional reports by notifying the Trust.
TELEPHONE ASSISTANCE
Call our telephone assistance numbers for specific forms, a copy of the SAI, the
most recent Annual Report and/or Semiannual Report, or if you have any questions
concerning any of the services offered.
SHARE PRICE CALCULATION
The price at which shares of the Fund are purchased and redeemed by shareholders
is equal to the NAV per share determined on the effective date of the purchase
or redemption.
WHEN
The NAV per share for the Fund is calculated at the close of the regular trading
session of the NYSE, which is usually 4:00 p.m. Eastern time. You may buy and
sell Fund shares at the NAV per share without a sales charge.
HOW
The NAV per share is calculated by adding the value of all securities and other
assets in the Fund, deducting liabilities, and dividing by the number of shares
outstanding. Portfolio securities, except as otherwise noted, traded primarily
on a domestic securities exchange are valued at the last sales price on that
exchange. Portfolio securities traded primarily on foreign securities exchanges
are 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 Board of Trustees. Securities which cannot be valued by
the methods set forth above, and all other assets, are valued in good faith at
fair value using methods determined by the Manager under the general supervision
of the Board of Trustees.
For additional information, see VALUATION OF SECURITIES in the SAI.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
Net investment income will be distributed to shareholders annually. Net capital
gains, if any, generally will be distributed at least annually. The Fund intends
to make such additional distributions as may be necessary to avoid the
imposition of any federal income or excise tax.
All income dividends and capital gain distributions are automatically
reinvested, unless the shareholder specifies otherwise. The share price will be
the net asset value of the Fund shares computed on the ex- dividend date. Any
income dividend or capital gain distributions paid by the Fund will reduce the
NAV per share by the amount of the dividend or distribution. An investor should
consider carefully the effects of purchasing shares of the Fund shortly before
any dividend or distribution.
18
<PAGE>
Although in effect a return of capital, these distributions are subject to
taxes.
Any dividend or distribution payment returned to the Manager as not
deliverable will be invested in the shareholder's Fund account at the
then-current NAV per share. If any check for the payment of dividends or
distributions is not cashed within six months from the date on the check, it
becomes void. The amount of the check will then be invested in the shareholder's
Fund account at the then-current NAV per share.
FEDERAL TAXES
The following discussion relates only to generally applicable federal income tax
provisions in effect as of the date of this Prospectus. Note that the recently
enacted Taxpayer Relief Act of 1997 and regulations that will likely be created
to implement the Act may affect the status and treatment of certain
distributions shareholders receive from the Fund. Shareholders are urged to
consult their own tax advisers about the status of distributions from the Fund
in their own states and localities.
FUND - The Fund intends to qualify as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended (the Code). By
complying with the applicable provisions of the Code, the Fund will not be
subject to federal income tax on its net investment income and net capital gains
(capital gains in excess of capital losses) distributed to shareholders.
SHAREHOLDER - Dividends from taxable net investment income and distributions of
net short-term capital gains are taxable to shareholders as ordinary income,
whether received in cash or reinvested in additional shares. It is not expected
that the dividends of the Fund will qualify for the 70% corporate dividends
received deduction.
Distributions of net long-term capital gains are taxable as long-term
capital gains whether received in cash or reinvested in additional shares, and
regardless of the length of time the investor has held the shares of the Fund.
Redemptions, including exchanges, are subject to income tax, based on the
difference between the cost of shares when purchased and the price received upon
redemption or exchange.
FOREIGN TAXES - The Fund may be subject to foreign withholding or other taxes.
If more than 50% of the value of the Fund's total assets at the close of any
taxable year consists of securities of foreign corporations, the Fund may file
an election with the Internal Revenue Service (the Foreign Election) that would
permit shareholders to take a credit (or a deduction) for foreign income taxes
paid by the Fund. If the Foreign Election is made, shareholders would include in
their gross income both dividends received from the Fund and foreign income
taxes paid by the Fund. Shareholders of the Fund would be entitled to treat the
foreign income taxes withheld as a credit against their U.S. federal income
taxes, subject to the limitations set forth in the Code with respect to the
foreign tax credit generally. Alternatively, shareholders could, if to their
advantage, treat the foreign income taxes withheld as an itemized deduction in
computing taxable income rather than as a tax credit. Shareholders will not be
entitled to a foreign tax credit for taxes paid to certain countries; however,
if the Fund otherwise qualifies for the Foreign Election, a deduction for such
taxes will be available to shareholders of the Fund. It is anticipated that the
Fund will make the Foreign Election.
WITHHOLDING - The Fund is required by federal law 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
19
<PAGE>
with a correct tax identification number, who underreports dividend or interest
income, or who fails to certify that he 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 Transfer Agent, that your tax identification
number is correct and that you are not currently subject to backup withholding.
REPORTING - Information concerning the status of dividends and distributions for
federal income tax purposes will be mailed to shareholders annually.
MANAGEMENT OF THE TRUST
The business affairs of the Trust are subject to the supervision of the Board of
Trustees.
The Manager, USAA Investment Management Company (IMCO), was organized in
May 1970 and is an affiliate of United Services Automobile Association (USAA), a
large diversified financial services institution. As of the date of this
Prospectus, the Manager had approximately $36 billion in total assets under
management. The Manager's mailing address is 9800 Fredericksburg Rd., San
Antonio, TX 78288.
Officers and employees of the Manager are permitted to engage in personal
securities transactions subject to restrictions and procedures set forth in the
Joint Code of Ethics adopted by the Trust and the Manager. Such restrictions and
procedures include substantially all of the recommendations of the Advisory
Group of the Investment Company Institute and comply with SEC rules and
regulations.
ADVISORY AGREEMENT
The Manager serves as the manager and investment adviser of the Trust, providing
services under an Advisory Agreement. Under the Advisory Agreement, the Manager
is responsible for the management of the business affairs, investment
portfolios, and placement of brokerage orders, subject to the authority of and
supervision by the Board of Trustees.
For its services under the Advisory Agreement, the Fund pays the Manager an
annual fee which is computed as a percentage of the Fund's ANA, accrued daily
and paid monthly. The Fund's management fees were computed and paid at
three-fourths of one percent (.75%) of ANA for the fiscal year ended May 31,
1997.
OPERATING EXPENSES
For the fiscal year ended May 31, 1997, the total operating expenses for the
Fund as a percentage of the Fund's ANA equaled 1.09%.
PORTFOLIO TRANSACTIONS
Purchases and sales of equity securities for the Fund's portfolio may be
accomplished through USAA Brokerage Services, a discount brokerage service of
the Manager. The Board of Trustees has adopted procedures to ensure that any
commissions paid to USAA Brokerage Services are reasonable and fair.
PORTFOLIO MANAGERS
The following individuals are primarily responsible for managing the Fund.
David G. Peebles, Vice President of Equity Investments since February 1988,
has managed or co-managed the Fund since its inception in July 1988. He has 31
years investment management experience and has worked for IMCO for 13 years. Mr.
Peebles earned the Chartered Financial Analyst (CFA) designation in 1971 and is
a member of the Association for Investment Management and Research (AIMR), the
San Antonio Financial Analysts Society, Inc. (SAFAS) and the International
Society of Financial Analysts (ISFA). He holds an MBA and a BS from Texas
Christian University.
20
<PAGE>
Albert C. Sebastian and W. Travis Selmier, II, co-manage the Fund with Mr.
Peebles. Mr. Peebles coordinates the activities of the Managers.
Albert C. Sebastian, Assistant Vice President of Equity Investments since
September 1996, has co-managed the Fund since October 1996. He has 13 years
investment management experience and has worked for IMCO for six years. Mr.
Sebastian earned the CFA designation in 1989 and is a member of AIMR, SAFAS and
ISFA. He holds an MBA from the University of Michigan and a BA from Holy Cross
College, Massachusetts.
W. Travis Selmier, II, Assistant Vice President of Equity Investments since
September 1996, has co-managed the Fund since October 1996. He has 10 years
investment management experience and has worked for IMCO for six years. Mr.
Selmier earned the CFA designation in 1990 and is a member of AIMR, SAFAS and
ISFA. He holds an MBA from Indiana University, a Certificate of Proficiency from
Sophia University Japanese Language Institute, Japan, and a BA from the
University of California at Santa Barbara.
DESCRIPTION OF SHARES
MASTER TRUST AGREEMENT
The Trust is an open-end management investment company established as a business
trust under the laws of the Commonwealth of Massachusetts pursuant to the First
Amended and Restated Master Trust Agreement (Master Trust Agreement) dated June
2, 1995, as amended. The Trust is authorized to issue an unlimited number of
shares of beneficial interest of separate portfolios, without par value. Eleven
such portfolios have been established, one of which is described in this
Prospectus. The Fund is classified as diversified. Under the Master Trust
Agreement, the Trustees are authorized to create new portfolios in addition to
those already existing without shareholder approval.
Under the Master Trust Agreement, no annual or regular meeting of
shareholders is required. Ordinarily, no shareholder meeting will be held unless
required by the 1940 Act. The Trustees may fill vacancies on the Board or
appoint new Trustees provided that immediately after such action at least
two-thirds of the Trustees have been elected by shareholders. Shareholders are
entitled to one vote per share (with proportionate voting for fractional shares)
irrespective of the relative net asset value of the shares. For matters
affecting an individual portfolio, a separate vote of the shareholders of that
portfolio is required. Shareholders holding an aggregate of at least 10% of the
outstanding shares of the Trust may request a meeting of shareholders at any
time for the purpose of voting to remove one or more of the Trustees, and the
Trust will assist shareholders in communicating with other shareholders in
connection with such a meeting.
Under Massachusetts law, shareholders of any portfolio could, under certain
circumstances, be held personally liable for the obligations of the Trust.
However, the Master Trust Agreement disclaims shareholder liability for acts or
obligations of the Trust and requires that notice of such disclaimer be given in
each agreement, obligation, or instrument entered into or executed by the Trust
or the Trustees. The Master Trust Agreement provides for indemnification out of
the Trust's property for all losses and expenses of any shareholder held
personally liable for the obligations of the Trust. Thus, the possibility of a
shareholder incurring financial loss on account of shareholder liability is
remote.
21
<PAGE>
SERVICE PROVIDERS
UNDERWRITER/ USAA Investment Management Company
DISTRIBUTOR 9800 Fredericksburg Rd., San Antonio, Texas 78288.
TRANSFER USAA Shareholder Account Services
AGENT 9800 Fredericksburg Rd., San Antonio, Texas 78288.
CUSTODIAN State Street Bank and Trust Company
P.O. Box 1713, Boston, Massachusetts 02105.
LEGAL Goodwin, Procter & Hoar LLP
COUNSEL Exchange Place, Boston, Massachusetts 02109.
INDEPENDENT KPMG Peat Marwick LLP
AUDITORS 112 East Pecan, Suite 2400, San Antonio, Texas 78205.
- --------------------------------------------------------------------------------
TELEPHONE ASSISTANCE
(Call toll free - Central Time)
Monday-Friday 8:00 a.m. to 8:00 p.m.
Saturday 8:30 a.m. to 5:00 p.m.
For further information on mutual funds:
1-800-531-8181
In San Antonio 456-7211
For account servicing, exchanges or redemptions:
1-800-531-8448
In San Antonio 456-7202
RECORDED 24 HOUR SERVICE
MUTUAL FUND PRICE QUOTES
(From any phone)
1-800-531-8066
In San Antonio 498-8066
MUTUAL FUND TOUCHLINE(R)
(From Touchtone phones only)
For account balance, last transaction or fund prices:
1-800-531-8777
In San Antonio 498-8777
- --------------------------------------------------------------------------------
22
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23
<PAGE>
[THIS PAGE LEFT BLANK INTENTIONALLY]
24
<PAGE>
Part A
Prospectus for the
World Growth Fund
is included herein
<PAGE>
USAA WORLD GROWTH FUND
October 1, 1997 PROSPECTUS
USAA WORLD GROWTH FUND (the Fund) is one of eleven no-load mutual funds offered
by USAA Investment Trust (the Trust). The Fund is managed by USAA Investment
Management Company (the Manager).
WHAT IS THE INVESTMENT OBJECTIVE?
The Fund's investment objective is capital appreciation. Page 8.
HOW DO YOU BUY?
Fund shares are sold on a continuous basis at the net asset value per share
without a sales charge. Make your initial investment directly with the Manager
by mail, in person, or in certain instances, by telephone. Page 11.
HOW DO YOU SELL?
You may redeem Fund shares by mail, telephone, fax, or telegraph on any day
that the net asset value is calculated. Page 13.
This Prospectus, which should be read and retained for future reference,
provides information regarding the Trust and the Fund that you should know
before investing.
SHARES OF THE USAA WORLD GROWTH FUND ARE NOT DEPOSITS OR OTHER OBLIGATIONS
OF, OR GUARANTEED BY, THE USAA FEDERAL SAVINGS BANK, ARE NOT INSURED BY THE FDIC
OR ANY OTHER GOVERNMENT AGENCY, ARE SUBJECT TO INVESTMENT RISKS, AND MAY LOSE
VALUE. BECAUSE THIS FUND INVESTS IN FOREIGN SECURITIES, IT INVOLVES A HIGHER
DEGREE OF RISK AND MAY NOT BE APPROPRIATE FOR SOME INVESTORS. SEE SPECIAL RISK
CONSIDERATIONS, PAGE 10.
If you would like more information about the Fund, you may call
1-800-531-8181 to request a free copy of the most recent financial report and/or
the Fund's Statement of Additional Information (SAI), dated October 1, 1997. The
SAI has been filed with the Securities and Exchange Commission (SEC) and is
incorporated by reference into this Prospectus (meaning it is legally a part of
the Prospectus).
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
Page
SUMMARY DATA
Fees and Expenses............................................. 3
Financial Highlights.......................................... 4
Performance Information....................................... 5
USING MUTUAL FUNDS
USAA Family of No-Load Mutual Funds........................... 6
Using Mutual Funds in an Investment Program................... 7
INVESTMENT PORTFOLIO INFORMATION
Investment Objective and Policies............................. 8
SHAREHOLDER INFORMATION
Purchase of Shares............................................ 11
Redemption of Shares.......................................... 13
Conditions of Purchase and Redemption......................... 14
Exchanges..................................................... 15
Other Services................................................ 16
Share Price Calculation....................................... 17
Dividends, Distributions and Taxes............................ 17
Management of the Trust....................................... 19
Description of Shares......................................... 20
Service Providers............................................. 21
Telephone Assistance Numbers.................................. 21
- --------------------------------------------------------------------------------
2
<PAGE>
FEES AND EXPENSES
The following summary, which is based on actual expenses and average net assets
(ANA) of the Fund for the year ended May 31, 1997, is provided to assist you in
understanding the expenses you will bear directly or indirectly as a Fund
investor.
Shareholder Transaction Expenses
- --------------------------------------------------------------------------------
Sales Load Imposed on Purchases............................. None
Sales Load Imposed on Reinvested Dividends.................. None
Deferred Sales Load......................................... None
Redemption Fee*............................................. None
Exchange Fee................................................ None
Annual Fund Operating Expenses (as a percentage of ANA)
- --------------------------------------------------------------------------------
Management Fees............................................. .75%
12b-1 Fees.................................................. None
Other Expenses
Transfer Agent Fees...................................... .25%
Custodian Fees........................................... .12%
All Other Expenses....................................... .08%
---
Total Other Expenses........................................ .45%
---
Total Fund Operating Expenses............................... 1.20%
====
- --------------------------
* A shareholder who requests delivery of redemption proceeds by wire transfer
will be subject to a $10 fee. See REDEMPTION OF SHARES - BANK WIRE.
Example of Effect of Fund Expenses
- --------------------------------------------------------------------------------
You would pay the following expenses on a $1,000 investment in the Fund,
assuming (1) 5% annual return and (2) redemption at the end of the periods
shown.
1 year - $ 12
3 years - $ 38
5 years - $ 66
10 years - $ 145
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
3
<PAGE>
FINANCIAL HIGHLIGHTS
The following financial highlights for a share outstanding throughout each of
the periods in the five-year period ended May 31, 1997, have been audited by
KPMG Peat Marwick LLP. This table should be read in conjunction with the Fund's
financial statements for the year ended May 31, 1997, and the independent
auditors' report thereon, that appear in the Fund's Annual Report. Further
performance information is contained in the Annual Report and is available upon
request without charge.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
EIGHT-MONTH
PERIOD ENDED YEAR ENDED
YEAR ENDED MAY 31, MAY 31, SEPTEMBER 30,
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Net asset value at
beginning of period $ 15.50 $ 12.96 $ 12.71 $ 11.80 $ 10.00
Net investment income .11 .12 .07 .04(b) .05
Net realized and
unrealized gain 2.28 2.73 .46 .93 1.75
Distributions from net
investment income (.14) (.08) - (.01) -
Distributions of realized
capital gains (.91) (.23) (.28) (.05) -
-------- -------- -------- -------- --------
Net asset value at
end of period $ 16.84 $ 15.50 $ 12.96 $ 12.71 $ 11.80
======== ======== ======== ======== ========
Total return (%)* 16.52 22.43 4.26 8.25 18.00
Net assets at end of
period (000) $306,799 $267,192 $200,745 $143,367 $ 68,818
Ratio of expenses to
average net assets (%) 1.20 1.27 1.28 1.28(a) 1.70
Ratio of net investment
income to average net
assets (%) .63 .96 .69 .42(a) .75
Portfolio turnover (%) 50.02 60.97 58.88 37.64 45.57
Average commission rate
paid per share** $ .0088 $ .0006
- ---------------------
* Assumes reinvestment of all dividend income and capital gain distributions
during the period.
** Calculated by aggregating all commissions paid on the purchase and sale of
securities and dividing by the actual number of shares purchased or sold
for which commissions were charged.
(a) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
(b) Calculated using weighted average shares.
</TABLE>
4
<PAGE>
PERFORMANCE INFORMATION
Performance information should be considered in light of the Fund's investment
objective and policies and market conditions during the time periods for which
it is reported. Historical performance should not be considered as
representative of the future performance of the Fund.
The Trust may quote the Fund's total return in advertisements and reports
to shareholders or prospective investors. The Fund's performance may also be
compared to that of other mutual funds with a similar investment objective and
to stock or relevant indexes that are referenced in APPENDIX B to the SAI.
Standard total return results reported by the Fund do not take into account
recurring and nonrecurring charges for optional services which only certain
shareholders elect and which involve nominal fees, such as the $10 fee for a
delivery of redemption proceeds by wire transfer.
The Fund's average annual total return is computed by determining the
average annual compounded rate of return for a specified period which, when
applied to a hypothetical $1,000 investment in the Fund at the beginning of the
period, would produce the redeemable value of that investment at the end of the
period, assuming reinvestment of all dividends and distributions during the
period.
Further information concerning the Fund's total return is included in the
SAI.
5
<PAGE>
USAA FAMILY OF NO-LOAD MUTUAL FUNDS
The USAA Family of No-Load Mutual Funds includes a variety of Funds, each with
different objectives and policies. In combination, these Funds are designed to
provide investors with the opportunity to formulate their own investment
program. You may exchange any shares you hold in any one USAA Fund for shares in
any other USAA Fund. For more complete information about the Funds in the USAA
Family of Funds, including charges and expenses, call the Manager for a
Prospectus. Read it carefully before you invest or send money.
USAA INVESTMENT TRUST
Income Strategy Fund
Growth and Tax Strategy Fund
Balanced Strategy Fund
Cornerstone Strategy Fund
Growth Strategy Fund
Emerging Markets Fund
Gold Fund
International Fund
World Growth Fund
GNMA Trust
Treasury Money Market Trust
USAA MUTUAL FUND, INC.
Aggressive Growth Fund
Science & Technology Fund
Growth Fund
First Start Growth Fund
S&P 500 Index Fund**
Growth & Income Fund
Income Stock Fund
Income Fund
Short-Term Bond Fund
Money Market Fund
USAA TAX EXEMPT FUND, INC.
Long-Term Fund
Intermediate-Term Fund
Short-Term Fund
Tax Exempt Money Market Fund
California Bond Fund*
California Money Market Fund*
New York Bond Fund*
New York Money Market Fund*
Virginia Bond Fund*
Virginia Money Market Fund*
USAA STATE TAX-FREE TRUST
Florida Tax-Free Income Fund*
Florida Tax-Free Money Market Fund*
Texas Tax-Free Income Fund*
Texas Tax-Free Money Market Fund*
* Offered only to residents of these specific states.
** S&P 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.
6
<PAGE>
USING MUTUAL FUNDS IN AN INVESTMENT PROGRAM
I. THE IDEA BEHIND MUTUAL FUNDS
Mutual funds provide small investors some of the advantages enjoyed by wealthy
investors. A relatively small investment can buy part of a widely diversified
portfolio. That portfolio is managed by investment professionals, relieving the
shareholder of the need to make individual stock or bond selections. The
investor also enjoys 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 each shareholder owns an investment that in earlier times
would have been available only to very wealthy people.
II. USING FUNDS IN AN INVESTMENT PROGRAM
In choosing a mutual fund as an investment vehicle, the shareholder is foregoing
some investment decisions, but must still make others. The decisions foregone
are those involved with choosing individual securities. The Fund Manager will
perform that function. In addition, the Manager will arrange for the safekeeping
of securities, auditing the annual financial statements, and daily valuation of
the Fund, as well as other functions.
The shareholder, however, retains at least part of the responsibility for
an equally important decision. This decision involves determining a portfolio of
mutual funds that balances the investor's investment goals with his or her
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 a shareholder wishes to diversify internationally. He
or she could do this by adding positions in the Emerging Markets, Gold,
International, or World Growth Funds to holdings in domestic funds. This would
give the investor exposure to the opportunities of investment in many foreign
countries and to currency changes. This is just one example of how an individual
could combine funds to create a portfolio tailored to his or her own risk and
reward goals.
III. USAA'S FAMILY OF FUNDS
The Manager offers investors another alternative in its asset strategy funds,
the Income Strategy, Growth and Tax Strategy, Balanced Strategy, Cornerstone
Strategy, and Growth Strategy Funds. These unique mutual funds provide a
professionally managed diversified investment portfolio within a mutual fund.
These Funds are designed for the shareholder who prefers to delegate the asset
allocation process to an investment manager. The Funds are structured to achieve
diversification across a number of investment categories.
Whether you prefer to create your own mix of mutual funds or use an asset
strategy fund, the USAA Family of Funds provides a broad range of choices
covering just about any investor's investment objectives. Our sales
representatives stand ready to assist you with your choices and to help you
craft a portfolio which meets your needs.
7
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
INVESTMENT OBJECTIVE
The Fund's investment objective is capital appreciation.
The investment objective of the Fund cannot be changed without shareholder
approval. In view of the risks inherent in all investments in securities, there
is no assurance that this objective will be achieved.
The investment policies and techniques used to pursue the Fund's objective
may be changed without shareholder approval, except as otherwise noted. Further
information regarding the Fund's investment policies, restrictions and risks is
provided in the SAI.
INVESTMENT POLICIES, TECHNIQUES AND RISK FACTORS
The Manager will pursue this objective by investing at least 65% of the Fund's
assets in common stocks, preferred stocks and other equity securities of both
foreign and domestic issuers, including securities which are convertible into or
which carry the right to buy common stocks and real estate investment trusts
(REITs). Under normal conditions investments will be made in at least three
countries. There are no restrictions as to the types of businesses or operations
of companies in which the Fund may invest.
The remainder of the Fund's assets may be invested in marketable securities
having remaining maturities of less than one year issued or guaranteed as to
both principal and interest by the U.S. Government or by its agencies or
instrumentalities and in repurchase agreements collateralized by such
securities. The Fund may on a temporary defensive basis invest its assets
without limitation in such securities. For a discussion of risks associated with
investments in foreign issuers and REITs, see SPECIAL RISK CONSIDERATIONS.
FORWARD CURRENCY CONTRACTS - The Fund may hold securities denominated in foreign
currencies. As a result, the value of the securities will be affected by changes
in the exchange rate between the dollar and foreign currencies. In managing the
currency exposure, the Fund 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.
The Fund may enter into forward currency contracts under two circumstances.
First, when the 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. Second, when management of the 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. The Fund may not
hedge with respect to a particular currency for an amount greater than the
aggregate market value (determined at the time of making any sale of forward
currency) of the securities held in its portfolio denominated or quoted in, or
bearing a substantial correlation to, such currency.
The use of forward currency contracts to protect the value of the Fund's
assets against a decline in the value of a currency does not eliminate
fluctuations in the value of the Fund's underlying security holdings. In
addition, although the use of forward currency contracts can minimize the risk
of loss due to a decline in value of the foreign currency, the use of such
contracts will tend to limit any potential gain resulting from an increase in
the relative value of the foreign currency to the U.S. dollar. Under certain
circumstances, a fund that has entered into forward currency contracts to hedge
its
8
<PAGE>
currency risks may be in a less favorable position than a fund that had not
entered into such contracts. The projection of short-term currency market
movements is extremely difficult and successful execution of a short-term
hedging strategy is highly uncertain.
REPURCHASE AGREEMENTS - The Fund may invest in repurchase agreements which are
collateralized by obligations backed by the full faith and credit of the U.S.
Government or by its agencies or instrumentalities. A repurchase agreement is a
transaction in which a security is purchased with a simultaneous commitment to
sell the security back to the seller (a commercial bank or recognized securities
dealer) at an agreed upon price on an agreed upon date, 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 the 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.
WHEN-ISSUED SECURITIES - The Fund may invest in new issues of debt securities
offered on a when-issued basis; that is, 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.
Cash or high quality liquid debt securities equal to the amount of the
when-issued commitments are segregated at the Fund's custodian bank. The
segregated securities are valued at market, and daily adjustments are made to
keep the value of the cash and segregated securities at least equal to the
amount of such commitments by the Fund. On the settlement date, the Fund will
meet its obligations from then available cash, sale of segregated securities,
sale of other securities, or sale of the when-issued securities themselves.
LIQUIDITY - The Fund may not invest more than 15% of the market value of its
total assets in securities which are illiquid or not readily marketable. Rule
144A Securities may be determined to be liquid in accordance with guidelines
established by the Board of Trustees.
INVESTMENT RESTRICTIONS
The following restrictions may not be changed without shareholder approval:
(1) The Fund may not invest more than 25% of its total assets in one industry.
(2) The Fund may not, 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 Investment Company Act of 1940, as amended (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.
(3) The Fund may not 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).
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SPECIAL RISK CONSIDERATIONS
INVESTMENT IN FOREIGN SECURITIES - The Fund may purchase foreign securities in
foreign or U.S. markets or it may purchase American Depositary Receipts (ADRs),
Global Depositary Receipts (GDRs), or similar forms of ownership interest in
securities of foreign issuers deposited with a depositary. Investing in foreign
securities presents certain risks not present in domestic investments. Such
risks may include currency exchange rate fluctuations; foreign market
illiquidity; increased price volatility; exchange control regulations; different
accounting, reporting, and disclosure requirements; political or social
instability; and difficulties in obtaining judgments or effecting collections
thereon. Brokerage commissions and custodial services may be more costly, and
stock trade settlements may be more lengthy, more costly and more difficult than
in domestic markets. These investments may be subject to foreign withholding
taxes which may reduce the effective rates of return. The Fund values its
securities and other assets in U.S. dollars.
Information which may impact the market value of securities of a foreign
issuer may not be available to the Manager on a timely basis. The Manager will
endeavor to ascertain such information on as timely a basis as is practicable,
however, any impact on the net asset value will be deemed to have occurred upon
authentication by the Manager.
A developing country can be considered to be a country which is in the
initial stages of its industrialization cycle. Investments in developing
countries involve exposure to economic structures that are generally less
diverse and mature than in the United States, and to political systems which may
be less stable. Due to illiquidity and lack of hedging instruments, it is
presently difficult or in some cases impossible to hedge the currency risk in
these markets. In the past, markets of developing countries have been more
volatile than the markets of developed countries.
Political risk includes a greater potential for coup d'etats, insurrections
and expropriation by governmental organizations. For example, the Fund may
invest in Eastern Europe and former states of the Soviet Union (also known as
the CIS or the Commonwealth of Independent States). These countries were under
communist systems which had nationalized private industry. There is no guarantee
that nationalization may not occur again in this region or others in which the
Fund invests, in which case the Fund may lose all or part of its investment in
that country's issuers.
INVESTMENT IN REITS - The Fund's investments in REITs may subject the Fund to
many of the same risks associated with the direct ownership of real estate. In
addition, REITs are dependent upon the capabilities of the REIT manager(s) and
have limited diversification.
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PURCHASE OF SHARES
OPENING AN ACCOUNT
You may open an account and make an investment by any of the following methods.
A complete, signed application is required together with a check for each new
account.
TAX ID NUMBER
We require that each shareholder named on the account provide the Trust with a
social security number or tax identification number to avoid possible tax
withholding requirements.
EFFECTIVE DATE
When you make a purchase, your purchase price will be the net asset value (NAV)
per share next determined after the Fund receives your request in proper form.
The NAV of the Fund is determined at the close of the regular trading session of
the New York Stock Exchange (NYSE) each day the NYSE is open. If the Fund
receives your request prior to that time, your purchase price will be the NAV
per share determined for that day. If the Fund receives your request after the
NAV per share is calculated, the purchase will be effective on the next business
day.
Because of the more lengthy clearing process and the need to convert
foreign currency, a check drawn on a foreign bank will not be deemed received
for the purchase of shares until such time as the check has cleared and the
Manager has received good funds, which may take up to four to six weeks.
Furthermore, a bank charge may be assessed in the clearing process, which will
be deducted from the amount of the purchase. To avoid a delay in the effective
date of your purchase, the Manager suggests that you convert your foreign check
to U.S. dollars prior to investment in the Fund.
PURCHASE OF SHARES
MINIMUM INVESTMENTS
Initial Purchase: $3,000 [$500 for Uniform Gifts/Transfers to Minors Act
(UGMA/UTMA) accounts and $250 for IRAs] or no initial
investment if you elect to have monthly electronic
investments of at least $50 each.
Additional Purchases: $50
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HOW TO PURCHASE:
MAIL o To open an account, send your application and check to:
USAA Investment Management Company
9800 Fredericksburg Rd., San Antonio, TX 78288
o To add to your account, send your check and the "Invest by
Mail" stub that accompanies your fund's transaction
confirmation to the Transfer Agent:
USAA Shareholder Account Services
9800 Fredericksburg Rd., San Antonio, TX 78288
IN PERSON o To open an account, bring your application and check to:
USAA Investment Management Company
USAA Federal Savings Bank
10750 Robert F. McDermott Freeway, San Antonio
AUTOMATICALLY o Additional purchases on a regular basis can be deducted from a
VIA bank account, paycheck, income-producing investment or from a
ELECTRONIC USAA money market account. Sign up for these services when
FUNDS opening an account or call 1-800-531-8448 to add these
TRANSFER (EFT) services.
o Purchases through payroll deduction ($25 minimum each pay period
with no initial investment) can be made by any employee of USAA
or any of its affiliated companies.
BANK WIRE o To add to an 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 World Growth Fund
USAA AC-69384998
Shareholder(s) Name(s)_________________
Shareholder(s) Account Number___________________
PHONE o If you have an existing USAA account and would like to open a
1-800-531-8448 new account or if you would like to 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.
o To add to an account, intermittent (as-needed) purchases
can be deducted from your bank account through our Buy/Sell
Service. Call for instructions.
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REDEMPTION OF SHARES
You may redeem shares of the Fund by any of the following methods on any day the
NAV per share is calculated. Redemptions will be effective on the day
instructions are received in accordance with the requirements set forth below.
However, if instructions are received after the NAV per share calculation,
redemption will be effective on the next business day.
REDEMPTION PROCEEDS
Redemption proceeds are distributed within seven days after the effective date
of redemption. Payment for redemption of shares purchased by check or electronic
funds transfer will not be disbursed until the purchase check or electronic
funds transfer has cleared, which could take up to 15 days from the purchase
date. If you are considering redeeming shares soon after purchase, you should
purchase by bank wire or certified check to avoid delay.
In addition, the Trust may elect to suspend the redemption of shares or
postpone the date of payment during any period that the NYSE is closed, or
trading in the markets the Trust normally utilizes is restricted, or during any
period that redemption is otherwise permitted to be suspended by the SEC.
HOW TO REDEEM:
WRITTEN, o Send your written instructions to:
FAX, OR USAA Shareholder Account Services
TELEGRAPH 9800 Fredericksburg Rd., San Antonio, TX 78288
o Send a signed fax to 1-800-292-8177, or send a telegraph to
USAA Shareholder Account Services.
Written redemption requests must include the following: (1) a letter of
instruction or stock assignment, and stock certificate (if issued), specifying
the Fund and the number of shares or dollar amount to be redeemed; (2)
signatures of all owners of the shares exactly as their names appear on the
account; (3) other supporting legal documents, if required, as in the case of
estates, trusts, guardianships, custodianships, partnerships, corporations, and
pension and profit-sharing plans; and (4) method of payment.
PHONE o Call toll free 1-800-531-8448, in San Antonio, 456-7202.
Telephone redemption is automatically established when you complete your
application. The Fund will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine; and if it does not, it may
be liable for any losses due to unauthorized or fraudulent instructions.
Information is obtained prior to any discussion regarding an account including:
(1) USAA number or account number, (2) the name(s) on the account registration,
and (3) social security number or tax identification number for the account
registration. In addition, all telephone communications with a shareholder are
recorded, and confirmations of all account transactions are sent to the address
of record.
Redemption by telephone, fax, or telegraph is not available for shares
represented by stock certificates.
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METHODS OF PAYMENT:
BANK WIRE o Allows redemptions to be sent directly to your bank account.
Establish this service when you apply for your account, or later upon
request. Please obtain precise wiring instructions from your financial
institution. USAA Shareholder Account Services (Transfer Agent) deducts a wire
fee from the account for the redemption by wire. The fee as of the date of this
Prospectus is $10 ($25 for wires to a foreign bank) and is subject to change at
any time. The fee is paid to State Street Bank and Trust Company and the
Transfer Agent for their services in connection with the wire redemption. Your
financial institution may also charge a fee for receiving funds by wire.
AUTOMATICALLY o Systematic (regular) or intermittent (as-needed) redemptions can
VIA EFT be credited to your bank account.
Establish any of our electronic investing services when you apply for your
account, or later upon request.
CHECK o A check payable to the registered shareholder(s) will be mailed
REDEMPTION to the address of record.
This check redemption privilege is automatically established when your
application is completed and accepted. There is a 15-day waiting period before a
check redemption can be processed following a telephone address change. Should
you wish to redeem shares within the 15 days following a telephone address
change, you may do so by providing written instructions by mail or facsimile.
CONDITIONS OF PURCHASE AND REDEMPTION
NONPAYMENT
If any order to purchase shares is cancelled due to nonpayment or if the Trust
does not receive good funds either by check or electronic funds transfer, the
Transfer Agent will treat the cancellation as a redemption of shares purchased,
and you will be responsible for any resulting loss incurred by the Fund or the
Manager. If you are a shareholder, the Transfer Agent can redeem shares from any
of your account(s) as reimbursement for all losses. In addition, you may be
prohibited or restricted from making future purchases in any of the USAA Family
of Funds. A $15 fee is charged for all returned items, including checks and
electronic funds transfers.
TRANSFER OF SHARES
You may transfer Fund shares to another person by sending written instructions
to the Transfer Agent. The account must be clearly identified, and you must
include the number of shares to be transferred, the signatures of all registered
owners, and all stock certificates, if any, which are the subject of transfer.
You also need to send written instructions signed by all registered owners and
supporting documents to change an account registration due to events such as
divorce, marriage, or death. If a new account needs to be established, you must
complete and return an application to the Transfer Agent.
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ACCOUNT BALANCE
Beginning in September 1998, and occurring each September thereafter, the
Transfer Agent will assess a small balance account fee of $12 to each
shareholder account with a balance, at the time of assessment, of less than
$2,000. The fee will be used to reduce total transfer agency fees paid by the
Fund to the Transfer Agent. 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 or 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).
TRUST RIGHTS
The Trust reserves the right to:
(1) reject purchase or exchange orders when in the best interest of the Trust;
(2) limit or discontinue the offering of shares of any portfolio of the Trust
without notice to the shareholders;
(3) require a signature guarantee for purchases, redemptions, or changes in
account information in those instances where the appropriateness of a
signature authorization is in question. The section ADDITIONAL INFORMATION
REGARDING REDEMPTION OF SHARES in the SAI contains information on
acceptable guarantors;
(4) redeem an account with less than $900, subject to certain limitations
described in ADDITIONAL INFORMATION REGARDING REDEMPTION OF SHARES in the
SAI.
EXCHANGES
EXCHANGE PRIVILEGE
The Exchange Privilege is automatically established 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 that the
shares to be acquired are offered in your state of residence. Exchange
redemptions and purchases will be processed simultaneously at the share prices
next determined after the exchange order is received. For federal income tax
purposes, an exchange between Funds is a taxable event. Accordingly, when
exchanging shares, you may realize a capital gain or loss.
The Fund has undertaken certain procedures regarding telephone
transactions. See REDEMPTION OF SHARES - PHONE.
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. Exchanges out of
any Fund in the USAA Family of Funds are limited for each account to six per
calendar year except that 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.
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<PAGE>
OTHER SERVICES
INVESTMENT PLANS
AUTOMATIC INVESTMENT PLANS - You may establish an automatic investment plan by
completing the appropriate forms, if any. 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. Call the Manager to obtain instructions. More information about
these preauthorized plans is contained in the SAI.
o INVESTART(R) - A no initial investment purchase plan. With this plan the
regular minimum initial investment amount is waived if you make subsequent
monthly additions of at least $50 through electronic funds transfer from a
checking or savings account. The Manager may periodically offer programs that
reduce the minimum amounts for monthly electronic investments.
o 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.
o DIRECT PURCHASE SERVICE - The periodic purchase of shares through electronic
funds transfer from an employer (including government allotments), an
income-producing investment, or an account with a participating financial
institution.
o 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.
o BUY/SELL SERVICE - The intermittent purchase or redemption of shares through
electronic funds transfer to or from a checking or savings account. o Systematic
Withdrawal Plan - The periodic redemption of shares from one of your accounts
permitting you to receive a fixed amount of money monthly or quarterly.
o RETIREMENT PLANS - Plans are available for various forms of IRAs and for
403(b)(7) accounts. Federal taxes on current income may be deferred if an
investor qualifies.
o 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.
SHAREHOLDER STATEMENTS AND REPORTS
You will receive a confirmation after each transaction in your account except:
(1) a payment you make under the InveStart(R), InvesTronic(R), Automatic
Purchase Plan, or Direct Purchase Service investment plans; or
(2) a redemption you make under the Systematic Withdrawal Plan.
At the end of each quarter, you will receive a consolidated statement for
all of your mutual fund accounts, regardless of account activity. The fourth
quarter consolidated statement will reflect all account activity for the prior
tax year. There will be a $10 fee charged for copies of historical statements
for other than the prior tax year for any one account. You will receive the
Fund's financial statements with a summary of its investments and performance at
least semiannually.
In an effort to reduce expenses and respond to shareholders' requests to
reduce mail, the Trust intends to consolidate mailings of Annual and Semiannual
Reports to households having multiple accounts with the same address of record.
One copy of each report will be furnished to that address. You may request
additional reports by notifying the Trust.
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<PAGE>
TELEPHONE ASSISTANCE
Call our telephone assistance numbers for specific forms, a copy of the SAI, the
most recent Annual Report and/or Semiannual Report, or if you have any questions
concerning any of the services offered.
SHARE PRICE CALCULATION
The price at which shares of the Fund are purchased and redeemed by shareholders
is equal to the NAV per share determined on the effective date of the purchase
or redemption.
WHEN
The NAV per share for the Fund is calculated at the close of the regular trading
session of the NYSE, which is usually 4:00 p.m. Eastern time. You may buy and
sell Fund shares at the NAV per share without a sales charge.
HOW
The NAV per share is calculated by adding the value of all securities and other
assets in the Fund, deducting liabilities, and dividing by the number of shares
outstanding. Portfolio securities, except as otherwise noted, traded primarily
on a domestic securities exchange are valued at the last sales price on that
exchange. Portfolio securities traded primarily on foreign securities exchanges
are 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 Board of Trustees. Securities which cannot be valued by
the methods set forth above, and all other assets, are valued in good faith at
fair value using methods determined by the Manager under the general supervision
of the Board of Trustees.
For additional information, see VALUATION OF SECURITIES in the SAI.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
Net investment income will be distributed to shareholders annually. Net capital
gains, if any, generally will be distributed at least annually. The Fund intends
to make such additional distributions as may be necessary to avoid the
imposition of any federal income or excise tax.
All income dividends and capital gain distributions are automatically
reinvested, unless the shareholder specifies otherwise. The share price will be
the net asset value of the Fund shares computed on the ex-dividend date. Any
income dividend or capital gain distributions paid by the Fund will reduce the
NAV per share by the amount of the dividend or distribution. An investor should
consider carefully the effects of purchasing shares of the Fund shortly before
any dividend or distribution. Although in effect a return of capital, these
distributions are subject to taxes.
Any dividend or distribution payment returned to the Manager as not
deliverable will be invested in the shareholder's Fund account at the
then-current NAV per share. If any check for the payment of dividends or
distributions is not cashed within six months from the date on the check, it
becomes void. The amount of the check will then be invested in the shareholder's
Fund account at the then-current NAV per share.
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FEDERAL TAXES
The following discussion relates only to generally applicable federal income tax
provisions in effect as of the date of this Prospectus. Note that the recently
enacted Taxpayer Relief Act of 1997 and regulations that will likely be created
to implement the Act may affect the status and treatment of certain
distributions shareholders receive from the Fund. Shareholders are urged to
consult their own tax advisers about the status of distributions from the Fund
in their own states and localities.
FUND - The Fund intends to qualify as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended (the Code). By
complying with the applicable provisions of the Code, the Fund will not be
subject to federal income tax on its net investment income and net capital gains
(capital gains in excess of capital losses) distributed to shareholders.
SHAREHOLDER - Dividends from taxable net investment income and distributions of
net short-term capital gains are taxable to shareholders as ordinary income,
whether received in cash or reinvested in additional shares. A portion of these
dividends may qualify for the 70% dividends received deduction available to
corporations.
Distributions of net long-term capital gains are taxable as long-term
capital gains whether received in cash or reinvested in additional shares, and
regardless of the length of time the investor has held the shares of the Fund.
Redemptions, including exchanges, are subject to income tax, based on the
difference between the cost of shares when purchased and the price received upon
redemption or exchange.
FOREIGN TAXES - The Fund may be subject to foreign withholding or other taxes.
If more than 50% of the value of the Fund's total assets at the close of any
taxable year consists of securities of foreign corporations, the Fund may file
an election with the Internal Revenue Service (the Foreign Election) that would
permit shareholders to take a credit (or a deduction) for foreign income taxes
paid by the Fund. If the Foreign Election is made, shareholders would include in
their gross income both dividends received from the Fund and foreign income
taxes paid by the Fund. Shareholders of the Fund would be entitled to treat the
foreign income taxes withheld as a credit against their U.S. federal income
taxes, subject to the limitations set forth in the Code with respect to the
foreign tax credit generally. Alternatively, shareholders could, if to their
advantage, treat the foreign income taxes withheld as an itemized deduction in
computing taxable income rather than as a tax credit. Shareholders will not be
entitled to a foreign tax credit for taxes paid to certain countries; however,
if the Fund otherwise qualifies for the Foreign Election, a deduction for such
taxes will be available to shareholders of the Fund. It is anticipated that the
Fund will make the Foreign Election.
WITHHOLDING - The Fund is required by federal law 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, who underreports
dividend or interest income, or who fails to certify that he 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 Transfer Agent, that your
tax identification number is correct and that you are not currently subject to
backup withholding.
REPORTING - Information concerning the status of dividends and distributions for
federal income tax purposes will be mailed to shareholders annually.
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MANAGEMENT OF THE TRUST
The business affairs of the Trust are subject to the supervision of the Board of
Trustees.
The Manager, USAA Investment Management Company (IMCO), was organized in
May 1970 and is an affiliate of United Services Automobile Association (USAA), a
large diversified financial services institution. As of the date of this
Prospectus, the Manager had approximately $36 billion in total assets under
management. The Manager's mailing address is 9800 Fredericksburg Rd., San
Antonio, TX 78288.
Officers and employees of the Manager are permitted to engage in personal
securities transactions subject to restrictions and procedures set forth in the
Joint Code of Ethics adopted by the Trust and the Manager. Such restrictions and
procedures include substantially all of the recommendations of the Advisory
Group of the Investment Company Institute and comply with SEC rules and
regulations.
ADVISORY AGREEMENT
The Manager serves as the manager and investment adviser of the Trust, providing
services under an Advisory Agreement. Under the Advisory Agreement, the Manager
is responsible for the management of the business affairs, investment
portfolios, and placement of brokerage orders, subject to the authority of and
supervision by the Board of Trustees.
For its services under the Advisory Agreement, the Fund pays the Manager an
annual fee which is computed as a percentage of the Fund's ANA, accrued daily
and paid monthly. The Fund's management fees were computed and paid at
three-fourths of one percent (.75%) of ANA for the fiscal year ended May 31,
1997.
OPERATING EXPENSES
For the fiscal year ended May 31, 1997, the total operating expenses for the
Fund as a percentage of the Fund's ANA equaled 1.20%.
PORTFOLIO TRANSACTIONS
Purchases and sales of equity securities for the Fund's portfolio may be
accomplished through USAA Brokerage Services, a discount brokerage service of
the Manager. The Board of Trustees has adopted procedures to ensure that any
commissions paid to USAA Brokerage Services are reasonable and fair.
PORTFOLIO MANAGERS
The following individuals are primarily responsible for managing the Fund.
David G. Peebles, Vice President of Equity Investments since February 1988,
is the asset allocation manager for the Fund. He has managed or co-managed the
Fund's investments in foreign securities since its inception in October 1992. He
has 31 years investment management experience and has worked for IMCO for 13
years. Mr. Peebles earned the Chartered Financial Analyst (CFA) designation in
1971 and is a member of the Association for Investment Management and Research
(AIMR), the San Antonio Financial Analysts Society, Inc. (SAFAS), and the
International Society of Financial Analysts (ISFA). He holds an MBA and BS from
Texas Christian University.
Albert C. Sebastian and W. Travis Selmier, II, co-manage the Fund's
investments in foreign securities with Mr. Peebles. Mr. Peebles coordinates the
activities of the Managers.
Albert C. Sebastian, Assistant Vice President of Equity Investments since
September 1996, has co-managed the Fund's investments in foreign securities
since October 1996. He has 13 years investment management experience and has
worked for IMCO for six years. Mr. Sebastian earned the CFA designation in 1989
and is a member of AIMR, SAFAS and ISFA. He holds an MBA from the University of
Michigan and a BA from Holy Cross College, Massachusetts.
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<PAGE>
W. Travis Selmier, II, Assistant Vice President of Equity Investments since
September 1996, has co-managed the Fund's investments in foreign securities
since October 1996. He has 10 years investment management experience and has
worked for IMCO for six years. Mr. Selmier earned the CFA designation in 1990
and is a member of AIMR, SAFAS and ISFA. He holds an MBA from Indiana
University, a Certificate of Proficiency from Sophia University Japanese
Language Institute, Japan, and a BA from the University of California at Santa
Barbara.
R. David Ullom, Assistant Vice President of Equity Investments since
September 1994, has managed the Fund's investments in domestic stocks since
February 1995. Mr. Ullom has 22 years investment management experience and has
worked for IMCO for 11 years. Mr. Ullom earned the CFA designation in 1980 and
is a member of AIMR and SAFAS. He holds an MBA from Washington University,
Missouri and a BS from Oklahoma State University.
DESCRIPTION OF SHARES
MASTER TRUST AGREEMENT
The Trust is an open-end management investment company established as a business
trust under the laws of the Commonwealth of Massachusetts pursuant to the First
Amended and Restated Master Trust Agreement (Master Trust Agreement) dated June
2, 1995, as amended. The Trust is authorized to issue an unlimited number of
shares of beneficial interest of separate portfolios, without par value. Eleven
such portfolios have been established, one of which is described in this
Prospectus. The Fund is classified as diversified. Under the Master Trust
Agreement, the Trustees are authorized to create new portfolios in addition to
those already existing without shareholder approval.
Under the Master Trust Agreement, no annual or regular meeting of
shareholders is required. Ordinarily, no shareholder meeting will be held unless
required by the 1940 Act. The Trustees may fill vacancies on the Board or
appoint new Trustees provided that immediately after such action at least
two-thirds of the Trustees have been elected by shareholders. Shareholders are
entitled to one vote per share (with proportionate voting for fractional shares)
irrespective of the relative net asset value of the shares. For matters
affecting an individual portfolio, a separate vote of the shareholders of that
portfolio is required. Shareholders holding an aggregate of at least 10% of the
outstanding shares of the Trust may request a meeting of shareholders at any
time for the purpose of voting to remove one or more of the Trustees, and the
Trust will assist shareholders in communicating with other shareholders in
connection with such a meeting.
Under Massachusetts law, shareholders of any portfolio could, under certain
circumstances, be held personally liable for the obligations of the Trust.
However, the Master Trust Agreement disclaims shareholder liability for acts or
obligations of the Trust and requires that notice of such disclaimer be given in
each agreement, obligation, or instrument entered into or executed by the Trust
or the Trustees. The Master Trust Agreement provides for indemnification out of
the Trust's property for all losses and expenses of any shareholder held
personally liable for the obligations of the Trust. Thus, the possibility of a
shareholder incurring financial loss on account of shareholder liability is
remote.
20
<PAGE>
SERVICE PROVIDERS
UNDERWRITER/ USAA Investment Management Company
DISTRIBUTOR 9800 Fredericksburg Rd., San Antonio, Texas 78288.
TRANSFER USAA Shareholder Account Services
AGENT 9800 Fredericksburg Rd., San Antonio, Texas 78288.
CUSTODIAN State Street Bank and Trust Company
P.O. Box 1713, Boston, Massachusetts 02105.
LEGAL Goodwin, Procter & Hoar LLP
COUNSEL Exchange Place, Boston, Massachusetts 02109.
INDEPENDENT KPMG Peat Marwick LLP
AUDITORS 112 East Pecan, Suite 2400, San Antonio, Texas 78205.
- --------------------------------------------------------------------------------
TELEPHONE ASSISTANCE
(Call toll free - Central Time)
Monday-Friday 8:00 a.m. to 8:00 p.m.
Saturday 8:30 a.m. to 5:00 p.m.
For further information on mutual funds:
1-800-531-8181
In San Antonio 456-7211
For account servicing, exchanges or redemptions:
1-800-531-8448
In San Antonio 456-7202
RECORDED 24 HOUR SERVICE
MUTUAL FUND PRICE QUOTES
(From any phone)
1-800-531-8066
In San Antonio 498-8066
MUTUAL FUND TOUCHLINE(R)
(From Touchtone phones only)
For account balance, last transaction or fund prices:
1-800-531-8777
In San Antonio 498-8777
- --------------------------------------------------------------------------------
21
<PAGE>
Part A
Prospectus for the
GNMA Trust
is included herein
<PAGE>
USAA GNMA TRUST
October 1, 1997 PROSPECTUS
USAA GNMA TRUST (the Fund) is one of eleven no-load mutual funds offered by USAA
Investment Trust (the Trust). The Fund is managed by USAA Investment Management
Company (the Manager).
WHAT IS THE INVESTMENT OBJECTIVE?
The Fund's investment objective is to provide investors a high level of current
income consistent with preservation of principal by investing in securities
backed by the full faith and credit of the U.S. Government. Page 9.
HOW DO YOU BUY?
Fund shares are sold on a continuous basis at the net asset value per share
without a sales charge. Make your initial investment directly with the Manager
by mail, in person, or in certain instances, by telephone. Page 12.
HOW DO YOU SELL?
You may redeem Fund shares by mail, telephone, fax, or telegraph on any day
that the net asset value is calculated. Page 14.
This Prospectus, which should be read and retained for future reference,
provides information regarding the Trust and the Fund that you should know
before investing.
SHARES OF THE USAA GNMA TRUST ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF, OR
GUARANTEED BY, THE USAA FEDERAL SAVINGS BANK, ARE NOT INSURED BY THE FDIC OR ANY
OTHER GOVERNMENT AGENCY, ARE SUBJECT TO INVESTMENT RISKS, AND MAY LOSE VALUE.
If you would like more information about the Fund, you may call
1-800-531-8181 to request a free copy of the most recent financial report and/or
the Fund's Statement of Additional Information (SAI), dated October 1, 1997. The
SAI has been filed with the Securities and Exchange Commission (SEC) and is
incorporated by reference into this Prospectus (meaning it is legally a part of
the Prospectus).
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
Page
SUMMARY DATA
Fees and Expenses............................................. 3
Financial Highlights.......................................... 4
Performance Information....................................... 6
USING MUTUAL FUNDS
USAA Family of No-Load Mutual Funds........................... 7
Using Mutual Funds in an Investment Program................... 8
INVESTMENT PORTFOLIO INFORMATION
Investment Objective and Policies............................. 9
SHAREHOLDER INFORMATION
Purchase of Shares............................................ 12
Redemption of Shares.......................................... 14
Conditions of Purchase and Redemption......................... 15
Exchanges..................................................... 16
Other Services................................................ 17
Share Price Calculation....................................... 18
Dividends, Distributions and Taxes............................ 18
Management of the Trust....................................... 20
Description of Shares......................................... 21
Service Providers............................................. 22
Telephone Assistance Numbers.................................. 22
- --------------------------------------------------------------------------------
2
<PAGE>
FEES AND EXPENSES
The following summary, which is based on actual expenses and average net assets
(ANA) of the Fund for the year ended May 31, 1997, is provided to assist you in
understanding the expenses you will bear directly or indirectly as a Fund
investor.
Shareholder Transaction Expenses
- --------------------------------------------------------------------------------
Sales Load Imposed on Purchases............................. None
Sales Load Imposed on Reinvested Dividends.................. None
Deferred Sales Load......................................... None
Redemption Fee*............................................. None
Exchange Fee................................................ None
Annual Fund Operating Expenses (as a percentage of ANA)
- --------------------------------------------------------------------------------
Management Fees............................................. .125%
12b-1 Fees.................................................. None
Other Expenses
Transfer Agent Fees...................................... .116%
Custodian Fees........................................... .029%
All Other Expenses....................................... .032%
----
Total Other Expenses........................................ .177%
----
Total Fund Operating Expenses............................... .302%
====
- ---------------------------
* A shareholder who requests delivery of redemption proceeds by wire transfer
will be subject to a $10 fee. See REDEMPTION OF SHARES - BANK WIRE.
Example of Effect of Fund Expenses
- --------------------------------------------------------------------------------
You would pay the following expenses on a $1,000 investment in the Fund,
assuming (1) 5% annual return and (2) redemption at the end of the periods
shown.
1 year - $ 3
3 years - $ 10
5 years - $ 17
10 years - $ 38
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
3
<PAGE>
FINANCIAL HIGHLIGHTS
The following financial highlights for a share outstanding throughout each of
the periods in the seven-year period ended May 31, 1997, have been audited by
KPMG Peat Marwick LLP. This table should be read in conjunction with the Fund's
financial statements for the year ended May 31, 1997, and the independent
auditors' report thereon, that appear in the Fund's Annual Report. Further
performance information is contained in the Annual Report and is available upon
request without charge.
EIGHT-MONTH
PERIOD ENDED
YEAR ENDED MAY 31, MAY 31,
1997 1996 1995 1994
---- ---- ---- ----
Net asset value at
beginning of period $ 9.76 $ 10.09 $ 9.82 $ 10.37
Net investment income .69 .70 .72 .49
Net realized and
unrealized gain (loss) .19 (.33) .27 (.55)
Distributions from net
investment income (.69) (.70) (.72) (.49)
-------- -------- --------- --------
Net asset value at
end of period $ 9.95 $ 9.76 $ 10.09 $ 9.82
======== ======== ========= ========
Total return (%)** 9.23 3.65 10.54 (.66)
Net assets at end of
period (000) $308,798 $301,589 $265,571 $261,251
Ratio of expenses to
average net assets (%) .30 .32 .32 .31(a)
Ratio of net investment
income to average net
assets (%) 6.93 6.90 7.34 7.20(a)
Portfolio turnover (%) 77.82 127.77 93.78 90.05
- ----------------------
* Fund commenced operations February 1, 1991.
** Assumes reinvestment of all dividend income distributions during the
period.
(a) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
(b) The information contained in this table is based on actual expenses for
the period, after giving effect to reimbursements of expenses by the
Manager. Absent such reimbursements the Fund's ratios would have been:
YEAR ENDED SEPTEMBER 30,
1992 1991*
---- ----
Ratio of expenses to average
net assets (%) .40 .91(a)
Ratio of net investment income
to average net assets (%) 7.89 7.82(a)
4
<PAGE>
FINANCIAL HIGHLIGHTS cont.
YEAR ENDED SEPTEMBER 30,
1993 1992 1991*
---- ---- ----
Net asset value at
beginning of period $ 10.47 $ 10.19 $ 10.00
Net investment income .79 .82 .53
Net realized and
unrealized gain (loss) (.10) .28 .19
Distributions from net
investment income (.79) (.82) (.53)
-------- ------- --------
Net asset value at
end of period $ 10.37 $ 10.47 $ 10.19
======== ======== ========
Total return (%)** 6.79 11.18 7.48
Net assets at end of
period (000) $288,879 $218,544 $ 69,431
Ratio of expenses to
average net assets (%) .32 .375(b) .375(a)(b)
Ratio of net investment
income to average net
assets (%) 7.53 7.92(b) 8.35(a)(b)
Portfolio turnover (%) 81.44 36.11 5.39
5
<PAGE>
PERFORMANCE INFORMATION
Performance information should be considered in light of the Fund's investment
objective and policies and market conditions during the time periods for which
it is reported. Historical performance should not be considered as
representative of the future performance of the Fund.
The Trust may quote the Fund's total return or yield in advertisements and
reports to shareholders or prospective investors. The Fund's performance may
also be compared to that of other mutual funds with a similar investment
objective and to stock or relevant indexes that are referenced in APPENDIX B to
the SAI. Standard total return and yield results reported by the Fund do not
take into account recurring and nonrecurring charges for optional services which
only certain shareholders elect and which involve nominal fees, such as the $10
fee for a delivery of redemption proceeds by wire transfer.
The Fund's average annual total return is computed by determining the
average annual compounded rate of return for a specified period which, when
applied to a hypothetical $1,000 investment in the Fund at the beginning of the
period, would produce the redeemable value of that investment at the end of the
period, assuming reinvestment of all dividends and distributions during the
period.
The Fund may advertise performance in terms of a 30-day yield quotation.
The yield quotation is computed by dividing the net investment income per share
earned during the period by the offering price per share on the last day of the
period. This income is then annualized.
Further information concerning the Fund's yield and total return is
included in the SAI.
6
<PAGE>
USAA FAMILY OF NO-LOAD MUTUAL FUNDS
The USAA Family of No-Load Mutual Funds includes a variety of Funds, each with
different objectives and policies. In combination, these Funds are designed to
provide investors with the opportunity to formulate their own investment
program. You may exchange any shares you hold in any one USAA Fund for shares in
any other USAA Fund. For more complete information about the Funds in the USAA
Family of Funds, including charges and expenses, call the Manager for a
Prospectus. Read it carefully before you invest or send money.
USAA INVESTMENT TRUST
Income Strategy Fund
Growth and Tax Strategy Fund
Balanced Strategy Fund
Cornerstone Strategy Fund
Growth Strategy Fund
Emerging Markets Fund
Gold Fund
International Fund
World Growth Fund
GNMA Trust
Treasury Money Market Trust
USAA MUTUAL FUND, INC.
Aggressive Growth Fund
Science & Technology Fund
Growth Fund
First Start Growth Fund
S&P 500 Index Fund**
Growth & Income Fund
Income Stock Fund
Income Fund
Short-Term Bond Fund
Money Market Fund
USAA TAX EXEMPT FUND, INC.
Long-Term Fund
Intermediate-Term Fund
Short-Term Fund
Tax Exempt Money Market Fund
California Bond Fund*
California Money Market Fund*
New York Bond Fund*
New York Money Market Fund*
Virginia Bond Fund*
Virginia Money Market Fund*
USAA STATE TAX-FREE TRUST
Florida Tax-Free Income Fund*
Florida Tax-Free Money Market Fund*
Texas Tax-Free Income Fund*
Texas Tax-Free Money Market Fund*
* Offered only to residents of these specific states.
** S&P 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.
7
<PAGE>
USING MUTUAL FUNDS IN AN INVESTMENT PROGRAM
I. THE IDEA BEHIND MUTUAL FUNDS
Mutual funds provide small investors some of the advantages enjoyed by wealthy
investors. A relatively small investment can buy part of a widely diversified
portfolio. That portfolio is managed by investment professionals, relieving the
shareholder of the need to make individual stock or bond selections. The
investor also enjoys 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 each shareholder owns an investment that in earlier times
would have been available only to very wealthy people.
II. USING FUNDS IN AN INVESTMENT PROGRAM
In choosing a mutual fund as an investment vehicle, the shareholder is foregoing
some investment decisions, but must still make others. The decisions foregone
are those involved with choosing individual securities. The Fund Manager will
perform that function. In addition, the Manager will arrange for the safekeeping
of securities, auditing the annual financial statements, and daily valuation of
the Fund, as well as other functions.
The shareholder, however, retains at least part of the responsibility for
an equally important decision. This decision involves determining a portfolio of
mutual funds that balances the investor's investment goals with his or her
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 a shareholder wishes to diversify internationally. He
or she could do this by adding positions in the Emerging Markets, Gold,
International, or World Growth Funds to holdings in domestic funds. This would
give the investor exposure to the opportunities of investment in many foreign
countries and to currency changes. This is just one example of how an individual
could combine funds to create a portfolio tailored to his or her own risk and
reward goals.
III. USAA'S FAMILY OF FUNDS
The Manager offers investors another alternative in its asset strategy funds,
the Income Strategy, Growth and Tax Strategy, Balanced Strategy, Cornerstone
Strategy, and Growth Strategy Funds. These unique mutual funds provide a
professionally managed diversified investment portfolio within a mutual fund.
These Funds are designed for the shareholder who prefers to delegate the asset
allocation process to an investment manager. The Funds are structured to achieve
diversification across a number of investment categories.
Whether you prefer to create your own mix of mutual funds or use an asset
strategy fund, the USAA Family of Funds provides a broad range of choices
covering just about any investor's investment objectives. Our sales
representatives stand ready to assist you with your choices and to help you
craft a portfolio which meets your needs.
8
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
INVESTMENT OBJECTIVE
The Fund's investment objective is to provide investors a high level of current
income consistent with preservation of principal by investing in securities
backed by the full faith and credit of the U.S. Government.
The investment objective of the Fund cannot be changed without shareholder
approval. In view of the risks inherent in all investments in securities, there
is no assurance that this objective will be achieved.
The investment policies and techniques used to pursue the Fund's objective
may be changed without shareholder approval, except as otherwise noted. Further
information regarding the Fund's investment policies and restrictions is
provided in the SAI.
INVESTMENT POLICIES AND TECHNIQUES
The Manager will pursue this objective by investing at least 65% of the Fund's
total assets in Government National Mortgage Association (GNMA) pass through
certificates. GNMA certificates represent ownership in a pool of mortgage loans
or a single mortgage loan. Each mortgage loan is either insured by the Federal
Housing Administration or guaranteed by the Veterans Administration. Once
approved by GNMA, each mortgage or pool of mortgages is additionally guaranteed
by GNMA as to the timely payment of principal and interest (regardless of
whether the mortgagors actually make their payments). The guarantee represents a
general obligation of the U.S. Treasury. Securities which are backed by the full
faith and credit of the U.S. Government (payment of principal and interest is
guaranteed by the U.S. Treasury) are considered to be of the highest credit
quality available.
GNMA securities differ from conventional bonds in that principal is paid
back to the certificate holders over the life of the loan rather than at
maturity. As a result, the Fund will receive monthly scheduled payments of
principal and interest. In addition, the Fund may receive unscheduled principal
payments representing prepayments on the underlying mortgages. Because the Fund
will reinvest these scheduled and unscheduled principal payments at a time when
prevailing interest rates may be higher or lower than the Fund's current yield,
an investment in the Fund may not be an effective means of "locking in"
long-term interest rates.
GNMA certificates evidence interests in a pool of underlying mortgages (or
a single mortgage) which generally have maximum lives of either 15, 20, or 30
years. However, due to both scheduled and unscheduled principal payments, GNMA
certificates have a shorter average life and, therefore, less principal
volatility than a bond of comparable maturity. Since prepayment rates vary
widely, it is not possible to accurately predict the average life of a
particular GNMA pool, though it will be shorter than the stated final maturity.
Because the expected average life is a better indicator of the maturity
characteristics of GNMA certificates, principal volatility and yield may be more
comparable to 10-year Treasury bonds.
The Manager may invest up to 35% of the Fund's total assets in other
obligations backed by the full faith and credit of the U.S. Government,
including U.S. Treasury bills, notes and bonds and securities issued by the
Federal Housing Administration, the Department of Housing and Urban Development,
the Export-Import Bank, the Farmer's Home Administration, the General Services
Administration, the Maritime Administration, and the Small Business
9
<PAGE>
Administration. The Fund will not invest in the securities of any U.S.
Government agencies which do not carry the full faith and credit of the U.S.
Government, such as Fannie Mae (FNMA) or Freddie Mac (FHLMC) securities.
The Fund may invest up to 35% of its total assets in repurchase agreements
which must be collateralized by obligations backed by the full faith and credit
of the U.S.
Government.
The types of securities to be purchased in the GNMA Trust have historically
involved little credit risk. However, the market value of these securities is
not guaranteed and will fluctuate inversely with changes in prevailing interest
rates, increasing in value when interest rates decline and decreasing in value
when interest rates rise.
The Manager may, however, on a temporary defensive basis, invest the Fund's
assets without limitation in short-term securities backed by the full faith and
credit of the U.S. Government, including repurchase agreements collateralized by
such obligations.
Although the portfolio turnover rate for the Fund is not expected to exceed
100%, it will not be a limiting factor when the Manager deems changes in the
Fund's portfolio appropriate in view of its investment objective.
REPURCHASE AGREEMENTS - The Fund may invest in repurchase agreements which are
exclusively collateralized by obligations backed by the full faith and credit of
the U.S. Government. A repurchase agreement is a transaction in which a security
is purchased with a simultaneous commitment to sell the security back to the
seller (a commercial bank or recognized securities dealer) at an agreed upon
price on an agreed upon date, 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.
WHEN-ISSUED SECURITIES - The Fund may invest in new issues of debt securities
offered on a when-issued basis; that is, 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.
Cash or high quality liquid debt securities equal to the amount of the
when-issued commitments are segregated at the Fund's custodian bank. The
segregated securities are valued at market, and daily adjustments are made to
keep the value of the cash and segregated securities at least equal to the
amount of such commitments by the Fund. On the settlement date, the Fund will
meet its obligations from then available cash, sale of segregated securities,
sale of other securities, or sale of the when-issued securities themselves.
10
<PAGE>
VARIABLE RATE SECURITIES - The Fund may invest in securities that bear interest
at rates which are adjusted periodically to market rates. These interest rate
adjustments can both raise and lower the income generated by such securities.
These changes will have the same effect on the income earned by the Fund
depending on the proportion of such securities held.
The market value of fixed coupon securities fluctuates with changes in
prevailing interest rates, increasing in value when interest rates decline and
decreasing in value when interest rates rise. The value of variable rate
securities, however, is less affected by changes in prevailing interest rates
because of the periodic adjustment of their coupons to a market rate. The
shorter the period between adjustments, the smaller the impact of interest rate
fluctuations on the value of these securities. The market value of variable rate
securities usually tends toward par (100% of face value) at interest rate
adjustment time.
LIQUIDITY - The Fund may not invest more than 15% of the value of its net assets
in securities which are illiquid or not readily marketable.
INVESTMENT RESTRICTIONS
The following restrictions may not be changed without shareholder approval:
(1) The Fund will not purchase any security if immediately after the purchase
25% or more of the value of its total assets will be invested in securities
of issuers principally engaged in a particular industry (except that such
limitation does not apply to obligations issued or guaranteed by the U.S.
Government or its agencies or instrumentalities).
(2) The Fund may not, 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 Investment Company Act of 1940, as amended (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.
(3) The Fund may not 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).
11
<PAGE>
PURCHASE OF SHARES
OPENING AN ACCOUNT
You may open an account and make an investment by any of the following methods.
A complete, signed application is required together with a check for each new
account.
TAX ID NUMBER
We require that each shareholder named on the account provide the Trust with a
social security number or tax identification number to avoid possible tax
withholding requirements.
EFFECTIVE DATE
When you make a purchase, your purchase price will be the net asset value (NAV)
per share next determined after the Fund receives your request in proper form.
The NAV of the Fund is determined at the close of the regular trading session of
the New York Stock Exchange (NYSE) each day the NYSE is open. If the Fund
receives your request prior to that time, your purchase price will be the NAV
per share determined for that day. If the Fund receives your request after the
NAV per share is calculated, the purchase will be effective on the next business
day.
Because of the more lengthy clearing process and the need to convert
foreign currency, a check drawn on a foreign bank will not be deemed received
for the purchase of shares until such time as the check has cleared and the
Manager has received good funds, which may take up to four to six weeks.
Furthermore, a bank charge may be assessed in the clearing process, which will
be deducted from the amount of the purchase. To avoid a delay in the effective
date of your purchase, the Manager suggests that you convert your foreign check
to U.S. dollars prior to investment in the Fund.
PURCHASE OF SHARES
MINIMUM INVESTMENTS
Initial Purchase: $3,000 [$500 for Uniform Gifts/Transfers to Minors Act
(UGMA/UTMA) accounts and $250 for IRAs] or no initial
investment if you elect to have monthly electronic
investments of at least $50 each.
Additional Purchases: $50
12
<PAGE>
HOW TO PURCHASE:
MAIL o To open an account, send your application and check to:
USAA Investment Management Company
9800 Fredericksburg Rd., San Antonio, TX 78288
o To add to your account, send your check and the "Invest by
Mail" stub that accompanies your fund's transaction
confirmation to the Transfer Agent:
USAA Shareholder Account Services
9800 Fredericksburg Rd., San Antonio, TX 78288
IN PERSON o To open an account, bring your application and check to:
USAA Investment Management Company
USAA Federal Savings Bank
10750 Robert F. McDermott Freeway, San Antonio
AUTOMATICALLY o Additional purchases on a regular basis can be deducted from a
VIA bank account, paycheck, income-producing investment or from a
ELECTRONIC USAA money market account. Sign up for these services when
FUNDS opening an account or call 1-800-531-8448 to add these
TRANSFER (EFT) services.
o Purchases through payroll deduction ($25 minimum each pay period
with no initial investment) can be made by any employee of USAA
or any of its subsidiaries or affiliated companies.
BANK WIRE o To add to an 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 GNMA Trust
USAA AC-69384998
Shareholder(s) Name(s)_________________
Shareholder(s) Account Number___________________
PHONE o If you have an existing USAA account and would like to open a
1-800-531-8448 new account or of you would like to 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.
o To add to an account, intermittent (as-needed) purchases
can be deducted from your bank account through our Buy/Sell
Service. Call for instructions.
13
<PAGE>
REDEMPTION OF SHARES
You may redeem shares of the Fund by any of the following methods on any day the
NAV per share is calculated. Redemptions will be effective on the day
instructions are received in accordance with the requirements set forth below.
However, if instructions are received after the NAV per share calculation,
redemption will be effective on the next business day.
REDEMPTION PROCEEDS
Redemption proceeds are distributed within seven days after the effective date
of redemption. Payment for redemption of shares purchased by check or electronic
funds transfer will not be disbursed until the purchase check or electronic
funds transfer has cleared, which could take up to 15 days from the purchase
date. If you are considering redeeming shares soon after purchase, you should
purchase by bank wire or certified check to avoid delay.
In addition, the Trust may elect to suspend the redemption of shares or
postpone the date of payment during any period that the NYSE is closed, or
trading in the markets the Trust normally utilizes is restricted, or during any
period that redemption is otherwise permitted to be suspended by the SEC.
HOW TO REDEEM:
WRITTEN, o Send your written instructions to:
FAX, OR USAA Shareholder Account Services
TELEGRAPH 9800 Fredericksburg Rd., San Antonio, TX 78288
o Send a signed fax to 1-800-292-8177, or send a telegraph to
USAA Shareholder Account Services.
Written redemption requests must include the following: (1) a letter of
instruction or stock assignment, and stock certificate (if issued), specifying
the Fund and the number of shares or dollar amount to be redeemed; (2)
signatures of all owners of the shares exactly as their names appear on the
account; (3) other supporting legal documents, if required, as in the case of
estates, trusts, guardianships, custodianships, partnerships, corporations, and
pension and profit-sharing plans; and (4) method of payment.
PHONE o Call toll free 1-800-531-8448, in San Antonio, 456-7202.
Telephone redemption is automatically established when you complete your
application. The Fund will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine; and if it does not, it may
be liable for any losses due to unauthorized or fraudulent instructions.
Information is obtained prior to any discussion regarding an account including:
(1) USAA number or account number, (2) the name(s) on the account registration,
and (3) social security number or tax identification number for the account
registration. In addition, all telephone communications with a shareholder are
recorded, and confirmations of all account transactions are sent to the address
of record.
Redemption by telephone, fax, or telegraph is not available for shares
represented by stock certificates.
14
<PAGE>
METHODS OF PAYMENT:
BANK WIRE o Allows redemptions to be sent directly to your bank account.
Establish this service when you apply for your account, or later upon
request. Please obtain precise wiring instructions from your financial
institution. USAA Shareholder Account Services (Transfer Agent) deducts a wire
fee from the account for the redemption by wire. The fee as of the date of this
Prospectus is $10 ($25 for wires to a foreign bank) and is subject to change at
any time. The fee is paid to State Street Bank and Trust Company and the
Transfer Agent for their services in connection with the wire redemption. Your
financial institution may also charge a fee for receiving funds by wire.
AUTOMATICALLY o Systematic (regular) or intermittent (as-needed) redemptions can
VIA EFT be credited to your bank account.
Establish any of our electronic investing services when you apply for your
account, or later upon request.
CHECK o A check payable to the registered shareholder(s) will be mailed
REDEMPTION to the address of record.
This check redemption privilege is automatically established when your
application is completed and accepted. There is a 15-day waiting period before a
check redemption can be processed following a telephone address change. Should
you wish to redeem shares within the 15 days following a telephone address
change, you may do so by providing written instructions by mail or facsimile.
CONDITIONS OF PURCHASE AND REDEMPTION
NONPAYMENT
If any order to purchase shares is cancelled due to nonpayment or if the Trust
does not receive good funds either by check or electronic funds transfer, the
Transfer Agent will treat the cancellation as a redemption of shares purchased,
and you will be responsible for any resulting loss incurred by the Fund or the
Manager. If you are a shareholder, the Transfer Agent can redeem shares from any
of your account(s) as reimbursement for all losses. In addition, you may be
prohibited or restricted from making future purchases in any of the USAA Family
of Funds. A $15 fee is charged for all returned items, including checks and
electronic funds transfers.
TRANSFER OF SHARES
You may transfer Fund shares to another person by sending written instructions
to the Transfer Agent. The account must be clearly identified, and you must
include the number of shares to be transferred, the signatures of all registered
owners, and all stock certificates, if any, which are the subject of transfer.
You also need to send written instructions signed by all registered owners and
supporting documents to change an account registration due to events such as
divorce, marriage, or death. If a new account needs to be established, you must
complete and return an application to the Transfer Agent.
15
<PAGE>
ACCOUNT BALANCE
Beginning in September 1998, and occurring each September thereafter, the
Transfer Agent will assess a small balance account fee of $12 to each
shareholder account with a balance, at the time of assessment, of less than
$2,000. The fee will be used to reduce total transfer agency fees paid by the
Fund to the Transfer Agent. 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 or 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).
TRUST RIGHTS
The Trust reserves the right to:
(1) reject purchase or exchange orders when in the best interest of the Trust;
(2) limit or discontinue the offering of shares of any portfolio of the Trust
without notice to the shareholders;
(3) require a signature guarantee for purchases, redemptions, or changes in
account information in those instances where the appropriateness of a
signature authorization is in question. The section ADDITIONAL INFORMATION
REGARDING REDEMPTION OF SHARES in the SAI contains information on
acceptable guarantors;
(4) redeem an account with less than $900, subject to certain limitations
described in ADDITIONAL INFORMATION REGARDING REDEMPTION OF SHARES in the
SAI.
EXCHANGES
EXCHANGE PRIVILEGE
The Exchange Privilege is automatically established 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 that the
shares to be acquired are offered in your state of residence. Exchange
redemptions and purchases will be processed simultaneously at the share prices
next determined after the exchange order is received. For federal income tax
purposes, an exchange between Funds is a taxable event. Accordingly, when
exchanging shares, you may realize a capital gain or loss.
The Fund has undertaken certain procedures regarding telephone
transactions. See REDEMPTION OF SHARES - PHONE.
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. Exchanges out of
any Fund in the USAA Family of Funds are limited for each account to six per
calendar year except that 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.
16
<PAGE>
OTHER SERVICES
INVESTMENT PLANS
AUTOMATIC INVESTMENT PLANS - You may establish an automatic investment plan by
completing the appropriate forms, if any. 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. Call the Manager to obtain instructions. More information about
these preauthorized plans is contained in the SAI.
o INVESTART(R) - A no initial investment purchase plan. With this plan the
regular minimum initial investment amount is waived if you make subsequent
monthly additions of at least $50 through electronic funds transfer from a
checking or savings account. The Manager may periodically offer programs that
reduce the minimum amounts for monthly electronic investments.
o 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.
o DIRECT PURCHASE SERVICE - The periodic purchase of shares through electronic
funds transfer from an employer (including government allotments), an
income-producing investment, or an account with a participating financial
institution.
o 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.
o BUY/SELL SERVICE - The intermittent purchase or redemption of shares through
electronic funds transfer to or from a checking or savings account.
o SYSTEMATIC WITHDRAWAL PLAN - The periodic redemption of shares from one of
your accounts permitting you to receive a fixed amount of money monthly or
quarterly.
o RETIREMENT PLANS - Plans are available for various forms of IRAs and for
403(b)(7) accounts. Federal taxes on current income may be deferred if an
investor qualifies.
o 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.
SHAREHOLDER STATEMENTS AND REPORTS
You will receive a confirmation after each transaction in your account except:
(1) a reinvested dividend;
(2) a payment you make under the InveStart(R), InvesTronic(R), Direct Purchase
Service, Automatic Purchase Plan, or Directed Dividends investment plans;
or
(3) a redemption you make under the Systematic Withdrawal Plan.
At the end of each quarter, you will receive a consolidated statement for
all of your mutual fund accounts, regardless of account activity. The fourth
quarter consolidated statement will reflect all account activity for the prior
tax year. There will be a $10 fee charged for copies of historical statements
for other than the prior tax year for any one account. You will receive the
Fund's financial statements with a summary of its investments and performance at
least semiannually.
In an effort to reduce expenses and respond to shareholders' requests to
reduce mail, the Trust intends to consolidate mailings of Annual and Semiannual
Reports to households having multiple accounts with the same address of record.
One copy of each report will be furnished to that address. You may request
additional reports by notifying the Trust.
17
<PAGE>
TELEPHONE ASSISTANCE
Call our telephone assistance numbers for specific forms, a copy of the SAI, the
most recent Annual Report and/or Semiannual Report, or if you have any questions
concerning any of the services offered.
SHARE PRICE CALCULATION
The price at which shares of the Fund are purchased and redeemed by shareholders
is equal to the NAV per share determined on the effective date of the purchase
or redemption.
WHEN
The NAV per share for the Fund is calculated at the close of the regular trading
session of the NYSE, which is usually 4:00 p.m. Eastern time. You may buy and
sell Fund shares at the NAV per share without a sales charge.
HOW
The NAV per share is calculated by adding the value of all securities and other
assets in the Fund, deducting liabilities, and dividing by the number of shares
outstanding. Portfolio securities are valued each business day at their current
market value as determined by a pricing service approved by the Board of
Trustees.
Securities purchased with maturities of 60 days or less are stated at
amortized cost which approximates market value. Securities which cannot be
valued by the methods set forth above, and all other assets, are valued in good
faith at fair value using methods determined by the Manager under the general
supervision of the Board of Trustees.
For additional information, see VALUATION OF SECURITIES in the SAI.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
Net investment income is accrued daily and is paid on the last business day of
each month. Net capital gains, if any, generally will be distributed at least
annually. The Fund intends to make such additional distributions as may be
necessary to avoid the imposition of any federal income or excise tax.
All shares purchased shall begin accruing dividends on the day following
the effective date of the purchase and shall receive dividends through the
effective date of redemption.
All income dividends and capital gain distributions are automatically
reinvested, unless the shareholder specifies otherwise. The share price will be
the net asset value 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. An investor should consider carefully the effects of
purchasing shares of the Fund shortly before any distribution which would
decrease the Fund's NAV per share. Although in effect a return of capital, these
distributions are subject to taxes.
18
<PAGE>
Any dividend or distribution payment returned to the Manager as not
deliverable will be invested in the shareholder's Fund account at the
then-current NAV per share. If any check for the payment of dividends or
distributions is not cashed within six months from the date on the check, it
becomes void. The amount of the check will then be invested in the shareholder's
Fund account at the then-current NAV per share.
FEDERAL TAXES
The following discussion relates only to generally applicable federal income tax
provisions in effect as of the date of this Prospectus. Note that the recently
enacted Taxpayer Relief Act of 1997 and regulations that will likely be created
to implement the Act may affect the status and treatment of certain
distributions shareholders receive from the Fund. Shareholders are urged to
consult their own tax advisers about the status of distributions from the Fund
in their own states and localities.
FUND - The Fund intends to qualify as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended (the Code). By
complying with the applicable provisions of the Code, the Fund will not be
subject to federal income tax on its net investment income and net capital gains
(capital gains in excess of capital losses) distributed to shareholders.
SHAREHOLDER - Dividends from taxable net investment income and distributions of
net short-term capital gains are taxable to shareholders as ordinary income,
whether received in cash or reinvested in additional shares.
Distributions of net long-term capital gains are taxable as long-term
capital gains whether received in cash or reinvested in additional shares, and
regardless of the length of time the investor has held the shares of the Fund.
Redemptions, including exchanges, are subject to income tax, based on the
difference between the cost of shares when purchased and the price received upon
redemption or exchange.
WITHHOLDING - The Fund is required by federal law 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, who underreports
dividend or interest income, or who fails to certify that he 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 Transfer Agent, that your
tax identification number is correct and that you are not currently subject to
backup withholding.
REPORTING - The Fund will report annually to its shareholders the federal tax
status of dividends and distributions paid or declared by the Fund during the
preceding calendar year.
19
<PAGE>
MANAGEMENT OF THE TRUST
The business affairs of the Trust are subject to the supervision of the Board of
Trustees.
The Manager, USAA Investment Management Company (IMCO), was organized in
May 1970 and is an affiliate of United Services Automobile Association (USAA), a
large diversified financial services institution. As of the date of this
Prospectus, the Manager had approximately $36 billion in total assets under
management. The Manager's mailing address is 9800 Fredericksburg Rd., San
Antonio, TX 78288.
Officers and employees of the Manager are permitted to engage in personal
securities transactions subject to restrictions and procedures set forth in the
Joint Code of Ethics adopted by the Trust and the Manager. Such restrictions and
procedures include substantially all of the recommendations of the Advisory
Group of the Investment Company Institute and comply with SEC rules and
regulations.
ADVISORY AGREEMENT
The Manager serves as the manager and investment adviser of the Trust, providing
services under an Advisory Agreement. Under the Advisory Agreement, the Manager
is responsible for the management of the business affairs, investment
portfolios, and placement of brokerage orders, subject to the authority of and
supervision by the Board of Trustees.
For its services under the Advisory Agreement, the Fund pays the Manager an
annual fee which is computed as a percentage of the Fund's ANA, accrued daily
and paid monthly. The Fund's management fees were computed and paid at
one-eighth of one percent (.125%) of ANA for the fiscal year ended May 31, 1997.
OPERATING EXPENSES
For the fiscal year ended May 31, 1997, the total operating expenses for the
Fund as a percentage of the Fund's ANA equaled .302%.
PORTFOLIO MANAGER
The following individual is primarily responsible for managing the Fund.
Kenneth E. Willmann, Vice President of Fixed Income Investments since
December 1986, has managed the Fund since February 1995. He has 23 years
investment management experience and has worked for IMCO for 20 years. Mr.
Willmann earned the Chartered Financial Analyst designation in 1978 and is a
member of the Association for Investment Management and Research, San Antonio
Financial Analysts Society, Inc. and the National Federation of Municipal
Analysts. He holds an MBA and a BA from the University of Texas.
20
<PAGE>
DESCRIPTION OF SHARES
MASTER TRUST AGREEMENT
The Trust is an open-end management investment company established as a business
trust under the laws of the Commonwealth of Massachusetts pursuant to the First
Amended and Restated Master Trust Agreement (Master Trust Agreement) dated June
2, 1995, as amended. The Trust is authorized to issue an unlimited number of
shares of beneficial interest of separate portfolios, without par value. Eleven
such portfolios have been established, one of which is described in this
Prospectus. The Fund is classified as diversified. Under the Master Trust
Agreement, the Trustees are authorized to create new portfolios in addition to
those already existing without shareholder approval.
Under the Master Trust Agreement, no annual or regular meeting of
shareholders is required. Ordinarily, no shareholder meeting will be held unless
required by the 1940 Act. The Trustees may fill vacancies on the Board or
appoint new Trustees provided that immediately after such action at least
two-thirds of the Trustees have been elected by shareholders. Shareholders are
entitled to one vote per share (with proportionate voting for fractional shares)
irrespective of the relative net asset value of the shares. For matters
affecting an individual portfolio, a separate vote of the shareholders of that
portfolio is required. Shareholders holding an aggregate of at least 10% of the
outstanding shares of the Trust may request a meeting of shareholders at any
time for the purpose of voting to remove one or more of the Trustees, and the
Trust will assist shareholders in communicating with other shareholders in
connection with such a meeting.
Under Massachusetts law, shareholders of any portfolio could, under certain
circumstances, be held personally liable for the obligations of the Trust.
However, the Master Trust Agreement disclaims shareholder liability for acts or
obligations of the Trust and requires that notice of such disclaimer be given in
each agreement, obligation, or instrument entered into or executed by the Trust
or the Trustees. The Master Trust Agreement provides for indemnification out of
the Trust's property for all losses and expenses of any shareholder held
personally liable for the obligations of the Trust. Thus, the possibility of a
shareholder incurring financial loss on account of shareholder liability is
remote.
21
<PAGE>
SERVICE PROVIDERS
UNDERWRITER/ USAA Investment Management Company
DISTRIBUTOR 9800 Fredericksburg Rd., San Antonio, Texas 78288.
TRANSFER USAA Shareholder Account Services
AGENT 9800 Fredericksburg Rd., San Antonio, Texas 78288.
CUSTODIAN State Street Bank and Trust Company
P.O. Box 1713, Boston, Massachusetts 02105.
LEGAL Goodwin, Procter & Hoar LLP
COUNSEL Exchange Place, Boston, Massachusetts 02109.
INDEPENDENT KPMG Peat Marwick LLP
AUDITORS 112 East Pecan, Suite 2400, San Antonio, Texas 78205.
- --------------------------------------------------------------------------------
TELEPHONE ASSISTANCE
(Call toll free - Central Time)
Monday-Friday 8:00 a.m. to 8:00 p.m.
Saturday 8:30 a.m. to 5:00 p.m.
For further information on mutual funds:
1-800-531-8181
In San Antonio 456-7211
For account servicing, exchanges or redemptions:
1-800-531-8448
In San Antonio 456-7202
RECORDED 24 HOUR SERVICE
MUTUAL FUND PRICE QUOTES
(From any phone)
1-800-531-8066
In San Antonio 498-8066
MUTUAL FUND TOUCHLINE(R)
(From Touchtone phones only)
For account balance, last transaction or fund prices:
1-800-531-8777
In San Antonio 498-8777
- --------------------------------------------------------------------------------
22
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23
<PAGE>
[THIS PAGE LEFT BLANK INTENTIONALLY]
24
<PAGE>
Part A
Prospectus for the
Treasury Money Market Trust
is included herein
<PAGE>
USAA TREASURY MONEY MARKET TRUST
October 1, 1997 PROSPECTUS
USAA TREASURY MONEY MARKET TRUST (the Fund) is one of eleven no-load mutual
funds offered by USAA Investment Trust (the Trust). The Fund is managed by USAA
Investment Management Company (the Manager).
WHAT IS THE INVESTMENT OBJECTIVE?
The Fund's investment objective is to provide investors maximum current income
while maintaining the highest degree of safety and liquidity. Page 9.
HOW DO YOU BUY?
Fund shares are sold on a continuous basis at the net asset value per share
without a sales charge. Make your initial investment directly with the Manager
by mail, in person, or in certain instances, by telephone. Page 11.
HOW DO YOU SELL?
You may redeem Fund shares by mail, telephone, fax, or telegraph on any day
that the net asset value is calculated. Page 13.
This Prospectus, which should be read and retained for future reference,
provides information regarding the Trust and the Fund that you should know
before investing.
SHARES OF THE USAA TREASURY MONEY MARKET TRUST ARE NOT DEPOSITS OR OTHER
OBLIGATIONS OF, OR GUARANTEED BY, THE USAA FEDERAL SAVINGS BANK, ARE NOT INSURED
BY THE FDIC OR ANY OTHER GOVERNMENT AGENCY, ARE SUBJECT TO INVESTMENT RISKS, AND
MAY LOSE VALUE.
If you would like more information about the Fund, you may call
1-800-531-8181 to request a free copy of the most recent financial report and/or
the Fund's Statement of Additional Information (SAI), dated October 1, 1997. The
SAI has been filed with the Securities and Exchange Commission (SEC) and is
incorporated by reference into this Prospectus (meaning it is legally a part of
the Prospectus).
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
AN INVESTMENT IN THE FUND IS NEITHER INSURED NOR GUARANTEED BY THE U.S.
GOVERNMENT AND THERE CAN BE NO ASSURANCE THAT THE FUND WILL BE ABLE TO MAINTAIN
A STABLE NET ASSET VALUE OF $1.00 PER SHARE.
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
Page
SUMMARY DATA
Fees and Expenses............................................. 3
Financial Highlights.......................................... 4
Performance Information....................................... 6
USING MUTUAL FUNDS
USAA Family of No-Load Mutual Funds........................... 7
Using Mutual Funds in an Investment Program................... 8
INVESTMENT PORTFOLIO INFORMATION
Investment Objective and Policies............................. 9
SHAREHOLDER INFORMATION
Purchase of Shares............................................ 11
Redemption of Shares.......................................... 13
Conditions of Purchase and Redemption......................... 15
Exchanges..................................................... 16
Other Services................................................ 16
Share Price Calculation....................................... 17
Dividends, Distributions and Taxes............................ 18
Management of the Trust....................................... 19
Description of Shares......................................... 20
Service Providers............................................. 21
Telephone Assistance Numbers.................................. 21
- --------------------------------------------------------------------------------
2
<PAGE>
FEES AND EXPENSES
The following summary, which is based on actual expenses and average net assets
(ANA) of the Fund for the year ended May 31, 1997, is provided to assist you in
understanding the expenses you will bear directly or indirectly as a Fund
investor.
Shareholder Transaction Expenses
- --------------------------------------------------------------------------------
Sales Load Imposed on Purchases............................... None
Sales Load Imposed on Reinvested Dividends.................... None
Deferred Sales Load........................................... None
Redemption Fee*............................................... None
Exchange Fee.................................................. None
Annual Fund Operating Expenses (as a percentage of ANA)
- --------------------------------------------------------------------------------
Management Fees, net of reimbursements........................ .106%
12b-1 Fees.................................................... None
Other Expenses
Transfer Agent Fees........................................ .101%
Custodian Fees............................................. .059%
All Other Expenses......................................... .109%
----
Total Other Expenses.......................................... .269%
----
Total Fund Operating Expenses, net of reimbursements.......... .375%
====
- ---------------------------
* A shareholder who requests delivery of redemption proceeds by wire transfe
will be subject to a $10 fee. See REDEMPTION OF SHARES - BANK WIRE.
During the year, the Manager voluntarily limited the annual expenses of the
Fund to .375% of its ANA and reimbursed the Fund for all expenses in excess of
this limitation. The Management Fees and Total Fund Operating Expenses reflect
all such expense reimbursements by the Manager. Absent such reimbursements, the
amount of the Management Fees and Total Fund Operating Expenses as a percentage
of ANA would have been .125% and .394%, respectively. The Manager has
voluntarily agreed to continue to limit the Fund's annual expenses until October
1, 1998, to .375% of its ANA and will reimburse the Fund for all expenses in
excess of such limitation.
Example of Effect of Fund Expenses
- --------------------------------------------------------------------------------
You would pay the following expenses on a $1,000 investment in the Fund,
assuming (1) 5% annual return and (2) redemption at the end of the periods
shown.
1 year - $ 4
3 years - $ 12
5 years - $ 21
10 years - $ 47
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
3
<PAGE>
FINANCIAL HIGHLIGHTS
The following financial highlights for a share outstanding throughout each of
the periods in the seven-year period ended May 31, 1997, have been audited by
KPMG Peat Marwick LLP. This table should be read in conjunction with the Fund's
financial statements for the year ended May 31, 1997, and the independent
auditors' report thereon, that appear in the Fund's Annual Report. Further
performance information is contained in the Annual Report and is available upon
request without charge.
EIGHT-MONTH
PERIOD ENDED
YEAR ENDED MAY 31, MAY 31,
1997 1996 1995 1994
---- ---- ---- ----
Net asset value at
beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00
Net investment income .05 .05 .05 .02
Distributions from net
investment income (.05) (.05) (.05) (.02)
------- ------- ------- -------
Net asset value at
end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00
======= ======= ======= =======
Total return (%)** 5.06 5.38 4.88 1.96
Net assets at end of
period (000) $88,612 $76,777 $67,876 $37,984
Ratio of expenses to
average net assets (%) .375(b) .375(b) .375(b) .375(a)(b)
Ratio of net investment
income to average net
assets (%) 4.95(b) 5.23(b) 4.91(b) 2.94(a)(b)
- --------------------------
* Fund commenced operations February 1, 1991.
** Assumes reinvestment of all dividend income distributions during the
period.
(a) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
(b) The information contained in this table is based on actual expenses for
the period, after giving effect to reimbursements of expenses by the
Manager. Absent such reimbursements the Fund's ratios would have been:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
EIGHT-MONTH
PERIOD ENDED
YEAR ENDED MAY 31, MAY 31, YEAR ENDED SEPTEMBER 30,
1997 1996 1995 1994 1993 1992 1991*
---- ---- ---- ---- ---- ---- ----
Ratio of expenses to
average net assets (%) .39 .40 .49 .62(a) .54 .721 .31(a)
Ratio of net investment
income to average net 4.94 5.21 4.80 2.69(a) 2.65 3.554 .33(a)
assets (%)
</TABLE>
4
<PAGE>
FINANCIAL HIGHLIGHTS cont.
YEAR ENDED SEPTEMBER 30,
1993 1992 1991*
---- ---- ----
Net asset value at
beginning of period $ 1.00 $ 1.00 $ 1.00
Net investment income .03 .04 .04
Distributions from net
investment income (.03) (.04) (.04)
-------- -------- --------
Net asset value at
end of period $ 1.00 $ 1.00 $ 1.00
======== ======== ========
Total return (%)** 2.84 4.05 3.51
Net assets at end of
period (000) $ 30,448 $ 25,393 $ 13,409
Ratio of expenses to
average net assets (%) .375(b) .375(b) .375(a)(b)
Ratio of net investment
income to average net
assets (%) 2.81(b) 3.89(b) 5.27(a)(b)
5
<PAGE>
PERFORMANCE INFORMATION
Performance information should be considered in light of the Fund's investment
objective and policies and market conditions during the time periods for which
it is reported. Historical performance should not be considered as
representative of the future performance of the Fund.
The Trust may quote the Fund's yield in advertisements and reports to
shareholders or prospective investors. The Fund's performance may also be
compared to that of other mutual funds with a similar investment objective and
to stock or relevant indexes that are referenced in APPENDIX B to the SAI. Yield
results reported by the Fund do not take into account recurring and nonrecurring
charges for optional services which only certain shareholders elect and which
involve nominal fees, such as the $10 fee for a delivery of redemption proceeds
by wire transfer.
The Fund may advertise its yield and effective yield. The yield of the Fund
refers to the income generated by an investment in the Fund over a seven-day
period (which period will be stated in the advertisement). This income is then
annualized, that is, the amount of income generated by the investment during the
week is assumed to be generated each week over a 52-week period and is shown as
a percentage of the investment.
The effective yield is calculated similarly, but when annualized, the
income earned by an investment in the Fund is assumed to be reinvested. The
effective yield will be slightly higher than the yield because of the
compounding effect of this assumed reinvestment.
Further information concerning the Fund's yield is included in the SAI.
6
<PAGE>
USAA FAMILY OF NO-LOAD MUTUAL FUNDS
The USAA Family of No-Load Mutual Funds includes a variety of Funds, each with
different objectives and policies. In combination, these Funds are designed to
provide investors with the opportunity to formulate their own investment
program. You may exchange any shares you hold in any one USAA Fund for shares in
any other USAA Fund. For more complete information about the Funds in the USAA
Family of Funds, including charges and expenses, call the Manager for a
Prospectus. Read it carefully before you invest or send money.
USAA INVESTMENT TRUST
Income Strategy Fund
Growth and Tax Strategy Fund
Balanced Strategy Fund
Cornerstone Strategy Fund
Growth Strategy Fund
Emerging Markets Fund
Gold Fund
International Fund
World Growth Fund
GNMA Trust
Treasury Money Market Trust
USAA MUTUAL FUND, INC.
Aggressive Growth Fund
Science & Technology Fund
Growth Fund
First Start Growth Fund
S&P 500 Index Fund**
Growth & Income Fund
Income Stock Fund
Income Fund
Short-Term Bond Fund
Money Market Fund
USAA TAX EXEMPT FUND, INC.
Long-Term Fund
Intermediate-Term Fund
Short-Term Fund
Tax Exempt Money Market Fund
California Bond Fund*
California Money Market Fund*
New York Bond Fund*
New York Money Market Fund*
Virginia Bond Fund*
Virginia Money Market Fund*
USAA STATE TAX-FREE TRUST
Florida Tax-Free Income Fund*
Florida Tax-Free Money Market Fund*
Texas Tax-Free Income Fund*
Texas Tax-Free Money Market Fund*
* Offered only to residents of these specific states.
** S&P 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.
7
<PAGE>
USING MUTUAL FUNDS IN AN INVESTMENT PROGRAM
I. THE IDEA BEHIND MUTUAL FUNDS
Mutual funds provide small investors some of the advantages enjoyed by wealthy
investors. A relatively small investment can buy part of a widely diversified
portfolio. That portfolio is managed by investment professionals, relieving the
shareholder of the need to make individual stock or bond selections. The
investor also enjoys 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 each shareholder owns an investment that in earlier times
would have been available only to very wealthy people.
II. USING FUNDS IN AN INVESTMENT PROGRAM
In choosing a mutual fund as an investment vehicle, the shareholder is foregoing
some investment decisions, but must still make others. The decisions foregone
are those involved with choosing individual securities. The Fund Manager will
perform that function. In addition, the Manager will arrange for the safekeeping
of securities, auditing the annual financial statements, and daily valuation of
the Fund, as well as other functions.
The shareholder, however, retains at least part of the responsibility for
an equally important decision. This decision involves determining a portfolio of
mutual funds that balances the investor's investment goals with his or her
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 a shareholder wishes to diversify internationally. He
or she could do this by adding positions in the Emerging Markets, Gold,
International, or World Growth Funds to holdings in domestic funds. This would
give the investor exposure to the opportunities of investment in many foreign
countries and to currency changes. This is just one example of how an individual
could combine funds to create a portfolio tailored to his or her own risk and
reward goals.
III. USAA'S FAMILY OF FUNDS
The Manager offers investors another alternative in its asset strategy funds,
the Income Strategy, Growth and Tax Strategy, Balanced Strategy, Cornerstone
Strategy, and Growth Strategy Funds. These unique mutual funds provide a
professionally managed diversified investment portfolio within a mutual fund.
These Funds are designed for the shareholder who prefers to delegate the asset
allocation process to an investment manager. The Funds are structured to achieve
diversification across a number of investment categories.
Whether you prefer to create your own mix of mutual funds or use an asset
strategy fund, the USAA Family of Funds provides a broad range of choices
covering just about any investor's investment objectives. Our sales
representatives stand ready to assist you with your choices and to help you
craft a portfolio which meets your needs.
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INVESTMENT OBJECTIVE AND POLICIES
INVESTMENT OBJECTIVE
The Fund's investment objective is to provide investors maximum current income
while maintaining the highest degree of safety and liquidity.
The investment objective of the Fund cannot be changed without shareholder
approval. In view of the risks inherent in all investments in securities, there
is no assurance that this objective will be achieved. The investment policies
and techniques used to pursue the Fund's objective may be changed without
shareholder approval, except as otherwise noted. Further information regarding
the Fund's investment policies and restrictions is provided in the SAI.
INVESTMENT POLICIES AND TECHNIQUES
The Manager will pursue the objective by investing the Fund's assets exclusively
in securities with maturities of 397 days or less that are backed by the full
faith and credit of the U.S. Government and repurchase agreements collateralized
by such securities. The Fund will under normal circumstances invest at least 65%
of its total assets in U.S. Treasury bills, notes, and bonds and repurchase
agreements collateralized by such obligations. Up to 35% of the Fund's total
assets may be invested in other obligations backed by the full faith and credit
of the U.S. Government, including securities issued by the General Services
Administration, Government National Mortgage Association, Rural Electrification
Administration, Small Business Administration, Federal Financing Bank and
repurchase agreements collateralized by such obligations.
Consistent with regulatory requirements, the Fund will maintain a
dollar-weighted average portfolio maturity of 90 days or less and will endeavor
to maintain a constant net asset value of $1.00 per share, although there is no
assurance that it will be able to do so.
Under federal law, the income derived from obligations issued by the U.S.
Government and certain of its agencies and instrumentalities is exempt from
state personal income taxes. Many states that tax personal income permit mutual
funds to pass-through this tax exemption to shareholders. It is anticipated that
a portion of the dividends paid to shareholders of the Fund residing in these
states will qualify for this exemption from state taxation.
REPURCHASE AGREEMENTS - The Fund may invest in repurchase agreements which are
exclusively collateralized by obligations backed by the full faith and credit of
the U.S. Government. A repurchase agreement is a transaction in which a security
is purchased with a simultaneous commitment to sell the security back to the
seller (a commercial bank or recognized securities dealer) at an agreed upon
price on an agreed upon date, 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 the 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.
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WHEN-ISSUED SECURITIES - The Fund may invest in new issues of debt securities
offered on a when-issued basis; that is, 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.
Cash or high quality liquid debt securities equal to the amount of the
when-issued commitments are segregated at the Fund's custodian bank. The
segregated securities are valued at market, and daily adjustments are made to
keep the value of the cash and segregated securities at least equal to the
amount of such commitments by the Fund. On the settlement date, the Fund will
meet its obligations from then available cash, sale of segregated securities,
sale of other securities, or sale of the when-issued securities themselves.
VARIABLE RATE SECURITIES - The Fund may invest in securities that bear interest
at rates which are adjusted periodically to market rates. These interest rate
adjustments can both raise and lower the income generated by such securities.
These changes will have the same effect on the income earned by the Fund
depending on the proportion of such securities held.
The market value of fixed coupon securities fluctuates with changes in
prevailing interest rates, increasing in value when interest rates decline and
decreasing in value when interest rates rise. The value of variable rate
securities, however, is less affected by changes in prevailing interest rates
because of the periodic adjustment of their coupons to a market rate. The
shorter the period between adjustments, the smaller the impact of interest rate
fluctuations on the value of these securities. The market value of variable rate
securities usually tends toward par (100% of face value) at interest rate
adjustment time.
LIQUIDITY - The Fund may not invest more than 10% of the value of its net assets
in securities which are illiquid or not readily marketable.
INVESTMENT RESTRICTIONS
The following restrictions may not be changed without shareholder approval:
(1) The Fund will not purchase any security if immediately after the purchase
25% or more of the value of its total assets will be invested in securities
of issuers principally engaged in a particular industry (except that such
limitation does not apply to obligations issued or guaranteed by the U.S.
Government or its agencies or instrumentalities).
(2) The Fund may not, 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 Investment Company Act of 1940, as amended (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.
(3) The Fund may not 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).
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PURCHASE OF SHARES
OPENING AN ACCOUNT
You may open an account and make an investment by any of the following methods.
A complete, signed application is required together with a check for each new
account.
TAX ID NUMBER
We require that each shareholder named on the account provide the Trust with a
social security number or tax identification number to avoid possible tax
withholding requirements.
EFFECTIVE DATE
When you make a purchase, your purchase price will be the net asset value (NAV)
per share next determined after the Fund receives your request in proper form.
The NAV of the Fund is determined at the close of the regular trading session of
the New York Stock Exchange (NYSE) each day the NYSE is open. If the Fund
receives your request prior to that time, your purchase price will be the NAV
per share determined for that day. If the Fund receives your request after the
NAV per share is calculated, the purchase will be effective on the next business
day.
Because of the more lengthy clearing process and the need to convert foreign
currency, a check drawn on a foreign bank will not be deemed received for the
purchase of shares until such time as the check has cleared and the Manager has
received good funds, which may take up to four to six weeks. Furthermore, a bank
charge may be assessed in the clearing process, which will be deducted from the
amount of the purchase. To avoid a delay in the effective date of your purchase,
the Manager suggests that you convert your foreign check to U.S. dollars prior
to investment in the Fund.
PURCHASE OF SHARES
MINIMUM INVESTMENTS
Initial Purchase: $3,000 [$500 for Uniform Gifts/Transfers to Minors Act
(UGMA/UTMA) accounts and $250 for IRAs] or no initial
investment if you elect to have monthly electronic
investments of at least $50 each.
Additional Purchases: $50 - (Except transfers from brokerage accounts)
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HOW TO PURCHASE:
MAIL o To open an account, send your application and check to:
USAA Investment Management Company
9800 Fredericksburg Rd., San Antonio, TX 78288
o To add to your account, send your check and the "Invest by
Mail" stub that accompanies your fund's transaction
confirmation to the Transfer Agent:
USAA Shareholder Account Services
9800 Fredericksburg Rd., San Antonio, TX 78288
IN PERSON o To open an account, bring your application and check to:
USAA Investment Management Company
USAA Federal Savings Bank
10750 Robert F. McDermott Freeway, San Antonio
AUTOMATICALLY o Additional purchases on a regular basis can be deducted from a
VIA bank account, paycheck, income-producing investment or from a
ELECTRONIC USAA money market account. Sign up for these services when
FUNDS opening an account or call 1-800-531-8448 to add these
TRANSFER (EFT) services.
o Purchases through payroll deduction ($25 minimum each pay period
with no initial investment) can be made by any employee of USAA
or any of its affiliated companies.
BANK WIRE o To add to an 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 Treasury Money Market Trust
USAA AC-69384998
Shareholder(s) Name(s)_________________
Shareholder(s) Account Number___________________
PHONE o If you have an existing USAA account and would like to open a
1-800-531-8448 new account or if you would like to 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.
o To add to an account, intermittent (as-needed) purchases
can be deducted from your bank account through our Buy/Sell
Service. Call for instructions.
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REDEMPTION OF SHARES
You may redeem shares of the Fund by any of the following methods on any day the
NAV per share is calculated. Redemptions will be effective on the day
instructions are received in accordance with the requirements set forth below.
However, if instructions are received after the NAV per share calculation,
redemption will be effective on the next business day.
REDEMPTION PROCEEDS
Redemption proceeds are distributed within seven days after the effective date
of redemption. Payment for redemption of shares purchased by check or electronic
funds transfer will not be disbursed until the purchase check or electronic
funds transfer has cleared, which could take up to 15 days from the purchase
date. If you are considering redeeming shares soon after purchase, you should
purchase by bank wire or certified check to avoid delay.
In addition, the Trust may elect to suspend the redemption of shares or
postpone the date of payment during any period that the NYSE is closed, or
trading in the markets the Trust normally utilizes is restricted, or during any
period that redemption is otherwise permitted to be suspended by the SEC.
HOW TO REDEEM:
WRITTEN, o Send your written instructions to:
FAX, OR USAA Shareholder Account Services
TELEGRAPH 9800 Fredericksburg Rd., San Antonio, TX 78288
o Send a signed fax to 1-800-292-8177, or send a telegraph to
USAA Shareholder Account Services.
Written redemption requests must include the following: (1) a letter of
instruction or stock assignment, and stock certificate (if issued), specifying
the Fund and the number of shares or dollar amount to be redeemed; (2)
signatures of all owners of the shares exactly as their names appear on the
account; (3) other supporting legal documents, if required, as in the case of
estates, trusts, guardianships, custodianships, partnerships, corporations, and
pension and profit-sharing plans; and (4) method of payment.
PHONE o Call toll free 1-800-531-8448, in San Antonio, 456-7202.
Telephone redemption is automatically established when you complete your
application. The Fund will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine; and if it does not, it may
be liable for any losses due to unauthorized or fraudulent instructions.
Information is obtained prior to any discussion regarding an account including:
(1) USAA number or account number, (2) the name(s) on the account registration,
and (3) social security number or tax identification number for the account
registration. In addition, all telephone communications with a shareholder are
recorded.
Redemption by telephone, fax, or telegraph is not available for shares
represented by stock certificates.
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METHODS OF PAYMENT:
BANK WIRE o Allows redemptions to be sent directly to your bank account.
Establish this service when you apply for your account, or later upon
request. Please obtain precise wiring instructions from your financial
institution. USAA Shareholder Account Services (Transfer Agent) deducts a wire
fee from the account for the redemption by wire. The fee as of the date of this
Prospectus is $10 ($25 for wires to a foreign bank) and is subject to change at
any time. The fee is paid to State Street Bank and Trust Company (SSB) and the
Transfer Agent for their services in connection with the wire redemption. Your
financial institution may also charge a fee for receiving funds by wire.
AUTOMATICALLY o Systematic (regular) or intermittent (as-needed) redemptions can
VIA EFT be credited to your bank account.
Establish any of our electronic investing services when you apply for your
account, or later upon request.
CHECK o A check payable to the registered shareholder(s) will be mailed
REDEMPTION to the address of record.
This check redemption privilege is automatically established when your
application is completed and accepted. There is a 15-day waiting period before a
check redemption can be processed following a telephone address change. Should
you wish to redeem shares within the 15 days following a telephone address
change, you may do so by providing written instructions by mail of facsimile.
CHECKWRITING o Checks can be issued for your Treasury Money Market Trust
account.
To establish your checkwriting privilege (CWP), complete the signature card
which accompanies the application form or Shareholder Services Guide, or request
and complete the signature card separately. There is no charge for the use of
checks nor for subsequent reorders. This privilege is subject to SSB's rules and
regulations governing checking accounts. Checks must be written for an amount of
at least $250. Checks written for less than $250 will be returned. Checkwriting
may not be used to close an account because the value of the account changes
daily as dividends are accrued.
When a check is presented to the Transfer Agent for payment, a sufficient
number of full and fractional shares in the investor's account will be redeemed
to cover the amount of the check. Checks will be returned if there are
insufficient shares to cover the amount of the check. Presently, there is a $15
processing fee assessed against an account for any redemption check not honored
by a clearing or paying agent. Checkwriting fees are subject to change at any
time. The Trust, the Transfer Agent and SSB each reserve the right to change or
suspend the checkwriting privilege upon 30 days' written notice to participating
shareholders. See the SAI for further information.
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. A $10 charge will be
made for each stop payment requested by a shareholder.
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CONDITIONS OF PURCHASE AND REDEMPTION
NONPAYMENT
If any order to purchase shares is cancelled due to nonpayment or if the Trust
does not receive good funds either by check or electronic funds transfer, the
Transfer Agent will treat the cancellation as a redemption of shares purchased,
and you will be responsible for any resulting loss incurred by the Fund or the
Manager. If you are a shareholder, the Transfer Agent can redeem shares from any
of your account(s) as reimbursement for all losses. In addition, you may be
prohibited or restricted from making future purchases in any of the USAA Family
of Funds. A $15 fee is charged for all returned items, including checks and
electronic funds transfers.
TRANSFER OF SHARES
You may transfer Fund shares to another person by sending written instructions
to the Transfer Agent. The account must be clearly identified, and you must
include the number of shares to be transferred, the signatures of all registered
owners, and all stock certificates, if any, which are the subject of transfer.
You also need to send written instructions signed by all registered owners and
supporting documents to change an account registration due to events such as
divorce, marriage, or death. If a new account needs to be established, you must
complete and return an application to the Transfer Agent.
ACCOUNT BALANCE
Beginning in September 1998, and occurring each September thereafter, the
Transfer Agent will assess a small balance account fee of $12 to each
shareholder account with a balance, at the time of assessment, of less than
$2,000. The fee will be used to reduce total transfer agency fees paid by the
Fund to the Transfer Agent. 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 or 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).
TRUST RIGHTS
The Trust reserves the right to:
(1) reject purchase or exchange orders when in the best interest of the Trust;
(2) limit or discontinue the offering of shares of any portfolio of the Trust
without notice to the shareholders;
(3) require a signature guarantee for purchases, redemptions, or changes in
account information in those instances where the appropriateness of a
signature authorization is in question. The section ADDITIONAL INFORMATION
REGARDING REDEMPTION OF SHARES in the SAI contains information on
acceptable guarantors;
(4) Redeem an account with less than $900, subject to certain limitations
described in ADDITIONAL INFORMATION REGARDING REDEMPTION OF SHARES in the
SAI.
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EXCHANGES
EXCHANGE PRIVILEGE
The Exchange Privilege is automatically established 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 that the
shares to be acquired are offered in your state of residence. Exchange
redemptions and purchases will be processed simultaneously at the share prices
next determined after the exchange order is received. For federal income tax
purposes, an exchange between Funds is a taxable event. Accordingly, when
exchanging shares, you may realize a capital gain or loss.
The Fund has undertaken certain procedures regarding telephone
transactions. See REDEMPTION OF SHARES - PHONE.
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. Exchanges out of
any Fund in the USAA Family of Funds are limited for each account to six per
calendar year except that 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.
OTHER SERVICES
INVESTMENT PLANS
AUTOMATIC INVESTMENT PLANS - You may establish an automatic investment plan by
completing the appropriate forms, if any. 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. Call the Manager to obtain instructions. More information about
these preauthorized plans is contained in the SAI.
o INVESTART(R) - A no initial investment purchase plan. With this plan the
regular minimum initial investment amount is waived if you make subsequent
monthly additions of at least $50 through electronic funds transfer from a
checking or savings account. The Manager may periodically offer programs that
reduce the minimum amounts for monthly electronic investments.
o 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.
o DIRECT PURCHASE SERVICE - The periodic purchase of shares through electronic
funds transfer from an employer (including government allotments), an
income-producing investment, or an account with a participating financial
institution.
o 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.
o BUY/SELL SERVICE - The intermittent purchase or redemption of shares through
electronic funds transfer to or from a checking or savings account.
o SYSTEMATIC WITHDRAWAL PLAN - The periodic redemption of shares from one of
your accounts permitting you to receive a fixed amount of money monthly or
quarterly.
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<PAGE>
o RETIREMENT PLANS - Plans are available for various forms of IRAs and for
403(b)(7) accounts. Federal taxes on current income may be deferred if an
investor qualifies.
o 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.
SHAREHOLDER STATEMENTS AND REPORTS
You will receive a confirmation for purchases or redemptions by check and
exchanges. If your account had activity other than reinvested dividends, such as
wire purchases or redemptions or purchases under the InveStart(R),
InvesTronic(R), Direct Purchase Service, Automatic Purchase Plan or Directed
Dividends investment plans, you will receive a monthly statement that will
reflect quarter-to-date account activity.
At the end of each quarter, you will receive a consolidated statement for
all of your mutual fund accounts, regardless of account activity. The fourth
quarter consolidated statement will reflect all account activity for the prior
tax year. There will be a $10 fee charged for copies of historical statements
for other than the prior tax year for any one account. You will receive the
Fund's financial statements with a summary of its investments and performance at
least semiannually.
In an effort to reduce expenses and respond to shareholders' requests to
reduce mail, the Trust intends to consolidate mailings of Annual and Semiannual
Reports to households having multiple accounts with the same address of record.
One copy of each report will be furnished to that address. You may request
additional reports by notifying the Trust.
TELEPHONE ASSISTANCE
Call our telephone assistance numbers for specific forms, a copy of the SAI, the
most recent Annual Report and/or Semiannual Report, or if you have any questions
concerning any of the services offered.
SHARE PRICE CALCULATION
The price at which shares of the Fund are purchased and redeemed by shareholders
is equal to the NAV per share determined on the effective date of the purchase
or redemption.
WHEN
The NAV per share for the Fund is calculated at the close of the regular trading
session of the NYSE, which is usually 4:00 p.m. Eastern time. You may buy and
sell Fund shares at the NAV per share without a sales charge.
HOW
The NAV per share is calculated by adding the value of all securities and other
assets in the Fund, deducting liabilities, and dividing by the number of shares
outstanding. Securities are stated at amortized cost which approximates market
value. For additional information, see VALUATION OF SECURITIES in the SAI.
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DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
Net investment income is accrued daily and is paid on the last business day of
each month. Net capital gains, if any, generally will be distributed at least
annually. The Fund intends to make such additional distributions as may be
necessary to avoid the imposition of any federal income or excise tax.
All shares purchased shall begin accruing dividends on the day following
the effective date of the purchase and shall receive dividends through the
effective date of redemption.
All income dividends and capital gain distributions are automatically
reinvested, unless the shareholder specifies otherwise. The share price will be
the net asset value of the Fund shares computed on the ex- dividend date.
Any dividend or distribution payment returned to the Manager as not
deliverable will be invested in the shareholder's Fund account at the
then-current NAV per share. If any check for the payment of dividends or
distributions is not cashed within six months from the date on the check, it
becomes void. The amount of the check will then be invested in the shareholder's
Fund account at the then-current NAV per share.
FEDERAL TAXES
The following discussion relates only to generally applicable federal income tax
provisions in effect as of the date of this Prospectus. Note that the recently
enacted Taxpayer Relief Act of 1997 and regulations that will likely be created
to implement the Act may affect the status and treatment of certain
distributions shareholders receive from the Fund. Shareholders are urged to
consult their own tax advisers about the status of distributions from the Fund
in their own states and localities.
FUND - The Fund intends to qualify as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended (the Code). By
complying with the applicable provisions of the Code, the Fund will not be
subject to federal income tax on its net investment income and net capital gains
(capital gains in excess of capital losses) distributed to shareholders.
SHAREHOLDER - Dividends from taxable net investment income and distributions of
net short-term capital gains are taxable to shareholders as ordinary income,
whether received in cash or reinvested in additional shares.
Distributions of net long-term capital gains are taxable as long-term
capital gains whether received in cash or reinvested in additional shares, and
regardless of the length of time the investor has held the shares of the Fund.
WITHHOLDING - The Fund is required by federal law 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, who underreports
dividend or interest income, or who fails to certify that he 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 Transfer Agent, that your
tax identification number is correct and that you are not currently subject to
backup withholding.
REPORTING - The Fund will report annually to its shareholders the federal tax
status of dividends and distributions paid or declared by the Fund during the
preceding calendar year.
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MANAGEMENT OF THE TRUST
The business affairs of the Trust are subject to the supervision of the Board of
Trustees.
The Manager, USAA Investment Management Company (IMCO), was organized in
May 1970 and is an affiliate of United Services Automobile Association (USAA), a
large diversified financial services institution. As of the date of this
Prospectus, the Manager had approximately $36 billion in total assets under
management. The Manager's mailing address is 9800 Fredericksburg Rd., San
Antonio, TX 78288.
Officers and employees of the Manager are permitted to engage in personal
securities transactions subject to restrictions and procedures set forth in the
Joint Code of Ethics adopted by the Trust and the Manager. Such restrictions and
procedures include substantially all of the recommendations of the Advisory
Group of the Investment Company Institute and comply with SEC rules and
regulations.
ADVISORY AGREEMENT
The Manager serves as the manager and investment adviser of the Trust, providing
services under an Advisory Agreement. Under the Advisory Agreement, the Manager
is responsible for the management of the business affairs, investment
portfolios, and placement of brokerage orders, subject to the authority of and
supervision by the Board of Trustees.
For its services under the Advisory Agreement, the Fund pays the Manager an
annual fee which is computed as a percentage of the Fund's ANA, accrued daily
and paid monthly. The Fund's management fees are computed at one-eighth of one
percent (.125%) of ANA. For the fiscal year ended May 31, 1997, the fees paid to
the Manager, net of the reimbursement, were .106% of ANA.
OPERATING EXPENSES
For the fiscal year ended May 31, 1997, the Manager limited total operating
expenses to .375% of the Fund's ANA. The Manager reimbursed the Fund $15,808 for
expenses in excess of the limitation. The Manager has voluntarily agreed to
continue to limit the Fund's annual expenses until October 1, 1998, to .375% of
its ANA and will reimburse the Fund for all expenses in excess of the
limitation.
PORTFOLIO MANAGER
The following individual is primarily responsible for managing the Fund.
Pamela K. Bledsoe, Executive Director of Money Market Funds since June
1995, has managed the Fund since May 1996. Ms. Bledsoe has nine years investment
management experience and has worked for IMCO for six years. Ms. Bledsoe 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.
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DESCRIPTION OF SHARES
MASTER TRUST AGREEMENT
The Trust is an open-end management investment company established as a business
trust under the laws of the Commonwealth of Massachusetts pursuant to the First
Amended and Restated Master Trust Agreement (Master Trust Agreement) dated June
2, 1995, as amended. The Trust is authorized to issue an unlimited number of
shares of beneficial interest of separate portfolios, without par value. Eleven
such portfolios have been established, one of which is described in this
Prospectus. The Fund is classified as diversified. Under the Master Trust
Agreement, the Trustees are authorized to create new portfolios in addition to
those already existing without shareholder approval.
Under the Master Trust Agreement, no annual or regular meeting of
shareholders is required. Ordinarily, no shareholder meeting will be held unless
required by the 1940 Act. The Trustees may fill vacancies on the Board or
appoint new Trustees provided that immediately after such action at least
two-thirds of the Trustees have been elected by shareholders. Shareholders are
entitled to one vote per share (with proportionate voting for fractional shares)
irrespective of the relative net asset value of the shares. For matters
affecting an individual portfolio, a separate vote of the shareholders of that
portfolio is required. Shareholders holding an aggregate of at least 10% of the
outstanding shares of the Trust may request a meeting of shareholders at any
time for the purpose of voting to remove one or more of the Trustees, and the
Trust will assist shareholders in communicating with other shareholders in
connection with such a meeting.
Under Massachusetts law, shareholders of any portfolio could, under certain
circumstances, be held personally liable for the obligations of the Trust.
However, the Master Trust Agreement disclaims shareholder liability for acts or
obligations of the Trust and requires that notice of such disclaimer be given in
each agreement, obligation, or instrument entered into or executed by the Trust
or the Trustees. The Master Trust Agreement provides for indemnification out of
the Trust's property for all losses and expenses of any shareholder held
personally liable for the obligations of the Trust. Thus, the possibility of a
shareholder incurring financial loss on account of shareholder liability is
remote.
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SERVICE PROVIDERS
UNDERWRITER/ USAA Investment Management Company
DISTRIBUTOR 9800 Fredericksburg Rd., San Antonio, Texas 78288.
TRANSFER USAA Shareholder Account Services
AGENT 9800 Fredericksburg Rd., San Antonio, Texas 78288.
CUSTODIAN State Street Bank and Trust Company
P.O. Box 1713, Boston, Massachusetts 02105.
LEGAL Goodwin, Procter & Hoar LLP
COUNSEL Exchange Place, Boston, Massachusetts 02109.
INDEPENDENT KPMG Peat Marwick LLP
AUDITORS 112 East Pecan, Suite 2400, San Antonio, Texas 78205.
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TELEPHONE ASSISTANCE
(Call toll free - Central Time)
Monday-Friday 8:00 a.m. to 8:00 p.m.
Saturday 8:30 a.m. to 5:00 p.m.
For further information on mutual funds:
1-800-531-8181
In San Antonio 456-7211
For account servicing, exchanges or redemptions:
1-800-531-8448
In San Antonio 456-7202
RECORDED 24 HOUR SERVICE
MUTUAL FUND PRICE QUOTES
(From any phone)
1-800-531-8066
In San Antonio 498-8066
MUTUAL FUND TOUCHLINE(R)
(From Touchtone phones only)
For account balance, last transaction or fund prices:
1-800-531-8777
In San Antonio 498-8777
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21
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Part B
Statement of Additional Information for the
Income Strategy, Growth and Tax Strategy, Balanced Strategy,
Cornerstone Strategy, Growth Strategy, Emerging Markets, Gold,
International, and World Growth Funds, GNMA Trust and
Treasury Money Market Trust
is included herein
<PAGE>
[USAA EAGLE LOGO]
USAA STATEMENT OF
INVESTMENT ADDITIONAL INFORMATION
TRUST October 1, 1997
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USAA INVESTMENT TRUST
USAA INVESTMENT TRUST (the Trust) is a registered investment company offering
shares of eleven no-load mutual funds which are described in this Statement of
Additional Information (SAI): the Income Strategy Fund, Growth and Tax Strategy
Fund, Balanced Strategy Fund, Cornerstone Strategy Fund, Growth Strategy Fund,
Emerging Markets Fund, Gold Fund, International Fund, World Growth Fund, GNMA
Trust, and Treasury Money Market Trust (collectively, the Funds). Each Fund is
classified as diversified and has its own investment objective designed to meet
different investment goals.
You may obtain a free copy of a Prospectus for each Fund dated October 1, 1997,
by writing to USAA Investment Trust, 9800 Fredericksburg Rd., 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 Trust and
the Funds, and should be read in conjunction with each Fund's Prospectus.
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TABLE OF CONTENTS
Page
2 Valuation of Securities
3 Conditions of Purchase and Redemption
3 Additional Information Regarding Redemption of Shares
4 Investment Plans
5 Investment Policies
8 Special Risk Considerations
8 Investment Restrictions
11 Portfolio Transactions
13 Further Description of Shares
14 Tax Considerations
15 Trustees and Officers of the Trust
18 The Trust's Manager
20 General Information
20 Calculation of Performance Data
22 Appendix A - Long-Term and Short-Term Debt Ratings
25 Appendix B - Comparison of Portfolio Performance
28 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 securities of the Income Strategy, Growth and Tax Strategy,
Balanced Strategy, Cornerstone Strategy, Growth Strategy, Emerging Markets,
Gold, International, and World Growth Funds and the GNMA Trust is determined by
one or more of the following methods:
(1) Portfolio securities, except as otherwise noted, traded primarily on a
domestic securities exchange are valued at the last sales price on that
exchange. Portfolio securities traded primarily on foreign securities
exchanges are generally valued at the closing values of such securities on
the exchange where primarily traded. If no sale is reported, the average
of the bid and asked prices is generally used depending upon local custom
or regulation.
(2) Over-the-counter securities are priced at the last sales price or, if not
available, at the average of the bid and asked prices at the time trading
closes on the NYSE.
(3) Debt securities purchased with maturities of 60 days or less are stated at
amortized cost which approximates market value. Repurchase agreements are
valued at cost.
(4) Other debt and government securities are valued each business day by a
pricing service (the Service) approved by the Board of Trustees. The
Service uses the mean between quoted bid and asked prices or the last
sales price to price securities when, in the Service's judgment, these
prices are readily available and are representative of the securities'
market values. For many securities, such prices are not readily available.
The Service generally prices those securities based on methods which
include consideration of yields or prices of securities of comparable
quality, coupon, maturity and type, indications as to values from dealers
in securities, and general market conditions.
(5) Securities which cannot be valued by the methods set forth above, and all
other assets, are valued in good faith at fair value using methods
determined by the Manager under the general supervision of the Board of
Trustees.
Securities trading in foreign markets may not take place on all days on
which the NYSE is open. Further, trading takes place in various foreign markets
on days on which the NYSE is not open. The calculation of a Fund's NAV therefore
may not take place contemporaneously with the determination of the prices of
securities held by a Fund. 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, unless the Manager determines that the particular event would
materially affect NAV. In such a case, the Fund's Manager, under the supervision
of the Board of Trustees, will use all relevant available information to
determine a fair value for the affected portfolio securities.
The value of the Treasury Money Market Trust'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 Trust would receive upon the sale of the
instrument.
The valuation of the Treasury Money Market Trust'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 Trustees has established procedures designed to stabilize the
Treasury Money Market Trust's price per share, as computed for the purpose of
sales and redemptions, at $1.00. There can be no assurance, however, that the
Fund will at all times be able to maintain a constant $1.00 NAV per share. Such
procedures include review of the Fund's holdings at such intervals as is deemed
appropriate to determine whether the Fund's NAV calculated by using available
market quotations deviates from $1.00 per share and,
2
<PAGE>
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 Trustees will take such corrective action as it
regards as necessary and appropriate. Such action may include selling portfolio
instruments prior to maturity to realize capital gains or losses or to shorten
average portfolio maturity, withholding dividends, or establishing a NAV per
share by using available market quotations.
CONDITIONS OF PURCHASE AND REDEMPTION
Nonpayment
If any order to purchase shares is cancelled due to nonpayment or if the Trust
does not receive good funds either by check or electronic funds transfer, the
Transfer Agent will treat the cancellation as a redemption of shares purchased,
and you will be responsible for any resulting loss incurred by the Fund or the
Manager. If you are a shareholder, the Transfer Agent can redeem shares from any
of your account(s) as reimbursement for all losses. In addition, you may be
prohibited or restricted from making future purchases in any of the USAA Family
of Funds. A $15 fee is charged for all returned items, including checks and
electronic funds transfers.
Transfer of Shares
You may transfer Fund shares to another person by sending written instructions
to USAA Shareholder Account Services (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 a shareholder's investment at the time of redemption may be more or
less than the cost at purchase, depending on the value of the securities held in
each Fund's portfolio. Requests for redemption which are subject to any special
conditions, or which specify an effective date other than as provided herein,
cannot be accepted. A gain or loss for tax purposes may be realized on the sale
of shares, depending upon the price when redeemed.
The Board of Trustees may cause the redemption of an account with a
balance of less than $900, provided that (1) the value of such account has been
reduced below the minimum initial investment required in such Fund at the time
of the establishment of the account to less than $900 entirely for reasons other
than market action, (2) the account has remained below the minimum initial
investment for six months, and (3) 60 days' prior written notice of the proposed
redemption has been sent to the shareholder. Shares will be redeemed at the NAV
on the date fixed for redemption by the Board of Trustees. Prompt payment will
be made by mail to the last known address of the shareholder.
The Trust 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 Trust normally utilizes is
restricted, or an emergency exists as determined by the SEC so that disposal of
the Trust's investments or determination of its NAV is not reasonably
practicable, or (3) for such other periods as the SEC by order may permit for
protection of the Trust's shareholders.
For the mutual protection of the investor and the Funds, the Trust 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 Treasury Money Market Trust may request that checks be
issued for their accounts. Checks must be written in the amount of at least
$250.
Checks issued to shareholders of the Treasury Money Market Trust will be
sent only to the person in whose name the account is registered and only to the
address of record. The checks must be manually signed by the registered owner(s)
exactly as the account is registered. For joint accounts the signature of either
or both joint owners will be required on the check, according to the election
made on the signature card. Dividends will continue to be earned by the
shareholder until the shares are redeemed by the presentation of a check.
3
<PAGE>
When a check is presented to USAA Shareholder Account Services (Transfer
Agent) for payment, a sufficient number of full and fractional shares in the
investor's account will be redeemed to cover the amount of a check. If an
investor's account is not adequate to cover the amount of a check, the check
will be returned unpaid. Because the value of the account changes as dividends
are accrued on a daily basis, checks may not be used to close an account.
The checkwriting privilege will be 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 the shareholder
for the use of the checks or for subsequent reorders of checks.
The Trust reserves the right to assess a processing fee against a
shareholder's account for any redemption check not honored by a clearing or
paying agent. Currently, this fee is $15 and is subject to change at any time.
Some examples of such dishonor are improper endorsement, checks written for an
amount less than the minimum check amount, and insufficient or uncollectible
funds.
The Trust, 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.
INVESTMENT PLANS
The following investment plans are made available by the Trust 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 an employer (including government allotments), an
income-producing investment, or an account with a participating financial
institution.
AUTOMATIC PURCHASE PLAN - the periodic transfer of funds from a USAA money
market fund to purchase shares in another non-money market USAA mutual fund.
There is a minimum investment required for this program of $5,000 in the money
market fund, with a monthly transaction minimum of $50.
BUY/SELL SERVICE - the intermittent purchase or redemption of shares through
electronic funds transfer to or from a checking or savings account.
Participation in these automatic purchase plans will permit a shareholder
to engage in dollar-cost averaging. For additional information concerning the
benefits of dollar-cost averaging, see Appendix C.
SYSTEMATIC WITHDRAWAL PLAN
If a shareholder in a single investment account (accounts in different Funds
cannot be aggregated for this purpose) owns shares having a NAV of $5,000 or
more, the shareholder may request that enough shares to produce a fixed amount
of money be liquidated from the account monthly or quarterly. The amount of each
withdrawal must be at least $50. Using the electronic funds transfer service,
shareholders may choose to have withdrawals electronically deposited at their
bank or other financial institution. They may also elect to have checks mailed
to a designated address.
Such a plan may be initiated by depositing shares worth at least $5,000
with the Transfer Agent and by completing a Systematic Withdrawal Plan
application, which may be requested from the Manager. The shareholder may
terminate participation in the plan at any time. There is no charge to the
shareholder for withdrawals under the Systematic Withdrawal Plan. The Trust 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 selected by the shareholder 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 a shareholder's investment and eventually exhaust the account. Reinvesting
dividends and
4
<PAGE>
distributions helps replenish the account. Because share values and net
investment income can fluctuate, shareholders 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 the shareholder's income tax return. Therefore, a shareholder should
keep an accurate record of any gain or loss on each withdrawal.
TAX-DEFERRED RETIREMENT PLANS (NOT AVAILABLE IN THE GROWTH AND TAX STRATEGY
FUND)
Federal taxes on current income may be deferred if an investor qualifies for
certain types of retirement programs. For the convenience of the investor, the
Manager offers 403(b)(7) accounts and various forms of IRAs. The minimum initial
investment in each of these plans is $250, or no minimum is required with a
minimum $50 monthly electronic investment. Subsequent investments of $50 or more
per account may be made at any time. Investments may be made in one or any
combination of the portfolios described in the Prospectus of each Fund of USAA
Investment Trust and USAA Mutual Fund, Inc.
Retirement plan applications for the IRA and 403(b)(7) programs should be
sent directly to USAA Shareholder Account Services, 9800 Fredericksburg Rd., San
Antonio, TX 78288. USAA Federal Savings Bank serves as Custodian of 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 proceeds of a
distribution 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 the
investor 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. Detailed
information about the plans may be obtained from the Manager.
INVESTMENT POLICIES
The section captioned Investment Objective and Policies in each Fund's
Prospectus (Investment Policies and Risks in the Growth and Tax Strategy Fund
Prospectus) describes the fundamental investment objective and the investment
policies applicable to each Fund and the following is provided as additional
information.
SECTION 4(2) COMMERCIAL PAPER AND RULE 144A SECURITIES
The Income Strategy, Balanced Strategy and Growth Strategy Funds 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. 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, except the GNMA Trust and the Treasury Money Market Trust, may
also purchase restricted securities eligible for resale to "qualified
institutional buyers" pursuant to Rule 144A under the Securities Act of 1933
(Rule 144A Securities). Rule 144A provides a non-exclusive safe harbor from the
registration requirements of the Securities Act of 1933 for resales of certain
securities to institutional investors.
MUNICIPAL LEASE OBLIGATIONS
The Income Strategy, Balanced Strategy, Growth Strategy and Growth and Tax
Strategy Funds may invest in municipal lease obligations, installment purchase
contract 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.
LIQUIDITY DETERMINATIONS
The Board of Trustees has established guidelines pursuant to which Municipal
Lease Obligations, Section 4(2) Commercial Paper and 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 the Funds' investment
restriction applicable to
5
<PAGE>
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 Trustees: (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 Trustees.
CALCULATION OF MATURITY FOR FIXED INCOME SECURITIES
A fixed income security's maturity is typically determined on a stated final
maturity basis, although there are some exceptions to the rule.
If the issuer of the security has committed to take advantage of a
maturity shortening device, such as a call, refunding, or redemption provision,
the date on which the instrument will be called, refunded, or redeemed will be
considered to be its maturity date. Maturities of securities subject to sinking
fund arrangements are determined on a weighted average life basis, which is the
average time for principal to be repaid. The weighted average lives of these
securities will be shorter than their stated final maturities. A security will
be treated as having a maturity earlier than its stated maturity date if the
security has technical features, such as a put or demand feature which, in the
judgment of the Manager, will result in the security being valued in the market
as though it has the earlier maturity.
LENDING OF SECURITIES
Each Fund may lend its securities. A lending policy may be authorized by the
Trust's Board of Trustees and implemented by the Manager, but securities may be
loaned only to qualified broker-dealers or institutional investors that agree to
maintain cash collateral with the Trust equal at all times to at least 100% of
the value of the loaned securities. The Trustees will establish procedures and
monitor the creditworthiness of any institution or broker-dealer during such
times as any loan is outstanding. The Trust will continue to receive interest on
the loaned securities and will invest the cash collateral in short-term
obligations of the U.S. Government or of its agencies or instrumentalities or in
repurchase agreements, thereby earning additional interest.
No loan of securities will be made if, as a result, the aggregate of such
loans would exceed 33 1/3% of the value of a Fund's total assets. The Trust
may terminate such loans at any time.
FORWARD CURRENCY CONTRACTS
Each Fund, except the Growth and Tax Strategy, GNMA and Treasury Money Market
Trusts, may enter into forward currency contracts in order to protect against
uncertainty in the level of future foreign exchange rates. A forward contract
involves an agreement to purchase or sell a specific currency at a specified
future date or over a specified time period at a price set at the time of the
contract. These contracts are usually traded directly between currency traders
(usually large commercial banks) and their customers. A forward contract
generally has no deposit requirements, and no commissions are charged.
The Funds may enter into forward currency contracts under two
circumstances. First, when a Fund enters into a contract for the purchase or
sale of a security denominated in a foreign currency, it may desire to "lock in"
the U.S. dollar price of the security. By entering into such a contract, a 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 a 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. A Fund may not hedge with respect to a
particular currency for an amount greater than the aggregate market value
6
<PAGE>
(determined at the time of making any sale of forward currency) of the
securities held in its portfolio denominated or quoted in, or bearing a
substantial correlation to, such currency.
The use of forward contracts involves certain risks. The precise matching
of contract amounts and the value of securities involved generally will not be
possible since the future value of such securities in currencies more than
likely will change between the date the contract is entered into and the date it
matures. The projection of short-term currency market movements is extremely
difficult and successful execution of a short-term hedging strategy is
uncertain. Under normal circumstances, consideration of the prospect for
currency parities will be incorporated into the longer term investment
strategies. The Manager believes it is important, however, to have the
flexibility to enter into such contracts when it determines it is in the best
interest of the Funds to do so. It is impossible to forecast what the market
value of portfolio securities will be at the expiration of a contract.
Accordingly, it may be necessary for the Funds to purchase additional currency
(and bear the expense of such purchase) if the market value of the security is
less than the amount of currency the Funds are obligated to deliver, and if a
decision is made to sell the security and make delivery of the currency.
Conversely, it may be necessary to sell some of the foreign currency received on
the sale of the portfolio security if its market value exceeds the amount of
currency the Funds are obligated to deliver. The Funds are not required to enter
into such transactions and will not do so unless deemed appropriate by the
Manager.
Although the Funds value their assets each business day in terms of U.S.
dollars, they do not intend to convert their foreign currencies into U.S.
dollars on a daily basis. They will do so from time to time, and shareholders
should be aware of currency conversion costs. Although foreign exchange dealers
do not charge a fee for conversion, they do realize a profit based on the
difference (spread) between the prices at which they are buying and selling
various currencies. Thus, a dealer may offer to sell a foreign currency to the
Fund at one rate, while offering a lesser rate of exchange should the Fund
desire to resell that currency to the dealer.
WHEN-ISSUED SECURITIES
Each Fund may invest in new issues of debt securities offered on a when-issued
basis; that is, delivery of and payment for the securities take place after the
date of the commitment to purchase, normally within 45 days. The payment
obligation and the interest rate that will be received on the securities are
each fixed at the time the buyer enters into the commitment. A Fund may sell
these securities before the settlement date if it is deemed advisable.
Debt securities purchased on a when-issued basis are subject to changes in
value in the same way that other debt securities held in the Funds' portfolios
are; that is, both generally experience appreciation when interest rates decline
and depreciation when interest rates rise. The value of such securities will
also be affected by the public's perception of the creditworthiness of the
issuer and anticipated changes in the level of interest rates. Purchasing
securities on a when-issued basis involves a risk that the yields available in
the market when the delivery takes place may actually be higher than those
obtained in the transaction itself. Cash or high-quality, liquid-debt securities
equal to the amount of the when-issued commitments are segregated at the Fund's
custodian bank. The segregated securities are valued at market, and daily
adjustments are made to keep the value of the cash and segregated securities at
least equal to the amount of such commitments by the Fund.
On the settlement date of the when-issued securities, the Fund will meet
its obligations from then available cash, sale of segregated securities, sale of
other securities, or from sale of the when-issued securities themselves (which
may have a value greater or less than the Trust's payment obligations). Sale of
securities to meet such obligations carries with it a greater potential for the
realization of capital gains.
INVESTMENTS IN REAL ESTATE INVESTMENT TRUSTS (REITS)
Because the Income Strategy, Balanced Strategy, Cornerstone Strategy, Growth
Strategy, and World Growth Funds may invest a portion of their assets in REITs,
the Funds may also be subject to certain risks associated with direct
investments in REITs. REITs may be affected by changes in the value of their
underlying properties and by defaults by borrowers or tenants. Furthermore,
REITs are dependent upon specialized management skills of their managers and may
have limited geographic diversification, thereby, subjecting them to risks
inherent in financing a limited number of projects. REITs depend generally on
their ability to generate cash flow to make distributions to shareholders, and
certain REITs have self-liquidation provisions by which mortgages held may be
paid in full and distributions of capital returns may be made at any time.
PUT AND CALL OPTIONS, FINANCIAL FUTURES CONTRACTS, OPTIONS ON FINANCIAL FUTURES
CONTRACTS
Although the GNMA Trust, Income Strategy, Balanced Strategy, Growth Strategy,
and Emerging Markets Funds are permitted to purchase and sell these contracts or
options, the Funds have no current intention of doing so in the coming year and
will not engage in such transactions without first notifying shareholders and
supplying further information in each Fund's Prospectus.
7
<PAGE>
TAX-EXEMPT SECURITIES
Tax-exempt securities generally include debt obligations issued by states and
their political subdivisions, and duly constituted authorities and corporations,
to obtain funds to construct, repair, or improve various public facilities such
as airports, bridges, highways, hospitals, housing, schools, streets, and water
and sewer works. Tax-exempt securities may also be issued to refinance
outstanding obligations as well as to obtain funds for general operating
expenses and for loans to other public institutions and facilities.
The two principal classifications of tax-exempt securities are "general
obligations" and "revenue" or "special tax" bonds. General obligation bonds are
secured by the issuer's pledge of its full faith, credit and taxing power for
the payment of principal and interest. Revenue or special tax bonds are payable
only from the revenues derived from a particular facility or class of facilities
or, in some cases, from the proceeds of a special excise or other tax, but not
from general tax revenues. The Funds may also invest in tax-exempt private
activity bonds, which in most cases are revenue bonds and generally do not have
the pledge of the credit of the issuer. The payment of the principal and
interest on such industrial revenue bonds is dependent solely on the ability of
the user of the facilities financed by the bonds to meet its financial
obligations and the pledge, if any, of real and personal property so financed as
security for such payment. There are, of course, many variations in the terms
of, and the security underlying tax-exempt securities. Short-term obligations
issued by states, cities, municipalities or municipal agencies, include Tax
Anticipation Notes, Revenue Anticipation Notes, Bond Anticipation Notes,
Construction Loan Notes, and Short-Term Discount Notes.
The yields of tax-exempt securities depend on, among other things, general
money market conditions, conditions of the tax-exempt bond market, the size of a
particular offering, the maturity of the obligation, and the rating of the
issue. The ratings of Moody's Investors Service, Inc. (Moody's), Standard &
Poor's Ratings Group (S&P), Fitch Investors Service, Inc. (Fitch), and Duff &
Phelps Inc. represent their opinions of the quality of the securities rated by
them, see Appendix A. It should be emphasized that such ratings are general and
are not absolute standards of quality. Consequently, securities with the same
maturity, coupon, and rating may have different yields, while securities of the
same maturity and coupon but with different ratings may have the same yield. It
will be the responsibility of the Manager to appraise independently the
fundamental quality of the tax-exempt securities included in a Fund's portfolio.
SPECIAL RISK CONSIDERATIONS
CURRENCY EXCHANGE RATE FLUCTUATIONS
The Income Strategy, Balanced Strategy, Cornerstone Strategy, Growth Strategy,
Emerging Markets, Gold, International, and World Growth Funds' assets may be
invested in securities of foreign issuers. Any such investments will be made in
compliance with U.S. and foreign currency restrictions, tax laws, and laws
limiting the amount and types of foreign investments. Pursuit of the Funds'
investment objectives will involve currencies of the United States and of
foreign countries. Consequently, changes in exchange rates, currency
convertibility, and repatriation requirements may favorably or adversely affect
the Funds.
UNPREDICTABLE POLITICAL, ECONOMIC AND SOCIAL CONDITIONS
For the Income Strategy, Balanced Strategy, Cornerstone Strategy, Growth
Strategy, Emerging Markets, Gold, International, and World Growth Funds,
investing in securities of foreign issuers presents certain other risks not
present in domestic investments, including different accounting, reporting, and
disclosure requirements for foreign issuers, possible political or social
instability, including policies of foreign governments which may affect their
respective equity markets, and foreign taxation requirements including
withholding taxes.
INVESTMENT RESTRICTIONS
The following investment restrictions have been adopted by the Trust for and are
applicable to each Fund as stated. 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 that Fund's outstanding voting securities. The investment
restrictions of one Fund may thus be changed without affecting those of any
other Fund.
Under the restrictions, each of the Growth and Tax Strategy, Cornerstone
Strategy, Gold, International, and World Growth Funds may not:
(1) With respect to 75% of its total assets, purchase the securities of any
issuer (except U.S. Government Securities, as such term is defined in the
Investment Company Act of 1940, as amended (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.
8
<PAGE>
(2) Borrow money, except for temporary or emergency purposes in an amount not
exceeding 33 1/3% of its total assets (including the amount borrowed) less
liabilities (other than borrowings).
(3) 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.
(4) Underwrite securities of other issuers, except to the extent that it may
be deemed to act as a statutory underwriter in the distribution of any
restricted securities or not readily marketable securities.
(5) Purchase securities on margin or sell securities short, except that it may
obtain such short-term credits as are necessary for the clearance of
securities transactions.
(6) Invest in put, call, straddle, or spread options or interests in oil, gas
or other mineral exploration or development programs, except that it may
purchase securities of issuers whose principal business activities fall
within such areas in accordance with its investment objectives and
policies.
(7) Invest more than 2% of the market value of its total assets in marketable
warrants to purchase common stock. Warrants initially attached to
securities and acquired by a Fund upon original issuance thereof shall be
deemed to be without value.
(8) Purchase or sell real estate or partnership interests therein, except that
the Cornerstone Strategy Fund may purchase securities secured by real
estate interests or interests therein, or issued by companies or
investment trusts which invest in real estate or interests therein.
(9) Purchase or sell commodities or commodity contracts.
(10) Purchase securities of other open-end investment companies, except a Fund
may invest up to 10% of the market value of its total assets in such
securities through purchases in the open market involving only customary
broker's commissions or in connection with a merger, consolidation,
reorganization, or acquisition of assets approved by the shareholders.
(11) Invest more than 5% of the market 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.
(12) Change the nature of its business so as to cease to be an investment
company.
(13) Issue senior securities as defined in the 1940 Act, except as permitted by
Section 18(f)(2) and rules thereunder.
For purposes of restriction 8 above, interests in publicly traded Real
Estate Investment Trusts (REITs) are not deemed to be real estate or partnership
interests therein.
Each of the GNMA and Treasury Money Market Trusts 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, 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.
(2) Borrow money, except for temporary or emergency purposes in an amount not
exceeding 33 1/3% of its total assets (including the amount borrowed) less
liabilities (other than borrowings).
(3) 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.
(4) Underwrite securities of other issuers, except to the extent that it may
be deemed to act as a statutory underwriter in the distribution of any
restricted securities or not readily marketable securities.
(5) Change the nature of its business so as to cease to be an investment
company.
(6) Issue senior securities as defined in the 1940 Act, except as permitted
by Section 18(f)(2) and rules thereunder.
(7) Purchase or sell real estate, commodities or commodity contracts, except
that the GNMA Trust may invest in financial futures contracts and options
thereon.
(8) Purchase any security if immediately after the purchase 25% or more of the
value of its total assets will be invested in securities of issuers
principally engaged in a particular industry (except that such limitation
does not apply to obligations issued or guaranteed by the U.S. Government
or its agencies or instrumentalities).
The Emerging Markets Fund may not:
(1) With respect to 75% of its total assets, purchase the securities of any
issuer (except U.S. Government Securities, as such term is defined in the
1940 Act) if, as a result, it would own more than 10% of the
9
<PAGE>
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 that it may borrow money 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), nor will it
purchase securities when its borrowings exceed 5% of its total assets.
(3) Concentrate its investments in any one industry although it may invest up
to 25% of the value of its total assets in any one industry; provided,
this limitation does not apply to securities issued or guaranteed by the
U.S. Government or its corporate instrumentalities.
(4) Issue senior securities, except as permitted under the 1940 Act.
(5) Underwrite securities of other issuers, except to the extent that it may
be deemed to act as a statutory underwriter in the distribution of any
restricted securities or not readily marketable securities.
(6) Lend any securities or make any loan if, as a result, more than 33 1/3% of
its total assets would be lent to other parties, except that this
limitation does not apply to purchases of debt securities or to repurchase
agreements.
(7) Purchase or sell commodities, except that the Fund may invest in financial
futures contracts, options thereon, and similar instruments.
(8) Purchase or sell real estate unless acquired as a result of ownership of
securities or other instruments, except that the Fund may invest in
securities or other instruments backed by real estate or securities of
companies that deal in real estate or are engaged in the real estate
business.
Each of the Income Strategy, Balanced Strategy, and Growth Strategy Funds may
not:
(1) With respect to 75% of its total assets, purchase the securities of any
issuer (except U.S. Government Securities, as such term is defined in the
1940 Act) if, as a result, it would own more than 10% of the outstanding
voting securities of such issuer or it would have more than 5% of the
value of its total assets invested in the securities of such issuer.
(2) Borrow money, except for temporary or emergency purposes in an amount not
exceeding 33 1/3% of its total assets (including the amount borrowed) less
liabilities (other than borrowings).
(3) Concentrate its investments in any one industry although it may invest up
to 25% of the value of its total assets in any one industry; provided,
this limitation does not apply to securities issued or guaranteed by the
U.S. Government and its agencies or instrumentalities.
(4) Issue senior securities, except as permitted under the 1940 Act.
(5) Underwrite securities of other issuers, except to the extent that it may
be deemed to act as a statutory underwriter in the distribution of any
restricted securities or not readily marketable securities.
(6) Lend any securities or make any loan if, as a result, more than 33 1/3% of
its total assets would be lent to other parties, except that this
limitation does not apply to purchases of debt securities or to repurchase
agreements.
(7) Purchase or sell commodities, except that 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 and in its
Prospectus, the Manager uses industry classifications for industries based on
categories established by Standard & Poor's Corporation (S&P) 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
S&P have unique investment characteristics, additional industries are included
as industry classifications. The Manager classifies municipal obligations by
projects with similar characteristics, such as toll road revenue bonds, housing
revenue bonds or higher education revenue bonds. In addition, the Cornerstone
Strategy Fund may not concentrate investments in any one industry, although it
may invest up to 25% of the value of its total assets in one industry; the Basic
Value Stocks, Foreign Stocks, and U.S. Government Securities investment
categories are not considered industries for this purpose.
10
<PAGE>
ADDITIONAL RESTRICTION
The following restriction is not considered to be a fundamental policy of the
Funds. The Trust's Board of Trustees may change this additional restriction
without notice to or approval by the shareholders.
Under the additional restriction, each of the Funds may not:
(1) Purchase any security while borrowings representing more than 5% of the
Fund's total assets are outstanding.
PORTFOLIO TRANSACTIONS
The Manager, pursuant to the Advisory Agreement dated September 21, 1990, and
subject to the general control of the Trust's Board of Trustees, places all
orders for the purchase and sale of Fund securities. In executing portfolio
transactions and selecting brokers and dealers, it is the Trust'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.
In the allocation of brokerage business used to purchase securities for
the Income Strategy, Growth and Tax Strategy, Balanced Strategy, Cornerstone
Strategy, Growth Strategy, Emerging Markets, Gold, International, and World
Growth Funds, 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 a broker a higher
commission than may be charged by other brokers, provided that the Manager
determines in good faith that such commission is reasonable in relation to the
value of the brokerage and research services provided by such broker, viewed in
terms of either that particular transaction or of the overall responsibility of
the Manager to the Funds and its other clients. The Manager continuously reviews
the performance of the broker-dealers with whom it places orders for
transactions. The receipt of research from broker-dealers that execute
transactions on behalf of the Trust 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 Trust. 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 Trust. 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 Trust's Manager.
Securities of the same issuer may be purchased, held, or sold at the same
time by the Trust 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 Trust, 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 Trust
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 Trust. In some instances, this procedure may impact the price and
size of the position obtainable for the Trust.
The Trust 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.
11
<PAGE>
BROKERAGE COMMISSION
During the last three fiscal years, the Funds paid the following brokerage fees:
FUND 1995 1996 1997
----------- ------------ -----------
Income Strategy - $ 3,434* $ 2,820
Growth and Tax Strategy $ 30,774 $ 58,596 $ 81,456
Balanced Strategy - $ 16,908* $ 13,006
Cornerstone Strategy $ 1,278,398 $ 1,560,138 $ 1,428,772
Growth Strategy - $ 104,911* $ 230,440
Emerging Markets $ 140,877** $ 394,696 $ 484,792
Gold $ 299,874 $ 224,458 $ 225,284
International $ 1,422,707 $ 1,551,078 $ 1,362,389
World Growth $ 599,043 $ 709,486 $ 558,990
- ---------------------
* For the nine-month period ended May 31, 1996.
** For the seven-month period ended May 31, 1995.
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 1995 1996 1997**
-------- --------- ----------
Income Strategy - $ 216* $ 454
Growth and Tax Strategy $ 1,400 $ 400 $ 15,356
Balanced Strategy - $ 632* $ 1,132
Cornerstone Strategy $ 2,120 $ 4,000 $ 11,878
Growth Strategy - $ 556* $ 10,580
Emerging Markets - - $ 240
World Growth $ 7,576 $ 928 $ 2,380
- ---------------------
* For the nine-month period ended May 31, 1996.
** These amounts are 16.10%, 18.85%, 8.7%, .83%, 4.59%, .05%, and .43%,
respectively, of brokerage fees paid by each Fund.
For the year ended May 31, 1997, 16.07%, 11.57%, 7.97%, 2.36%, 7.59%, .22%, and
1.58%, of the aggregate dollar amounts of transactions involving the payment of
commissions by the Income Strategy, Growth and Tax Strategy, Balanced Strategy,
Cornerstone Strategy, Growth Strategy, Emerging Markets, and World Growth Funds,
respectively, were effected through USAA Brokerage Services.
The Manager directed a portion of the Funds' brokerage transactions to
certain broker-dealers that provided the Manager with research, statistical and
other information. Such transactions amounted to $755,255, $33,359,021,
$3,768,476, $65,579,532, $25,198,552, $283,516, $2,154,238, and $12,833,895, and
the related brokerage commissions or underwriting commissions were $1,154,
$46,750, $5,267, $87,403, $46,990, $850, $2,850 and $13,902 for the Income
Strategy, Growth and Tax Strategy, Balanced Strategy, Cornerstone Strategy,
Growth Strategy, Emerging Markets, International and World Growth Funds,
respectively, for the year ended May 31, 1997.
PORTFOLIO TURNOVER RATES
The rate of portfolio turnover in any of the Funds (other than the Treasury
Money Market Trust) will not be a limiting factor when the Manager deems changes
in a Fund's portfolio appropriate in view of its investment objective. 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. A higher degree of
equity portfolio activity will increase brokerage costs to a Fund. It is not
anticipated that the portfolio turnover rates of the Income Strategy, Growth and
Tax Strategy, Balanced Strategy, Cornerstone Strategy, Growth Strategy, Emerging
Markets, Gold, International, and World Growth Funds or the GNMA Trust will
exceed 100%.
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 and short-term U.S. Government securities are not considered when
computing the turnover rate.
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For the last two fiscal years, the Funds' portfolio turnover rates were as
follows:
FUND 1996 1997
-------- -------
Income Strategy 78.60%* 64.71%
Growth and Tax Strategy 1 202.55% 194.21%
Balanced Strategy 26.53%* 28.06%
Cornerstone Strategy 36.15% 35.14%
Growth Strategy 40.21%* 62.50%
Emerging Markets 87.98% 61.21%
Gold 16.48% 26.40%
International 70.01% 46.03%
World Growth 60.97% 50.02%
GNMA Trust 127.77%** 77.82%
- --------------------
* For the nine-month period ended May 31, 1996.
** The turnover rate was higher because the assets in the portfolio were
repositioned in response to changing market conditions.
1 The Fund has simultaneously purchased and sold the same securities. These
transactions have at times been high in volume and dissimilar to other
trade activity within the Fund. If these transactions were excluded from
the calculation, the portfolio turnover rate would have been as follows:
YEAR ENDED MAY 31,
------------------
1996 1997
---- ----
Portfolio turnover(%) 61.98 52.97
Purchases and sales of this type are
as follows:
Purchases (000) $192,239 $220,402
Sales (000) $192,490 $220,683
FURTHER DESCRIPTION OF SHARES
The Trust is authorized to issue shares of beneficial interest in separate
portfolios. Eleven such portfolios have been established which are described in
this SAI. Under the First Amended and Restated Master Trust Agreement (Master
Trust Agreement), dated June 2, 1995, as amended, the Board of Trustees is
authorized to create new portfolios in addition to those already existing
without the approval of the shareholders of the Trust. The Cornerstone Strategy
and Gold Funds were established May 9, 1984, by the Board of Trustees and
commenced public offering of their shares on August 15, 1984. The International
Fund, established on November 4, 1987, commenced public offering of its shares
on July 11, 1988. The Growth and Tax Strategy Fund was established on November
3, 1988, and commenced public offering of its shares on January 11, 1989. On
November 7, 1990, the Board of Trustees established the GNMA Trust and Treasury
Money Market Trust and commenced public offering of their shares on February 1,
1991. The World Growth Fund was established on July 21, 1992, and commenced
public offering of its shares on October 1, 1992. The Emerging Markets Fund was
established on September 7, 1994, and commenced public offering of its shares on
November 7, 1994. The Income Strategy, Balanced Strategy, and Growth Strategy
Funds were established on June 2, 1995, and commenced public offering of their
shares on September 1, 1995.
Each Fund's assets, and all income, earnings, profits and proceeds
thereof, subject only to the rights of creditors, are specifically allocated to
each 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 Trust 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 Trustees
determine 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 Trustees. Upon liquidation of that
Fund, shareholders are entitled to share pro rata in the net assets belonging to
such Fund available for distribution.
Under the Trust's Master Trust Agreement, no annual or regular meeting of
shareholders is required. Thus, there will ordinarily be no shareholder meeting
unless otherwise required by the 1940 Act. Under certain circumstances, however,
shareholders may apply to the Trustees for shareholder information in order to
obtain signatures to request a shareholder meeting. Moreover, pursuant to the
Master Trust Agreement, any Trustee may be removed by the vote of two-thirds of
the outstanding Trust shares and holders of 10% or more of the outstanding
shares of the Trust can require Trustees to call a meeting of shareholders for
the purpose of voting on the removal of one or more Trustees. On any matter
submitted to the shareholders, the holder of any share is entitled to one vote
per share (with proportionate voting for fractional shares) regardless
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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. For example, the Advisory Agreement must be approved separately by
each Fund and only becomes effective with respect to a Fund when a majority of
the outstanding voting securities of that Fund approves it. Shareholders of a
Fund are not entitled to vote on any matter which does not affect that Fund but
which requires a separate vote of another Fund. For example, a proposed change
in the investment objectives of a particular Fund would require the affirmative
vote of a majority of the outstanding voting securities of only that Fund.
Shares do not have cumulative voting rights, which means that in
situations in which shareholders elect Trustees, holders of more than 50% of the
shares voting for the election of Trustees can elect 100% of the Board of
Trustees, and the holders of less than 50% of the shares voting for the election
of Trustees will not be able to elect any person as a Trustee.
When issued, each Fund's shares are fully paid and nonassessable by the
Trust, have no preemptive or subscription rights, and are fully transferable.
There are no conversion rights.
TAX CONSIDERATIONS
TAXATION OF THE FUNDS
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, a 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); (2) derive in each taxable year less
than 30% of its gross income from the sale or other disposition of stock or
securities, and certain options, futures contracts, forward contracts, and
foreign currencies held for less than three months (the 30% test); and (3)
satisfy certain diversification requirements, at the close of each quarter of
the Fund's taxable year. In the case of the Growth and Tax Strategy Fund, in
order to be entitled to pay exempt-interest dividends to shareholders, at the
close of each quarter of its taxable year, at least 50% of the value of the
Fund's total assets must consist of obligations the interest of which is exempt
from federal income tax. The Growth and Tax Strategy Fund intends to satisfy
this requirement.
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
excise tax.
The Income Strategy, Balanced Strategy, Cornerstone Strategy, Growth
Strategy, Emerging Markets, Gold, International, and World Growth Funds' ability
to make certain investments may be limited by provisions of the Code that
require inclusion of certain unrealized gains or losses in the Fund's income for
purposes of the 90% test, the 30% test, and the distribution requirements of the
Code, and by provisions of the Code that characterize certain income or loss as
ordinary income or loss rather than capital gain or loss. Such recognition,
characterization and timing rules generally apply to investments in certain
forward currency contracts, foreign currencies and debt securities denominated
in foreign currencies, as well as certain other investments.
If the Income Strategy, Balanced Strategy, Cornerstone Strategy, Growth
Strategy, Emerging Markets, Gold, International, or World Growth Funds invest in
an entity that is classified as a "passive foreign investment company" (PFIC)
for federal income tax purposes, the application of certain provisions of the
Code applying to PFICs could result in the imposition of certain federal income
taxes on the Fund. It is anticipated that any taxes on a Fund with respect to
investments in PFICs would be insignificant.
TAXATION OF THE SHAREHOLDERS
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 a Fund pays the dividend
during the following January. If a shareholder of a Fund receives a distribution
taxable as long-term capital gain with respect to shares of a Fund and redeems
or exchanges the shares before he has held them for more than six months, any
loss on the redemption or exchange that is less than or equal to the amount of
the distribution will be treated as long-term capital loss, except as noted
below.
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In the case of the Growth and Tax Strategy Fund, if a shareholder receives
an exempt-interest dividend with respect to any share and such share has been
held for six months or less, any loss on the sale or exchange of such share will
be disallowed to the extent of such exempt-interest dividend. Shareholders who
are recipients of Social Security benefits should be aware that exempt-interest
dividends received from the Growth and Tax Strategy Fund are includible in their
"modified adjusted gross income" for purposes of determining the amount of such
Social Security benefits, if any, that are required to be included in their
gross income.
The Growth and Tax Strategy Fund may invest in private activity bonds.
Interest on certain private activity bonds issued after August 7, 1986, is an
item of tax preference for purposes of the Federal Alternative Minimum Tax
(AMT), although the interest continues to be excludable from gross income for
other purposes. AMT is a supplemental tax designed to ensure that taxpayers pay
at least a minimum amount of tax on their income, even if they make substantial
use of certain tax deductions and exclusions (referred to as tax preference
items). Interest from private activity bonds is one of the tax preference items
that is added to income from other sources for the purposes of determining
whether a taxpayer is subject to AMT and the amount of any tax to be paid.
Opinions relating to the validity of the tax-exempt securities purchased
for the Growth and Tax Strategy Fund and the exemption of interest thereon from
federal income tax are rendered by recognized bond counsel to the issuers.
Neither the Manager's nor the Fund's counsel makes any review of the basis of
such opinions.
The exemption of interest income for federal income tax purposes does not
necessarily result in exemption under the income or other tax laws of any state
or local taxing authority. Shareholders of a Fund may be exempt from state and
local taxes on distributions of tax-exempt interest income derived from
obligations of the state and/or municipalities of the state in which they are a
resident, but generally are subject to tax on income derived from obligations of
other jurisdictions. Shareholders should consult their tax advisers about the
status of distributions from a Fund in their own states and localities.
TRUSTEES AND OFFICERS OF THE TRUST
The Board of Trustees of the Trust consists of seven Trustees. Set forth below
are the Trustees and officers of the Trust, and their respective offices and
principal occupations during the last five years. Unless otherwise indicated,
the business address of each is 9800 Fredericksburg Rd., San Antonio, TX 78288.
Robert G. Davis 1, 2
Trustee and Chairman of the Board of Trustees
Age: 50
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); Director, Chairman, President, and Chief Executive
Officer, USAA Financial Planning Network, Inc. (1/97-present); Director, Vice
Chairman, Executive Vice President, and Chief Operating Officer, USAA Financial
Planning Network, Inc. (9/96-1/97); Special Assistant to Chairman, United
Services Automobile Association (USAA) (6/96-12/96); President and Chief
Executive Officer, Banc One Credit Corporation (12/95-6/96); and President and
Chief Executive Officer, Banc One Columbus, (8/91-12/95). Mr. Davis also serves
as a Trustee and Chairman of the Board of Trustees of USAA State Tax-Free Trust
and as a Director and Chairman of the Boards of Directors of USAA Investment
Management Company (IMCO), USAA Mutual Fund, Inc., USAA Tax Exempt Fund, Inc.,
USAA Shareholder Account Services, USAA Federal Savings Bank and USAA Real
Estate Company.
Michael J. C. Roth 1, 2
Trustee, President and Vice Chairman of the Board of Trustees
Age: 56
Chief Executive Officer, IMCO (10/93-present); President, Director and Vice
Chairman of the Board of Directors, IMCO (1/90-present). Mr. Roth serves as
President, Trustee and Vice Chairman of the Board of Trustees of USAA State
Tax-Free Trust, as President, Director and Vice Chairman of the Boards of
Directors of USAA Mutual Fund, Inc., USAA Tax Exempt Fund, Inc. and USAA
Shareholder Account Services, as Director of USAA Life Insurance Company and as
Trustee and Vice Chairman of USAA Life Investment Trust.
15
<PAGE>
John W. Saunders, Jr. 1, 2, 4
Trustee and Vice President
Age: 62
Senior Vice President, Fixed Income Investments, IMCO (10/85-present). Mr.
Saunders serves as a Trustee and Vice President of USAA State Tax-Free Trust, as
a Director of IMCO, Director and Vice President of USAA Mutual Fund, Inc., and
USAA Tax Exempt Fund, Inc., as Senior Vice President of USAA Shareholder Account
Services, and as Vice President of USAA Life Investment Trust.
Barbara B. Dreeben 3, 4, 5
200 Patterson #1008
San Antonio, TX 78209
Trustee
Age: 52
President, Postal Addvantage (7/92-present); Consultant, Nancy Harkins Stationer
(8/91-12/95). Mrs. Dreeben serves as a Trustee of USAA State Tax-Free Trust and
as a Director of USAA Mutual Fund, Inc. and USAA Tax Exempt Fund, Inc.
Howard L. Freeman, Jr. 2, 3, 4, 5
2710 Hopeton
San Antonio, TX 78230
Trustee
Age: 62
Retired. Assistant General Manager for Finance, San Antonio City Public Service
Board (1976-1996). Mr. Freeman serves as a Trustee of USAA State Tax-Free Trust
and as a Director of USAA Mutual Fund, Inc. and USAA Tax Exempt Fund, Inc.
Robert L. Mason, Ph.D. 3, 4, 5
12823 Queens Forest
San Antonio, TX 78230
Trustee
Age: 51
Manager, Statistical Analysis Section, Southwest Research Institute
(8/75-present). Dr. Mason serves as a Trustee of USAA State Tax-Free Trust and
as a Director of USAA Mutual Fund, Inc. and USAA Tax Exempt Fund, Inc.
Richard A. Zucker 3, 4, 5
407 Arch Bluff
San Antonio, TX 78216
Trustee
Age: 54
Vice President, Beldon Roofing and Remodeling (1985-present). Mr. Zucker serves
as a Trustee of USAA State Tax-Free Trust and as a Director of USAA Mutual Fund,
Inc. and USAA Tax Exempt Fund, Inc.
Michael D. Wagner 1
Secretary
Age: 49
Vice President, Corporate Counsel, USAA (1982-present). Mr. Wagner has held
various positions in the legal department of USAA since 1970 and serves as Vice
President, Secretary and Counsel, IMCO and USAA Shareholder Account Services;
Secretary, USAA State Tax-Free Trust, USAA Mutual Fund, Inc., and USAA Tax
Exempt Fund, Inc.; and as Vice President, Corporate Counsel, for various other
USAA subsidiaries and affiliates.
16
<PAGE>
Alex M. Ciccone 1
Assistant Secretary
Age: 47
Vice President, Compliance, IMCO (12/94-present); Vice President and Chief
Operating Officer, Commonwealth Shareholder Services (6/94-11/94); and Vice
President, Compliance, IMCO (12/91-5/94). Mr. Ciccone serves as Assistant
Secretary of USAA State Tax-Free Trust, USAA Mutual Fund, Inc. and USAA Tax
Exempt Fund, Inc.
Mark S. Howard 1
Assistant Secretary
Age: 33
Executive Director, Securities Counsel, USAA (9/96-present); Senior Associate
Counsel, Securities Counsel, USAA (5/95 to 8/96); Attorney, Kirkpatrick &
Lockhart LLP (9/90-4/95). Mr. Howard serves as Assistant Secretary of USAA State
Tax-Free Trust, USAA Mutual Fund, Inc., and USAA Tax Exempt Fund, Inc., and as
Executive Director, Securities Counsel for various other USAA subsidiaries and
affiliates.
Sherron A. Kirk 1
Treasurer
Age: 52
Vice President, Controller, IMCO (10/92-present); Vice President, Corporate
Financial Analysis, USAA (9/92- 10/92); Assistant Vice President, Financial
Plans and Support, USAA (8/91-9/92). Mrs. Kirk serves as Treasurer of USAA State
Tax-Free Trust, USAA Mutual Fund, Inc., and USAA Tax Exempt Fund, Inc., and as
Vice President, Controller of USAA Shareholder Account Services.
Dean R. Pantzar 1
Assistant Treasurer
Age: 38
Executive Director, Mutual Fund Accounting, IMCO (10/95-present); Director,
Mutual Fund Accounting, IMCO (12/94-10/95); Senior Manager, KPMG Peat Marwick
LLP (7/88-12/94). Mr. Pantzar serves as Assistant Treasurer of USAA Mutual Fund,
Inc., USAA State Tax-Free Trust, and USAA Tax Exempt Fund, Inc.
- -------------
1 Indicates those Trustees 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 Trustees and while the Board is not
in session, the Executive Committee of the Board of Trustees has all the powers
and may exercise all the duties of the Board of Trustees in the management of
the business of the Trust which may be delegated to it by the Board. The Pricing
and Investment Committee of the Board of Trustees 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 Trustees reviews the financial
statements and the auditor's reports and undertakes certain studies and analyses
as directed by the Board. The Corporate Governance Committee of the Board of
Trustees maintains oversight of the organization, performance, and effectiveness
of the Board and independent Trustees.
In addition to the previously listed Trustees and/or officers of the Trust
who also serve as Directors and/or officers of the Manager, the following
individuals are Directors and/or executive officers of the Manager: Harry W.
Miller, Senior Vice President, Investments (Equity); Carl W. Shirley, Senior
Vice President, Insurance Company Portfolios; and John J. Dallahan, Senior Vice
President, Investment Services. There are no family relationships among the
Trustees, officers and managerial level employees of the Trust or its Manager.
17
<PAGE>
The following table sets forth information describing the compensation of
the current Trustees of the Trust for their services as Trustees for the fiscal
year ended May 31, 1997.
Name Aggregate Total Compensation
of Compensation from the USAA
Trustee from the Trust Family of Funds (b)
- -------- --------------- -------------------
George E. Brown* $ 5,484 $19,600
Robert G. Davis None (a) None (a)
Barbara B. Dreeben $10,275 $36,600
Howard L. Freeman, Jr. $10,275 $36,600
Robert L. Mason $ 4,791 $17,000
Michael J.C. Roth None (a) None (a)
John W. Saunders, Jr. None (a) None (a)
Richard A. Zucker $10,275 $36,600
- ----------------
* Effective December 31, 1996, George E. Brown retired as a Trustee from the
Board of Trustees.
(a) Robert G. Davis, Michael J.C. Roth, and John W. Saunders, Jr. are
affiliated with the Trust's investment adviser, IMCO, and, accordingly,
receive no remuneration from the Trust or any other Fund of the USAA
Family of Funds.
(b) At May 31, 1997, the USAA Family of Funds consisted of four registered
investment companies offering 33 individual funds. Each Trustee presently
serves as a Trustee or Director of each investment company in the USAA
Family of Funds. In addition, Michael J.C. Roth presently serves as a
Trustee of USAA Life Investment Trust, a registered investment company
advised by IMCO, consisting of seven funds offered to investors in a fixed
and variable annuity contract with USAA Life Insurance Company. Mr. Roth
receives no compensation as Trustee of USAA Life Investment Trust.
All of the above Trustees are also Trustees/Directors of the other funds
for which IMCO serves as investment adviser. No compensation is paid by any fund
to any Trustee/Director 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 Trust also reimburses certain expenses of the Trustees who are not
affiliated with the investment adviser. As of August 31, 1997, the officers and
Trustees of the Trust and their families as a group owned beneficially or of
record less than 1% of the outstanding shares of the Trust.
As of August 31, 1997, USAA and its affiliates owned 502,387 shares
(32.2%) of the Income Strategy Fund, 143,603 shares (4.8%) of the Balanced
Strategy Fund, 12,337,246 shares (64.1%) of the Emerging Markets Fund, 5,480,218
shares (18.1%) of the of the International Fund, 399,593 shares (1.2%) of the
GNMA Trust and no shares of the Growth and Tax Strategy Fund, Cornerstone
Strategy Fund, Growth Strategy Fund, Gold Fund, World Growth Fund, and Treasury
Money Market Trust.
The Trust knows of no other persons who, as of August 31, 1997, held of
record or owned beneficially 5% or more of the voting stock of any Fund's
shares.
THE TRUST'S MANAGER
As described in each Fund's Prospectus, USAA Investment Management Company is
the Manager and investment adviser, providing the services under the Advisory
Agreement. The Manager, organized in May 1970, has served as investment adviser
and underwriter for USAA Investment Trust from its inception.
In addition to managing the Trust's assets, the Manager advises and
manages the investments for USAA and its affiliated companies as well as those
of USAA Mutual Fund, Inc., USAA Tax Exempt Fund, Inc., USAA State Tax-Free
Trust, and USAA Life Investment Trust. As of the date of this SAI, total assets
under management by the Manager were approximately $36 billion, of which
approximately $21 billion were in mutual fund portfolios.
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 Trustees
of the Trust, 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 Trust. The
Manager compensates all personnel, officers, and Trustees of the Trust if such
persons are also employees of the Manager or its affiliates. For these services
under the Advisory Agreement, each Fund has agreed to pay the Manager a fee
computed as described under Management of the Trust in its Prospectus (Fund
Management in the Growth and Tax Strategy Fund Prospectus). Management fees are
computed and accrued daily and are payable monthly.
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<PAGE>
Except for the services and facilities provided by the Manager, the Funds
pay all other expenses incurred in their operations. Expenses for which the
Funds are responsible include taxes (if any), brokerage commissions on portfolio
transactions, 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 Trustees who are not interested (not affiliated)
persons of the Manager, costs of typesetting, printing and mailing the
Prospectus, SAI and periodic reports to existing shareholders, and any other
charges or fees not specifically enumerated. The Manager pays the cost of
printing and mailing copies of the Prospectus, the SAI and reports to
prospective shareholders.
The Advisory Agreement will remain in effect until June 30, 1998, for each
Fund and will continue in effect from year to year thereafter for each 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 Trustees
(on behalf of such Fund) including a majority of the Trustees who are not
interested persons of the Manager or (otherwise than as Trustees) of the Trust,
at a meeting called for the purpose of voting on such approval. The Advisory
Agreement may be terminated at any time by either the Trust or the Manager on 60
days' written notice. It will automatically terminate in the event of its
assignment (as defined by 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 Treasury Money Market Trust to .375% and the Income Strategy and
Balanced Strategy Funds to 1.00% and 1.25%, respectively, of its ANA until
October 1, 1998, and will reimburse the Funds for all expenses in excess of such
limitation. After October 1, 1998, any such waiver or reimbursement may be
terminated by the Manager at any time without prior notice to the shareholders.
For the last three fiscal years, management fees were as follows:
FUND 1995 1996 1997
---------- ------------- ------------
Income Strategy - $ 34,662** $ 65,023
Growth and Tax Strategy 646,528 $ 728,915 $ 852,055
Balanced Strategy - $ 66,393** $ 190,093
Cornerstone Strategy 6,268,976 $ 7,072,915 $ 8,496,435
Growth Strategy - $ 219,751** $ 990,525
Emerging Markets 80,503* $ 308,963 $ 600,181
Gold 1,224,603 $ 1,170,207 $ 996,721
International 2,171,329 $ 2,730,374 $ 3,805,999
World Growth 1,310,951 $ 1,708,489 $ 1,994,809
GNMA Trust 318,921 $ 361,221 $ 381,390
Treasury Money Market Trust 59,980 $ 94,427 $ 105,420
As a result of the Funds' actual expenses exceeding an expense limitation, the
Manager did not receive fees to which it would have been entitled as follows:
FUND 1995 1996 1997
---------- ------------ ---------
Income Strategy - $ 34,662** $ 66,382
Balanced Strategy - $ 66,393** $ 37,577
Emerging Markets $ 8,091* - -
Treasury Money Market Trust $ 54,428 $ 21,001 $ 15,808
- -------------
* For the seven-month period ended May 31, 1995.
** For the nine-month period ended May 31, 1996.
UNDERWRITER
The Trust has an agreement with the Manager for exclusive underwriting and
distribution of the Funds' 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 Trust under a
Transfer Agency Agreement. Services include maintenance of shareholder account
records, handling of communications with shareholders, distribution of Fund
dividends, and production of reports with respect to account activity for
shareholders and the Trust. For its services under the Transfer Agency
Agreement, each Fund pays the Transfer Agent an annual fixed fee ranging from
$23.50 to $26.00 per account. This fee is subject to change at any time.
19
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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, the Funds pay all out-of-pocket expenses of the
Transfer Agent and other expenses which are incurred at the specific direction
of the Trust.
GENERAL INFORMATION
CUSTODIAN
State Street Bank and Trust Company, P.O. Box 1713, Boston, MA 02105, is the
Trust's Custodian. The Custodian is responsible for, among other things,
safeguarding and controlling the Trust's cash and securities, handling the
receipt and delivery of securities, and collecting interest on the Trust's
investments. In addition, assets of the Income Strategy, Balanced Strategy,
Cornerstone Strategy, Growth Strategy, Emerging Markets, Gold, International,
and World Growth Funds may be held by certain foreign banks and foreign
securities depositories as agents of the Custodian in accordance with the rules
and regulations established by the SEC.
COUNSEL
Goodwin, Procter & Hoar LLP, Exchange Place, Boston, MA 02109, will review
certain legal matters for the Trust in connection with the shares offered by the
Prospectus.
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP, 112 East Pecan, Suite 2400, San Antonio, TX 78205, is the
Trust's independent auditor. In this capacity, the firm is responsible for
auditing the annual financial statements of the Funds and reporting thereon.
FINANCIAL STATEMENTS
The financial statements for each of the Funds of USAA Investment Trust and the
Independent Auditors' Reports thereon for the fiscal year ended May 31, 1997,
are included in the Annual Reports to Shareholders of that date and are
incorporated herein by reference. The Manager will deliver a copy of the Fund's
Annual Report free of charge with each SAI requested.
CALCULATION OF PERFORMANCE DATA
Information regarding the total return and yield of each Fund is provided under
PERFORMANCE INFORMATION in its Prospectus. See VALUATION OF SECURITIES herein
for a discussion of the manner in which each Fund's price per share is
calculated.
YIELD - TREASURY MONEY MARKET TRUST
When the Treasury Money Market Trust 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, in the value of a
hypothetical preexisting account having a balance of one share at the beginning
of the period, (2) dividing the net change in account value by the value of the
account at the beginning of the base period to obtain the base return, then (3)
multiplying the base period return by 52.14 (365/7). The resulting yield figure
is carried to the nearest hundredth of one percent.
The calculation includes (1) the value of additional shares purchased with
dividends on the original share, and dividends declared on both the original
share and any such additional shares, and (2) any fees charged to all
shareholder accounts, in proportion to the length of the base period and the
Trust's average account size.
The capital changes excluded from the calculation are realized capital
gains and losses from the sale of securities and unrealized appreciation and
depreciation. The Trust'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 5/31/97 . . . . . 5.10%
Effective Yield For 7-day Period ended 5/31/97 . . . . . 5.23%
20
<PAGE>
YIELD - INCOME STRATEGY FUND, GROWTH AND TAX STRATEGY FUND AND GNMA TRUST
These Funds may advertise performance in terms of 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 left [ left ({a-b} over cd + 1 right)^6 - 1 right]
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 May 31, 1997, for the Income Strategy
Fund, Growth and Tax Strategy Fund and GNMA Trust were 5.00%, 3.66% and 6.89%,
respectively.
TAX EQUIVALENT YIELD
A tax-exempt mutual fund may provide more "take-home" income than a fully
taxable mutual fund after paying taxes. Calculating a "tax equivalent yield"
means converting a tax-exempt yield to a pretax equivalent so that a meaningful
comparison can be made between a tax-exempt municipal fund and a fully taxable
fund. Because the Growth and Tax Strategy Fund invests a significant percentage
of its assets in tax-exempt securities, it may advertise performance in terms of
a 30-day tax equivalent yield.
To calculate a tax equivalent yield, an investor must know his federal
marginal income tax rate. The tax equivalent yield for the Growth and Tax
Strategy Fund is then computed by dividing that portion of the yield which is
tax-exempt by the complement of the federal marginal tax rate and adding the
product to that portion of the yield which is taxable. The complement, for
example, of a federal marginal tax rate of 36.0% is 64.0%, that is
(1.00-0.36=0.64).
Tax Equivalent Yield =
(% Tax Exempt Income x 30-day Yield/ (1-Federal Marginal Tax Rate))
+ (% Taxable Income x 30-day Yield)
Based on a federal marginal tax rate of 36.0%, the tax equivalent yield
for the Growth and Tax Strategy Fund for the period ended May 31, 1997, was
5.06%.
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 any of such 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 such Fund are reinvested at the
price stated in the Prospectus on the reinvestment dates during the period, and
includes all recurring fees that are charged to all shareholder accounts.
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<PAGE>
Average Annual Total Returns
For Periods Ended 5/31/97
1 5 10 From
Fund year years years Inception*
------ ----- ----- ----- ----------
Income Strategy 13.59% - - 9.47%
Growth and Tax Strategy 14.21% 10.89% - 10.29%
Balanced Strategy 19.26% - - 14.45%
Cornerstone Strategy 16.94% 13.38% 8.88% -
Growth Strategy 7.73% - - 19.82%
Emerging Markets 8.69% - - 8.72%
Gold (27.25%) 5.70% (4.95%) -
International 16.72% 13.94% - 11.25%
World Growth 16.52% - - 14.68%
GNMA Trust 9.23% 6.87% - 7.55%
* Data from inception is shown for Funds that are less than ten years old.
Income Strategy, Balanced Strategy, and Growth Strategy Funds commenced
operations on September 1, 1995. Growth and Tax Strategy Fund commenced
operations on January 11, 1989. Emerging Markets Fund commenced operations
on November 7, 1994. International Fund commenced operations on July 11,
1988. World Growth Fund commenced operations on October 1, 1992. GNMA Trust
commenced operations on February 1, 1991.
APPENDIX A - LONG-TERM AND SHORT TERM DEBT RATINGS
1. LONG-TERM DEBT RATINGS
MOODY'S:
Aaa Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred
to as "gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong
position of such issues.
Aa Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high-grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities
or fluctuation of protective elements may be of greater amplitude or
there may be other elements present which make the long-term risks
appear somewhat larger than in Aaa securities.
A Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper-medium-grade obligations. Factors
giving security to principal and interest are considered adequate, but
elements may be present which suggest a susceptibility to impairment
sometime in the future.
Baa Bonds which are rated Baa are considered as medium-grade obligation
(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 characteristically unreliable over
any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
NOTE: THOSE BONDS IN THE AA, A, AND BAA GROUPS WHICH MOODY'S BELIEVES POSSESS
THE STRONGEST INVESTMENT ATTRIBUTES ARE DESIGNATED BY THE SYMBOLS AA1, A1, AND
BAA1.
A description of ratings Ba and below assigned to debt obligations by Moody's is
included in Appendix A of the Emerging Markets Fund Prospectus.
S&P:
AAA Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small
degree.
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<PAGE>
A Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher
rated categories.
BBB Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than in higher
rated categories.
PLUS (+) OR MINUS (-): THE RATINGS FROM AA TO BBB MAY BE MODIFIED BY THE
ADDITION OF A PLUS OR MINUS SIGN TO SHOW RELATIVE STANDING WITHIN THE MAJOR
RATING CATEGORIES.
A description of ratings BB and below assigned to debt obligations by S&P is
included in Appendix A of the Emerging Markets Fund Prospectus.
FITCH:
AAA Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by
reasonably foreseeable events.
AA Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is
very strong, although not quite as strong as bonds rated AAA. Because
bonds rated in the AAA and AA categories are not significantly
vulnerable to foreseeable future developments, short-term debt of these
issuers is generally rated F-1+.
A Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to
be strong, but may be more vulnerable to adverse changes in economic
conditions and circumstances than bonds with higher ratings.
BBB Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have adverse impact on these
bonds, and therefore, impair timely payment. The likelihood that the
ratings of these bonds will fall below investment grade is higher than
for bonds with higher ratings.
PLUS (+) AND MINUS (-): PLUS AND MINUS SIGNS ARE USED WITH A RATING SYMBOL TO
INDICATE THE RELATIVE POSITION OF A CREDIT WITHIN THE RATING CATEGORY. PLUS AND
MINUS SIGNS, HOWEVER, ARE NOT USED IN THE AAA CATEGORY.
DUFF & PHELPS:
AAA Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA+ High credit quality. Protection factors are strong. Risk is modest but
AA may vary slightly from time to time because of economic conditions.
AA-
A+ Protection factors are average but adequate. However, risk factors are
A more variable and greater in periods of economic stress.
A-
BBB+ Below-average protection factors but still considered sufficient for
BBB prudent investment. Considerable variability in risk during economic
BBB- cycles.
2. SHORT-TERM DEBT RATINGS
MOODY'S CORPORATE AND GOVERNMENT:
Prime-1 Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1
repayment ability will often be evidenced by many of the following
characteristics:
o Leading market positions in well-established industries.
o High rates of return on funds employed.
o Conservative capitalization structure with moderate reliance on
debt and ample asset protection.
o Broad margins in earnings coverage of fixed financial charges and
high internal cash generation.
o Well-established access to a range of financial markets and
assured sources of alternate liquidity.
23
<PAGE>
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, will be more subject to variation. Capitalization
characteristics, while still appropriate, may be more affected by
external conditions. Ample alternate liquidity is maintained.
MOODY'S MUNICIPAl:
MIG 1/VMIG 1 This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity support
or demonstrated broadbased access to the market for refinancing.
MIG 2/VMIG 2 This designation denotes high quality. Margins of protection are
ample although not so large as in the preceding group.
MIG 3/VMIG 3 This designation denotes favorable quality. All Security elements
are accounted for but there is lacking the undeniable strength of
the preceding grades. Liquidity and cash flow protection may be
narrow and market access for refinancing is likely to be less
well established.
MIG 4/VMIG 4 This designation denotes adequate quality. Protection commonly
regarded as required of an investment security is present and
although not distinctly or predominantly speculative, there is
specific risk.
S&P CORPORATE AND GOVERNMENT:
A-1 This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely
strong safety characteristics are denoted with a plus (+) sign
designation.
A-2 Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as
for issues designated A-1.
S&P MUNICIPAL:
SP-1 Strong capacity to pay principal and interest. Issues determined to
possess very strong characteristics are given a plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest, with some
vulnerability to adverse financial and economic changes over the term
of the notes.
FITCH:
F-1+ Exceptionally strong credit quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely
payment.
F-1 Very strong credit quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues
rated F-1+.
F-2 Good credit quality. Issues assigned this rating have a satisfactory
degree of assurance for timely payment, but the margin of safety is not
as great as for issuers assigned F-1+ and F-1 ratings.
F-3 Fair credit quality. Issues assigned this rating have characteristics
suggesting that the degree of assurance for timely payment is adequate,
however, near-term adverse changes could cause these securities to be
rated below investment grade.
DUFF & PHELPS:
D-1+ Highest certainty of timely payment. Short-term liquidity, including
internal operating factors and/or access to alternative sources of
funds, is outstanding, and safety is just below risk-free U.S. Treasury
short-term obligations.
D-1 Very high certainty of timely payment. Liquidity factors are excellent
and supported by good fundamental protection factors. Risk factors are
minor.
D-1- High certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection factors. Risk factors are very
small.
D-2 Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge
total financing requirements, access to capital markets is good.
Risk factors are small.
D-3 Satisfactory liquidity and other protection factors qualify issues as
to investment grade. Risk factors are larger and subject to more
variation. Nevertheless, timely payment is expected.
24
<PAGE>
APPENDIX B - COMPARISON OF PORTFOLIO PERFORMANCE
Occasionally, we may make comparisons in advertising and sales literature
between the Funds contained in this SAI and other Funds in the USAA Family of
Funds. These comparisons may include such topics as risk and reward, investment
objectives, investment strategies, and performance.
Fund performance may be compared to the performance of broad groups of
mutual funds with similar investment goals or unmanaged indexes of comparable
securities. Evaluations of Fund performance made by independent sources may also
be used in advertisements concerning the Fund, including reprints of, or
selections from, editorials or articles about the Fund. The Fund or its
performance may also be compared to products and services not constituting
securities subject to registration under the Securities Act of 1933 such as, but
not limited to, certificates of deposit and money market accounts. Sources for
performance information and articles about the Fund may include but are not
restricted to the following:
AAII JOURNAL, a monthly association magazine for members of the American
Association of Individual Investors.
ARIZONA REPUBLIC, a newspaper which may cover financial and investment news.
AUSTIN AMERICAN-STATESMAN, a newspaper which may cover financial news.
BARRON'S, a Dow Jones and Company, Inc. business and financial weekly that
periodically reviews mutual fund performance data.
BUSINESS WEEK, a national business weekly that periodically reports the
performance rankings and ratings of a variety of mutual funds.
CHICAGO TRIBUNE, a newspaper which may cover financial news.
CONSUMER REPORTS, a monthly magazine which from time to time reports on
companies in the mutual fund industry.
DALLAS MORNING NEWS, a newspaper which may cover financial news.
DENVER POST, a newspaper which may quote financial news.
FINANCIAL SERVICES WEEK, a weekly newspaper which covers financial news.
FINANCIAL PLANNING, a monthly magazine that periodically features companies in
the mutual fund industry.
FINANCIAL WORLD, a monthly magazine which may periodically review mutual fund
companies.
FORBES, a national business publication that periodically reports the
performance of companies in the mutual fund industry.
FORTUNE, a national business publication that periodically rates the performance
of a variety of mutual funds.
FUND ACTION, a mutual fund news report.
HOUSTON CHRONICLE, a newspaper which may cover financial news.
HOUSTON POST, a newspaper which may cover financial news.
IBC/DONOGHUE'S MONEYLETTER, a biweekly newsletter which covers financial news
and from time to time rates specific mutual funds.
INCOME AND SAFETY, a monthly newsletter that rates mutual funds.
INVESTECH, a bimonthly investment newsletter.
INVESTMENT ADVISOR, a monthly publication directed primarily to the advisor
community; includes ranking of mutual funds using a proprietary methodology.
INVESTMENT COMPANY INSTITUTE, the national association of the American
investment company industry.
INVESTOR'S BUSINESS DAILY, a newspaper which covers financial news.
KIPLINGER'S PERSONAL FINANCE MAGAZINE, a monthly investment advisory publication
that periodically features the performance of a variety of securities.
LIPPER ANALYTICAL SERVICES, INC.'S FIXED INCOME FUND PERFORMANCE ANALYSIS, a
monthly publication of industry-wide mutual fund performance averages by type of
fund.
LIPPER ANALYTICAL SERVICES, INC.'S MUTUAL FUND PERFORMANCE ANALYSIS, a weekly
and quarterly publication of industry-wide mutual fund performance averages by
type of fund.
LOS ANGELES TIMES, a newspaper which may cover financial news.
LOUIS RUKEYSER'S WALL STREET, a publication for investors.
MEDICAL ECONOMICS, a monthly magazine providing information to the medical
profession.
25
<PAGE>
MONEY, a monthly magazine that features the performance of both specific funds
and the mutual fund industry as a whole.
MORNINGSTAR 5 STAR INVESTOR, a monthly newsletter which covers financial news
and rates mutual funds produced by Morningstar, Inc. (a data service which
tracks open-end mutual funds).
MUTUAL FUND FORECASTER, a monthly newsletter that ranks mutual funds.
MUTUAL FUND INVESTING, a newsletter covering mutual funds.
MUTUAL FUND PERFORMANCE REPORT, a monthly publication of mutual fund performance
and rankings, produced by Morningstar, Inc.
MUTUAL FUNDS MAGAZINE, a monthly publication reporting on mutual fund investing.
MUTUAL FUND SOURCE BOOK, an annual publication produced by Morningstar, Inc.
which describes and rates mutual funds.
MUTUAL FUND VALUES, a biweekly guidebook to mutual funds, produced by
Morningstar, Inc.
NEWSWEEK, a national business weekly.
NEW YORK TIMES, a newspaper which may cover financial news.
NO LOAD FUND INVESTOR, a newsletter covering companies in the mutual fund
industry.
ORLANDO SENTINEL, a newspaper which may cover financial news.
PERSONAL INVESTOR, a monthly magazine which from time to time features mutual
fund companies and the mutual fund industry.
SAN ANTONIO BUSINESS JOURNAL, a weekly newspaper that periodically covers mutual
fund companies as well as financial news.
SAN ANTONIO EXPRESS-NEWS, a newspaper which may cover financial news.
SAN FRANCISCO CHRONICLE, a newspaper which may cover financial news.
SMART MONEY, a monthly magazine featuring news and articles on investing and
mutual funds.
USA TODAY, a newspaper which may cover financial news.
U.S. NEWS AND WORLD REPORT, a national business weekly that periodically reports
on mutual fund performance data.
WALL STREET JOURNAL, a Dow Jones and Company, Inc. newspaper which covers
financial news.
WASHINGTON POST, a newspaper which may cover financial news.
WEISENBERGER MUTUAL FUNDS INVESTMENT REPORT, a monthly newsletter that reports
on both specific mutual fund companies and the mutual fund industry as a whole.
WORLD MONITOR, The Christian Science Monitor Monthly.
WORTH, a magazine which covers financial and investment subjects including
mutual funds.
YOUR MONEY, a monthly magazine directed toward the novice investor.
In addition, the Cornerstone Strategy, Growth Strategy, Emerging Markets,
Gold, International, and World Growth Funds may be cited for performance
information and articles in International Reports, a publication providing
insights on world financial markets and economics.
The GNMA and Treasury Money Market Trusts may be cited in:
THE BOND BUYER, a daily newspaper which covers bond market news.
IBC/DONOGHUE'S MONEY FUND REPORT, a weekly publication of the Donoghue
Organization, Inc., reporting on the performance of the nation's money market
funds, summarizing money market fund activity, and including certain averages as
performance benchmarks, specifically "Donoghue's Taxable 100% U.S. Treasury
Money Fund Average."
IBC'S MONEY MARKET INSIGHT, a monthly money market industry analysis prepared by
IBC USA, Inc.
In addition to the sources above, performance of our Funds may also be
tracked by Lipper Analytical Services, Inc. and Morningstar, Inc. A Fund will be
compared to Lipper's or Morningstar's appropriate fund category according to its
objective and portfolio holdings. Footnotes in advertisements and other sales
literature will include the time period applicable for any rankings used.
26
<PAGE>
For comparative purposes, unmanaged indexes of comparable securities or
economic data may be cited. Examples include the following:
- Bond Buyer Indices, indices of debt of varying maturities including revenue
bonds, general obligation bonds, and U.S. Treasury bonds which can be found in
THE BOND BUYER.
- Consumer Price Index, a measure of U.S. inflation in prices on consumer
goods.
- Financial Times Gold Mines Index, an index that includes gold mining
companies if they: a) have sustainable, attributable gold production of at least
300,000 ounces a year; b) draw at least 75% of revenue from mined gold sales;
and c) have at least 10% of their capital available to the investing public.
- Ibbotson Associates, Inc., Stocks, Bonds, Bills, and Inflation Yearbook.
- IFC Investable Index (IFCI) and IFC Global Index (IFCG), premier benchmarks
for international investors. Both index series cover 25 discrete markets,
regional indexes, and a composite index, providing the most accurate
representation of the emerging markets universe available.
- Lehman Brothers Inc. GNMA 30 Year Index.
- Lehman Brothers Municipal Bond Index, a total return performance benchmark
for the long-term investment grade tax-exempt bond market.
- London Gold, a traditional index that prices London gold.
- London Gold PM Fix Price, the evening gold prices as set by London dealers.
- Morgan Stanley Capital Index (MSCI) - EAFE, an unmanaged index which reflects
the movements of stock markets in Europe, Australia, and the Far East by
representing a broad selection of domestically listed companies within each
market.
- Morgan Stanley Capital Index (MSCI) - World, an unmanaged index which
reflects the movements of world stock markets by representing a broad selection
of domestically listed companies within each market.
- NAREIT Equity Index (National Association of Real Estate Investment Trusts,
Inc.), a broad based listing of all tax-qualified REITs (only common shares
issued by the REIT) listed on the NYSE, American Stock Exchange and NASDAQ.
- Philadelphia Gold/Silver Index (XAU), an index representing nine holdings in
the gold and silver sector.
- S&P 500 Index, a broadbased composite unmanaged index that represents the
average performance of a group of 500 widely held, publicly traded stocks.
- Shearson Lehman Hutton Bond Indices - indices of fixed-rate debt issues rated
investment grade or higher which can be found in the BOND MARKET REPORT.
Other sources for total return and other performance data which may be
used by a Fund or by those publications listed previously are Schabaker
Investment Management, and Investment Company Data, Inc. These are services that
collect and compile data on mutual fund companies.
27
<PAGE>
APPENDIX C - DOLLAR-COST AVERAGING
Dollar-cost averaging is a systematic investing method which can be used by
investors as a disciplined technique for investing. A fixed amount of money is
invested in a security (such as a stock or mutual fund) on a regular basis over
a period of time, regardless of whether securities markets are moving up or
down.
This practice reduces average share costs to the investor who acquires
more shares in periods of lower securities prices and fewer shares in periods of
higher prices.
While dollar-cost averaging does not assure a profit or protect against
loss in declining markets, this investment strategy is an effective way to help
calm the effect of fluctuations in the financial markets. Systematic investing
involves continuous investment in securities regardless of fluctuating price
levels of such securities. Investors should consider their financial ability to
continue purchases through periods of low and high price levels.
As the following chart illustrates, dollar-cost averaging tends to keep
the overall cost of shares lower. This example is for illustration only, and
different trends would result in different average costs.
HOW DOLLAR-COST AVERAGING WORKS
$100 Invested Regularly for 5 Periods
Market Trend
------------------------------------------------------------
Down Up Mixed
---------------- ------------------ -------------------
Share Shares Share Shares Share Shares
Investment Price Purchased Price Purchased Price Purchased
---------------- ------------------ -------------------
$100 10 10 6 16.67 10 10
100 9 11.1 7 14.29 9 11.1
100 8 12.5 7 14.29 8 12.5
100 8 12.5 9 11.1 9 11.1
100 6 16.67 10 10 10 10
---- -- ----- -- ----- --- ----
$500 ***41 62.77 ***39 66.35 ***46 54.7
*Avg. Cost: $7.97 *Avg. Cost: $7.54 *Avg. Cost: $9.14
----- ----- -----
**Avg. Price: $8.20 **Avg. Price:$7.80 **Avg. Price $9.20
----- ----- -----
* Average Cost is the total amount invested divided by number of
shares purchased.
** Average Price is the sum of the prices paid divided by number of
purchases.
*** Cumulative total of share prices used to compute average prices.
06088-1097
<PAGE>
<PAGE>
USAA INVESTMENT TRUST
PART C. OTHER INFORMATION
-----------------
Item 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements:
Financial Statements included in Parts A and B (Prospectus and
Statement of Additional Information) of this Registration
Statement:
Financial Statements and Independent Auditors' Reports are
incorporated by reference to the USAA Income Strategy, Growth
and Tax Strategy, Balanced Strategy, Cornerstone Strategy,
Growth Strategy, Emerging Markets, Gold, International, and
World Growth Funds' and GNMA and Treasury Money Market
Trusts' Annual Reports to Shareholders for the fiscal year
ended May 31, 1997.
(b) Exhibits:
Exhibit No. Description of Exhibits
- ---------- -----------------------
1 (a) First Amended and Restated Master Trust Agreement, June 2,
1995 (1)
(b) Amendment No. 1 dated July 12, 1995 (2)
2 By-laws, as amended January 18, 1994 (1)
3 Voting trust agreement - Not Applicable
4 Specimen certificates for shares of
(a) Cornerstone Strategy Fund (2)
(b) Gold Fund (2)
(c) International Fund (2)
(d) Growth and Tax Strategy Fund (2)
(e) GNMA Trust (2)
(f) Treasury Money Market Trust (2)
(g) World Growth Fund (2)
(h) Emerging Markets Fund (2)
(i) Balanced Strategy Fund (2)
(j) Growth Strategy Fund (2)
(k) Income Strategy Fund (2)
5 (a) Advisory Agreement dated September 21, 1990 (1)
(b) Letter Agreement dated January 24, 1991 adding GNMA Trust
and Treasury Money Market Trust (1)
(c) Letter Agreement dated July 21, 1992 adding World Growth
Fund (1)
(d) Letter Agreement dated September 7, 1994 adding Emerging
Markets Fund (1)
(e) Letter Agreement dated September 1, 1995 adding Balanced
Strategy, Growth Strategy and Income Strategy Funds (2)
6 (a) Underwriting Agreement dated July 9, 1990 (2)
(b) Letter Agreement dated January 24, 1991 adding GNMA Trust
and Treasury Money Market Trust (2)
(c) Letter Agreement dated July 21, 1992 adding World Growth
Fund (2)
(d) Letter Agreement dated September 7, 1994 adding Emerging
Markets Fund (2)
(e) Letter Agreement dated September 1, 1995 adding Balanced
Strategy, Growth Strategy and Income Strategy Funds (2)
C-1
<PAGE>
Exhibit No. Description of Exhibits
- ---------- -----------------------
7 Not Applicable
8 (a) Custodian Agreement dated July 27, 1984 (2)
(b) Amendment to Custodian Contract dated May 13, 1985 (2)
(c) Amendment to Custodian Contract dated May 1, 1986 (2)
(d) Amendment to Amendment to Custodian Contract dated May 1, 1986
(2)
(e) Amendment to the Custodian Agreement dated November 3, 1988
(2)
(f) Letter Agreement dated May 26, 1988 adding International Fund
(2)
(g) Letter Agreement dated January 3, 1989 adding Growth and Tax
Strategy Fund (2)
(h) Letter Agreement dated January 24, 1991 adding GNMA Trust and
Treasury Money Market Trust (2)
(i) Letter Agreement dated July 21, 1992 adding World Growth Fund
(2)
(j) Letter Agreement dated September 7, 1994 adding Emerging
Markets Fund (2)
(k) Letter Agreement dated September 1, 1995 adding Balanced
Strategy, Growth Strategy and Income Strategy Funds (2)
(l) Subcustodian Agreement dated March 24, 1994 (4)
(m) Amendment to Custodian Contract dated May 13, 1996 (4)
9 (a) Transfer Agency Agreement dated January 23, 1992 (2)
(b) Letter Agreement dated July 21, 1992 adding World Growth Fund
(2)
(c) Letter Agreement dated September 7, 1994 adding Emerging
Markets Fund (2)
(d) Amendments dated May 3, 1995 to the Transfer Agency Agreement
Fee Schedules for Gold Fund, Cornerstone Strategy Fund,
International Fund, Growth and Tax Strategy Fund, GNMA Trust,
Treasury Money Market Trust, World Growth Fund, and Emerging
Markets Fund (2)
(e) Letter Agreement dated September 1, 1995 adding Balanced
Strategy, Growth Strategy and Income Strategy Funds (2)
(f) Amendment No. 1 to Transfer Agency Agreement dated November
14, 1995 (3)
(g) Master Revolving Credit Facility Agreement with USAA Capital
Corporation dated January 14, 1997 (5)
(h) Master Revolving Credit Facility Agreement with NationsBank
of Texas dated January 15, 1997 (5)
10 (a) Opinion of Counsel with respect to the Balanced Strategy,
Growth Strategy and Income Strategy Funds (1)
(b) Opinion of Counsel with respect to the Growth and Tax Strategy
Fund, Cornerstone Strategy Fund, Emerging Markets Fund, Gold
Fund, International Fund, World Growth Fund, GNMA Trust, and
Treasury Money Market Trust (2)
(c) Consent of Counsel (filed herewith)
11 Consent of Independent Accountants (filed herewith)
12 Financial statements omitted from prospectus - Not Applicable
13 Subscriptions and Investment Letters
(a) GNMA Trust and Treasury Money Market Trust (2)
(b) World Growth Fund (2)
(c) Emerging Markets Fund (2)
(d) Growth Strategy Fund, Income Strategy Fund, and Balanced
Strategy Fund (2)
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<PAGE>
Exhibit No. Description of Exhibits
- ---------- -----------------------
14 Prototype Plans
(a) USAA INVESTMENT MANAGEMENT COMPANY IRA Custodial Agreement
(filed herewith)
(b) USAA INVESTMENT MANAGEMENT COMPANY SEP-IRA Custodial Agreement
(filed herewith)
(c) USAA INVESTMENT MANAGEMENT COMPANY 403(b)(7) Custodial
Agreement (filed herewith)
(d) USAA INVESTMENT MANAGEMENT COMPANY Simple IRA Custodial
Agreement (filed herewith)
15 12b-1 Plans - Not Applicable
16 Schedule for Computation of Performance Quotation (2)
17 Financial Data Schedules
(a) Cornerstone Strategy Fund (filed herewith)
(b) Gold Fund (filed herewith)
(c) International Fund (filed herewith)
(d) Growth and Tax Strategy Fund (filed herewith)
(e) GNMA Trust (filed herewith)
(f) Treasury Money Market Trust (filed herewith)
(g) World Growth Fund (filed herewith)
(h) Emerging Markets Fund (filed herewith)
(i) Income Strategy Fund (filed herewith)
(j) Balanced Strategy Fund (filed herewith)
(k) Growth Strategy Fund (filed herewith)
18 Plan Adopting Multiple Classes of Shares - Not Applicable
19 Powers of Attorney
(a) Powers of Attorney for Michael J.C. Roth, Sherron A. Kirk,
John W. Saunders, Jr., George E. Brown, Howard L. Freeman,
Jr., and Richard A. Zucker dated January 21, 1994 (2)
(b) Power of Attorney for Barbara B. Dreeben (1)
(c) Power of Attorney for Robert G. Davis dated July 9, 1997 (5)
(d) Power of Attorney for Robert L. Mason dated July 9, 1997 (5)
- ---------------------
(1) Previously filed with Post-Effective Amendment No. 20 of the Registrant
(No. 2-91069) filed with the Securities and Exchange Commission on
June 15, 1995.
(2) Previously filed with Post-Effective Amendment No. 21 of the Registrant
(No. 2-91069) filed with the Securities and Exchange Commission on
September 26, 1995.
(3) Previously filed with Post-Effective Amendment No. 22 of the Registrant
(No. 2-91069) filed with the Securities and Exchange Commission on
January 26, 1996.
(4) Previously filed with Post-Effective Amendment No. 23 of the Registrant
(No. 2-91069) filed with the Securities and Exchange Commission on
August 1, 1996.
(5) Previously filed with Post-Effective Amendment No. 24 of the Registrant
(No. 2-91069) filed with the Securities and Exchange Commission on
July 31, 1997.
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<PAGE>
Item 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Information pertaining to persons controlled by or under common
control with Registrant is hereby incorporated by reference to the
section captioned "Management of the Trust" in the Prospectus and
the section captioned "Trustees and Officers of the Trust" in the
Statement of Additional Information.
Item 26. NUMBER OF HOLDERS OF SECURITIES
Set forth below are the number of record holders, as of August 31,
1997, of each class of securities of the Registrant.
Title of Class Number of Record Holders
-------------- ------------------------
Growth and Tax Strategy Fund 9,043
Cornerstone Strategy Fund 103,515
Emerging Markets Fund 11,022
Gold Fund 18,566
International Fund 39,385
World Growth Fund 29,768
GNMA Trust 12,362
Treasury Money Market Trust 3,286
Balanced Strategy Fund 3,185
Growth Strategy Fund 24,788
Income Strategy Fund 834
Item 27. INDEMNIFICATION
Protection for the liability of the adviser and underwriter and
for the officers and trustees of the Registrant is provided by two
methods:
(a) THE DIRECTOR AND OFFICER LIABILITY POLICY. This policy covers all
----------------------------------------- losses incurred by the
Registrant, its adviser and its underwriter from any claim made
against those entities or persons during the policy period by any
shareholder or former shareholder of any Fund by reason of any
alleged negligent act, error or omission committed in connection
with the administration of the investments of said Registrant or in
connection with the sale or redemption of shares issued by said
Registrant. The Trust will not pay for such insurance to the
extent that payment therefor is in violation of the Investment
Company Act of 1940 or the Securities Act of 1933.
(b) INDEMNIFICATION PROVISIONS UNDER AGREEMENT AND DECLARATION OF
TRUST.
------------------------------------------------------------------
Under Article VI of the Registrant's Agreement and Declaration of
Trust, each of its trustees and officers or any person serving at
the Registrant's request as a director, officer or trustee of
another entity in which the Registrant has any interest as a
shareholder, creditor or otherwise ("Covered Person") shall be
indemnified against all liabilities, including but not limited to
amounts paid in satisfaction of judgments, in compromise or as
fines and penalties, and expenses, including reasonable
accountants' and counsel fees, incurred by any Covered Person in
connection with the defense or disposition of any action, suit or
other proceeding, whether civil or criminal, before any court or
administrative or legislative body, in which such person may be or
may have been threatened, while in office or thereafter, by reason
of being or having been such an officer, director or trustee,
except with respect to any matter as to which it has been
determined that such Covered Person (i) did not act in good
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<PAGE>
faith in the reasonable belief that such Covered Person's action
was in or not opposed to the best interests of the Trust or (ii)
had acted with willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of such
Covered Person's office (either and both of the conduct described
in (i) and (ii) being referred to hereafter as "Disabling
Conduct"). A determination that the Covered Person is entitled to
indemnification may be made by (i) a final decision on the merits
by a court or other body before whom the proceeding was brought
that the person to be indemnified was not liable by reason of
Disabling Conduct, (ii) dismissal of a court action or an
administrative proceeding against a Covered Person for
insufficiency of evidence of Disabling Conduct, or (iii) a
reasonable determination, based upon a review of the facts, that
the indemnitee was not liable by reason of Disabling Conduct by
(a) a vote of a majority of a quorum of trustees who are neither
"interested persons" of the Registrant as defined in section
2(a)(19) of the 1940 Act nor parties to the proceeding, or (b) an
independent legal counsel in a written opinion.
Expenses, including accountants and counsel fees so incurred by
any such Covered Person (but excluding amounts paid in
satisfaction of judgments, in compromise or as fines or
penalties), may be paid from time to time by the Fund of the
Registrant in question in advance of the final disposition of any
such action, suit or proceeding, provided that the covered person
shall have undertaken to repay the amounts so paid to the Fund of
Registrant in question if it is ultimately determined that
indemnification of such expenses is not authorized under Article
VI of the Agreement and Declaration of Trust and (i) the Covered
Person shall have provided security for such undertaking, (ii) the
Registrant shall be insured against losses arising by reason of
any lawful advances, or (iii) a majority of a quorum of the
disinterested trustees who are not a party to the proceeding, or
an independent legal counsel in a written opinion, shall have
determined, based on a review of readily available facts (as
opposed to full trial-type inquiry), that there is reason to
believe that the Covered Person ultimately will be found entitled
to indemnification. As to any matter disposed of by a compromise
payment by any such Covered Person pursuant to a consent decree or
otherwise, no such indemnification either for said payment or for
any other expenses shall be provided unless such indemnification
shall be approved (a) by a majority of the disinterested trustees
of the Registrant who are not a party to the proceeding or (b) by
an independent legal counsel in a written opinion. Approval by the
trustees pursuant to clause (a) or by independent legal counsel
pursuant to clause (b) shall not prevent the recovery form any
Covered Person of any amount paid to such Covered Person in
accordance with any of such clauses as indemnification if such
Covered Person is subsequently adjudicated by a court of competent
jurisdiction not to have acted in good faith in the reasonable
belief that such Covered Person's action was in or not opposed to
the best interests of the Registrant or to have been liable to the
Registrant or its shareholders by reason of willful misfeasance,
bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of such Covered Person's office.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to trustees, officers and
controlling persons of the Registrant pursuant to the Registrant's
Agreement and Declaration of the Trust or otherwise, the
Registrant has been advised that, in the opinion of the Securities
and Exchange Commission, such
C-5
<PAGE>
indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment
by the Registrant of expenses incurred or paid by a trustee,
officer or controlling person of the Registrant in the successful
defense of any action, suit or proceeding) is asserted by such
trustee, officer or controlling person in connection with the
securities being registered, then the Registrant will, unless in
the opinion of its counsel the matter has been settled by a
controlling precedent, submit to a court of appropriate
jurisdiction the question of whether indemnification by it is
against public policy as expressed in the Act and will be governed
by the final adjudication of such issue.
Item 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
Information pertaining to business and other connections of the
Registrant's investment adviser is hereby incorporated by
reference to the section of the Prospectus captioned "Management
of the Trust" and to the section of the Statement of Additional
Information captioned "Trustees and Officers of the Trust."
Item 29. PRINCIPAL UNDERWRITERS
(a) USAA Investment Management Company (the "Adviser") acts as
principal underwriter and distributor of the Registrant's shares
on a best-efforts basis and receives no fee or commission for its
underwriting services. The Adviser, wholly-owned by United
Services Automobile Association, also serves as principal
underwriter for USAA Tax Exempt Fund, Inc., USAA Mutual Fund,
Inc., and USAA State Tax-Free Trust.
(b) Set forth below is information concerning each director and
executive officer of USAA Investment Management Company.
Name and Principal Position and Offices Position and Offices
Business Address with Underwriter with Registrant
- ----------------- ------------------- -------------------
Robert G. Davis Director and Chairman Trustee and
9800 Fredericksburg Rd. of the Board of Directors Chairman of the
San Antonio, TX 78288 Board of Trustees
Michael J.C. Roth Chief Executive Officer, President, Trustee
9800 Fredericksburg Rd. President, Director, and and Vice Chairman of
San Antonio, TX 78288 Vice Chairman of the the Board of Trustees
Board of Directors
John W. Saunders, Jr. Senior Vice President, Vice President and
9800 Fredericksburg Rd. Fixed Income Investments, Trustee
San Antonio, TX 78288 and Director
Harry W. Miller Senior Vice President None
9800 Fredericksburg Rd. Equity Investments,
San Antonio, TX 78288 and Director
John J. Dallahan Senior Vice President, None
9800 Fredericksburg Rd. Investment Services
San Antonio, TX 78288
C-6
<PAGE>
Carl W. Shirley Senior Vice President, None
9800 Fredericksburg Rd. Insurance Company Portfolios
San Antonio, TX 78288
Michael D. Wagner Vice President, Secretary Secretary
9800 Fredericksburg Rd. and Counsel
San Antonio, TX 78288
Sherron A. Kirk Vice President and Treasurer
9800 Fredericksburg Rd. Controller
San Antonio, TX 78288
Alex M. Ciccone Vice President, Assistant
9800 Fredericksburg Rd. Compliance Secretary
San Antonio, TX 78288
(c) Not Applicable.
Item 30. LOCATION OF ACCOUNTS AND RECORDS
The following entities prepare, maintain and preserve the records
required by Section 31(a) of the Investment Company Act of 1940
(the "1940 Act") for the Registrant. These services are provided
to the Registrant through written agreements between the parties
to the effect that such services will be provided to the
Registrant for such periods prescribed by the Rules and
Regulations of the Securities and Exchange Commission under the
1940 Act and such records are the property of the entity required
to maintain and preserve such records and will be surrendered
promptly on request.
USAA Investment Management Company
9800 Fredericksburg Road
San Antonio, Texas 78288
USAA Shareholder Account Services
10750 Robert F. McDermott Freeway
San Antonio, Texas 78288
State Street Bank and Trust Company
1776 Heritage Drive
North Quincy, Massachusetts 02171
Item 31. MANAGEMENT SERVICES
Not Applicable.
Item 32. UNDERTAKING
The Registrant hereby undertakes, if requested to do so by the
holders of at least 10% of the Registrant's outstanding shares, to
call a meeting of shareholders for the purpose of voting upon the
question of removal of a Trustee or Trustees and to assist in
communications with other shareholders as required by Section
16(c) of the Investment Company Act of 1940.
The Registrant hereby undertakes to provide each person to whom a
prospectus is delivered a copy of the Registrant's latest annual
report(s) to shareholders upon request and without charge.
C-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Registration Statement pursuant to
Rule 485(b) under the Securities Act of 1933 and has duly caused this amendment
to its Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of San Antonio and State of Texas on the
3rd day of September, 1997.
USAA INVESTMENT TRUST
/S/ MICHAEL J. C. ROTH
----------------------
Michael J.C. Roth
President
Pursuant to the requirements of the Securities Act of 1933, this amendment
to its Registration Statement has been signed below by the following persons in
the capacities and on the date indicated.
(Signature) (Title) (Date)
/S/ ROBERT G. DAVIS Chairman of the September 3, 1997
- ------------------------- Board of Trustees
Robert G. Davis
/S/ MICHAEL J. C. ROTH Vice Chairman of the Board September 3, 1997
- ------------------------- of Trustees and President
Michael J. C. Roth (Principal Executive Officer)
/S/ SHERRON A. KIRK Treasurer (Principal September 3, 1997
- ------------------------- Financial and
Sherron A. Kirk Accounting Officer)
/S/ JOHN W. SAUNDERS, JR. Trustee September 3, 1997
- -------------------------
John W. Saunders, Jr.
/S/ ROBERT L. MASON Trustee September 3, 1997
- -------------------------
Robert L. Mason
/S/ HOWARD L. FREEMAN, JR. Trustee September 3, 1997
- --------------------------
Howard L. Freeman, Jr.
/S/ RICHARD A. ZUCKER Trustee September 3, 1997
- --------------------------
Richard A. Zucker
/S/ BARBARA B. DREEBEN Trustee September 3, 1997
- --------------------------
Barbara B. Dreeben
C-8
<PAGE>
EXHIBIT INDEX
EXHIBIT ITEM PAGE NO. *
1 (a) First Amended and Restated Master Trust Agreement,
June 2, 1995 (1)
(b) Amendment No. 1 dated July 12, 1995 (2)
2 By-laws, as amended January 18, 1994 (1)
3 Voting trust agreement - Not Applicable
4 Specimen certificates for shares of
(a) Cornerstone Strategy Fund (2)
(b) Gold Fund (2)
(c) International Fund (2)
(d) Growth and Tax Strategy Fund (2)
(e) GNMA Trust (2)
(f) Treasury Money Market Trust (2)
(g) World Growth Fund (2)
(h) Emerging Markets Fund (2)
(i) Balanced Strategy Fund (2)
(j) Growth Strategy Fund (2)
(k) Income Strategy Fund (2)
5 (a) Advisory Agreement dated September 21, 1990 (1)
(b) Letter Agreement dated January 24, 1991 adding GNMA
Trust and Treasury Money Market Trust (1)
(c) Letter Agreement dated July 21, 1992 adding World
Growth Fund (1)
(d) Letter Agreement dated September 7, 1994 adding
Emerging Markets Fund (1)
(e) Letter Agreement dated September 1, 1995 adding
Balanced Strategy, Growth Strategy and Income
Strategy Funds (2)
6 (a) Underwriting Agreement dated July 9, 1990 (2)
(b) Letter Agreement dated January 24, 1991 adding GNMA
Trust and Treasury Money Market Trust (2)
(c) Letter Agreement dated July 21, 1992 adding
World Growth Fund (2)
(d) Letter Agreement dated September 7, 1994 adding
Emerging Markets Fund (2)
(e) Letter Agreement dated September 1, 1995 adding
Balanced Strategy, Growth Strategy and Income
Strategy Funds (2)
7 Not Applicable
8 (a) Custodian Agreement dated July 27, 1984 (2)
(b) Amendment to Custodian Contract dated May 13, 1985 (2)
(c) Amendment to Custodian Contract dated May 1, 1986 (2)
(d) Amendment to Amendment to Custodian Contract dated
May 1, 1986 (2)
(e) Amendment to the Custodian Agreement dated November 3, 1988 (2)
(f) Letter Agreement dated May 26, 1988 adding International Fund (2)
(g) Letter Agreement dated January 3, 1989 adding Growth and
Tax Strategy Fund (2)
(h) Letter Agreement dated January 24,1991 adding
GNMA Trust and Treasury Money Market Trust (2)
C-9
<PAGE>
EXHIBIT INDEX, CONT.
EXHIBIT ITEM PAGE NO. *
(i) Letter Agreement dated July 21, 1992 adding World
Growth Fund (2)
(j) Letter Agreement dated September 7, 1994 adding
Emerging Markets Fund (2)
(k) Letter Agreement dated September 1, 1995 adding
Balanced Strategy, Growth Strategy and Income
Strategy Funds (2)
(l) Subcustodian Agreement dated March 24, 1994 (4)
(m) Amendment to Custodian Contract dated
May 13, 1996 (4)
9 (a) Transfer Agency Agreement dated January 23, 1992 (2)
(b) Letter Agreement dated July 21, 1992 adding World
Growth Fund (2)
(c) Letter Agreement dated September 7, 1994 adding
Emerging Markets Fund (2)
(d) Amendments dated May 3, 1995 to the Transfer Agency
Agreement Fee Schedules for Gold Fund, Cornerstone
Strategy Fund, International Fund, Growth and Tax
Strategy Fund, GNMA Trust, Treasury Money Market Trust,
World Growth Fund, and Emerging Markets Fund (2)
(e) Letter Agreement dated September 1, 1995 adding
Balanced Strategy, Growth Strategy and Income
Strategy Funds (2)
(f) Amendment No. 1 to Transfer Agency Agreement dated
November 14, 1995 (3)
(g) Master Revolving Credit Facility Agreement with
USAA Capital Corporation dated January 14, 1997 (5)
(h) Master Revolving Credit Facility Agreement with
NationsBank of Texas dated January 15, 1997 (5)
10 (a) Opinion of Counsel with respect to the Balanced
Strategy, Growth Strategy and Income Strategy
Funds (1)
(b) Opinion of Counsel with respect to the Growth and
Tax Strategy Fund, Cornerstone Strategy Fund,
Emerging Markets Fund, Gold Fund, International
Fund, World Growth Fund, GNMA Trust, and Treasury
Money Market Trust (2)
(c) Consent of Counsel (filed herewith) 301
11 Consent of Independent Accountants (filed herewith) 303
12 Financial statements omitted from prospectus -
Not Applicable
13 Subscriptions and Investment Letters
(a) GNMA Trust and Treasury Money Market Trust (2)
(b) World Growth Fund (2)
(c) Emerging Markets Fund (2)
(d) Growth Strategy Fund, Income Strategy Fund, and
Balanced Strategy Fund (2)
14 Prototype Plans
(a) USAA INVESTMENT MANAGEMENT COMPANY IRA Custodial
Agreement (filed herewith) 305
(b) USAA INVESTMENT MANAGEMENT COMPANY SEP-IRA Custodial
Agreement (filed herewith) 312
(c) USAA INVESTMENT MANAGEMENT COMPANY 403(b)(7) Custodial
Agreement (filed herewith) 320
C-10
<PAGE>
EXHIBIT INDEX, CONT.
EXHIBIT ITEM PAGE NO. *
(d) USAA INVESTMENT MANAGEMENT COMPANY Simple IRA
Custodial Agreement (filed herewith) 340
15 12b-1 Plans - Not Applicable
16 Schedule for Computation of Performance Quotation (2)
17 Financial Data Schedules
(a) Cornerstone Strategy Fund (filed herewith) 348
(b) Gold Fund (filed herewith) 350
(c) International Fund (filed herewith) 352
(d) Growth and Tax Strategy Fund (filed herewith) 354
(e) GNMA Trust (filed herewith) 356
(f) Treasury Money Market Trust (filed herewith) 358
(g) World Growth Fund (filed herewith) 360
(h) Emerging Markets Fund (filed herewith) 362
(i) Income Strategy Fund (filed herewith) 364
(j) Balanced Strategy Fund (filed herewith) 366
(k) Growth Strategy Fund (filed herewith) 368
18 Plan Adopting Multiple Classes of Shares -
Not Applicable
19 Powers of Attorney
(a) Powers of Attorney for Michael J.C. Roth, Sherron A. Kirk, John
W. Saunders, Jr., George E. Brown, Howard L. Freeman, Jr.,
and Richard A. Zucker dated January 21, 1994 (2)
(b) Power of Attorney for Barbara B. Dreeben (1)
(c) Power of Attorney for Robert G. Davis dated July 9, 1997 (5)
(d) Power of Attorney for Robert L. Mason dated July 9, 1997 (5)
- ---------------------
(1) Previously filed with Post-Effective Amendment No. 20 of the Registrant
(No. 2-91069) filed with the Securities and Exchange Commission on
June 15, 1995.
(2) Previously filed with Post-Effective Amendment No. 21 of the Registrant
(No. 2-91069) filed with the Securities and Exchange Commission on
September 26, 1995.
(3) Previously filed with Post-Effective Amendment No. 22 of the Registrant
(No. 2-91069) filed with the Securities and Exchange Commission on
January 26, 1996.
(4) Previously filed with Post-Effective Amendment No. 23 of the Registrant
(No. 2-91069) filed with the Securities and Exchange Commission on
August 1, 1996.
(5) Previously filed with Post-Effective Amendment No. 24 of the Registrant
(No. 2-91069) filed with the Securities and Exchange Commission on
July 31, 1997.
* Refers to sequentially numbered pages
C-11
<PAGE>
EXHIBIT 10(c)
GOODWIN, PROCTER & HOAR LLP
COUNSELLORS AT LAW
EXCHANGE PLACE
BOSTON, MASSACHUSETTS 02109-2881
TELEPHONE (617) 570-1000
TELECOPIER (617) 523-1231
September 16, 1997
USAA Investment Trust
USAA Building
9800 Fredericksburg Road
San Antonio, Texas 78288
Ladies and Gentlemen:
We hereby consent to the reference in Post-Effective Amendment No. 25 (the
"Amendment") to the Registration Statement (No. 2-91069) on Form N-1A of USAA
Investment Trust (the "Registrant") to (i) our opinion with respect to the
legality of the shares of the Registrant representing interests in USAA Balanced
Strategy Fund, USAA Growth Strategy Fund and USAA Income Strategy Fund, which
opinion was filed with Post-Effective Amendment No. 20 to the Registration
Statement and (ii) our opinion with respect to the legality of the shares of the
Registrant representing interests in USAA Growth and Tax Strategy Fund, USAA
Cornerstone Strategy Fund, USAA Emerging Markets Fund, USAA Gold Fund, USAA
International Fund, USAA World Growth Fund, USAA GNMA Trust and USAA Treasury
Money Market Trust, which opinion was filed with Post-Effective Amendment No. 21
to the Registration Statement.
We also hereby consent to the reference to this firm in the Prospectuses
under the heading "Legal Counsel" and in the Statement of Additional Information
under the heading "General Information--Counsel" which form a part of the
Amendment and to the filing of this consent as an exhibit to the Amendment.
Very truly yours,
/s/ Goodwin, Procter & Hoar LLP
-----------------------------------------------
GOODWIN, PROCTER & HOAR LLP
DOCSC\551138.1
EXHIBIT 11
Consent of Independent Accountants
The Shareholders and Board of Trustees
USAA Investment Trust
We consent to the use of our reports incorporated by reference dated July 9,
1997 on the Balanced Strategy, Cornerstone Strategy, Emerging Markets, Gold,
Growth Strategy, Income Strategy, International, and World Growth Funds, and the
GNMA and Treasury Money Market Trusts, separate funds of USAA Investment Trust
and to the references to our firm under the headings "Financial Highlights" in
the Funds' prospectuses.
/s/ KPMG Peat Marwick LLP
---------------------------------------
KPMG Peat Marwick LLP
San Antonio, Texas
September 15, 1997
EXHIBIT 14(a)
CUSTODIAL AGREEMENT
ARTICLE I
The Custodian may accept additional cash contributions on behalf of the
Depositor for a tax year of the Depositor. The total cash contributions are
limited to $2,000 for the tax year unless the contribution is a rollover
contribution described in section 402(c) (but only after December 31, 1992),
403(a)(4), 403(b)(8), 408(d)(3) or an employer contribution to a simplified
employee pension plan as described in section 408(k). Rollover contributions
before January 1, 1993, include rollovers described in section 402(a)(5),
402(a)(6), 402(a)(7), 403(a)(4), 403(b)(8), 408(d)(3), or an employer
contribution to a simplified employee pension plan as described in section
408(k).
ARTICLE II
The Depositor's interest in the balance in the custodial account is
nonforfeitable.
ARTICLE III
1. No part of the custodial funds may be invested in life insurance contracts,
nor may the assets of the custodial account be commingled with other property
except in a common trust fund or common investment fund (within the meaning of
section 408(a)(5).
2. No part of the custodial funds may be invested in collectibles (within the
meaning of section 408(m), except as otherwise permitted by section 408(m)(3)
which provides an exception for certain gold and silver coins and coins issued
under the laws of any state.
ARTICLE IV
1. Notwithstanding any provision of this agreement to the contrary, the
distribution of the Depositor's interest in the custodial account shall be made
in accordance with the following requirements and shall otherwise comply with
section 408(a)(6) and Proposed Regulations section 1.408-8, including the
incidental death benefit provisions of Proposed Regulations section
1.401(a)(9)-2, the provisions of which are incorporated by reference.
2. Unless otherwise elected by the time distributions are required to begin to
the Depositor under paragraph 3, or to the surviving spouse under paragraph 4,
other than in the case of a life annuity, life expectancies shall be
recalculated annually. Such election shall be irrevocable as to the Depositor
and the surviving spouse and shall apply to all subsequent years. The life
expectancy of a nonspouse beneficiary may not be recalculated.
3. The Depositor's entire interest in the custodial account must be, or begin
to be, distributed by the Depositor's required beginning date (April 1 following
the calendar year end in which the Depositor reaches age 701/2). By that date,
the Depositor may elect, in a manner acceptable to the Custodian, to have the
balance in the custodial account distributed in:
(a) A single sum payment.
(b) An annuity contract that provides equal or substantially equal monthly,
quarterly, or annual payments over the life of the Depositor.
(c) An annuity contract that provides equal or substantially equal monthly,
quarterly, or annual payments over the joint and last survivor lives of the
Depositor and his or her designated beneficiary.
(d) Equal or substantially equal annual payments over a specified period that
may not be longer than the Depositor's life expectancy.
(e) Equal or substantially equal annual payments over a specified period that
may not be longer than the joint life and last survivor expectancy of the
Depositor and his or her designated beneficiary.
4. If the Depositor dies before his or her entire interest is distributed to
him or her, the entire remaining interest will be distributed as follows:
(a) If the Depositor dies on or after distribution of his or her interest has
begun, distribution must continue to be made in accordance with paragraph 3.
(b) If the Depositor dies before distribution of his or her interest has begun,
the entire remaining interest will, at the election of the Depositor
<PAGE>
or, if the Depositor has not so elected, at the election of beneficiary or
beneficiaries, either
(i) Be distributed by December 31 of the year containing the fifth
anniversary of the Depositor's death, or
(ii) Be distributed in equal or substantially equal payments over the life
or life expectancy of the designated beneficiary or beneficiaries,
starting by December 31 of the year following the year of the
Depositor's death. If, however, the beneficiary is the Depositor's
surviving spouse, then this distribution is not required to begin
before December 31 of the year in which the Depositor would have turned
age 70 1/2.
(c) Except where distribution in the form of an annuity meeting the requirements
of section 408(b)(3) and its related regulations has irrevocably commenced
distributions are treated as having begun on the Depositor's required
beginning date, even though payments may actually have been made before that
date.
(d) If the Depositor dies before his or her entire interest has been distributed
and if the beneficiary is other than the surviving spouse, no additional
cash contributions or rollover contributions may be accepted in the account.
5. In the case of distribution over life expectancy in equal or substantially
equal annual payments, to determine the minimum annual payment for each year,
divide the Depositor's entire interest in the Custodial account as of the close
of business on December 31 of the preceding year by the life expectancy of the
Depositor (or the joint life and last survivor expectancy of the Depositor and
the Depositor's designated beneficiary, or the life expectancy of the designated
beneficiary, whichever applies). In the case of distributions under paragraph
(3), determine the initial life expectancy (or joint life and last survivor
expectancy) using the attained ages of the Depositor and designated beneficiary
as of their birthdays in the year the Depositor reaches age 70 1/2. In the case
of distribution in accordance with paragraph (4) (b)(ii), determine life
expectancy using the attained age of the designated beneficiary as of the
beneficiary's birthday in the year distributions are required to commence.
6. The owner of two or more individual retirement accounts may use the
"alternative method" described in Notice 88-38 1988-1 C.B. 524, to satisfy the
minimum distribution requirements described above. This method permits an
individual to satisfy these requirements by taking from one individual
retirement account the amount required to satisfy the requirement for another.
ARTICLE V
1. The Depositor agrees to provide the Custodian with information necessary for
the Custodian to prepare any reports required under section 408(i) and
Regulations sections 1.408-5 and 1.408-6.
2. The Custodian agrees to submit reports to the Internal Revenue Service and
the Depositor as prescribed by the Internal Revenue Service.
ARTICLE VI
Notwithstanding any other articles which may be added or incorporated, the
provisions of Articles I through III and this sentence will be controlling. Any
additional articles that are not consistent with section 408(a) and the related
regulations will be invalid.
ARTICLE VII
This agreement will be amended from time to time to comply with the provisions
of the Code and related regulations. Other amendments may be made with the
consent of the persons whose signatures appear below.
ARTICLE VIII
1. All assets in the Account shall be invested in such shares of one or more
Designated Investment Companies as the Depositor may from time to time specify.
The Depositor's instructions may relate to current contributions or to amounts
previously contributed (including earnings thereon) or to both. In the event
that the Custodian receives a contribution from the Depositor with respect to
which no investment direction is specifically applicable, or if any such
<PAGE>
investment direction is, in the opinion of the Custodian, unclear, the Custodian
may hold such amounts uninvested or return any such contributions without
liability for any loss, including any loss of income or appreciation, and
without liability for interest or any tax liability incurred by Depositor
pending receipt of instructions or clarification. For all purposes of this
Agreement, the term "Designated Investment Company" shall mean USAA INVESTMENT
TRUST or USAA MUTUAL FUND, INC. and any other regulated investment company for
which USAA INVESTMENT MANAGEMENT COMPANY (or any affiliate thereof) acts as
investment advisor and which is designated by USAA INVESTMENT MANAGEMENT COMPANY
as eligible for investment under this Agreement.
2. Except as otherwise permitted in paragraph 12 below, all contributions made
under this Agreement shall be deposited in the form of cash and shall be made to
the Custodian in accordance with such rules as the Custodian may establish. Any
contribution so made with respect to a tax year of the Depositor shall be made
prior to the due date of the Depositor's tax return (not including extensions).
Unless otherwise indicated in writing by the Depositor, contributions shall be
credited to the tax year in which they are received by the Custodian. The
Custodian, upon receipt of written instructions from the Depositor, may exchange
or cause to be exchanged shares of a Designated Investment Company held by the
Custodian on behalf of the Depositor for any other shares of a Designated
Investment Company available for investment hereunder, subject to and in
accordance with the terms and conditions of the exchange privilege, as outlined
in the current prospectuses of any such Designated Investment Company and as may
be agreed upon, in writing, from time to time between the Custodian and USAA
Investment Management Company. The Depositor shall be the beneficial owner of
the assets held in the Account. All dividends and capital gains distributions
received on shares of a Designated Investment Company held in the Depositor's
Account shall, unless received in additional shares, be reinvested in shares of
the Designated Investment Company paying such dividends. If any distributions of
the shares of a Designated Investment Company may be received at the election of
the Depositor in additional shares or in cash or other property, the Custodian
shall elect to receive additional shares.
3. USAA INVESTMENT MANAGEMENT COMPANY may remove the Custodian at any time upon
thirty (30) days' notice in writing to the Custodian, and the Custodian may
resign at any time upon thirty (30) days' notice in writing to USAA INVESTMENT
MANAGEMENT COMPANY. Upon such resignation or removal, USAA INVESTMENT MANAGEMENT
COMPANY shall appoint a successor custodian, which successor custodian shall be
a "bank" as defined in Section 408(n) of the Code or another person found
qualified to act as a custodian of an Individual Retirement Account by the
Secretary of the Treasury or his delegate. Upon receipt by the Custodian of
written acceptance of such appointment by the successor custodian or trustee,
the Custodian shall transfer and pay over to such successor the assets of the
Account and all records pertaining thereto. The Custodian is authorized,
however, to reserve such sum of money as it may deem advisable for payment of
all its fees, compensation, costs, and expenses or for payment of any other
liabilities constituting a charge on or against the assets of the Account or on
or against the Custodian, with any balance of such reserve remaining after the
payment of all such items to be paid over to the successor custodian or trustee.
If within the thirty (30) day period provided for above, USAA Investment
Management Company has not appointed a successor custodian or trustee which has
accepted such appointment, the Custodian shall, unless it elects to terminate
the Custodial Account, appoint a successor custodian itself.
4. The Custodian shall deliver, or cause to be delivered, to the Depositor all
notices, prospectuses, financial statements, proxies and
<PAGE>
proxy soliciting materials relating to Designated Investment Companies' shares
held for Depositor. The Custodian shall not vote any of the shares held
hereunder except in accordance with the written instructions of the Depositor.
5. (a) The Custodian shall, from time to time, in accordance with
instructions in writing from the Depositor (or the Depositor's
beneficiary if the Depositor is deceased), make distributions out of
the Account to the Depositor in the manner and amounts as may be
specified in such instructions. All such instructions shall be deemed
to cnstitute a certification by the Depositor (or the Depositor's
beneficiary if the Depositor is deceased) that the distribution
directed is one that the Depositor (or the Depositor's beneficiary if
the Depositor is deceased) is permitted to receive. Notwithstanding
the provision of Article IV above, the Custodian assumes (and shall
have) no responsibility to make any distribution to the Depositor (or
the Depositor's beneficiary if the Depositor is deceased) unless and
until such written instructions specify the occasion for such
distribution, the elected manner of distribution and any declaration
required by Article IV. Prior to making any such distribution from
the Account, the Custodian shall be furnished with any and all
applications, certificates, tax waivers, signature guarantees, and
other documents (including proof of any legal representative's
authority) deemed necessary or advisable by the Custodian, but the
Custodian shall not be liable for complying with written instructions
which appear on their face to be genuine, or for refusing to comply
if not satisfied such instructions are genuine, and assumes no duty
of further inquiry. Upon receipt of proper written instructions as
required above, the Custodian shall cause the assets of the Account
to be distributed in cash and/or in kind, as specified in such
written order. (b) Distribution of the assets of the Account shall be
made in accordance with the provisions of Article IV as the Depositor
(or the Depositor's beneficiary if the Depositor is deceased and has
not previously elected) shall elect by written instructions to the
Custodian; subject, however to the provisions of Sections 401(a)(9),
408(a)(6) and 408(b)(3) of the Code, the regulations promulgated
thereunder, and the following:
(i) No distribution from the Account shall be made in the form of an
annuity contract.
(ii)The recalculation of life expectancy of the Depositor and/or the
Depositor's spouse shall only be made at the written election of the
Depositor. The recalculation of life expectancy of the surviving
spouse shall only be made at the written election of the surviving
spouse.
(iii)If the Depositor dies before his/her entire interest in the Account
has been distributed, and if the designated beneficiary of the
Depositor is the Depositor's surviving spouse, the spouse may treat
the Account as his/her own individual retirement arrangement. This
election will be deemed to have been made if the surviving spouse
makes regular IRA contribution to the Account, makes a rollover to
or from such Account, or fails to receive a payment from the Account
within the appropriate time period applicable to the deceased
Depositor under Section 401(a)(9)(B) of the Code.
6. Any notice from the Custodian to the Depositor provided for in this
Agreement shall be effective if sent by regular mail to him at his last address
of record.
7. The Depositor hereby delegates to USAA Investment Management Company the
power to amend at any time and from time to time the terms and provisions of the
Agreement and hereby consents to such amendments, provided they shall comply
with all applicable provisions
<PAGE>
of the Code, the regulations thereunder and with any other governmental law,
regulation or ruling. Any such amendments shall be effective as of the date
specified in a written notice sent by first-class mail to the address of the
Depositor indicated by the Custodian's records. Notwithstanding the foregoing,
no amendment which increases the burdens of the Custodian shall take effect
without its prior written consent. Nothing in this paragraph 7 shall be
construed to restrict the Custodian's freedom to change or substitute fee
schedules in accordance with the provisions of the adoption agreement, and no
such change or substitution shall be deemed to be an amendment to this
Agreement.
8. The Custodian shall not be bound by any certificate, notice, order,
information or other communication unless and until it shall have been received
in writing at its place of business.
9. (a) The Custodian shall have the right to rely upon any information
furnished in writing by the Depositor. The Depositor and the
Depositor's legal representatives, as appropriate, shall always fully
indemnify the Custodian and USAA Investment Management Company and
save each of them harmless from any and all liability whatsoever
which may arise in connection with this Agreement and matters which
the Agreement contemplates, except that which arises due to the
Custodian's gross negligence, willful misconduct or lack of good
faith. The Custodian shall not be obligated or expected to commence
or defend any legal action or proceeding in connection with this
Agreement or such matters unless agreed upon by the Custodian and the
Depositor or said legal representatives and unless fully indemnified
for so doing to the Custodian's satisfaction.
(b) The Custodian shall be an agent for the Depositor to perform the
duties conferredon it by the Depositor. The parties do not intend to
confer any fiduciary duties on the Custodian and none shall be
implied. The Custodian shall not be liable (and does not assume any
responsibility for) the collection of contributions, the
deductibility of any contribution or the propriety of any
contributions under this Agreement, the selection of any shares of
any Designated Investment Company for the Account, or the purpose or
propriety of any distribution ordered in accordance with Article IV
or paragraph 5 of this Article VIII, which matters are the sole
responsibility of the Depositor or the Depositor's beneficiary, as
the case may be.
(c) The Custodian and USAA Investment Management Company shall not be
responsible for any losses, penalties or other consequences to the
Depositor or to any other person arising out of the making of any
contribution or withdrawal.
10. This Agreement together with the Application and Adoption Agreement attached
hereto and by this reference made a part hereof, constitutes the entire
agreement between the parties, and it shall be construed in accordance with the
laws of the State of Texas.
11. The Depositor shall have the right by written notice to the Custodian on a
form acceptable to the Custodian, to designate or to change a beneficiary to
receive any benefit to which such Depositor may be entitled in event of his
death prior to the complete distribution of such benefit. If no such designation
is in effect at the time of the Depositor's death, or if the designated
beneficiary has predeceased the Depositor, the Depositor's beneficiary shall be
his or her estate. The last designation filed with the Custodian shall be
controlling, and, whether or not it fully disposes the Account, shall revoke all
such other designations previously filed by the Depositor.
12. (a) The Custodian shall have the right to receive rollover contributions
as described in the Code and if any property is so transferred to it
as a rollover contribution, such property shall be sold by the
<PAGE>
Custodian and the proceeds less any expenses, fees or commissions
reinvested as provided in paragraph 1 of this Article VIII. The
Custodian reserves the right to refuse to accept any property which
is not in the form of cash.
(b) The Custodian, upon written direction of the Depositor and after
submission to the Custodian of such documents as it may reasonably
require, shall transfer the assets held under this Agreement (reduced
by any amounts referred to in paragraph 3 of this Article VIII) to a
successor individual retirement account, or individual retirement
annuity (other than an endowment contract, for the Depositor's
benefit or to an exempt employee's trust established under a plan
which satisfies the qualification requirements of Section 401(a) of
the Code. Any amounts received or transferred by the Custodian under
this paragraph 12 shall be accompanied by such records and other
documents as the Custodian deems necessary to establish the nature,
value, and extent of the assets, and of the various interests
therein.
13. The benefits provided hereunder shall not be subject to alienation,
assignment, garnishment, attachment, execution or levy of any kind, and any
attempt to cause such benefits to be so subjected shall not be recognized,
except to such extent as may be required by law. Any pledging of assets in the
Account by the Depositor as security for a loan, or any loan or other extension
of credit from the Account to the Depositor shall be prohibited.
14. The Custodian may perform any of its administrative duties through such
other persons or entities as may be designated by the Custodian from time to
time with the prior approval of USAA Investment Management Company, except that
the Designated Investment Company shares must be registered in the name of the
Custodian or its nominee. No such delegation or subsequent change herein shall
be considered an amendment of this agreement.
15. In addition to the reports required by Article V, the Custodian shall cause
to be mailed to the Depositor in respect of each tax year an account of all
transactions affecting the Account during such year and a statement showing the
Account as of the end of such year. If, within sixty (60) days after such
mailing, the Depositor has not given the Custodian written notice of any
exception or objection thereto, the annual accounting shall be deemed to have
been approved, and in such case, or upon the written approval of the Depositor,
the Custodian shall be released, relieved and discharged with respect to all
matters and statements set forth in such accounting as though the account had
been settled by judgment or decree of a court of competent jurisdiction.
16. (a) The Custodian may charge the Depositor reasonable fees, including an
annual maintenance fee, for services hereunder according to
standard schedules of rates which may be in effect from time to time.
Initially, the fees payable to the Custodian shall be in the schedule
amount provided with the Agreement. Upon thirty (30) days' prior
written notice, the Custodian may substitute a fee schedule differing
from that schedule initially provided.
(b) Custodian's fees,any income (includingunrelated business income tax),
gift, state and inheritance taxes and other taxes of any kind
whatsoever, including transfer taxes incurred in connection with the
investment or reinvestment of the assets of the Account, that may be
levied or incurred by the Custodian in the performance of its duties
may be charged to the Account, with the right to liquidate shares of
any Designated Investment Company for this purpose, or (at
Custodian's option) to the Depositor.
<PAGE>
EXHIBIT 14(b)
CUSTODIAL AGREEMENT
ARTICLE I
The Custodian may accept additional cash contributions on behalf of the
Depositor for a tax year of the Depositor. The total cash contributions are
limited to $2,000 for the tax year unless the contribution is a rollover
contribution described in section 402(c) (but only after December 31, 1992),
403(a)(4), 403(b)(8), 408(d)(3) of the Code or an employer contribution to a
simplified employee pension plan as described in section 408(k). Rollover
contributions before January 1, 1993, include rollovers described in section
402(a)(5), 402(a)(6), 402(a)(7), 403(a)(4), 403(b)(8), 408(d)(3), or an employer
contribution to a simplified employee pension plan as described in section
408(k).
ARTICLE II
The Depositor's interest in the balance in the custodial account is
nonforfeitable.
ARTICLE III
1. No part of the custodial funds may be invested in life insurance contracts,
nor may the assets of the custodial account be commingled with other property
except in a common trust fund or common investment fund [within the meaning of
section 408(a)(5)].
2. No part of the custodial funds may be invested in collectibles [within the
meaning of section 408(m), except as otherwise permitted by section 408(m)(3)
which provides an exception for certain gold and silver coins and coins issued
under the laws of any state.
ARTICLE IV
1. Notwithstanding any provision of this agreement to the contrary, the
distribution of the Depositor's interest in the custodial account shall be made
in accordance with the following requirements and shall otherwise comply with
section 408(a)(6) and Proposed Regulations section 1.408-8, including the
incidental death benefit provisions of Proposed Regulations section
1.401(a)(9)-2, the provisions of which are incorporated by reference.
2. Unless otherwise elected by the time distributions are required to begin to
the Depositor under paragraph 3, or to the surviving spouse under paragraph 4,
other than in the case of a life annuity, life expectancies shall be
recalculated annually. Such election shall be irrevocable as to the Depositor
and the surviving spouse and shall apply to all subsequent years. The life
expectancy of a nonspouse beneficiary may not be recalculated.
3. The Depositor's entire interest in the custodial account must be, or begin
to be, distributed by the Depositor's required beginning date (April 1 following
the calendar year end in which the Depositor reaches age 70 1/2). By that date,
the Depositor may elect, in a manner acceptable to the Custodian, to have the
balance in the custodial account distributed in:
(a) A single sum payment.
(b) An annuity contract that provides equal or substantially equal monthly,
quarterly, or annual payments over the life of the Depositor.
(c) An annuity contract that provides equal or substantially equal monthly,
quarterly, or annual payments over the joint and last survivor lives of the
Depositor and his or her designated beneficiary.
(d) Equal or substantially equal annual payments over a specified period that
may not be longer than the Depositor's life expectancy.
(e) Equal or substantially equal annual payments over a specified period that
may not be longer than the joint life and last survivor expectancy of the
Depositor and his or her designated beneficiary.
4. If the Depositor dies before his or her entire interest is distributed to
him or her, the entire
<PAGE>
remaining interest will be distributed as follows:
(a) If the Depositor dies on or after distribution of his or her interest has
begun, distribution must continue to be made in accordance with paragraph 3.
(b) If the Depositor dies before distribution of his or her interest has begun,
the entire remaining interest will, at the election of the Depositor or, if
the Depositor has not so elected, at the election of beneficiary or
beneficiaries, either
(i) Be distributed by December 31 of the year containing the fifth
anniversary of the Depositor's death, or
(ii) Be distributed in equal or substantially equal payments over the life
or life expectancy of the designated beneficiary or beneficiaries,
starting by December 31 of the year following the year of the
Depositor's death. If, however, the beneficiary is the Depositor's
surviving spouse, then this distribution is not required to begin
before December 31 of the year in which the Depositor would have turned
age 70 1/2.
(c) Except where distribution in the form of an annuity meeting the requirements
of section 408(b)(3) and its related regulations has irrevocably commenced,
distributions are treated as having begun on the Depositor's required
beginning date, even though payments may actually have been made before that
date.
(d) If the Depositor dies before his or her entire interest has been distributed
and if the beneficiary is other than the surviving spouse, no additional
cash contributions or rollover contributions may be accepted in the account.
5. In the case of distribution over life expectancy in equal or substantially
equal annual payments, to determine the minimum annual payment for each year,
divide the Depositor's entire interest in the Custodial account as of the close
of business on December 31 of the preceding year by the life expectancy of the
Depositor (or the joint life and last survivor expectancy of the Depositor and
the Depositor's designated beneficiary, or the life expectancy of the designated
beneficiary, whichever applies). In the case of distributions under paragraph
(3), determine the initial life expectancy (or joint life and last survivor
expectancy) using the attained ages of the Depositor and designated beneficiary
as of their birthdays in the year the Depositor reaches age 70 1/2. In the case
of distribution in accordance with paragraph (4) (b)(ii), determine life
expectancy using the attained age of the designated beneficiary as of the
beneficiary's birthday in the year distributions are required to commence.
6. The owner of two or more individual retirement accounts may use the
"alternative method" described in Notice 88-38 1988-1 C.B. 524, to satisfy the
minimum distribution requirements described above. This method permits an
individual to satisfy these requirements by taking from one individual
retirement account the amount required to satisfy the requirement for another.
ARTICLE V
1. The Depositor agrees to provide the Custodian with information necessary for
the Custodian to prepare any reports required under section 408(i) and
Regulations sections 1.408-5 and 1.408-6.
2. The Custodian agrees to submit reports to the Internal Revenue Service and
the Depositor as prescribed by the Internal Revenue Service.
<PAGE>
ARTICLE VI
Notwithstanding any other articles which may be added or incorporated, the
provisions of Articles I through III and this sentence will be controlling. Any
additional articles that are not consistent with section 408(a) and the related
regulations will be invalid.
ARTICLE VII
This agreement will be amended from time to time to comply with the provisions
of the Code and related regulations. Other amendments may be made with the
consent of the persons whose signatures appear below.
ARTICLE VIII
1. All assets in the Account shall be invested in such shares of one or more
Designated Investment Companies as the Depositor may from time to time specify.
The Depositor's instructions may relate to current contributions or to amounts
previously contributed (including earnings thereon) or to both. In the event
that the Custodian receives a contribution from the Depositor with respect to
which no investment direction is specifically applicable, or if any such
investment direction is, in the opinion of the Custodian, unclear, the Custodian
may hold such amounts uninvested or return any such contributions without
liability for any loss, including any loss of income or appreciation, and
without liability for interest or any tax liability incurred by Depositor
pending receipt of instructions or clarification. For all purposes of this
Agreement, the term "Designated Investment Company" shall mean USAA INVESTMENT
TRUST or USAA MUTUAL FUND, INC. and any other regulated investment company for
which USAA INVESTMENT MANAGEMENT COMPANY (or any affiliate thereof) acts as
investment advisor and which is designated by USAA INVESTMENT MANAGEMENT COMPANY
as eligible for investment under this Agreement.
2. Except as otherwise permitted in paragraph 12 below, all contributions made
under this Agreement shall be deposited in the form of cash and shall be made to
the Custodian in accordance with such rules as the Custodian may establish. Any
contribution so made with respect to a tax year of the Depositor shall be made
prior to the due date of the Depositor's tax return (not including extensions).
Unless otherwise indicated in writing by the Depositor, contributions shall be
credited to the tax year in which they are received by the Custodian. The
Custodian, upon receipt of written instructions from the Depositor, may exchange
or cause to be exchanged shares of a Designated Investment Company held by the
Custodian on behalf of the Depositor for any other shares of a Designated
Investment Company available for investment hereunder, subject to and in
accordance with the terms and conditions of the exchange privilege, as outlined
in the current prospectuses of any such Designated Investment Company and as may
be agreed upon, in writing, from time to time between the Custodian and USAA
Investment Management Company. The Depositor shall be the beneficial owner of
the assets held in the Account. All dividends and capital gains distributions
received on shares of a Designated Investment Company held in the Depositor's
Account shall, unless received in additional shares, be reinvested in shares of
the Designated Investment Company paying such dividends. If any distributions of
the shares of a Designated Investment Company may be received at the election of
the Depositor in additional shares or in cash or other property, the Custodian
shall elect to receive additional shares.
3. USAA INVESTMENT MANAGEMENT COMPANY may remove the Custodian at any time upon
thirty (30) days' notice in writing to the Custodian, and the Custodian may
resign at any time upon thirty (30) days' notice in writing to USAA INVESTMENT
MANAGEMENT
<PAGE>
COMPANY. Upon such resignation or removal, USAA INVESTMENT MANAGEMENT COMPANY
shall appoint a successor custodian, which successor custodian shall be a "bank"
as defined in Section 408(n) of the Code or another person found qualified to
act as a custodian of an Individual Retirement Account by the Secretary of the
Treasury or his delegate. Upon receipt by the Custodian of written acceptance of
such appointment by the successor custodian or trustee, the Custodian shall
transfer and pay over to such successor the assets of the Account and all
records pertaining thereto. The Custodian is authorized, however, to reserve
such sum of money as it may deem advisable for payment of all its fees,
compensation, costs, and expenses or for payment of any other liabilities
constituting a charge on or against the assets of the Account or on or against
the Custodian, with any balance of such reserve remaining after the payment of
all such items to be paid over to the successor custodian or trustee. If within
the thirty (30) day period provided for above, USAA Investment Management
Company has not appointed a successor custodian or trustee which has accepted
such appointment, the Custodian shall, unless it elects to terminate the
Custodial Account, appoint a successor custodian itself.
4. The Custodian shall deliver, or cause to be delivered, to the Depositor all
notices, prospectuses, financial statements, proxies and proxy soliciting
materials relating to Designated Investment Companies' shares held for
Depositor. The Custodian shall not vote any of the shares held hereunder except
in accordance with the written instructions of the Depositor.
5. (a) The Custodian shall, from time to time, in accordance with
instructions in writing from the Depositor (or the Depositor's
beneficiary if the Depositor is deceased), make distributions out of
the Account to the Depositor in the manner and amounts as may be
specified in such instructions. All such instructions shall be deemed
to constitute a certification by the Depositor (or the Depositor's
beneficiary if the Depositor is deceased) that the distribution
directed is one that the Depositor (or the Depositor's beneficiary if
the Depositor is deceased) is permitted to receive. Notwithstanding
the provision of Article IV above, the Custodian assumes (and shall
have) no responsibility to make any distribution to the Depositor (or
the Depositor's beneficiary if the Depositor is deceased) unless and
until such written instructions specify the occasion for such
distribution, the elected manner of distribution and any declaration
required by Article IV. Prior to making any such distribution from
the Account, the Custodian shall be furnished with any and all
applications, certificates, tax waivers, signature guarantees, and
other documents (including proof of any legal representative's
authority) deemed necessary or advisable by the Custodian, but the
Custodian shall not be liable for complying with written instructions
which appear on their face to be genuine, or for refusing to comply
if not satisfied such instructions are genuine, and assumes no duty
of further inquiry. Upon receipt of proper written instructions as
required above, the Custodian shall cause the assets of the Account
to be distributed in cash and/or in kind, as specified in such
written order.
(b) Distribution of the assets of the Account shall be made in accordance
with the provisions of Article IV as the Depositor
<PAGE>
(or the Depositor's beneficiary if the Depositor is deceased and has
not previously elected) shall elect by written instructions to the
Custodian; subject, however to the provisions of Sections 401(a)(9),
408(a)(6) and 408(b)(3) of the Code, the regulations promulgated
thereunder, and the following:
(i) No distribution from the Account shall be made in the form of an
annuity contract.
(ii)The recalculation of life expectancy of the Depositor and/or the
Depositor's spouse shall only be made at the written election of the
Depositor. The recalculation of life expectancy of the surviving
spouse shall only be made at the written election of the surviving
spouse.
(iii)If the Depositor dies before his/her entire interest in the Account
has been distributed, and if the designated beneficiary of the
Depositor is the Depositor's surviving spouse, the spouse may treat
the Account as his/her own individual retirement arrangement. This
election will be deemed to have been made if the surviving spouse
makes regular IRA contribution to the Account, makes a rollover to
or from such Account, or fails to receive a payment from the Account
within the appropriate time period applicable to the deceased
Depositor under Section 401(a)(9)(B) of the Code.
6. Any notice from the Custodian to the Depositor provided for in this
Agreement shall be effective if sent by regular mail to him at his last address
of record.
7. The Depositor hereby delegates to USAA Investment Management Company the
power to amend at any time and from time to time the terms and provisions of the
Agreement and hereby consents to such amendments, provided they shall comply
with all applicable provisions of the Code, the regulations thereunder and with
any other governmental law, regulation or ruling. Any such amendments shall be
effective as of the date specified in a written notice sent by first-class mail
to the address of the Depositor indicated by the Custodian's records.
Notwithstanding the foregoing, no amendment which increases the burdens of the
Custodian shall take effect without its prior written consent. Nothing in this
paragraph 7 shall be construed to restrict the Custodian's freedom to change or
substitute fee schedules in accordance with the provisions of the adoption
agreement, and no such change or substitution shall be deemed to be an amendment
to this Agreement.
8. The Custodian shall not be bound by any certificate, notice, order,
information or other communication unless and until it shall have been received
in writing at its place of business.
9. (a) The Custodian shall have the right to rely upon any information
furnished in writing by the Depositor. The Depositor and the
Depositor's legal representatives, as appropriate, shall always fully
indemnify the Custodian and USAA Investment Management Company and
save each of them harmless from any and all liability whatsoever
which may arise in connection with this Agreement and matters which
the Agreement contemplates, except that which arises due to the
Custodian's gross negligence, willful misconduct or lack of good
faith. The Custodian shall not be obligated or expected to commence
or defend any legal action or proceeding in connection with this
Agreement or such matters unless agreed upon by the Custodian and the
Depositor or said legal representatives
<PAGE>
and unless fully indemnified for so doing to the Custodian's
satisfaction.
(b) The Custodian shall be an agent for the Depositor to perform the
duties conferredon it by the Depositor. The parties do not intend to
confer any fiduciary duties on the Custodian and none shall be
implied. The Custodian shall not be liable (and does not assume any
responsibility for) the collection of contributions, the
deductibility of any contribution or the propriety of any
contributions under this Agreement, the selection of any shares of
any Designated Investment Company for the Account, or the purpose or
propriety of any distribution ordered in accordance with Article IV
or paragraph 5 of this Article VIII, which matters are the sole
responsibility of the Depositor or the Depositor's beneficiary, as
the case may be.
(c) The Custodian and USAA Investment Management Company shall not be
responsible for any losses, penalties or other consequences to the
Depositor or to any other person arising out of the making of any
contribution or withdrawal.
10. This Agreement together with the Application and Adoption Agreement attached
hereto and by this reference made a part hereof, constitutes the entire
agreement between the parties, and it shall be construed in accordance with the
laws of the State of Texas.
11. The Depositor shall have the right by written notice to the Custodian on a
form acceptable to the Custodian, to designate or to change a beneficiary to
receive any benefit to which such Depositor may be entitled in event of his
death prior to the complete distribution of such benefit. If no such designation
is in effect at the time of the Depositor's death, or if the designated
beneficiary has predeceased the Depositor, the Depositor's beneficiary shall be
his or her estate. The last designation filed with the Custodian shall be
controlling, and, whether or not it fully disposes the Account, shall revoke all
such other designations previously filed by the Depositor.
12. (a) The Custodian shall have the right to receive rollover contributions
as described in the Code and if any property is so transferred to
it as a rollover contribution, such property shall be sold by the
Custodian and the proceeds less any expenses, fees or commissions
reinvested as provided in paragraph 1 of this Article VIII. The
Custodian reserves the right to refuse to accept any property which
is not in the form of cash.
(b) The Custodian, upon written direction of the Depositor and after
submission to the Custodian of such documents as it may reasonably
require, shall transfer the assets held under this Agreement (reduced
by any amounts referred to in paragraph 3 of this Article VIII) to a
successor individual retirement account, or individual retirement
annuity (other than an endowment contract, for the Depositor's
benefit or to an exempt employee's trust established under a plan
which satisfies the qualification requirements of Section 401(a) of
the Code. Any amounts received or transferred by the Custodian under
this paragraph 12 shall be accompanied by such records and other
documents as the Custodian deems necessary to establish the nature,
value, and extent of the assets, and of the various interests
therein.
13. The benefits provided hereunder shall not be subject to alienation,
assignment, garnishment, attachment, execution or levy of any kind, and any
<PAGE>
attempt to cause such benefits to be so subjected shall not be recognized,
except to such extent as may be required by law. Any pledging of assets in the
Account by the Depositor as security for a loan, or any loan or other extension
of credit from the Account to the Depositor shall be prohibited.
14. The Custodian may perform any of its administrative duties through such
other persons or entities as may be designated by the Custodian from time to
time with the prior approval of USAA Investment Management Company, except that
the Designated Investment Company shares must be registered in the name of the
Custodian or its nominee. No such delegation or subsequent change herein shall
be considered an amendment of this agreement.
15. In addition to the reports required by Article V, the Custodian shall cause
to be mailed to the Depositor in respect of each tax year an account of all
transactions affecting the Account during such year and a statement showing the
Account as of the end of such year. If, within sixty (60) days after such
mailing, the Depositor has not given the Custodian written notice of any
exception or objection thereto, the annual accounting shall be deemed to have
been approved, and in such case, or upon the written approval of the Depositor,
the Custodian shall be released, relieved and discharged with respect to all
matters and statements set forth in such accounting as though the account had
been settled by judgment or decree of a court of competent jurisdiction.
16. (a) The Custodian may charge the Depositor reasonable fees, including an
annual maintenance fee, for services hereunder according to standard
schedules of rates which may be in effect from time to time.
Initially, the fees payable to the Custodian shall be in the schedule
amount provided with the Agreement. Upon thirty (30) days' prior
written notice, the Custodian may substitute a fee schedule differing
from that schedule initially provided.
(b) Custodian's fees, any income (includingunrelated business income
tax), gift, state and inheritance taxes and other taxes of any kind
whatsoever, including transfer taxes incurred in connection with the
investment or reinvestment of the assets of the Account, that may be
levied or incurred by the Custodian in the performance of its duties
may be charged to the Account, with the right to liquidate shares of
any Designated Investment Company for this purpose, or (at
Custodian's option) to the Depositor.
<PAGE>
EXHIBIT 14(c)
CUSTODIAL AGREEMENT
<PAGE>
INTRODUCTION TO THE USAA MUTUAL FUNDS SECTION CUSTODIAL ACCOUNT;
The attached documents are intended to establish an arrangement that satisfies
Section 403(b) of the Internal Revenue Code of 1986, as amended from time to
time (the "Code"). However, no Internal Revenue Service ruling has been
requested with respect to the tax consequences of the attached documents and
neither USAA INVESTMENT MANAGEMENT COMPANY nor the custodian, USAA Federal
Savings Bank, makes any representation with respect to such matters.
Arrangements such as those reflected in the attached documents should not be
entered into by any Employer or Employee who has not first obtained competent
independent professional advice on the tax and other consequences.
This material is not authorized for distribution unless preceded or accompanied
by an effective prospectus containing further information about the mutual funds
in which the assets of the account are to be invested.
ELIGIBILITY
Employees of organizations qualified under Section 501(c)(3) of the Code or
employees of an educational institution (including public school systems) are
eligible to arrange for tax-sheltered contributions to a Section 403(b)(7)
Custodial Account investing in mutual funds.
CONTRIBUTIONS
Each year, approximately 20 percent of an eligible Employee's includible
compensation (up to a maximum of $9,500, which dollar amount may be adjusted
upwards in the future by the Internal Revenue Service to reflect inflation) may
be contributed to a 403(b) account for that employee. It is also possible to
make additional catch-up contributions in certain limited circumstances.
Contributions must be made by the Employer and are arranged through a "salary
reduction agreement" such as the one enclosed. If your Employer has another
standard form which is used for all employees, it may be used instead of our
form. The $9,500 limit discussed above applies to the aggregate of all
"elective" contributions made for the Employee under all 403(b) accounts plus
certain elective contributions under other tax- qualified plans. If you exceed
this limit for any year, you may be subject to serious adverse tax consequences.
Accordingly, you should take care and consult with your tax advisor to ensure
that the limit is not exceeded.
In addition to the $9,500 per year limit on 403(b) "elective" contributions, all
403(b) contributions are subject to annual contribution limits which are quite
complicated and depend on a variety of factors, including your age, your years
of service with an eligible employer, your participation in other retirement
programs, etc.
<PAGE>
If you choose, we will make all calculations for you. Requests for this service
may be made by calling 1-800-531-8292 (in San Antonio 456-9034) and asking for a
Tax-Sheltered Annuity representative.
Eligible contributions are not taxable as current income for federal income tax
purposes, giving you the benefit of investing money which would otherwise have
been paid in federal income tax. Your employer should exclude these amounts from
your federal gross income on your W-2, and you do not have to separately deduct
them on your annual federal income tax return. Amounts distributed from a 403(b)
account will be included in taxable gross income at that time. (Contributions to
the account may be subject to social security taxes or state and local income
taxes.)
DISTRIBUTION
The IRS requirements for mutual fund custodial accounts provide for distribution
to be made under several conditions. In general, you may begin to receive assets
held in your account at the time of termination of service, death, attainment of
age 59 1/2, or if you incur a "financial hardship." A financial hardship will be
present only if the Employee is faced with immediate and heavy financial needs
and does not have other resources reasonably available to meet these needs. The
determination that a financial hardship exists and the amount needed to meet the
hardship must be made by an independent person or persons designated by the
Employer. The Custodian will not make any distribution based on financial
hardship until it has received the requisite written notice from the independent
person or persons.
If you incur a "financial hardship," you will only be able to receive from the
403(b) account the "elective" contributions which the Employer has made on your
behalf under a "salary reduction agreement" and not any of the earnings in the
403(b) account.
In general, any distribution to you from the 403(b) account where you are
employed and before you reach age 59 1/2 may be subject to a 10 percent penalty
tax in addition to regular income tax. In addition, there are other special
taxes which may apply to your distribution. Further, in certain cases, your
distribution may be subject to mandatory 20% federal income tax withholding, if
it is not rolled over directly to an IRA or another Section 403(b) arrangement.
You should consult your tax advisor in conjunction with any election you make
with regard to distributions of amounts in your account.
INTRODUCTION
The Employer, the Employee and the Custodian, by signing the Application, have
established this tax-sheltered Custodial Account under Section 403(b)(7) of the
Internal Revenue Code. The Application is hereby made a part of this Agreement.
The Employer will make an initial contribution to the Account as indicated on
the
<PAGE>
Application. The Employer, the Employee and the Custodian agree that the terms
and conditions of the Custodial Account are as set forth in this Agreement.
This Agreement shall take effect upon acceptance by the custodian, USAA Federal
Savings Bank. As provided more fully in Article IV below, the Custodian is to
invest all contributions to the Custodial Account in shares of one or more
Designated Investment Companies.
ARTICLE I/DEFINITIONS
As used in this Agreement, the following terms shall have the meaning
hereinafter set forth, unless a different meaning is plainly required by the
context.
1. "Application" means the agreement between the Employer, the Employee and the
Custodian which incorporates this Agreement in order to establish a USAA Mutual
Funds Section 403(b)(7) Custodial Account for the Employee.
2. "Code" means the Internal Revenue Code of 1986, as amended from time to time,
or any successor thereto. References to the Code shall be deemed to include any
Treasury Regulations issued thereunder.
3. "Custodial Account" means the Section 403(b)(7) Custodial Account established
under this Agreement, and when the context so implies, refers to the assets, if
any, then held by the Custodian hereunder.
4. "Custodian" means USAA Federal Savings Bank, or any successor thereto as
provided in Article IX hereof.
5. "Designated Investment Company" means USAA MUTUAL FUND, INC., USAA INVESTMENT
TRUST, and any other regulated investment company (within the meaning of Section
851(a) of the Code) for which USAA INVESTMENT MANAGEMENT COMPANY (or any
affiliate thereof) acts as investment advisor and which is designated by USAA
INVESTMENT MANAGEMENT COMPANY as eligible for investment under this Agreement.
6. "Employee" means any person employed by the Employer on a full or part time
basis for whom the Employer and the Employee have agreed to execute an
Application. This term also includes any person formerly employed by the
Employer and who has assets in his Custodial Account.
7. "Employer" means the Employer named in the Application. The Employer shall be
an organization that is (i) described in Section 501(c)(3) of the Code and
exempt from tax under Section 501(a) of the Code, or (ii) an educational
organization described in Section 170(b)(1)(A)(ii) of the Code and which is a
State, political subdivision of a State, or an agency or instrumentality of one
or more of the foregoing.
<PAGE>
8. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended
from time to time.
9. "Excess Contribution" means the amount of any contribution made by the
Employer on behalf of the Employee for any year which is an "excess
contribution" as that term is defined in Section 4973(c) of the Code.
10. "Excess Deferral" means the amount of any contribution made by the Employer
on behalf of the Employee for any year which is an "excess deferral" as that
term is defined in Section 402(g) of the Code.
11. "Rollover Contribution" means any amount distributed from an individual
retirement account or an individual retirement annuity described in Section 408
of the Code, the entire amount of which is attributable to a tax- sheltered
annuity contract described in Section 403(b) of the Code, or directly from such
a tax-sheltered annuity contract and then transferred to the Custodial Account
in accordance with Section 403(b)(8) or 408(d)(3)(A)(iii) of the Code.
12. "Sponsor" means USAA INVESTMENT MANAGEMENT COMPANY.
ARTICLE II/ESTABLISHMENT
OF CUSTODIAL ACCOUNT
The Custodian shall open and maintain a Custodial Account for the benefit of the
Employee. The Custodian may evidence its acceptance of its appointment by
sending to the Employee a confirmation of the Custodian's receipt of the first
contribution to the Custodial Account. The Employee shall be the beneficial
owner of all Designated Investment Company shares held in his Custodial Account.
The name, address and social security number of the Employee are set forth in
the Application, and it shall be the obligation of the Employee to notify the
Custodian of any address changes. The Custodian shall notify the Employee of the
identification number of the Custodial Account maintained for his benefit
hereunder.
ARTICLE III/CONTRIBUTIONS
1. EMPLOYER CONTRIBUTIONS. The Employer shall make contributions in cash to the
Custodian either in accordance with a salary reduction agreement between the
Employer and the Employee or otherwise. The initial contribution shall be
submitted to the Custodian with the executed Application. The aggregate
contribution by the Employer on behalf of the Employee during the first 12
months following the establishment of the Custodial Account shall be at least
$250; the Custodian shall not accept any contribution to the Custodial Account
of less than $25.
2. TRANSFERS FROM AND TO OTHER ACCOUNTS. The Employer or the Employee may cause
the transfer of assets acceptable to the Custodian from an existing custodial
account established
<PAGE>
under Section 403(b)(7) of the Code on behalf of the Employee and/or from an
existing annuity contract established under Section 403(b) of the Code on behalf
of the Employee to his Custodial Account hereunder. Such transferred assets
shall be treated as an Employer contribution for purposes of this Agreement and
shall be invested, distributed and otherwise dealt with as such; provided,
however, that such transferred amounts shall be disregarded in applying the
limitations on the amount of Employer contributions which can be made hereunder.
The Employee may cause the transfer of assets from the Employee's Custodial
Account hereunder to another custodial account established under Section
403(b)(7) of the Code and/or to an annuity contract qualified under Section
403(b) of the Code. It shall be the responsibility of the person who causes a
transfer under this Paragraph (i.e., the Employer or Employee), and not the
responsibility of the Custodian, the Sponsor, or any Designated Investment
Company, to determine and ensure that such transfer complies with all applicable
tax law requirements.
3. LIMITATIONS ON CONTRIBUTIONS. The Employee shall compute the maximum amount
that may be contributed on his behalf by the Employer for each tax year in
accordance with his "exclusion allowance" as that term is defined in Section
403(b)(2) of the Code. The Employee shall also determine the applicable
limitation(s) on contributions under Section 415 of the Code, and the Employee
shall have the right to avail himself of and make any of the elections provided
under such section.
In addition, the Employee shall determine the applicable limitation on
"elective" contributions to the Custodial Account under Section 402(g) of the
Code. Such computations and determinations shall be made at least annually, and
the Employee shall communicate the results to the Employer.
Neither the Custodian, the Sponsor nor any Designated Investment Company shall
have any duty or responsibility to determine that the amount of the initial or
any subsequent contribution made by the Employer on behalf of the Employee is
consistent with the terms of any applicable salary reduction agreement entered
into by and between the Employer and the Employee or to verify that such amount
is not in excess of the Employee's exclusion allowance under Section 403(b)(2)
of the Code or the applicable limitations under Sections 402(g) and 415 of the
Code.
4. ROLLOVER CONTRIBUTIONS. The Custodian may also accept Rollover Contributions
in cash as a deposit to the Custodial Account, provided, however, that any such
Rollover Contribution shall be held by the Custodian in a separate Custodial
Account for the benefit of the Depositor that consists only of Rollover
Contributions and the earnings thereof. Once transferred into the Employee's
Custodial Account, such assets shall be treated as an
<PAGE>
Employer contribution for purposes of this Agreement and shall be invested,
distributed and otherwise dealt with as such; provided, however, that such
Rollover Contributions shall be disregarded in applying the limitations on the
amount of Employer contributions which can be made hereunder. The Employee shall
execute such forms and provide such information as the Custodian may require
with respect to the source of Rollover Contributions. It shall be the
responsibility of the Employee, and not the responsibility of the Custodian, the
Sponsor, or any Designated Investment Company, to determine and ensure that such
Rollover Contribution complies with all applicable tax law requirements.
A Rollover Contribution also may be made in Designated Investment Company shares
and/or in other securities, provided that the Custodian reserves the right to
refuse to accept any property which is not in the form of cash or Designated
Investment Company shares. If securities, other than Designated Investment
Company shares, are accepted by the Custodian, they shall be sold by the
Custodian and the proceeds, after deduction of all expenses and charges involved
in the sale, shall be reinvested in accordance with Article IV.
ARTICLE IV/INVESTMENT OF
ACCOUNT ASSETS
1. CONTRIBUTIONS. All contributions to the Custodial Account shall be invested
in such shares of one or more Designated Investment Companies as the Employee
may direct. Such Designated Investment Company shares shall be acquired by the
Custodian at the price and in the manner in which such shares are then being
publicly offered by such Designated Investment Company. If such investment
instructions are not received by the Custodian, or are received but are, in the
opinion of the Custodian, unclear, the Custodian may hold or return all or a
portion of the contribution uninvested without liability for loss of income or
appreciation, and without liability for interest, pending receipt of proper
instructions or clarification. The Custodian shall advise the Employee of the
form and manner in which investment instructions must be given and shall not be
required to act or be held liable for failure to act upon improperly given
instructions.
2. CHANGES IN INVESTMENT. The Employee may from time to time direct the
Custodian to redeem any or all Designated Investment Company shares acquired by
the Custodian under this Agreement and to reinvest the proceeds in such other
Designated Investment Company shares as the Employee may specify. Any such
transaction must conform with the provisions of the current prospectus(es) of
the applicable Designated Investment Company(ies).
3. DIVIDENDS. All dividends or other distributions received by the Custodian on
shares of any Designated Investment Company held in the Custodial Account shall
(unless received in additional shares of such Designated Investment Company) be
reinvested in additional shares of
<PAGE>
the Designated Investment Company from which the distribution is made. If any
distribution on shares of a Designated Investment Company may be received at the
election of the shareholder in additional shares or cash or other property, the
Custodian shall elect to receive such distribution in additional shares.
4. REGISTRATION AND VOTING. All Designated Investment Company shares acquired by
the Custodian hereunder shall be registered in the name of the Custodian or of
its nominee. The Custodian shall deliver, or cause to be executed and delivered,
to the Employee all notices, prospectuses, financial statements, proxies, and
proxy soliciting materials relating to the Designated Investment Company shares
held in the Custodial Account. The Custodian shall not vote any of the shares
held hereunder except in accordance with written instructions received from the
Employee. Voting instructions which have not been timely received by the
Custodian shall not be voted by the Custodian.
ARTICLE V/DISTRIBUTIONS
1. TIME OF DISTRIBUTIONS.
(a) Subject to the remaining provisions of this Article V, distribution of
assets held in the Employee's Custodial Account shall begin at such
times as the Employee (or his beneficiary, if applicable) shall elect
by written notice to the Custodian at any time after the occurrence of
the earliest of these events:
(1) The Employee's
(a) separation from service with the Employer;
(b) disability (within the meaning of Section 72(m)(7) of the
Code);
(c) death;
(d) attainment of age 59 1/2.
(2) a financial hardship of the Employee, as determined by an
independent person or persons designated by the Employer.
"Financial hardship" shall include a financial need of the Employee
because of sickness, temporary disability, or any other immediate and
heavy financial need of the Employee, provided, however, that the term
financial hardship shall be limited so as to conform to the
requirements
<PAGE>
of Section 403(b)(7) of the Code. No distribution based on financial
hardship may exceed the amount determined to be required to meet the
immediate financial need created by the hardship and not reasonably
available from other resources of the Employee.
Effective in 1989, a distribution because of financial hardship is
limited to an Employee's "elective" contributions not previously
distributed, and the earnings on such contributions will not be
distributable on account of financial hardship. Any distribution prior
to age 59 1/2 even on account of a financial hardship, may subject the
Employee to a 10 percent penalty tax on the distribution.
No distribution based on financial hardship shall be made by the
Custodian until its receipt of written notice from such independent
person (or persons) that a qualifying hardship has been determined and
stating the amount required to be distributed to meet that hardship.
(b) If, and only if, contributions have been made to the Custodial Account
under this Agreement after December 31, 1986 then, subject to the
provisions of Paragraph 2(f), the distribution to an Employee of
amounts under this Agreementshall begin no later than the April 1
following the close of the calendar year in which the Employee attains
age 70 1/2 (the "Required Distribution Date"). Notwithstanding the
foregoing, the Required Distribution Date for any Employee who attained
age 70 1/2 before January 1, 1988 shall be no earlier than the April 1
next following the calendar year in which the Employee terminates
employment.
(c) The Custodian shall not be responsible for making any distributions
until such time as it has received written instructions from the
Employee (or his beneficiary, if applicable) to begin making
distributions, and, in the case of financial hardship, it has received
the written notice of the designated independent person or persons.
(d) At any time before the commencement of distributions, the Employee (or
his beneficiary, if applicable, subject to the restrictions in
paragraph 4) shall instruct the Custodian of the method of
distribution. Upon receipt by the Custodian of any and all certificates
and other documents requested by the Custodian, the Custodian will
comply with the written instructions of the Employee (or his
beneficiary, if applicable) to make distribution in accordance with one
of the methods of distribution set forth.
<PAGE>
In the event that the Employee (or his beneficiary, if applicable)fails
to properly elect a method of distribution of his Custodial Account,
installment payments pursuant to sub-paragraph (b) of paragraph 2 shall
be made to the Employee (or his beneficiary) on a monthly basis over a
10-year period if a systematic withdrawal plan is available for the
Designated Investment Company shares held in the Custodial Account and
if the assets in such Account are determined sufficient by the Sponsor.
If such a plan is unavailable and/or if such assets are insufficient,
the value of the shares held in the Custodial Account will be
distributed in a single lump sum in cash.
2. METHODS OF DISTRIBUTION.
(a) The value of the Custodial Account may be distributed in one of the
following ways:
(1) A single sum payment, in cash and/or in kind, consisting of the
entire balance in the Custodial Account; or a single sum payment, in
cash and/or in kind, consisting of part of the balance in the Custodial
Account with the remainder distributed pursuant to sub-paragraph (b) or
(c);
(2) In installments, in cash and/or in kind, over a period of years not
to exceed the life expectancy of the Employee or the joint life and
last survivor expectancy of the Employee and his beneficiary. The
installment payments shall be made in approximately equal amounts or
approximately equal fractions of the Employee's Custodial Account and
may be paid in monthly or other regular increments as elected by the
Employee and as agreed to by the Custodian.
(3) By the purchase and distribution of an annuity contract, utilizing
all available assets of the Custodial Account, from an insurance
company designated by the Employee, with either fixed or variable
annuity payments for the life of the Employee or, if the Employee so
elects, for the lives of the Employee and his beneficiary. Such policy
may provide for installment payments over a period measured by the life
expectancy of the Employee or the joint life expectancy of the Employee
and his beneficiary and the survivor, or over a shorter period.
If the Employee elects the method of distribution described in (3)
above, the annuity contract must satisfy the requirements of Section
401(a)(9) of the Code. If the Employee elects the
<PAGE>
method of distribution described in (2), the annual payment required to
be made by the Employee's Required Distribution Date is for the
calendar year the Employee reached age 70 1/2. Annual payments for
subsequent years, including the year the Employee's Required
Distribution Date occurs, must be made by December 31 of that year.
(4) In the case of an Eligible Rollover Distribution, by a Direct
Rollover to an Eligible Retirement Plan, an Eligible Rollover
Distribution is any distribution of all or any portion of the balance
to the credit of the Employee, except that an Eligible Rollover
Distribution does not include: any distribution that is one of a series
of substantially equal periodic payments (not less frequently than
annually) made for the life (or life expectancy) of the Employee or the
joint lives (or life expectancies) of the Employee and the Employee's
designated beneficiary, or for a specified period of ten years or more;
any distribution to the extent such distribution is required under
Section 401(a)(9) of the Code; and the portion of any distribution that
is not includible in gross income. An Eligible Retirement Plan is an
individual retirement account describedin Section 408(a) of the Code,
an individual retirement annuity described in Section 408(b) of the
Code, an annuity or custodial account described in Section 403(b) of
the Code. A Direct Rollover is a payment by the Custodian to the
Eligible Retirement Plan specified by the Employee.
(b) If, and only if, contributions have been made to the Custodial Account
under this Agreement after December 31, 1986, the method of
distribution
(1) may not extend the payment of such Employee's benefits beyond the
life expectancy of the Employee or the joint life and last survivor
expectancy of the Employee and his beneficiary (determined using
attained ages as of the calendar year in which payments commence under
Section 1.72-9 of the Treasury Regulations) and
(2) if someone other than the Employee's spouse is the beneficiary,
then the period of years over which installment payments are to be paid
shall be such that any period of years remaining as of the calendar
year in which the Employee attains age 70 1/2 or any subsequent
calendar year shall meet the minimum distribution
<PAGE>
incidental benefit requirement which shall be determined in accordance
with the regulations promulgated under Section 401(a)(9) of the Code.
(c) Notwithstanding the foregoing, if the value of the Custodial Account at
the time distribution is to be made or commenced is less than $250, the
full amount in the Custodial Account shall be distributed as a
single-sum payment in cash.
(d) The Employee (or his beneficiary, if applicable) shall be responsible
for insuring that distributions are made in accordance with this
Agreement and with all requirements of applicable law. The Custodian
shall have no responsibility regarding the method and timing of
distributions other than to follow the written instructions of the
Employee (or his beneficiary, if applicable).
(e) In the case of distributions to be made over the life expectancy of the
Employee (or over the joint lives of the Employee and his beneficiary
or the life expectancy of the beneficiary) in equal or substantially
equal annual payments, to determine the minimum annual payments, to
determine the minimum annual payment for each year, divide the
Employee's entire interest in the Custodial Account as of the close of
business on December 31 of the preceding year by the life expectancy of
the Employee (or the joint life and last survivor expectancy of the
Employee and his beneficiary, or the life expectancy of the
beneficiary, whichever applies). In the case of distributions under
paragraph 2, determine the initial life expectancy (or joint life and
last survivor expectancy) using the attained ages of the Employee and
beneficiary as of their birthdays in the year the Employee reaches age
70 1/2. In the case of distributions in accordance with paragraph 4,
determine life expectancy using the attained age of the beneficiary as
of the beneficiary's birthday in the year distributions are required to
commence. The recalculation of the life expectancy of the Employee
and/or the Employee's spouse shall only be made at the written election
of the Employee. The recalculation of the life expectancy of the
Employee's surviving spouse shall only be made at the written election
of the surviving spouse. Any recalculation of the Employee's and/or
spouse's life expectancy will be done annually using their attained
ages as of their birthdays in the year for which the minimum
<PAGE>
annual payment is being determined. The life expectancy of a
beneficiary (other than the spouse) will not be recalculated. The
minimum annual payment may be made in a series of installments (e.g.,
monthly, quarterly, etc.) as long as the total payments for the year
made by the date required are not less than the minimum amounts
required.
(f) If the Employee maintains one or more 403(b) accounts or annuities with
any institution other than the Custodian, the Employee may elect to
withdraw the minimum distribution required under sub-paragraph (e)
above from such other accounts or annuities.
(g) Within a reasonable time period before making an Eligible Rollover
Distribution, the Custodian shall provide an explanation to the
Employee of his right to elect a Direct Rollover and the income tax
withholding consequences of not electing a Direct Rollover.
3. DESIGNATION OF BENEFICIARY.
The Employee may designate and change his beneficiary or beneficiaries under
this Agreement on a form acceptable to the Custodian for such purpose. A
designation of beneficiary hereunder shall not become effective until it has
been filed with the Custodian. If no such designation is in effect at the time
of the Employee's death, the beneficiary shall be the Employee's surviving
spouse, or, if there is no surviving spouse, then the estate of the Employee.
The balance in the Custodial Account at the death of the Employee shall be
distributed to such beneficiary of beneficiaries. Such beneficiary shall have
the right to determine the timing and method of distribution, subject to any
applicable restrictions contained in this Article V.
4. DEATH BENEFITS. If the Employee dies before his entire interest is
distributed to him, the entire remaining interest will be distributed as
follows:
(a) If the Employee dies on or after his Required Distribution Date,
distribution must continue to be made in accordance with paragraph 2.
(b) If the Employee dies before his Required Distribution Date, the entire
remaining interest will, at the election of the beneficiary, either (i)
be distributed by the December 31 of the year containing the fifth
anniversary of the Employee's death, or (ii) be distributed in equal or
substantially equal payments over the life or life expectancy of the
beneficiary or (iii) by the purchase of an annuity contract. The
<PAGE>
election of either (i), (ii) or (iii) must be made by December 31 of
the year following the year of the Employee's death. If the beneficiary
does not elect either of the distribution options described in (i),
(ii) and (iii), distribution will be made in accordance with (ii) if
the beneficiary is the Employee's surviving spouse and in accordance
with (i) if the beneficiary is anyone other than the surviving spouse.
In the case of distributions under (ii) or (iii), distributions must
commence by December 31 of the year following the year of the
EmployeeOs death. If the EmployeeOs spouse is the beneficiary,
distributions need not commence until December 31 of the year the
Employee would have attained age 70 1/2, if later.
(c) Following the death of the Employee and until distribution of the
Custodial Account has been completed, the beneficiary shall have the
right to control the investment of the assets of the Custodial Account
to the same extent as the Employee had such right under Article IV.
(d) If the beneficiary dies before receiving the entire balance of the
Custodial Account, such balance shall be paid to the executor of the
beneficiary's estate.
(e) If the Employee's spouse is the beneficiary, and is entitled to receive
an Eligible Rollover Distribution, she may direct the Custodian to make
a Direct Rollover of the Eligible Rollover Distribution to an
individual retirement account described in Section 408(a) of the Code
or an individual retirement annuity described in Section 408(b) of the
Code. Within a reasonable time period before making an Eligible
Rollover Distribution, the Custodian shall provide an explanation to
the surviving spouse of her right to elect a Direct Rollover and the
income tax consequences of not electing a Direct Rollover.
5. DISTRIBUTION OF EXCESS CONTRIBUTIONS AND EXCESS DEFERRALS.
Any provision herein to the contrary notwithstanding, if the Employee notifies
the Custodian in writing within the time prescribed by law (if any) that all or
any portion of a contribution made on behalf of the Employee was an Excess
Contribution or an Excess Deferral, then the Custodian may distribute, within
the time prescribed by law (if any), to the Employee Designated Investment
Company shares and/or cash representing the amount of
<PAGE>
such Excess Contribution or Excess Deferral, and in either case, the net income
attributable thereto, reduced by any administrative charges allocable to the
Excess Contribution or Excess Deferral.
ARTICLES VI/PROTECTION OF EMPLOYEE BENEFITS
1. NON-FORFEITABLE. The Custodial Account has been created for the exclusive
benefit of the Employee and his beneficiaries. The interest of the Employee in
the balance in the Custodial Account shall at all times be non-forfeitable, but
shall be subject to the fees, expenses and charges described in Article VII.
2. NON-ALIENABLE. Except as provided in Article V, no interest, right or claim
in or to any part of the Custodial Account or any payment therefrom shall be
assignable, transferable, or subject to sale, mortgage, pledge, hypothecation,
commutation, anticipation, garnishment, attachment, execution, or levy of any
kind, and the Custodian shall not recognize any attempt to assign, transfer,
sell, mortgage, pledge, hypothecate, commute, anticipate, garnish, attach,
execute upon or levy upon the same, except to the extent required by law.
ARTICLE VII/REPORTING,
CUSTODIAN FEES AND
EXPENSES OF THE ACCOUNT
1. FURNISHING OF DATA. The Employee agrees to provide at such times and in such
manner as may be requested by the Custodian, such information as may be
necessary for the Custodian to prepare any reports required by the Internal
Revenue Service, the Department of Labor or any other governmental agency.
2. REPORTS BY CUSTODIAN. The Custodian agrees to submit reports to the Internal
Revenue Service, other government agencies, and the Employee at such times and
in such manner and containing such information as may be prescribed as the
responsibility of the Custodian by applicable statues and regulations
thereunder.
3. CUSTODIAN FEES AND EXPENSES OF ACCOUNT. The Custodian shall advise the
Employer and the Employee of its fee schedule at the time of the execution of
the initial Application. All fees of the Custodian in the performance of its
duties hereunder may be charged against the Custodial Account in such manner as
may be determined by the Custodian, or at the Custodian's option, may be paid by
the Employer or the Employee directly. Upon thirty (30) days' prior written
notice, the Custodian may substitute a different fee schedule. The Custodian's
fees, any income or other taxes of any kind that may be levied or assessed in
respect to the assets of the Custodial Account, and all other administrative
expenses incurred by the Custodian in the performance of its duties, including
fees for legal services rendered to the Custodian, may be reserved by the
Custodian and charged to the Custodial
<PAGE>
Account, with the right to liquidate Designated Investment Company shares for
this purpose.
ARTICLE VIII/CONCERNING
THE CUSTODIAN
1. ANNUAL REPORT. The Custodian shall keep adequate records of transactions it
is required to perform hereunder. Not later than sixty (60) days after the close
of each calendar year or after the Custodian's resignation or removal pursuant
to Article IX, the Custodian shall render to the Employee a written report or
reports reflecting the transactions effected by it during such period and the
assets of the Custodial Account at the close of the period. Sixty (60) days
after rendering such reports(s), the Custodian shall, to the extent permitted by
applicable law, be forever released and discharged from all liability and
accountability to anyone with respect to its acts and transactions shown in or
reflected by such report(s), except with respect to those as to which the
recipient of such report(s) shall have filed written objections with the
Custodian within the later such sixty (60) day period.
2. ERISA REQUIREMENTS. Certain ERISA requirements will apply if the Custodial
Account and this Agreement are determined to constitute, or to be a part of, an
"employee pension benefit plan" subject to Title I of ERISA. This may occur if,
for example, the Employer makes any contributions on behalf of an Employee other
than the elective contributions contemplated herein. If the Custodial Account
becomes subject to Title I of ERISA, the Employer shall be responsible for
assuring that the Custodial Account complies with all requirements of the
provisions of Title I. The Custodian, the Employer and the Employee shall
furnish to one another such information relevant to the Custodial Account as may
be required in that respect.
3. DELEGATION OF AUTHORITY. The Custodian may perform any of its administrative
duties through such other persons or entities as may be designated from time to
time by the Custodian, with the prior approval of the Sponsor, except that
Designated Investment Company shares must be registered as provided in paragraph
4 of Article IV. No such delegation or subsequent change therein shall be
considered an amendment of this Agreement. The Custodian shall not be liable
(and assumes no responsibility) for the collection of contributions, the tax
exclusion of any contribution or its propriety under this Agreement, or the
purpose, propriety, or timeliness of any distribution ordered in accordance with
Article V.
4. LIABILITY OF CUSTODIAN. The Custodian's liability under this Agreement and
matters which it contemplates shall be limited to matters arising from the
Custodian's negligence or willful misconduct. The Custodian shall not be
obligated or expected to commence or defend any legal action or proceeding in
connection
<PAGE>
with this Agreement unless agreed upon by the Custodian, the Employer and the
Employee and unless fully indemnified for so doing to the Custodian's
satisfaction.
5. RELIANCE ON DOCUMENTS. The Custodian may conclusively rely upon and shall be
protected in acting upon any written order from the Employer or the Employee or
his beneficiary or any other notice, request, consent, certificate or other
instrument or paper believed by it to be genuine and to have been properly
executed and, so long as it acts in good faith, in taking or omitting to take
any other action in reliance thereon.
6. CASH BALANCES. The Custodian shall not be liable for interest on any cash
balances maintained in the Custodial Account.
ARTICLE IX/RESIGNATION
OR REMOVAL OF CUSTODIAN
1. WITH RESPECT TO A CUSTODIAL ACCOUNT. Except as otherwise provided in
paragraph 2 of this Article IX, the Custodian may resign at any time upon thirty
(30) days' notice in writing to the Employer and the Employee, and may be
removed by the Employee at any time upon thirty (30) days' notice in writing to
the Custodian and the Employer. Upon such resignation or removal, the Employee
shall appoint a successor custodian or trustee, which successor shall be a
"bank" as defined in Section 401(d)(1) of the Code. Upon receipt by the
Custodian of written acceptance of such appointment by the successor custodian
or trustee, the Custodian shall transfer and pay over to such successor the
assets of the Custodial Account and all records pertaining thereto. The
Custodian is authorized, however, to reserve such sum of money as it may deem
advisable for payment of all its fees, compensation, costs, and expenses or for
payment of any other liabilities constituting a charge on or against the assets
of the Custodial Account or on or against the Custodian, with any balance of
such reserve remaining after the payment of all such items to be paid over to
the successor custodian or trustee. If within the thirty (30) day period
provided for, the Employee has not appointed a successor custodian or trustee
which has accepted such appointment, the Custodian shall, unless it elects to
terminate this Agreement, appoint a successor custodian itself.
2. WITH RESPECT TO ALL CUSTODIAL ACCOUNTS. The Sponsor may remove the Custodian
at any time upon thirty (30) days' notice in writing to the Custodian and the
Custodian may resign at anytime upon thirty (30) days' notice in writing to the
Sponsor. Upon such resignation or removal, the Sponsor shall appoint a successor
custodian, which successor custodian shall be a "bank" as defined in Section
401(d)(1) of the Code and the provisions of paragraph 1 of this Article IX shall
apply with respect to the transfer of custodianship to such successor custodian.
The provisions of this paragraph 2 shall apply if,
<PAGE>
and only if, the resignation or removal of the Custodian relates to all Section
403(b)(7) Custodial Accounts established pursuant to agreements comparable to
this Agreement.
ARTICLE X/AMENDMENT
1. BY SPONSOR. The Employee also delegates to the Sponsor the Employee's rights
so to amend, provided that the Sponsor amends in the same manner all agreements
comparable to this one under which such power has been delegated to it. Such an
amendment by the Sponsor shall be communicated in writing to the Employee, the
Employer and the Custodian.
2. CHANGES IN CUSTODIAN'S FEE SCHEDULE. This Article X shall not be construed to
restrict the Custodian's freedom to change or substitute fee schedules in the
manner provided by paragraph 3 of Article VII, and no such change or
substitution shall be deemed to be an amendment of this Agreement.
3. LIMITATIONS ON AMENDMENTS. Notwithstanding the foregoing, no amendment shall
be made which would:
(a) cause or permit any part of the assets in the Custodial Account to be
diverted to purposes other than for the exclusive benefit of the
Employee and/or his beneficiaries, or cause or permit any portion
of such assets to revert to or become the property of the Employer:
(b) increase the burdens of the Custodian without its prior written
consent; or
(c) retroactively deprive the Employee of any benefit to which he was
entitled under the Agreement by reason of contributions made by the
Employer, unless such modification or amendment is necessary to conform
the Agreement to, or satisfy the conditions of, any law, governmental
regulation or ruling, and to permit the Agreement and Custodial Account
to meet the requirements of Section 403(b) of the Code, or any similar
statute enacted in lieu thereof, and any such retroactive modification
or amendment must be pursuant to an opinion of counsel that it is
necessary or advisable to conform the Agreement to the requirements for
qualification under Section 403(b) of the Code.
ARTICLE XI/TERMINATION OF CUSTODIAL ACCOUNT
1. VOLUNTARY TERMINATION. With respect to amounts not yet earned by the Employee
the salary reduction agreement between the Employee and the Employer may be
terminated by either the Employee or the Employer by
<PAGE>
giving written notice to the other. Copies of such notice shall be sent
forthwith to the Custodian. Unless otherwise mutually agreed upon by the
Employer and the Employee, any such termination shall take effect as of the last
day of the month next following the month in which such written notice shall
have been given, the Employee's compensation level shall be increased by the
amount by which it otherwise would be reduced pursuant to any applicable salary
reduction agreement and the obligations under this Agreement of the Employer
with respect to future pay periods shall cease.
2. NO SUCCESSOR CUSTODIAN. If, within the time specified in paragraph 1 of
Article IX after the Custodian's resignation or removal, the Employee has not
appointed a successor Custodian which has accepted such appointment, termination
of the Custodial Account may be effected by the Custodian by distributing all
assets thereof in a lump sum in kind to the Employee (or his beneficiary, if
applicable), subject to the Custodian's right to reserve funds as provided in
Article VII. Upon such termination of the Custodial Account, this Agreement
shall terminate and have no further force and effect, and the Custodian shall be
relieved from all further liability with respect to this Agreement, the
Custodial Account, and all assets thereof so distributed.
3. TERMINATION ON DISQUALIFICATION. The Agreement shall terminate as to the
Employee if the Internal Revenue Service declares that this Custodial Account
does not constitute a tax-qualified custodial account under Section 403(b)(7) of
the Code. On such termination of this Agreement, all assets in the Custodial
Account shall be distributed in kind by the Custodian to the Employee (or his
beneficiary, if applicable), subject to the Custodian's right to reserve funds
as provided in Article VII.
4. TERMINATION ON DISTRIBUTION. This Agreement shall terminate as to the
Employee when all assets held in the Custodial Account for the Employee have
been distributed.
ARTICLE XII/MISCELLANEOUS
1. APPLICABLE LAW. This Agreement shall be construed, administered and enforced
according to the laws of the Commonwealth of Massachusetts; provided, however,
that it is intended that this Agreement create a tax-qualified custodial account
under Section 403(b)(7) of the Code and this Agreement shall be so construed and
limited and the powers hereunder exercised so as to accomplish the purpose.
2. PRONOUNS. Whenever used in this Agreement, the masculine pronoun is to be
deemed to include feminine. The singular form, whenever used herein, shall mean
or include the plural form where applicable, and vice versa.
<PAGE>
3. NOTICES. Any notices, accounting or other communication which the Custodian
may give the Employer or the Employee shall be deemed given when mailed to the
Employer or Employee at the latest address which has been furnished to the
Custodian. Any notice or other communication which the Employer or Employee may
give to the Custodian shall not become effective until actual receipt of said
notice by the Custodian.
4. SEPARABILITY. If any provision of this Agreement shall be for any reason
invalid or unenforceable, the remaining provisions shall, nevertheless, continue
in effect and shall not be invalidated thereby unless they are rendered
unconscionable, inadequate, or incapable of being interpreted as a result of the
deletion of the invalid or unenforceable portions of the Agreement.
5. SUCCESSORS. This Agreement shall be binding upon and shall inure to the
benefit of the successor in interest of the parties hereto.
6. NO EMPLOYMENT CONTRACT. This Agreement shall not be deemed to constitute a
contract of employment between the Employer and the Employee, nor shall any
provision hereof restrict the right of the Employer to discharge the Employee or
of the Employee to terminate his employment.
7. If the Custodial Account and this Agreement are determined to constitute, or
to be a part of, an "employee pension benefit plan" subject to Title I of ERISA
and, as a result, the Employer adopts a written plan document which has
provisions which are inconsistent with the provisions of this Agreement, then
provided such plan document complies with the requirements of the Code and
ERISA, the provisions of such plan document shall control, to the extent
necessary to comply with ERISA; provided, however, that nothing in such plan
document may be construed to increase the responsibilities of the Custodian or
the Sponsor, and, consistent with Paragraph 2 of Article VIII, the Employer
shall ensure compliance with applicable ERISA requirements.
EXHIBIT 14(d)
CUSTODIAL AGREEMENT
ARTICLE I
The Custodian will accept cash contributions on behalf of the participant by the
participant's employer under the terms of a SIMPLE plan described in section
408(p). In addition, the custodian will accept transfers or rollovers from other
SIMPLE-IRAs of the participant. No other contributions will be accepted by the
custodian.
ARTICLE II
The Depositor's interest in the balance in the custodial account is
nonforfeitable.
ARTICLE III
1. No part of the custodial funds may be invested in life insurance contracts,
nor may the assets of the custodial account be commingled with other property
except in a common trust fund or common investment fund (within the meaning of
section 408(a)(5)).
2. No part of the custodial funds may be invested in collectibles (within the
meaning of section 408(m)) except as otherwise permitted by section 408(m)(3)
which provides an exception for certain gold and silver coins and coins issued
under the laws of any state.
ARTICLE IV
1. Notwithstanding any provision of this agreement to the contrary, the
distribution of the participant's interest in the custodial account shall be
made in accordance with the following requirements and shall otherwise comply
with section 408(a)(6) and Proposed Regulations section 1.408-8, including the
incidental death benefit provisions of Proposed Regulations section
1.401(a)(9)-2, the provisions of which are incorporated by reference.
2. Unless otherwise elected by the time distributions are required to begin to
the participant under paragraph 3, or to the surviving spouse under paragraph 4,
other than in the case of a life annuity, life expectancies shall be
recalculated annually.
Such election shall be irrevocable as to the participant and the surviving
spouse and shall apply to all subsequent years. The life expectancy of a
nonspouse beneficiary may not be recalculated.
3. The participant's entire interest in the custodial account must be, or begin
to be, distributed by the participant's required beginning date, (April 1
following the calendar year end in which the participant reaches age 70 1/2). By
that date, the participant may elect, in a manner acceptable to the Custodian,
to have the balance in the custodial account distributed in:
(a) A single sum payment.
(b) An annuity contract that provides equal or substantially equal
monthly, quarterly, or annual payments over the life of the
participant.
(c) An annuity contract that provides equal or substantially equal
monthly, quarterly, or annual payments over the joint and last
survivor lives of the participant and his or her designated
beneficiary.
(d) Equal or substantially equal annual payments over a specified
period that may not be longer than the participant's life
expectancy.
(e) Equal or substantially equal annual payments over a specified
period that may not be longer than the joint life and last
survivor expectancy of the participant and his or her designated
beneficiary.
4. If the participant dies before his or her entire interest is distributed
to him or her, the entire remaining interest will be distributed as follows:
(a) If the participant dies on or after distribution of his or her
interest has begun, distribution must continue to be made in
accordance with paragraph 3.
<PAGE>
(b) If the participant dies before distribution of his or her interest
has begun, the entire remaining interest will, at the election of
the participant or, if the participant has not so elected, at the
election of beneficiary or beneficiaries, either
(i) Be distributed by December 31 of the year containing th
fifth anniversary of the participant's death, or
(ii) Be distributed in equal or substantially equal payments
over the life or life expectancy of the designated
beneficiary or beneficiaries, starting by December 31 of
the year following the year of the participant's death.
If, however, the beneficiary is the participant's
surviving spouse, then this distribution is not required
to begin before December 31 of the year in which the
participant would have turned age 70 1/2. (c) Except
where distribution in the form of an annuity meeting the
requirements of section 408(b)(3) and its related
regulations has irrevocably commenced, distributions are
treated as having begun on the participant's required
beginning date, even though payments may actually have
been made before that date. (d)If the participant dies
before his or her entire interest has been distributed
and if the beneficiary is other than the surviving
spouse, no additional cash contributions or rollover
contributions may be accepted in the account.
5. In the case of distribution over life expectancy in equal or substantially
equal annual payments, to determine the minimum annual payment for each year,
divide the participant's entire interest in the Custodial account as of the
close of business on December 31 of the preceding year by the life expectancy of
the participant (or the joint life and last survivor expectancy of the
participant and the participant's designated beneficiary, or the life expectancy
of the designated beneficiary, whichever applies). In the case of distributions
under paragraph (3), determine the initial life expectancy (or joint life and
last survivor expectancy) using the attained ages of the participant and
designated beneficiary as of their birthdays in the year the participant reaches
age 70 1/2. In the case of distribution in accordance with paragraph (4)(b)(ii),
determine life expectancy using the attained age of the designated beneficiary
as of the beneficiary's birthday in the year distributions are required to
commence.
6. The owner of two or more individual retirement accounts may use the
"alternative method" described in Notice 88-38 1988-1 C.B. 524, to satisfy the
minimum distribution requirements described above. This method permits an
individual to satisfy these requirements by taking from one individual
retirement account the amount required to satisfy the requirement for another.
ARTICLE V
1. The participant agrees to provide the Custodian with information necessary
for the Custodian to prepare any reports required under section 408(i) and
408(l)(2)and Regulations sections 1.408-5 and 1.408-6.
2. The Custodian agrees to submit reports to the Internal Revenue Service
and the participant as prescribed by the Internal Revenue Service.
3. The Custodian also agrees to provide the participant's employer the summary
description described in section 408(l)(2) unless this SIMPLE IRA is a transfer
SIMPLE IRA.
ARTICLE VI
Notwithstanding any other articles which may be added or incorporated, the
provisions of Articles
<PAGE>
I through III and this sentence will be controlling. Any additional articles
that are not consistent with section 408(a) and 408(p) and the related
regulations will be invalid.
ARTICLE VII
This agreement will be amended from time to time to comply with the provisions
of the Code and related regulations. Other amendments may be made with the
consent of the persons whose signatures appear below.
ARTICLE VIII
1. All assets in the Account shall be invested in such shares of one or more
Designated Investment Companies as the participant may from time to time
specify. The participant's instructions may relate to current contributions or
to amounts previously contributed (including earnings thereon) or to both. In
the event that the Custodian receives a contribution from the participant's
employer with respect to which no investment direction is specifically
applicable, or if any such investment direction is, in the opinion of the
Custodian, unclear, the Custodian may hold such amounts uninvested or return any
such contributions without liability for any loss, including any loss of income
or appreciation, and without liability for interest or any tax liability
incurred by participant pending receipt of instructions or clarification. For
all purposes of this Agreement, the term "Designated Investment Company" shall
mean USAA INVESTMENT TRUST or USAA MUTUAL FUND, INC. and any other regulated
investment company for which USAA INVESTMENT MANAGEMENT COMPANY (or any
affiliate thereof) acts as investment advisor and which is designated by USAA
INVESTMENT MANAGEMENT COMPANY as eligible for investment under this Agreement.
2. Except as otherwise permitted in paragraph 12 below, all contributions made
under this Agreement shall be deposited in the form of cash and shall be made to
the Custodian in accordance with such rules as the Custodian may establish. The
Custodian, upon receipt of instructions from the participant may exchange or
cause to be exchanged shares of a Designated Investment Company held by the
Custodian on behalf of the participant for any other shares of a Designated
Investment Company available for investment hereunder, subject to and in
accordance with the terms and conditions of the exchange privilege, as outlined
in the current prospectuses of any such Designated Investment Company and as may
be agreed upon, in writing, from time to time between the Custodian and USAA
Investment Management Company. The participant shall be the beneficial owner of
the assets held in the Account. All dividends and capital gains distributions
received on shares of a Designated Investment Company held in the participantOs
Account shall, unless received in additional shares, be reinvested in shares of
the Designated Investment Company paying such dividends. If any distributions of
the shares of a Designated Investment Company may be received at the election of
the participant in additional shares or in cash or other property, the Custodian
shall elect to receive additional shares.
3. USAA INVESTMENT MANAGEMENT COMPANY may remove the Custodian at any time upon
thirty (30) days' notice in writing to the Custodian, and the Custodian may
resign at any time upon thirty (30) days' notice in writing to USAA INVESTMENT
MANAGEMENT COMPANY. Upon such resignation or removal, USAA INVESTMENT MANAGEMENT
COMPANY shall appoint a successor custodian, which successor custodian shall be
a "bank" as defined in Section 408(n) of the Code or another person found
qualified to act as a custodian of an Individual Retirement Account by the
Secretary
<PAGE>
of the Treasury or his delegate. Upon receipt by the Custodian of written
acceptance of such appointment by the successor custodian or trustee, the
Custodian shall transfer and pay over to such successor the assets of the
Account and all records pertaining thereto. The Custodian is authorized,
however, to reserve such sum of money as it may deem advisable for payment of
all its fees, compensation, costs, and expenses or for payment of any other
liabilities constituting a charge on or against the assets of the Account or on
or against the Custodian, with any balance of such reserve remaining after the
payment of all such items to be paid over to the successor custodian or trustee.
If within the thirty (30) day period provided for above, USAA Investment
Management Company has not appointed a successor custodian or trustee which has
accepted such appointment, the Custodian shall, unless it elects to terminate
the Custodial Account, appoint a successor custodian itself.
4. The Custodian shall deliver, or cause to be delivered, to the participant all
notices, prospectuses, financial statements, proxies and proxy soliciting
materials relating to Designated Investment Companies' shares held for
participant. The Custodian shall not vote any of the shares held hereunder
except in accordance with the written instructions of the participant.
5. (a) The Custodian shall, from time to time, in accordance with
instructions in writing from the participant (or the participant's
beneficiary if the participant is deceased), make distributions
out of the Account to the participant in the manner and amounts as
may be specified in such instructions. All such instructions shall
be deemed to constitute a certification by the participant (or the
participant's beneficiary if the participant is deceased) that the
distribution directed is one that the participant (or the
participant's beneficiary if the participant is deceased) is
permitted to receive. Notwithstanding the provision of Article IV
above, the Custodian assumes (and shall have) no responsibility to
make any distribution to the participant (or the participant's
beneficiary if the participant is deceased) unless and until such
written instructions specify the occasion for such distribution,
the elected manner of distribution and any declaration required by
Article IV. Prior to making any such distribution from the
Account, the Custodian shall be furnished with any and all
applications, certificates, tax waivers, signature guarantees, and
other documents (including proof of any legal representative's
authority) deemed necessary or advisable by the Custodian, but the
Custodian shall not be liable for complying with written
instructions which appear on their face to be genuine, or for
refusing to comply if not satisfied such instructions are genuine,
and assumes no duty of further inquiry. Upon receipt of proper
written instructions as required above, the Custodian shall cause
the assets of the Account to be distributed in cash and/or in
kind, as specified in such written order.
(b) Distribution of the assets of the Account shall be made in
accordance with the provisions of Article IV as the participant
(or the participant's beneficiary if the participant is deceased
and has not previously elected) shall elect by written
instructions to the Custodian; subject, however to the provisions
of Sections 401(a)(9), 408(a)(6) and 408(b)(3) of the Code, the
regulations promulgated thereunder, and the following: (i) No
distribution from the
<PAGE>
Account shall be made in the form of an annuity contract.
(ii) The recalculation of life expectancy of the participant and/or
the participant's spouse shall only be made at the written
election of the participant. The recalculation of life
expectancy of the surviving spouse shall only be made at the
written election of the surviving spouse.
(iii) If the participant dies before his/her entire interest in the
Account has been distributed, and if the designated beneficiary
of the participant is the participant's surviving spouse, the
spouse may treat the Account as his/her own individual
retirement arrangement. This election will be deemed to have
been made if the surviving spouse makes a regular IRA
contribution to the Account, makes a rollover to or from such
Account, or fails to receive a payment from the Account within
the appropriate time period applicable to the deceased
participant under Section 401(a)(9)(B) of the Code.
6. Any notice from the Custodian to the participant provided for in this
Agreement shall be effective if sent by regular mail to him at his last address
of record.
7. The participant hereby delegates to USAA Investment Management Company the
power to amend at any time and from time to time the terms and provisions of the
Agreement and hereby consents to such amendments, provided they shall comply
with all applicable provisions of the Code, the regulations there under and with
any other governmental law, regulation or ruling. Any such amendments shall be
effective as of the date specified in a written notice sent by first-class mail
to the address of the participant indicated by the Custodian's records.
Notwithstanding the foregoing, no amendment which increases the burdens of the
Custodian shall take effect without its prior written consent. Nothing in this
paragraph 7 shall be construed to restrict the Custodian's freedom to change or
substitute fee schedules in accordance with the provisions of the adoption
agreement, and no such change or substitution shall be deemed to be an amendment
to this Agreement.
8. The Custodian shall not be bound by any certificate, notice, order,
information or other communication unless and until it shall have been received
in writing at its place of business.
9. (a) The Custodian shall have the right to rely upon any information
furnished in writing by the participant. The participant and the
participant's legal representatives, as appropriate, shall always fully
indemnify the Custodian and USAA Investment Management Company and save
each of them harmless from any and all liability whatsoever which may
arise in connection with this Agreement and matters which the Agreement
contemplates, except that which arises due to the Custodian's gross
negligence, willful misconduct or lack of good faith. The Custodian
shall not be obligated or expected to commence or defend any legal
action or proceed-ing in connection with this Agreement or such matters
unless agreed upon by the Custodian and the participant or said legal
representatives and unless fully indemnified for so doing to the
Custodian's satisfaction.
(b) The Custodian shall be an agent for the participant to perform the
duties conferred on it by the participant. The parties do not intend to
confer any fiduciary duties on the Custodian and none shall be implied.
The Custodian
<PAGE>
shall not be liable (and does not assume any responsibility for) the
collection of contributions, the deductibility of any contribution or
the propriety of any contributions under this Agreement, the selection
of any shares of any Designated Investment Company for the Account, or
the purpose or propriety of any distribution ordered in accordance with
Article IV or paragraph 5 of this Article VIII, which matters are the
sole responsibility of the participant or the participant's
beneficiary, as the case may be. (c) The Custodian and USAA Investment
Management Company shall not be responsible for any losses, penalties
or other consequences to the Depositor or to any other person arising
out of the making of any contribution or withdrawal.
10. This Agreement together with the Appli-cation and Adoption Agreement
attached hereto and by this reference made a part hereof, constitutes the entire
agreement between the parties, and it shall be construed in accordance with the
laws of the state of Texas.
11. The participant shall have the right by written notice to the Custodian on a
form acceptable to the Custodian, to designate or to change a beneficiary to
receive any benefit to which such participant may be entitled in event of his
death prior to the complete distribution of such benefit. If no such designation
is in effect at the time of the participant's death, or if the designated
beneficiary has predeceased the participant, the participant's beneficiary shall
be his or her estate. The last designation filed with the Custodian shall be
controlling, and, whether or not it fully disposes the Account, shall revoke all
such other designations previously filed by the participant.
12. (a) The Custodian shall have the right to receive rollover contributions
from another SIMPLE-IRA of the participant as described in the Code and
if any property is so transferred to it as a rollover contribution,
such property shall be sold by the Custodian and the proceeds less
any expenses, fees or commissions reinvested in paragrap 1 of this
Article VIII. The Custodian reserves the right to refuse to accept any
property which is not in the form of cash.
(b) The Custodian, upon written direction of the participant and after
submission to the Custodian of such documents as it may reasonably
require, shall transfer the assets held under this Agreement (reduced
by any amounts referred to in paragraph 3 of this Article VIII to a
successor SIMPLE individual retirement account, or regular or
individual retirement account. Any amounts received or transferred by
the Custodian under this paragraph 12 shall be accompanied by such
records and other documents as the Custodian deems necessary to
establish the nature, value, and extent of the assets, and of the
various interests therein.
13. The benefits provided hereunder shall not be subject to alienation,
assignment, garnishment, attachment, execution or levy of any kind, and any
attempt to cause such benefits to be so subjected shall not be recognized,
except to such extent as may be required by law. Any pledging of assets in the
Account by the participant as security for a loan, or any loan or other
extension of credit from the Account to the participant shall be prohibited.
<PAGE>
14. The Custodian may perform any of its administrative duties through such
other persons or entities as may be designated by the Custodian from time to
time with the prior approval of USAA Investment Management Company, except that
the Designated Investment Company shares must be registered in the name of the
Custodian or its nominee. No such delegation or subsequent change herein shall
be considered an amendment of this agreement.
15. In addition to the reports required by Article V, the Custodian shall cause
to be mailed to the participant in respect of each tax year an account of all
transactions affecting the Account during such year and a statement showing the
Account as of the end of such year. If, within sixty (60) days after such
mailing, the participant has not given the Custodian written notice of any
exception or objection thereto, the annual accounting shall be deemed to have
been approved, and in such case, or upon the written approval of the
participant, the Custodian shall be released, relieved and discharged with
respect to all matters and statements set forth in such accounting as though the
account had been settled by judgment or decree of a court of competent
jurisdiction.
16. (a) The Custodian may charge the participant reasonable fees, including an
annual maintenance fee, for services hereunder according to standard
schedules of rates which may be in effect from time to time. Initially,
the fees payable to the Custodian shall be in the schedule amount
provided with the Agreement. Upon thirty (30) days' prior written
notice, the Custodian may substitute a fee schedule differing from that
schedule initially provided.
(b) Custodian's fees, any income (including unrelated business income tax),
gift, estate and inheritance taxes and other taxes of any kind
whatsoever, including transfer taxes incurred in connection with the
investment or reinvestment of the assets of the Account, that may be
levied or incurred by the Custodian in the performance of its duties
may be charged to the Account, with the right to liquidate shares of
any Designated Investment Company for this purpose, or (at Custodian's
option) to the participant.
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000745903
<NAME> USAA INVESTMENT TRUST
<SERIES>
<NUMBER> 1
<NAME> CORNERSTONE STRATEGY FUND
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAY-31-1997
<PERIOD-END> MAY-31-1997
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<NAME> GNMA TRUST
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<NAME> TREASURY MONEY MARKET TRUST
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<NAME> USAA INVESTMENT TRUST
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<NAME> USAA INVESTMENT TRUST
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