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TABLE OF CONTENTS:
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INTRODUCTION.................................................................32B
FINANCIAL HIGHLIGHTS.........................................................32B
THE FUNDS....................................................................32B
USAA Life Variable Annuity Money Market Fund...........................32B
USAA Life Variable Annuity Income Fund.................................33B
USAA Life Variable Annuity Growth
and Income Fund....................................................33B
USAA Life Variable Annuity World Growth Fund...........................34B
USAA Life Variable Annuity Diversified Assets Fund.....................34B
CERTAIN INVESTMENT POLICIES, TECHNIQUES
AND RESTRICTIONS.......................................................34B
Convertible Securities.................................................34B
Mortgage-Backed and Asset-Backed Securities............................35B
Yankee and Eurodollar Obligations......................................36B
Depositary Receipts....................................................36B
Forward Currency Contracts.............................................36B
Repurchase Agreements..................................................36B
Master Demand Notes....................................................37B
Variable Rate Securities...............................................37B
Put Bonds..............................................................37B
When-Issued Securities.................................................37B
Liquidity..............................................................37B
Portfolio Turnover.....................................................38B
SPECIAL RISK CONSIDERATIONS..................................................38B
Foreign Securities.....................................................38B
Forward Currency Contracts.............................................38B
INVESTMENT RESTRICTIONS......................................................39B
MANAGEMENT...................................................................39B
Advisory Fees..........................................................39B
Expenses...............................................................40B
Portfolio Transactions.................................................40B
Portfolio Managers.....................................................40B
PURCHASE OF FUND SHARES......................................................41B
Distributor............................................................41B
REDEMPTION OF FUND SHARES....................................................41B
VALUATION OF FUND SHARES.....................................................42B
DIVIDENDS AND DISTRIBUTIONS..................................................42B
TAX MATTERS..................................................................42B
Diversification........................................................43B
PERFORMANCE INFORMATION......................................................43B
ADDITIONAL INFORMATION ABOUT THE TRUST.......................................43B
Organization and Capitalization........................................43B
Voting Privileges......................................................44B
SERVICE PROVIDERS............................................................44B
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THE TRUST
USAA LIFE INVESTMENT TRUST
9800 Fredericksburg Road
San Antonio, Texas 78288 Prospectus dated: August 1, 1995
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USAA Life Investment Trust (the "Trust") is a Delaware business trust
organized on July 20, 1994. The Trust is a diversified open-end management
investment company (commonly referred to as a "mutual fund"), which consists of
the following five separate series, each with its own investment objectives and
policies (individually, "Fund"; collectively "Funds"):
USAA LIFE VARIABLE ANNUITY MONEY MARKET FUND ("VA Money Market Fund"). The
VA Money Market Fund's investment objective is to obtain the highest level of
current income consistent with preservation of capital and maintenance of
liquidity.
USAA LIFE VARIABLE ANNUITY INCOME FUND ("VA Income Fund"). The VA Income
Fund's investment objective is maximum current income without undue risk to
principal.
USAA LIFE VARIABLE ANNUITY GROWTH AND INCOME FUND ("VA Growth and Income
Fund"). The VA Growth and Income Fund's investment objective is capital
growth and current income.
USAA LIFE VARIABLE ANNUITY WORLD GROWTH FUND ("VA World Growth Fund"). The VA
World Growth Fund's investment objective is long-term capital appreciation.
USAA LIFE VARIABLE ANNUITY DIVERSIFIED ASSETS FUND ("VA Diversified Assets
Fund"). The VA Diversified Assets Fund's investment objective is long-term
capital growth, consistent with preservation of capital and balanced by
current income.
Shares of the Trust currently are offered only to the Separate Account of
USAA Life Insurance Company (the "Separate Account") to serve as the funding
medium for certain variable annuity contracts (the "Contracts") that USAA Life
Insurance Company ("USAA Life") is offering to individual members and families
of members of the United Services Automobile Association ("USAA"), as well as to
the general public. USAA, a large diversified financial services institution, is
the parent company of the USAA Group of Companies, which includes USAA Life and
USAA Investment Management Company ("USAA IMCO"), the investment adviser
("Adviser") to the Trust. As Adviser to the Trust, USAA IMCO will use its
professional experience and expertise to assist the Funds in trying to meet
their objectives. However, there can be no assurance that these objectives will
be attained. SHARES OF THE TRUST ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF, OR
GUARANTEED BY THE USAA FEDERAL SAVINGS BANK, ARE NOT INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION (FDIC) OR ANY OTHER GOVERNMENT AGENCY, AND ARE
SUBJECT TO MARKET RISKS. BECAUSE THE VA WORLD GROWTH FUND INVESTS IN FOREIGN
SECURITIES, IT INVOLVES A HIGHER DEGREE OF RISK AND MAY NOT BE APPROPRIATE FOR
SOME INVESTORS. (SEE "SPECIAL RISK CONSIDERATIONS" AT PAGE 38B.)
This Prospectus provides prospective purchasers of the Contracts with basic
information regarding the Trust that they should know before allocating premium
payments to any Fund. Please read it carefully and retain it for future
reference. Additional information regarding the Trust is contained in a
Statement of Additional Information ("SAI") dated August 1, 1995, which has been
filed with the Securities and Exchange Commission (the "SEC") and is
incorporated in this Prospectus by reference. If you have any questions about
this Prospectus or desire a copy of the SAI at no charge, please write to the
Trust at the address shown above or call: (210) 498-8000 or toll free
1-800-531-8000.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. AN
INVESTMENT IN THE USAA LIFE VARIABLE ANNUITY MONEY MARKET 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.
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Introduction
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The Trust is registered with the SEC as a diversified, open-end
management investment company. The Trust currently consists of five Funds,
each of which represents a separate series of shares of beneficial interest
in the Trust. The Trust serves as the funding vehicle for Contracts issued by
USAA Life through the Separate Account. The Separate Account, and not the
individual Contract Owners ("Contract Owners"), is the shareholder of the
Trust. However, certain voting instruction privileges with respect to Trust
shares are extended to Contract Owners. See "Voting Privileges," below. A
prospectus describing the Contracts accompanies this Prospectus.
Financial Highlights
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The Financial Highlights for the period ended April 30, 1995 have not been
audited. The Financial Highlights should be read in conjunction with the Trust's
financial statements and notes thereto which are contained in the Statement of
Additional Information. The Statement of Additional Information may be obtained
without charge. For a copy call 1-800-531-8000 or write the Trust at 9800
Fredericksburg Road, San Antonio, Texas 78288. Additional information about the
performance of the Trust and the Funds will be included in the Trust's annual
report to shareholders, which will also be provided free of charge.
USAA LIFE INVESTMENT TRUST
FINANCIAL HIGHLIGHTS
Per share operating performance for a share outstanding throughout the
four-month period ended April 30, 1995 is as follows*:
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USAA Life USAA Life USAA Life USAA Life USAA Life
VA Money VA Income VA Growth and VA World VA Diversified
Market Fund Fund Income Fund Growth Fund Assets Fund
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<S> <C> <C> <C> <C> <C>
Net asset value at beginning of period $ 1.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00
Net investment income 0.02 (a) 0.24 (a) 0.11 (a) 0.07 (a) 0.17 (a)
Net realized and unrealized gain -- 0.46 0.97 0.42 0.69
Distributions from net investment income (0.02) -- -- -- --
----------- --------- ------------- ----------- --------------
Net asset value at end of period $ 1.00 $ 10.70 $ 11.08 $ 10.49 $ 10.86
=========== ========= ============= =========== ==============
Total return 1.81%(b) 7.00%(b) 10.80%(b) 4.90%(b) 8.60%(b)
Net assets at end of period ($000) $ 3,938 $ 21,588 $ 22,162 $ 20,307 $ 21,798
Ratio of expenses to average net assets 0.34%(c,d) 0.34%(c,d) 0.34%(c,d) 0.64%(c,d) 0.34%(c,d)
Ratio of net investment income to average
net assets 5.67%(c,d) 7.26%(c,d) 3.14%(c,d) 2.16%(c,d) 5.03%(c,d)
Portfolio Turnover -- 0.79 0.65 22.95 7.99
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(a) Calculated using weighted average shares.
(b) Total returns do not reflect expenses that apply at the Separate Account
level. These expenses would reduce the total return for the period shown.
(c) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
(d) The information contained in this table is based on actual expenses for the
period, after giving effect to reimbursements of expenses by USAA Life. For
more information concerning reimbursement of expenses, see the discussion
under the heading "Management - Expenses." Absent reimbursements, the
following fund ratios would have been:
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USAA Life USAA Life USAA Life USAA Life USAA Life
VA Money VA Income VA Growth and VA World VA Diversified
Market Fund Fund Income Fund Growth Fund Assets Fund
----------- --------- ------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
Ratio of expenses to average net assets 3.46%(c) 0.68%(c) 0.76%(c) 0.92%(c) 0.68%(c)
Ratio of net investment income to average
net assets 2.55%(c) 6.92%(c) 2.72%(c) 1.88%(c) 4.69%(c)
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* Funds commenced operations January 5, 1995.
The Funds
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Set out below is a description of the investment objectives, investment
program, policies, and restrictions of each Fund. The investment objective of
each Fund is a fundamental policy that may not be changed without the approval
of a majority of that Fund's outstanding shares (within the meaning of the
Investment Company Act of 1940 ["1940 Act"]). The investment program, policies,
and restrictions are not fundamental, and, except as otherwise noted or as
required by law, may be changed by the Board of Trustees of the Trust ("Board of
Trustees") without shareholder approval. There are risks in the ownership of any
security, and no assurance can be given that any Fund will achieve its
investment objective.
USAA LIFE VARIABLE ANNUITY MONEY MARKET FUND
INVESTMENT OBJECTIVE. The VA Money Market Fund's investment objective is to
obtain the highest level of current income consistent with preservation of
capital and maintenance of liquidity.
INVESTMENT PROGRAM. The Fund will pursue this objective by investing its assets
in a diversified portfolio of high quality U.S. dollar-denominated debt
instruments that present minimal credit risk with remaining maturities of 397
days or less. Consistent with regulatory requirements, the Fund will maintain an
overall dollar-weighted average portfolio maturity of no more than 90 days.
The Fund may invest in the following categories of money market
instruments: (1) obligations issued or guaranteed by the U.S. Government, its
agencies or instrumentalities, and repurchase agreements collateralized by such
obligations; (2) corporate debt obligations such as notes, bonds, and commercial
paper; (3) U.S. bank or foreign bank obligations including certificates of
deposit, banker's acceptances, and time deposits; (4) obligations of state and
local governments and their agencies and instr umentalities; (5) mortgage-backed
securities; (6) asset-backed securities; (7) 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 ("Eurodollar obligations"); (8) dollar-denominated instruments
issued by foreign issuers in the U.S. capital markets ("Yankee obligations");
(9) master demand notes; and (10) other short-term debt obligations. As a matter
of operating policy, the Fund will limit its investments in any one issuer
(other than the U.S. Government, its agencies or instrumentalities) to no more
than 5% of its total assets.
The Fund will purchase only high quality debt securities that qualify, at
the time of purchase, as "first-tier" securities as defined by Rule 2a-7 under
the 1940 Act. In general, a first-tier security means a security that is: (1)
issued or guaranteed by the U.S. Government or any agency or instrumentality
thereof; (2) rated in the highest category for short-term securities by at least
two nationally recognized statistical rating organizations ("NRSROs"), or by one
NRSRO if the security is rated by only one NRSRO; (3) unrated but issued by an
issuer that has other comparable short-term debt obligations so rated; or (4)
unrated but determined to be of comparable quality by the Adviser. If a security
is downgraded after purchase, the Adviser will follow written procedures adopted
by the Board of Trustees to determine whether it is in the best interest of the
Fund's shareholders for the Fund to continue to hold the security. Current
NRSROs include: Moody's Investors Service, Inc., Standard & Poor's Ratings
Group, Fitch Investors Service, Inc., Duff & Phelps Inc., Thompson BankWatch,
Inc., and IBCA Inc. (See Appendix A to the SAI for a further description of debt
ratings provided by these NRSROs.)
The value of the VA Money Market Fund's securities is stated at amortized
cost, which approximates market value. This involves valuing a security at its
cost and thereafter assuming a constant amortization to maturity of any discount
or premium, regardless of the impact of fluctuating interest rates. While this
method provides certainty in valuation, it may result in periods during which
the value of an instrument, as determined by amortized cost, is higher or lower
than the price the Fund would receive upon the sale of the instrument. The
market value of a money market instrument
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can fluctuate due to changes in short-term interest rates or changes in the
actual or perceived creditworthiness of the issuer or guarantor.
WHO SHOULD INVEST. The VA Money Market Fund is designed for investors seeking to
benefit from money market yields consistent with safety of principal. The Fund
does not constitute a balanced investment program, but rather, is a useful
component of a long-term balanced investment program for the conservative
investor. The securities in which the VA Money Market Fund may invest may not
yield as high a level of income as securities with a lesser degree of credit
safety and liquidity or longer-term debt obligations. Accordingly, the VA Money
Market Fund is expected to provide lower levels of income and risk than the VA
Income Fund. The Fund 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.
The VA Money Market Fund's shares are neither insured nor guaranteed by the U.S.
Government.
USAA LIFE VARIABLE ANNUITY INCOME FUND
INVESTMENT OBJECTIVE. The VA Income Fund's investment objective is to obtain
maximum current income without undue risk to principal.
INVESTMENT PROGRAM. The Fund will pursue this objective by investing, under
normal market conditions, primarily (i.e., not less than 65% of its total
assets) in a diversified portfolio of U.S. dollar-denominated debt and income
producing equity securities selected for their high yields relative to the
risk involved. Consistent with this policy, in periods of rising interest
rates, the Fund may invest a greater portion of its assets in securities the
value of which is believed to be less sensitive to interest rate changes.
The debt securities in which the Fund can invest include: (1) obligations
of the U.S. Government, its agencies and instrumentalities, and repurchase
agreements collateralized by such obligations; (2) mortgage-backed securities;
(3) corporate debt securities such as notes, bonds, and commercial paper; (4)
U.S. bank obligations, including certificates of deposit and banker's
acceptances; (5) obligations of state and local governments and their agencies
and instrumentalities; (6) asset-backed securities; (7) master demand notes; (8)
Eurodollar obligations; (9) Yankee obligations; and (10) other debt securities.
In addition to investments in debt securities, the Fund can invest in dividend
paying common stocks, preferred stocks, convertible securities, and warrants.
As a temporary defensive measure, the Adviser may invest up to 100% of the
Fund's assets in high quality, short-term debt instruments.
The debt securities 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 in the top four
categories of any one NRSRO (e.g., those rated at least Baa by Moody's Investors
Service ["Moody's"], BBB by Standard and Poor's Ratings Group ["S&P"], BBB by
Fitch Investors Service ["Fitch"], or BBB by Duff and Phelps ["D&P"]), or those
judged to be of equivalent quality by the Adviser if not rated. Securities rated
in the lowest level of investment grade have some 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 Adviser 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. Investment grade debt securities typically do not
generate as high a level of income as lower-rated debt securities. The Fund,
therefore, can be expected to provide a lower level of income than mutual funds
that invest in securities of lesser quality. (See Appendix A to the SAI for a
more complete description of debt ratings.)
The Fund may invest in debt securities of any maturity, which will have a
bearing on the interest rate risk that the Fund assumes. Generally, longer-term
debt securities are more sensitive to interest rate changes than are shorter-
term debt securities.
WHO SHOULD INVEST. The VA Income Fund is designed primarily for investors
seeking to benefit from a level of income higher than that available from the VA
Money Market Fund, and who are willing to accept principal fluctuation. Like the
VA Money Market Fund, the VA Income Fund should not be relied upon as a complete
investment program.
USAA LIFE VARIABLE ANNUITY GROWTH AND INCOME FUND
INVESTMENT OBJECTIVE. The VA Growth and Income Fund seeks capital growth and
current income.
INVESTMENT PROGRAM. The Fund will pursue this objective by investing, under
normal market conditions, not less than 65% of its assets in a diversified
portfolio of dividend paying common stocks, convertible securities,
nonconvertible preferred stock and nonconvertible debt securities of companies
that offer the prospect for growth of earnings. These securities may be listed
on a national securities exchange or traded in an established over-the-counter
securities market ("OTC market"). The debt securities in which the Fund may
invest will be of the type in which the VA Income Fund may invest.
The Fund also may invest in U.S. real estate investment trusts ("REITs").
The Fund's investment in REITs may subject the Fund to many of the same risks
associated with direct ownership of real estate. In addition, REITs are
dependent upon the capabilities of the REIT manager(s) and have limited
diversification. The Fund may invest up to 30% of its total assets in American
Depositary Receipts ("ADRs") or similar forms of ownership interests in
securities of foreign issuers deposited with a depositary, and securities of
for-
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eign issuers that are traded on U.S. securities exchanges or in U.S. OTC
markets. (See "Special Risk Considerations - Foreign Securities," below.)
As a temporary defensive measure, the Adviser may invest up to 100% of
the Fund's assets in high quality, short-term debt instruments.
SUITABILITY. The Fund is designed for investors seeking to benefit from long-
term growth of capital and income. Because of the Fund's emphasis on investments
in common stocks, its value will fluctuate based on market conditions.
Consequently, the Fund should not be relied on for short-term financial needs or
for short-term investment in the stock market.
USAA LIFE VARIABLE ANNUITY WORLD GROWTH FUND
INVESTMENT OBJECTIVE. The VA World Growth Fund seeks long-term capital
appreciation.
INVESTMENT PROGRAM. The Fund will pursue this objective by investing, under
normal market conditions, at least 65% of its total assets in a diversified
portfolio of common stocks and other equity securities of both foreign and
domestic issuers representing at least three countries, one of which may include
the United States. The Fund may purchase ADR's, Global Depositary Receipts
("GDRs") or similar forms of ownership interest in securities of foreign issuers
deposited with a depositary. (For a discussion of the risks pertaining to
investments in foreign securities, see "Special Risk Considerations-Foreign
Securities," below.) The Fund also may invest in convertible securities and in
REITs. The Fund's investment in REITs may subject the Fund to many of the same
risks associated with direct ownership of real estate. In addition, REITs are
dependent upon the capabilities of the REIT manager(s) and have limited
diversification.
The Fund may invest up to 35% of its total assets in marketable debt
securities having remaining maturities of less than one year that are 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 up to 100%
of its total assets in such securities.
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 exposure to currency
risk, the Fund may enter into forward currency contracts, which 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. (See
"Certain Investment Policies, Techniques and Restrictions -Forward Currency
Contracts," below.)
WHO SHOULD INVEST. The VA World Growth Fund is designed for investors seeking to
diversify by investing in securities of both foreign and domestic issuers, and
who are prepared to bear the risks of such investments. (For a discussion of the
risks pertaining to investments in foreign securities, see "Special Risk
Considerations - Foreign Securities," below.) Because of its emphasis on equity
securities and securities of foreign issuers, this Fund should not be relied
upon as a complete investment program.
USAA LIFE VARIABLE ANNUITY DIVERSIFIED ASSETS FUND
INVESTMENT OBJECTIVE. The VA Diversified Assets Fund seeks long-term capital
growth, consistent with preservation of capital and balanced by current income.
INVESTMENT PROGRAM. To achieve its objective, the Fund will invest, under
normal market conditions, approximately 60% of its assets in equity
securities, selected for total return potential and approximately 40% of its
assets in debt securities of varying maturities.
The equity component of the Fund will consist primarily of "basic value
stocks," which consist of common stocks, preferred stocks, or convertible
securities of U.S. companies that the Adviser believes are undervalued in
relation to such factors as the company's assets and current or prospective
earnings. The Fund also may invest 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. In most cases, these
securities will be listed on the New York Stock Exchange, though securities
listed on other exchanges or traded in an OTC market may be utilized.
The income component of the Fund will consist primarily of debt
securities of the type in which the VA Income Fund may invest. Subject to the
policies above, the Fund may shift its emphasis between the equity and income
portions of its portfolio based on the Adviser's analysis of relevant market,
financial and economic conditions.
As a temporary defensive measure, the Adviser may invest up to 100% of
the Fund's assets in high quality, short-term debt instruments.
WHO SHOULD INVEST. The VA Diversified Assets Fund is designed for investors
seeking the benefits of both long-term capital appreciation and current income.
This Fund is expected generally to have less exposure to equity securities than
the VA Growth and Income Fund and, unlike that Fund, will not invest in
securities of foreign issuers other than Yankee and Eurodollar obligations.
Certain Investment Policies, Techniques and Restrictions
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CONVERTIBLE SECURITIES
Each Fund, other than the VA Money Market Fund, may invest in bonds,
notes, debentures, preferred stocks and other securities that are convertible
into or carry the right to buy, common stock. Investments in convertible
securities can provide an opportunity for capital appreciation and/or income
34B
<PAGE>
through interest and dividend payments by virtue of their conversion or
exchange features.
Convertible debt securities and convertible preferred stocks, until
converted, have general characteristics similar to both debt and equity
securities. Convertible securities are generally subordinated to other
similar but non-convertible securities of the same issuer, although
convertible bonds, as corporate debt obligations, enjoy seniority in right of
payment to all equity securities, and convertible preferred stock is senior
to common stock, of the same issuer. However, because of the subordination
feature, convertible bonds and convertible preferred stock typically have
lower ratings than similar non-convertible securities. Convertible securities
generally offer lower yields than non-convertible securities of similar
quality because of their conversion or exchange features.
Although to a lesser extent than with debt securities generally, the
market value of convertible debt securities tends to decline as interest
rates increase and, conversely, tends to increase as interest rates decline.
In addition, because of the conversion or exchange feature, the market value
of convertible securities typically changes as the market value of the
underlying common stock changes, and, therefore, also tends to follow
movements in the general market for equity securities. A unique feature of
convertible securities is that as the market price of the underlying common
stock declines, convertible securities tend to trade increasingly on a yield
basis, and so may not experience market value declines to the same extent as
the underlying common stock. When the market price of the underlying common
stock increases, the prices of the convertible securities tend to rise as a
reflection of the value of the underlying common stock, although typically
not as much as the underlying common stock. While no securities investments
are without risk, investments in convertible securities generally entail less
risk than investments in common stock of the same issuer.
The convertible debt securities in which these Funds may invest include
fixed income or zero coupon debt securities that may be converted or
exchanged at a stated or determinable exchange ratio into underlying shares
of common stock. Fixed income convertible securities pay interest with yields
generally higher than common stocks. Of course, like all fixed income
securities, there can be no assurance of income or principal payments because
the issuers of the convertible securities may default on their obligations.
Zero coupon notes and bonds, including Liquid Yield Option Notes ("LYONs"),
pay no interest and are sold at substantial discounts from their face value.
When held to maturity, their entire income comes from the difference between the
purchase price and their value at maturity. Zero coupon convertible securities
offer the opportunity for capital appreciation as increases (or decreases) in
market value of such securities closely follows the movements in the market
value of the underlying common stock. Zero coupon convertible securities are
generally expected to be less volatile than the underlying common stocks as they
are usually issued with short to medium length maturities (15 years or less) and
are issued with options and/or redemption features exercisable by the holder of
the obligation entitling the holder to redeem the obligation and receive a
defined cash payment.
MORTGAGE-BACKED AND ASSET-BACKED SECURITIES
Each Fund, other than the VA World Growth Fund, may invest in
mortgage-backed and asset-backed securities. Mortgage-backed securities
include, but are not limited to, securities issued or guaranteed 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 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 and the cash flows from the underlying
mortgages are 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
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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 mortgage and asset-backed securities is
likely to be substantially shorter than their stated final maturity as a
result of scheduled principal payments and unscheduled principal prepayments.
YANKEE AND EURODOLLAR OBLIGATIONS
Each Fund, other than the VA World Growth Fund, may invest in Yankee and
Eurodollar obligations. Yankee obligations include money market instruments
and bonds of foreign issuers who customarily register such securities with
the SEC and borrow U.S. dollars by issuing such securities for delivery in
the United States. Although the principal trading market for Yankee
securities is the United States, foreign buyers can and do participate in the
Yankee securities market. Interest on such Yankee bonds is customarily paid
on a semi-annual basis. The marketability of these "foreign bonds" in the
United States is in many cases better than that for foreign bonds in foreign
markets, but is, of course dependent upon the quality of the issuer.
Eurodollar obligations include money market instruments and bonds
underwritten by an international syndicate and sold "at issue" to non-U.S.
investors. Such securities are not registered with the SEC or issued
domestically and generally may only be sold to U.S. investors after the
initial offering and cooling-off periods. The market for Eurodollar
securities is dominated by foreign-based investors and the primary trading
market for these securities is London. While investments in Eurodollar and
Yankee obligations are intended to reduce risk by providing further
diversification, such investments involve certain political and economic
risks in addition to credit and market risk.
In addition, each 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 that may be less stable. In the past, markets of
emerging market countries have been more volatile then the markets of developed
countries. (See "Special Risk Considerations-Foreign Securities," below.)
DEPOSITARY RECEIPTS
The VA World Growth Fund and the VA Growth and Income Fund may purchase
ADRs, which are U.S. dollar-denominated certificates issued by a U.S. bank or
trust company and represent the right to receive securities of a foreign
issuer deposited in a domestic bank or foreign branch of a U.S. bank and
traded on a U.S. exchange or in an OTC market. Generally, ADRs are in
registered form. There are no fees imposed on the purchase or sale of ADRs
when purchased from the issuing bank or trust company in the initial
underwriting, although the issuing bank or trust company may impose charges
for the collection of dividends and the conversion of ADRs into the
underlying securities. Investment in ADRs has certain advantages over direct
investment in the underlying foreign securities since: (i) ADRs are U.S.
dollar-denominated investments that are registered domestically, easily
transferable and for which market quotations are readily available, and (ii)
in some cases, the issuers whose securities are represented by ADRs may be
subject to the same auditing, accounting, and financial reporting standards
as domestic issuers.
The VA World Growth Fund may invest in GDRs. GDRs are typically issued by
foreign banks or trust companies, although they also may be issued by United
States banks or trust companies, and evidence ownership of underlying securities
issued by either a foreign or a United States corporation. Generally, GDRs in
bearer form are designed for use in foreign securities markets.
FORWARD CURRENCY CONTRACTS
The VA World Growth 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 the
Adviser 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 enter a forward sale contract with
respect to a particular currency for an amount greater than the aggregate
market value (determined at the time of making the forward sale) of the
securities held in its portfolio denominated or quoted in, or bearing a
substantial correlation to, such currency. The Fund is not required to enter
into such transactions and will not do so unless deemed appropriate by the
Adviser. (See "Special Risk Considerations - Forward Currency Contracts.")
REPURCHASE AGREEMENTS
Each Fund may invest in repurchase agreements that are collateralized by
obligations issued or guaranteed by or backed by the full faith and credit of
the U.S. Government, its agencies and instrumentalities. A repurchase
agreement is a transaction in which a security is purchased with a
simultaneous commitment to sell 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. A repurchase agreement involves the obligation of the
seller to pay
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the agreed-upon price, which obligation 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 or another
third-party 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.
MASTER DEMAND NOTES
Each Fund, other than the VA World Growth 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 a Fund, at
varying rates of interest pursuant to 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, it is
not contemplated that such instruments generally will be traded, and there
generally is no secondary market for these notes, although they are
redeemable (and thus 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 Funds 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 Funds 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 Funds generally may invest.
VARIABLE RATE SECURITIES
Each Fund may invest in securities that bear interest at rates that 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 a 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.
PUT BONDS
Each Fund may invest in securities (including securities with variable
interest rates) that may be redeemed or sold back (put) to the issuer of the
security or a third party at face value prior to stated maturity. Such
securities will normally trade as if maturity is the earlier put date, even
though stated maturity is longer.
WHEN-ISSUED SECURITIES
Each Fund may invest in new issues of 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 market value at the time the
transaction is completed may be more or less than the fixed purchase price.
Although such commitments are made with the intention of actually acquiring
the securities, a Fund can sell a commitment before settlement date, though
as a matter of policy, the Funds will not do so. No interest accrues to the
purchaser of a when-issued security during the period prior to settlement.
Securities purchased on a when-issued basis are subject to changes in value
in the same way as securities held in a Fund's portfolio, that is, both
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.
LIQUIDITY
Each Fund may invest up to 15% of its total assets (10% in the case of the
VA Money Market Fund) in illiquid securities. Commercial paper that is subject
to restrictions on transfer, securities that may be sold pursuant to Rule 144A
under the Securities Act of 1933, and put bonds with restrictions on transfer
will not be counted towards the limitation on illiquid securities, provided that
the Adviser determines that such securities have a readily available trading
market, in
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accordance with guidelines established by the Board of Trustees.
PORTFOLIO TURNOVER
Although no Fund purchases securities with a view to rapid turnover,
there are no limitations on the length of time that securities must be held
by any Fund. A Fund's annual portfolio turnover rate may vary significantly
from year to year. The portfolio turnover rates for each Fund, other than the
VA Money Market Fund, are not expected to exceed 100%.
Special Risk Considerations
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FOREIGN SECURITIES
Investments by a Fund in foreign securities, including Eurodollar,
Yankee, and other foreign obligations, and ADRs and GDRs, may entail one or
more of the following risks:
CURRENCY RISK. The value of the Fund's foreign investments may be affected by
changes in currency exchange rates. The U.S. dollar value of a foreign
security generally decreases when the value of the U.S. dollar rises against
the foreign currency in which the security is denominated, and tends to
increase when the value of the U.S. dollar falls against such currency. In
developing markets, it may be difficult or in some cases impossible to hedge
currency risk, due to the lack of available hedging instruments and illiq-
uidity in these markets.
POLITICAL AND ECONOMIC RISK. The economies of many of the countries in which
the Fund may invest are not as developed as the U.S. economy and may be
subject to significantly different forces. Political or social instability,
expropriation or confiscatory taxation, and limitations on the removal of
funds or other assets could also adversely affect the value of the Fund's
investments. For example, the Fund may invest in Eastern Europe and former
states of the Soviet Union (also known as the Commonwealth of Independent
States or CIS). These countries were under communist systems that 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.
REGULATORY RISK. Foreign companies are generally not subject to the
regulatory controls imposed on U.S. issuers and, as a consequence, there is
generally less publicly available information about foreign securities than
is available about domestic securities. Foreign companies are not subject to
uniform accounting, auditing and financial reporting standards, practices and
requirements comparable to those applicable to domestic companies. Income
from foreign securities owned by the Fund may be reduced by a withholding tax
at the source, which tax would reduce dividend income payable by the Fund.
There is generally less government regulation and supervision of foreign
stock exchanges, brokers and issuers, which may make it difficult to enforce
contractual obligations, obtain judgments or effect collections thereon.
MARKET RISK. The securities markets in many of the countries in which the
Fund invests will have substantially less trading volume than the major U.S.
markets. As a result, the securities of some foreign companies and
governments may be less liquid and may experience more price volatility than
comparable domestic securities. Increased custodian costs as well as
administrative difficulties (such as the need to use foreign custodians) may
be associated with the maintenance of assets in foreign jurisdictions. In
addition, transaction costs in foreign securities markets are likely to be
higher, since brokerage commission rates in foreign countries are likely to
be higher than in the U.S.
FORWARD CURRENCY CONTRACTS
The use of forward currency contracts to protect the value of a 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 uncertain.
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 Adviser believes it is important, however, to have
the flexibility to enter into such contracts when it determines it is in the
best interest of the Fund to do so. It is impossible to forecast what the
market value of a portfolio security will be at the expiration of a contract.
Accordingly, it may be necessary for the Fund to purchase additional currency
(and bear the expense of such purchase) if the market value of the security
is less than the amount of currency the Fund is obligated to deliver, and if
a decision is made to sell the security and make delivery of the currency.
Conversely, it may be necessary to sell some of the foreign currency received
on the sale of the portfolio security if its
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market value exceeds the amount of currency the Fund is obligated to deliver.
Investment Restrictions
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Except as otherwise indicated, the following restrictions are fundamental
and may not be changed without the approval of a majority of the outstanding
voting securities of any Fund of the Trust, which means the approval of the
lesser of: (i) the holders of 67% or more of the shares represented in a meeting
if the holders of more than 50% of the outstanding shares are present in person
or by proxy or (ii) the holders of more than 50% of the outstanding shares. (See
"Additional Information About the Trust," below.)
A FUND MAY NOT:
A. Borrow money, except that a Fund 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). A Fund will
not purchase securities when its borrowings exceed 5% of its total assets.
To the extent necessary to comply with State insurance regulatory
requirements a Fund as a matter of operating policy, will limit the amount of
borrowings to 25% of its net assets.
B. With respect to 75% of its total assets, purchase the securities of any
issuer (except Government Securities, as such term is defined in the 1940
Act) if, as a result, the Fund would own more than 10% of the outstanding
voting securities of such issuer or the Fund would have more than 5% of the
value of its total assets invested in the securities of such issuer. As a
non-fundamental operating policy, the VA Money Market Fund, in accordance
with Rule 2a-7 under the Investment Company Act of 1940, as amended, will not
invest more than 5% of its total assets in the securities (other than
securities issued by the U.S. Government or any of its agencies or
instrumentalities) issued by a single issuer.
C. Invest more than 25% of the value of its total assets (taken at current value
at the time of each investment) in securities of issuers whose principal
business activities are in the same industry. With respect to the VA Money
Market Fund, banks are not considered a single industry for purposes of this
policy. This limitation does not apply to securities issued or guaranteed by
the U.S. Government or its agencies or instrumentalities.
Management
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The Trust has a Board of Trustees which has the primary responsibility for
the overall management of the Trust and each of the Funds.
USAA IMCO serves as the Adviser to the Trust pursuant to an Investment
Advisory Agreement dated December 16, 1994 ("Advisory Agreement.") Under the
Advisory Agreement, USAA IMCO is responsible for furnishing a continuous
investment program for each Fund; selecting the investments of each Fund,
including determining what investments each Fund will purchase, hold, sell,
or exchange, and what portion, if any, of the assets of each Fund will remain
uninvested; placing all orders for the purchase and sale of investments for
each Fund with brokers and dealers selected by the Adviser; assisting the
Trust in the preparation of various regulatory reports; and providing office
space facilities and personnel in connection with the foregoing. USAA IMCO
will render such services in accordance with the investment objectives,
investment programs, policies, and restrictions of each Fund, under the
supervision of the Board of Trustees.
USAA IMCO was organized in May 1970, and is registered as an investment
adviser with the SEC. USAA IMCO is an indirect wholly-owned subsidiary of
USAA and an affiliate of USAA Life and the Trust. As of the date of this
Prospectus, the Adviser had approximately $27 billion in total assets under
management, $15.1 billion of which are in publicly available mutual funds. The
Adviser's mailing address is 9800 Fredericksburg Rd, San Antonio, Texas 78288
which is also the Home Office of USAA, USAA Life, and other affiliates.
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
Securities and Exchange Commission rules and regulations.
ADVISORY FEES
For its services under the Advisory Agreement, the Trust pays the Adviser a
monthly investment advisory fee for each Fund equal to an annualized rate of
0.20% of the monthly average net assets of each Fund. Pursuant to an
Underwriting and Administrative Services Agreement, dated December 16, 1994, by
and between USAA Life, USAA IMCO, and the Trust ("Underwriting Agreement"), USAA
Life, out of its general account, will reimburse USAA IMCO for the expenses that
it incurs in rendering services to the Trust under the Advisory Agreement, but
only to the extent these expenses exceed the amount of the above advisory fees.
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EXPENSES
Pursuant to the Underwriting Agreement, the Trust will bear the expense
of: (a) all charges, commissions and fees agreed to by it pursuant to the
Advisory Agreement by and between the Trust and USAA IMCO in its capacity as
Adviser; (b) the charges and expenses of independent auditors and outside
counsel retained by the Trust; (c) brokerage commissions for transactions in
the portfolio investments of the Trust and similar fees and charges for the
acquisition, disposition, lending or borrowing of such portfolio investments;
(d) all taxes, including issuance and transfer taxes, and corporate fees,
payable by the Trust to Federal, state or other governmental agencies; (e)
interest payable on the Trust's borrowings; (f) extraordinary or
non-recurring expenses, such as legal claims and liabilities and litigation
costs and indemnification payments by the Trust in connection therewith; and
(g) all expenses of Shareholders and Trustees' meetings (exclusive of
compensation and travel expenses of those Trustees of the Trust who are
"interested persons" of the Trust within the meaning of the 1940 Act),
including those in the following item (h); (h) compensation and travel
expenses of those Trustees who are not "interested persons" within the
meaning of the 1940 Act; (i) the charges and expenses of any registrar, stock
transfer or dividend disbursing agent, custodian, or depository appointed by
the Trust for the safekeeping of its cash, portfolio securities and other
property; (j) the fees and expenses involved in registering and maintaining
registrations of the Trust and its shares with the SEC and various states and
other jurisdictions (other than any such expenses referred to in the
following paragraph); (k) membership or association dues for the Investment
Company Institute or similar organization; and (l) the cost of the fidelity
bond required by 1940 Act Rule 17g-1 and any errors and omissions insurance
or other liability insurance covering the Trust and/or its officers, Trustees
and employees; (m) the preparation, setting in type, printing in quantity and
distribution of materials distributed to then-current shareholders and/or
Contract Owners of such material as prospectuses, statements of additional
information, supplements to prospectuses and statements of additional
information, periodic reports to Shareholders and/or Contract Owners,
communications, and proxy materials (including proxy statements, proxy cards
and voting instruction forms) relating to either the Trust or the Separate
Account and the processing, including tabulation, of the results of voting
instruction and proxy solicitations; (n) furnishing, or causing to be
furnished, to each Shareholder statements of account, including the expense
of mailing; and (o) postage. USAA Life, out of its General Account, agrees to
pay directly or reimburse the Trust for these Trust expenses to the extent that
such expenses exceed .65% of the monthly average net assets of the VA World
Growth Fund and .35% of the monthly average net assets of each other Fund.
The Underwriting Agreement further provides that USAA Life, out of its
General Account, will assume the expense of: (a) organizing the Trust; (b)
compensation and travel expenses of those Trustees of the Trust who are
"interested persons" of the Trust within the meaning of the 1940 Act; and (c)
any activity that may be attributable to the Trust as primarily intended to
result in the sale of Trust shares to other than current shareholders and/or
Contract Owners, including the preparation, setting in type, printing in
quantity and distribution of such materials as prospectuses, statements of
additional information, supplements to prospectuses and statements of
additional information, sales literature (including the Trust's periodic
reports to shareholders and any Separate Account periodic report to Contract
Owners), advertising and other promotional material relating to either the
Trust or the Account and compensation paid to sales personnel.
PORTFOLIO TRANSACTIONS
The Adviser directs the placement of orders for the purchase and sale of
the Funds' portfolio securities. In doing so, the Adviser seeks the best
combination of price and execution, which involves a number of judgmental
factors. When the Adviser believes that more than one broker or dealer is
capable of providing the best combination of price and execution in a
particular portfolio transaction, normally a broker or dealer is selected
that furnishes research services. The Adviser, a registered broker-dealer,
also may act as a broker for the Trust in conformity with the securities laws
and rules thereunder.
It is likely that from time to time the Adviser may make similar
investment decisions for the Funds and for its other clients, including
USAA's General Account and other USAA affiliates, where it is consistent with
their respective investment objectives. If these entities desire to buy or
sell the same portfolio securities at about the same time, combined purchases
and sales are made and normally allocated at the average price and as nearly
as practicable on a pro-rata basis in proportion to the amounts desired to be
purchased or sold by each entity. While it is conceivable that in certain
instances this procedure could have a detrimental effect on the price or
volume of the security to be purchased or sold, as far as a Fund is
concerned, it is believed that the procedure generally contributes to better
overall execution of the Fund's portfolio transactions. For example,
coordination with transactions for other clients and the ability to
participate in volume transactions could benefit the Fund.
PORTFOLIO MANAGERS
Set out below are the names, titles, years of investment management
experience, and prior business experience (if they have been with the Adviser
for less than 5 years) of the
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individuals who are primarily responsible for the day-to-day management of
the Funds, in each case since the inception of the Fund.
VA MONEY MARKET FUND. J. Eric Thorderson, Executive Director, Fixed Income
Investments at USAA IMCO, is primarily responsible for managing the Money
Market Fund. Mr. Thorderson has eight years investment management experience
and has been affiliated with USAA IMCO for four years. Prior to joining USAA
IMCO, Mr. Thorderson was an investment analyst with Alexander Hamilton Life
Insurance Company.
VA INCOME FUND. John W. Saunders, Jr., Senior Vice President of Fixed Income
Investments at USAA IMCO, is primarily responsible for managing the VA Income
Fund. Mr. Saunders has 26 years investment management experience and has been
affiliated with USAA IMCO for 25 years.
VA GROWTH AND INCOME FUND. R. David Ullom, Assistant Vice President of Equity
Investments at USAA IMCO, is primarily responsible for managing the VA Growth
and Income Fund. Mr Ullom has 20 years investment management experience and
has been affiliated with USAA IMCO for 10 years.
VA WORLD GROWTH FUND. R. David Ullom, Assistant Vice President of Equity
Investments at USAA IMCO, and David G. Peebles, Vice President of Equity
Investments at USAA IMCO, together are primarily responsible for managing the VA
World Growth Fund. Mr. Peebles also acts as Asset Allocation Manager for the
Fund. Mr Ullom has 20 years investment management experience and has been
affiliated with USAA IMCO for 10 years. Mr. Peebles has 29 years investment
management experience and has been affiliated with USAA IMCO for 11 years.
VA DIVERSIFIED ASSETS FUND. Paul H. Lundmark, Executive Director of Fixed Income
Investments, and Harry W. Miller, Senior Vice President of Equity Investments at
USAA IMCO, together are primarily responsible for managing the fixed income and
equity components, respectively, of the VA Diversified Assets Fund. Mr. Miller
also acts as Asset Allocation Manager for the Fund. Mr. Lundmark has 9 years
investment management experience and has been associated with USAA IMCO for 4
years. Prior to joining USAA IMCO, Mr. Lundmark was an associate at Raymond
James & Associates, Inc., a registered broker-dealer, and an investment analyst
with Home Life Insurance Company. Mr. Miller has 38 years investment management
experience and has been affiliated with USAA IMCO for 21 years.
Purchase of Fund Shares
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Shares of the Funds are currently sold in a continuous offering only to
the Separate Account to fund benefits under the Contracts issued by USAA
Life. The Separate Account is divided into seven Variable Fund Accounts, five
of which will invest in a corresponding Fund of the Trust, as directed by the
Contract Owners. The Variable Fund Accounts purchase Trust shares at the net
asset value per share ("NAV") of the corresponding Funds, without a sales
charge, next determined after the Company receives a premium payment or
request for a transfer into a Fund.
Investments in each Fund are credited to each Variable Fund Account in
the form of full and fractional shares of the designated Fund. The Funds do
not issue share certificates. Initial and subsequent premium payments
allocated to a specific Fund are subject to the limits applied by the Contracts.
In the future, the Trust may offer its shares to other separate accounts
of USAA Life as well as unaffiliated life insurance companies to fund
benefits under variable annuity contracts and variable life insurance
policies. The Trust does not foresee any disadvantage to purchasers of
variable annuity contracts and variable life insurance policies arising out
of these arrangements. Nevertheless, the Board of Trustees intends to monitor
events in order to identify any material irreconcilable conflicts which may
possibly arise and to determine what action, if any, should be taken in
response thereto.
DISTRIBUTOR
USAA IMCO serves as the distributor of the Fund shares pursuant to the
Underwriting Agreement, and receives no separate compensation for its
services in that capacity. No commissions are paid in connection with the
sale of Fund shares to the Separate Account.
Redemption of Fund Shares
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USAA Life redeems shares of the appropriate Fund to make withdrawals or
transfers under the terms of the Contracts. Redemptions are processed on each
day on which the New York Stock Exchange (the "Exchange") is open for
business. Redemptions due to Contract Owner withdrawals or transfers are
processed at the Fund's NAV next determined after USAA Life receives
instructions from the Contract Owner. Redemptions that are not based on
actions by Contract Owners will be effected at the Fund's NAV next determined
after the Fund receives the redemption request.
Payment for redeemed shares will be made promptly, but in no event later
than seven days after USAA Life receives the redemption order in proper form.
However, the Trust may suspend the right of redemption or postpone the date
of payment during any period that the Exchange 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. The amount
received upon the redemption of the shares of the Funds
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may be more or less than the amount paid for the shares, depending upon the
fluctuations in the market value of the assets owned by a particular Fund.
Valuation of Fund Shares
- --------------------------------------------------------------------------------
The price at which shares of the Funds are purchased and redeemed by the
Separate Account is equal to the NAV per share determined on the effective
date of the purchase or redemption. The NAV is calculated by adding the value
of all securities and other assets in a Fund, deducting liabilities, and
dividing that sum by the number of outstanding shares of the Fund. The NAV
per share for each Fund is calculated at the close of the regular trading
session of the Exchange, which is usually 4:00 p.m. Eastern time.
VALUATION OF SECURITIES OF THE FUNDS (OTHER THAN THE VA MONEY MARKET FUND)
Securities traded on a U.S. exchange are generally valued at the last
sales price on the exchange. If no sale is reported, the latest bid price is
generally used. Securities traded in a U.S. OTC market 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 carried at amortized cost, which generally 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 or
its delegates. Securities that cannot be valued by the methods set forth
above are valued in good faith at fair market value using methods determined
by the Adviser under the general supervision of the Board of Trustees.
Securities primarily traded on foreign securities exchanges are
generally valued at the preceding closing value of such security on the
exchange where they are primarily traded. If no sale is reported, the latest
bid price is generally used depending on local custom or regulation.
Securities traded in a foreign OTC market are valued at the last sales price,
or, if not available, at the average of the bid and asked prices. If there is
not active trading in a particular security for a given day, the latest bid
price is generally used. Because of the need to obtain prices as of the close
of trading on various exchanges throughout the world, the calculation of net
asset value does not take place contemporaneously with the determination of
the prices of the foreign portfolio securities of a particular Fund. If an
event were to occur after the value of an instrument was established, but
before the net asset value per share was determined, which was likely to
materially change the net asset value of a particular Fund, then that
instrument would be valued using fair value considerations by the Board of
Trustees or its delegate.
VALUATION OF THE VA MONEY MARKET FUND'S SECURITIES
The valuation of the VA Money Market Fund's securities is based upon
their amortized cost, which does not take into account unrealized capital
gain or loss. This involves valuing an instrument at its cost and thereafter
assuming a constant amortization to maturity of any discount or premium,
regardless of the impact of fluctuating interest rates on the market value of
the instrument. While this method provides certainty in valuation, it may
result in periods during which the value of an instrument, as determined by
amortized cost, is higher or lower than the price the Fund would receive upon
the sale of the instrument. (See "Valuation of Trust Shares" in the SAI.)
Dividends and Distributions
- --------------------------------------------------------------------------------
Each Fund, other than the VA Money Market Fund, will declare and pay to
the appropriate Variable Fund Account of the Separate Account at least once
each year: (1) all net investment income, which includes dividends and
interest paid on each Fund's investments less expenses incurred in the Fund's
operations; and (2) all net realized short-term and long-term capital gains,
if any, earned during the year.
The VA Money Market Fund declares a dividend each day the Fund's NAV is
calculated, equal to all of its daily net income, payable to the
corresponding Variable Fund Account of the Separate Account as of the close
of business the preceding business day. The amount of the dividend of the VA
Money Market Fund may fluctuate from day to day and may be omitted on some
days, depending on changes in the factors that comprise the VA Money Market
Fund's net income.
All distributions, whether from net capital gains or net investment
income, will be paid in the form of additional shares of that Fund at NAV.
Because the value of each Fund's shares, other than those of the VA Money
Market Fund, is based directly on the amount of its net assets, including any
undistributed net income, any distribution of income or capital gains will
result in a decrease in the value of that Fund's shares equal to the amount
of the distribution. The price of each Fund's shares is quoted ex-dividend
on the business day following the record date.
Tax Matters
- --------------------------------------------------------------------------------
Each Fund has elected to be treated as a "regulated investment company"
under Subchapter M of the Internal Revenue Code of 1986 (the "Code"), as
amended, and to take all other actions required so that no federal income tax
will be payable by the Funds. Each Fund will be treated as a separate entity
for federal income tax purposes. As a regulated investment company, each Fund
will not be subject to federal income tax provided it distributes all of its
investment company income and net capital gains for each taxable year in
accordance with the Code.
The VA World Growth Fund may make an election to pass through to USAA
Life any taxes withheld by foreign taxing jurisdictions on foreign source
income. Such an election will
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result in additional taxable income and income tax to USAA Life. The amount
of additional income tax, however, may be more than offset by credits for the
foreign taxes withheld, which are also passed through. These credits may
provide a benefit to USAA Life.
DIVERSIFICATION
Each Fund is subject to asset diversification requirements described by
the U.S. Treasury Department under Section 1.817-5 of the Treasury
Regulations. The regulations generally provide that, as of the end of each
calendar quarter or within 30 days thereafter, no more than 55% of the total
assets of a Fund may be represented by any one investment, no more than 70%
by any two investments, no more than 80% by any three investments and no more
than 90% by any four investments. For this purpose, all securities of the
same issuer are considered a single investment. Furthermore, each U.S.
Government agency or instrumentality is treated as a separate issuer. There
are also alternative diversification requirements that may be satisfied by
the Funds under the regulations.
The Funds intend to comply with the diversification requirements. If the
Funds or a Fund should fail to comply with these diversification requirements,
or fails to meet the requirements of Subchapter M of the Code, Contracts
invested in the Funds would not be treated as annuity contracts for income tax
purposes under the Code. (See "Certain Federal Income Tax Considerations" in the
Trust's SAI for further information.)
For more detailed information regarding the federal income tax treatment
of the Contracts and distributions to Contract Owners, please refer to the
accompanying Prospectus that describes the Contracts.
Performance Information
- --------------------------------------------------------------------------------
The Funds may, from time to time, include quotations of their TOTAL RETURN
or YIELD in advertisements, sales literature or reports to Contract Owners or to
prospective investors.
The TOTAL RETURN of a Fund refers to the percentage change in value of a
hypothetical investment in the Fund, including the deduction of a proportional
share of Fund expenses, and assumes that all dividends and capital gains
distributions during the period are reinvested. CUMULATIVE TOTAL RETURN reflects
the total change in value of an investment in the Fund over a specified period,
including, but not limited to, periods of one, five and ten years, or the period
since the Fund's inception through a stated ending date. AVERAGE ANNUAL TOTAL
RETURN is the constant rate of return that would produce the cumulative total
return over the specified period, if compounded annually. Average annual total
return figures are calculated according to a formula prescribed by the SEC.
The YIELD of a Fund refers to the income generated by an investment in
the Fund over a specific period (seven days in the case of the VA Money
Market Fund, 30 days in the case of all other Funds), excluding realized and
unrealized capital gains and losses in the Fund's investments. This income is
then "annualized" and shown as a percentage of the investments. The VA Money
Market Fund may also provide quotations of its EFFECTIVE YIELD, which is
calculated similarly but, when annualized, the income earned by an investment
in the Fund is assumed to be reinvested. The EFFECTIVE YIELD of the VA Money
Market Fund will be slightly higher than its yield because of the compounding
effect of this assumed reinvestment.
A Fund may also, from time to time, compare its performance in
advertisements, sales literature and reports to Contract Owners or to
prospective investors to: (1) widely recognized indices (e.g., the Standard &
Poors 500 Composite Stock Index, the Dow Jones Industrial Average, etc.); (2)
other mutual funds whose performance is reported by Lipper Analytical Services,
Inc., ("Lipper"), Variable Annuity Research & Data Service ("VARDS") and
Morningstar, Inc. ("Morningstar") or reported by other services, companies,
individuals or other industry or financial publications of general interest,
such as Forbes, Money, The Wall Street Journal, Business Week, Barron's,
Changing Times and Fortune, which rank and/or rate mutual funds by overall
performance or other criteria; and (3) the Consumer Price Index. Lipper, VARDS
and Morningstar are widely quoted independent research firms that rank mutual
funds by overall performance, investment objectives, and assets. Unmanaged
indices may assume the reinvestment of dividends but usually do not reflect any
"deduction" for the expense of operating or managing a fund.
Total return and yield quotations reflect only the performance of a
hypothetical investment in the Fund during a specified period. These
quotations are based on historical data and do not in any way indicate or
project future performance. Quotations of a Fund's total return and yield do
not reflect charges or deductions against the Variable Fund Account or
charges and deductions against the Contracts. The yield and share price of
the VA Income Fund, VA Growth and Income Fund, VA World Growth Fund and VA
Diversified Assets Fund will vary, and shares, when redeemed, may be worth
more or less than the original purchase price. The yield of the VA Money
Market Fund will also vary. See the Statement of Additional Information for
more information about the Funds' performance.
Additional Information About the Trust
- --------------------------------------------------------------------------------
ORGANIZATION AND CAPITALIZATION
The Trust was organized as a Delaware business trust on July 20, 1994.
The Trust is authorized to issue an unlimited number of full and fractional
shares of beneficial interest, having no par value, in one or more series.
The Board of Trustees currently has authorized the issuance of five
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series of shares representing interests in the respective Funds and may, in
the future, authorize the issuance of additional series of shares. Each share
of beneficial interest of each Fund represents an equal proportionate
interest in that Fund with each other share, and each share is entitled to
such dividends and distributions of income belonging to that Fund as may be
declared by the Board of Trustees.
USAA Life, through the Separate Account, provided the initial
capitalization of each Fund and, as of July 1, 1995, owned more than 25% of the
shares of beneficial interest in each Fund. As a result of such ownership, USAA
Life may be deemed to be in control of the Funds.
VOTING PRIVILEGES
The voting privileges of Contract Owners, and limitations on those
privileges, are explained in the accompanying prospectus relating to the
Contracts. USAA Life, as the owner of the assets in the Separate Account, will
vote Fund shares that are held in the Separate Account to fund benefits under
the Contracts in accordance with the instructions of Contract Owners. This
practice is commonly referred to as "pass-through" voting. USAA Life also
will vote for or against any proposition, or will abstain from voting, any
Fund shares attributable to a Contract for which no timely voting
instructions are received, and any Fund shares held by USAA Life for its own
account, in proportion to the voting instructions that it receives with
respect to all Contracts participating in that Fund. This practice is
commonly referred to as "mirror" or "echo" voting. If USAA Life determines,
however, that it is permitted to vote any Fund shares in its own right, it
may elect to do so, subject to the then current interpretation of the 1940
Act and the rules thereunder.
Each Fund share is entitled to one vote (with proportionate voting for
fractional shares) irrespective of the relative net asset value of the Fund
shares. Accordingly, the number of votes obtained will generally vary
depending upon which Fund's shares are purchased. For example, a $100
investment in shares of the VA Money Market Fund purchased at its initial NAV
of $1 would result in 100 votes, whereas the same investment in shares of any
one of the other Funds purchased at its initial NAV of $10 would result in
only 10 votes.
On matters affecting an individual Fund differently from any other Fund,
a separate vote of the shares of that Fund is required. Shares of a Fund are
not entitled to vote on any matter not affecting that Fund. The shares of all
the Funds vote together on matters that do not affect one Fund differently
from another, such as the election of Trustees.
Under Delaware law, the Trust is not required to hold annual or special
meetings of shareholders and the Trust does not expect to hold any such
meeting unless required by the 1940 Act. Special meetings may be called for
purposes such as electing or removing Trustees, changing fundamental
policies, or approving an investment advisory contract. Also, the holders of
an aggregate of at least 10% of the outstanding shares of the Trust may
request a meeting at any time for the purpose of voting to remove one or more
of the Trustees.
Service Providers
- --------------------------------------------------------------------------------
DISTRIBUTOR:
USAA Investment Management Company
9800 Fredericksburg Rd.
San Antonio, Texas 78288
CUSTODIAN:
State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02110
TRANSFER AGENT:
USAA Life Insurance Company
9800 Fredericksburg Road
San Antonio, Texas 78288
LEGAL COUNSEL:
Freedman, Levy, Kroll & Simonds
1050 Connecticut Avenue, N.W.
Washington, D.C. 20036
INDEPENDENT AUDITORS:
KPMG Peat Marwick LLP
112 East Pecan, Suite 2400
San Antonio, Texas 78205
No dealer, salesperson, or other person has been authorized to give any
information or to make any representation not contained in this Prospectus and,
if given or made, such information or representation must not be relied upon as
having been authorized. This Prospectus does not constitute an offering of any
securities other than the registered securities to which it relates or an offer
to any person in any jurisdiction where such offer would be unlawful.
USAA LIFE INVESTMENT TRUST
AUGUST 1, 1995
44B
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
-----------------------------------
USAA LIFE INVESTMENT TRUST
AUGUST 1, 1995
This Statement of Additional Information ("SAI") is not a Prospectus, but should
be read in conjunction with the Prospectus for the USAA Life Investment Trust.
The Prospectus sets forth information that a prospective investor ought to know
before investing. Capitalized terms used in this SAI that are not otherwise
defined herein have the same meaning given to them in the Prospectus. A copy of
the Prospectus may be obtained by writing USAA Life Insurance Company at 9800
Fredericksburg Road, San Antonio, Texas 78288, or by calling 1-800-531-8000.
This SAI and the Prospectus are dated August 1, 1995, and may be amended from
time to time.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
CAPTION PAGE
- ------- ----
<S> <C>
GENERAL INFORMATION AND HISTORY......................................... 3
DISTRIBUTOR............................................................. 3
INVESTMENT ADVISER...................................................... 3
CUSTODIAN............................................................... 4
TRANSFER AGENT.......................................................... 4
INDEPENDENT AUDITORS.................................................... 4
LEGAL MATTERS........................................................... 4
VALUATION OF SECURITIES................................................. 4
ADDITIONAL INFORMATION REGARDING REDEMPTION OF SHARES................... 7
INVESTMENT POLICIES AND TECHNIQUES...................................... 7
Section 4(2) Commercial Paper and Rule 144A Securities................ 7
Liquidity Determinations.............................................. 8
Lending of Securities................................................. 8
Forward Currency Contracts............................................ 9
When-Issued Securities................................................ 9
REITS................................................................. 10
Limitations on Holdings of Foreign Securities......................... 10
INVESTMENT RESTRICTIONS................................................. 10
Additional Restrictions............................................... 11
PORTFOLIO TRANSACTIONS.................................................. 12
Portfolio Turnover Rates.............................................. 13
FURTHER DESCRIPTION OF TRUST SHARES..................................... 13
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS............................... 14
TRUSTEES AND OFFICERS OF THE TRUST...................................... 15
Committees of the Board of Trustees................................... 18
THE TRUST'S ADVISER..................................................... 18
The Advisory Agreement................................................ 19
PRINCIPAL HOLDERS OF SECURITIES......................................... 20
CALCULATION OF PERFORMANCE DATA......................................... 20
Yield - VA Money Market Fund.......................................... 20
Yield - Other Funds................................................... 21
Total Return.......................................................... 21
FINANCIAL STATEMENTS.................................................... 23
APPENDIX A - LONG-TERM AND SHORT-TERM DEBT RATINGS...................... 52
APPENDIX B - COMPARISON OF FUND PERFORMANCE............................. 57
</TABLE>
2
<PAGE>
GENERAL INFORMATION AND HISTORY
USAA Life Investment Trust (the "Trust") is a diversified open-end
management investment company formed as a business trust under laws of the State
of Delaware on July 20, 1994. The Trust was established by USAA Life Insurance
Company ("USAA Life" or the "Company") to serve as the investment vehicle for
premium payments received by the Company from the sale of variable annuity
contracts (the "Contracts") funded through the Separate Account of USAA Life
Insurance Company (the "Separate Account"). The Trust is currently made up of
five investment Funds: USAA Life Variable Annuity Money Market Fund (the "VA
Money Market Fund"), USAA Life Variable Annuity Income Fund (the "VA Income
Fund"), USAA Life Variable Annuity Growth and Income Fund (the "VA Growth and
Income Fund"), USAA Life Variable Annuity World Growth Fund (the "VA World
Growth Fund"), and USAA Life Variable Annuity Diversified Assets Fund (the "VA
Diversified Assets Fund"), collectively referred to herein as the "Funds." Each
Fund represents a separate series of shares of beneficial interest in the Trust.
Each share of beneficial interest issued with respect to an individual Fund
represents a pro-rata interest in the assets of that Fund and has no interest in
the assets of any other Fund. Each Fund bears its own liability and also its
proportionate share of the general liabilities of the Trust. The Trust is
registered under the Investment Company Act of 1940 (the "1940 Act") and its
shares are registered under the Securities Act of 1933 (the "1933 Act"). This
registration does not imply any supervision by the Securities and Exchange
Commission (the "SEC" or the "Commission") over the Trust's management or its
investment policies or practices.
DISTRIBUTOR
The Contracts will be primarily sold in a continuous offering by direct
response through salaried sales account representatives who will be
appropriately licensed under state law to sell variable annuity contracts and
registered with the National Association of Securities Dealers, Inc. (the
"NASD") as registered representatives and/or principals. The Contracts will be
distributed through USAA Investment Management Company ("USAA IMCO" or the
"Adviser"), an affiliate of USAA Life, which is registered as a broker-dealer
with the SEC and is a member of the NASD.
INVESTMENT ADVISER
USAA IMCO, registered as an investment adviser with the SEC under the
Investment Advisers Act of 1940, is the investment adviser to the Trust.
3
<PAGE>
CUSTODIAN
State Street Bank and Trust Company, 225 Franklin Street, Boston, MA,
02110, is the Trust's custodian ("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 VA World Growth
Fund 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.
TRANSFER AGENT
USAA Life, the depositor of the Separate Account, serves as transfer agent
for the Trust pursuant to a Transfer Agent Agreement. USAA Life may be
reimbursed for its expenses incurred in connection with providing services under
the Transfer Agent Agreement.
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP, 112 East Pecan, Suite 2400, San Antonio, Texas
78205, independent auditors, will perform an annual audit of USAA Life, USAA
IMCO, and when required, an annual audit of the Trust. The audited financial
statements for USAA LIFE are included in the Statement of Additional Information
(the "SAI") for the Separate Account.
LEGAL MATTERS
Freedman, Levy, Kroll and Simmonds, Washington, D.C., has passed upon the
legal validity of the Funds' shares and has advised the Trust on certain federal
securities law matters.
VALUATION OF SECURITIES
Shares of each Fund are offered on a continuing basis to the Separate
Account through USAA IMCO. The offering price for shares of each Fund is equal
to the current net asset value (the "NAV") per share. The NAV per share of each
Fund is calculated by adding the value of
4
<PAGE>
each of the Fund's portfolio securities and other assets, deducting its
liabilities, and dividing the remainder by the number of Fund shares
outstanding.
A Fund's NAV per share is calculated each day, Monday through Friday,
except days on which the New York Stock Exchange (the "Exchange") is closed. The
Exchange is currently scheduled to be closed on New Year's Day, President's Day,
Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and
Christmas, and on the preceding Friday or subsequent Monday when one of these
holidays falls on a Saturday or Sunday, respectively.
The value of the securities of the VA Income Fund, VA Growth and Income
Fund, VA World Growth Fund and VA Diversified Assets Fund is determined by one
or more of the following methods:
(1) Portfolio securities, except as otherwise noted, traded primarily on a
domestic securities exchange, are valued at the last sales price on that
exchange. If no sale is reported, the latest bid price is generally used
depending upon local custom or regulation.
(2) Securities traded in a U.S. over-the-counter ("OTC") market are priced
at the last sales price or, if not available, at the average of the bid
and asked prices at the time regular trading of listed securities closes
on the Exchange.
(3) Debt securities purchased with maturities of 60 days or less are stated
at amortized cost, which generally approximates market value. Repurchase
agreements are valued at cost.
(4) Other debt securities are valued each business day by a pricing service
(the "Service") approved by the Board of Trustees of the Trust (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,
indicators as to values from dealing in securities, and general market
conditions.
(5) Securities primarily traded on foreign securities exchanges are
generally valued at the preceding closing value of such security on the
exchange where they are primarily traded. If no closing price is
available, the latest bid price is generally used, depending upon local
custom or regulation.
5
<PAGE>
(6) All foreign securities traded in the OTC market are valued at the last
sales price, or, if not available, at the average of the bid and asked
prices. If there is not active trading in a particular security for a
given day, the latest bid price is generally used.
(7) Securities which cannot be valued by the methods set forth above, and
all other assets, are valued in good faith at fair market value using
methods determined by the Adviser under the general supervision of the
Board of Trustees. For purposes of determining each Fund's net asset
value, all assets and liabilities initially expressed in foreign currency
values will be converted into U.S. dollar values at the spot price of
such currencies against U.S. dollars as last quoted by any recognized
broker-dealer.
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 net asset
value 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 net asset value is
calculated will not be reflected in a Fund's net asset value, unless the Adviser
determines that the particular event would materially affect net asset value. In
such a case, the Fund's Adviser, 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 VA Money Market Fund's securities is stated at amortized
cost, which generally approximates market value. This involves valuing a
security at its cost and thereafter assuming a constant amortization to maturity
of any discount or premium, regardless of the impact of fluctuating interest
rates. While this method provides certainty in valuation, it may result in
periods during which the value of an instrument, as determined by amortized
cost, is higher or lower than the price the Fund would receive upon the sale of
the instrument.
The valuation of the VA Money Market Fund's portfolio instruments based
upon their amortized cost is subject to the Fund's adherence to certain
procedures and conditions. The Adviser will purchase U.S. dollar-denominated
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 Adviser
will invest only in securities that are judged to present minimal credit risk
and that satisfy the quality and diversification requirements of applicable
rules and regulations of the SEC.
The Board of Trustees has established procedures designed to stabilize the
VA Money Market Fund'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
6
<PAGE>
market quotations, deviates from $1.00 per share and, if so, whether such
deviation may result in material dilution, or is otherwise unfair to existing
shareholders. In the event that it is determined that such a deviation exists,
the Board of 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 an NAV per
share by using available market quotations.
ADDITIONAL INFORMATION REGARDING REDEMPTION OF SHARES
The Trust reserves the right to suspend the redemption of Trust shares (1)
for any periods during which the Exchange 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.
INVESTMENT POLICIES AND TECHNIQUES
The Prospectus describes certain fundamental investment objectives and
certain investment policies applicable to each Fund. The following is provided
as additional information.
SECTION 4(2) COMMERCIAL PAPER AND RULE 144A SECURITIES
The Funds may invest in commercial paper issued in reliance on the "private
placement" exemption from registration afforded by Section 4(2) of the 1933 Act
("Section 4(2) Commercial Paper"). Section 4(2) Commercial Paper is restricted
as to disposition under the federal securities laws; therefore, any resale of
Section 4(2) Commercial Paper must be effected in a transaction exempt from
registration under the Securities Act of 1933 ("1933 Act"). Section 4(2)
Commercial Paper is normally resold to other investors through or with the
assistance of the issuer or investment dealers who make a market in Section 4(2)
Commercial Paper, thus providing liquidity.
The Funds may also purchase restricted securities eligible for resale to
"qualified institutional buyers" pursuant to Rule 144A under the 1933 Act ("Rule
144A Securities"). Rule 144A provides a non-exclusive safe harbor from the
registration requirements of the 1933 Act for resales of certain securities to
institutional investors.
7
<PAGE>
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 and will not be considered
"restricted securities" for purposes of a Fund's investment restriction.
LIQUIDITY DETERMINATIONS
The Board of Trustees has established guidelines pursuant to which Section
4(2) Commercial Paper, Rule 144A Securities, and certain restricted debt
securities that are subject to unconditional put or demand features exercisable
within seven days ("Demand Feature Securities") may be determined to be liquid
for purposes of complying with a Fund's investment restriction applicable to
investments in illiquid securities. In determining the liquidity of Section 4(2)
Commercial Paper and Rule 144A Securities, the Adviser will, among other things,
consider the following factors 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) the willingness of dealers to undertake to make a market in the
security, (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 and (5) such other factors as
the Adviser may determine to be relevant to such determination. In determining
the liquidity of Demand Feature Securities, the Adviser 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
Demand Feature Securities. In evaluating the credit quality of the Put Provider,
the Adviser will consider all factors that it deems indicative of the capacity
of the Put Provider to meet its obligations under the Demand Feature Securities
based upon a review of the Put Provider's outstanding debt and financial
statements and general economic conditions.
LENDING OF SECURITIES
Each Fund may lend its securities. A lending policy may be authorized by
the Board of Trustees and implemented by the Adviser, but securities may be
loaned only to qualified broker-dealers or institutional investors that agree to
maintain cash collateral with the Trust's custodian or another third party
custodian equal at all times to at least 100% of the value of the loaned
securities. The Board of 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.
8
<PAGE>
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, except that
this limitation does not apply to purchases of debt securities or to repurchase
agreements. The Trust may terminate such loans at any time.
FORWARD CURRENCY CONTRACTS
The VA World Growth Fund may enter into forward currency contracts in order
to protect against uncertainty in the level of future foreign exchange rates.
A forward currency contract involves an agreement to purchase or sell a
specific currency at 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.
Although the Fund values its assets each business day in terms of U.S.
dollars, it does not intend to convert its foreign currencies into U.S. dollars
on a daily basis. It will do so from time to time, and may incur 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 that 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.
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 deposit 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 the sale of the
when-issued securities themselves (which may have a value greater or less than
the Fund's payment obligations).
9
<PAGE>
REITS
Because the VA Growth and Income Fund, VA World Growth Fund and VA
Diversified Assets Fund each may invest a portion of its assets in REITs, each
Fund 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.
LIMITATIONS ON HOLDINGS OF FOREIGN SECURITIES
To the extent necessary to comply with state insurance regulatory
requirements the VA World Growth Fund as a matter of operating policy will
invest in no less than five foreign countries; provided that, (i) if foreign
securities comprise less than 80% of the value of the Fund's net assets, the
Fund will invest in no less than four foreign countries; (ii) if foreign
securities comprise less than 60% of the value of the Fund's net assets, the
Fund will invest in no less than three foreign countries; (iii) if foreign
securities comprise less than 40% of the value of the Fund's net assets, the
Fund will invest in no less than two foreign countries; and (iv) if foreign
securities comprise less than 20% of the value of the Fund's net assets the Fund
may invest in a single foreign country.
To the extent necessary to comply with state insurance regulatory
requirements the VA World Growth Fund as a matter of operating policy will not
invest more than 20% of the value of its net assets in securities of issuers
located in any one country; provided that an additional 15% of the value of the
Fund's net assets may be invested in securities of issuers located in any one of
the following countries: Australia, Canada, France, Japan, the United Kingdom
and Germany; and provided further that 100% of the Fund's assets may be invested
in securities of issuers located in the United States.
INVESTMENT RESTRICTIONS
The following investment restrictions have been adopted by the Trust for
and are applicable to each Fund as stated. They are considered to be fundamental
policies of the Funds, and may not be changed for any given Fund without
approval by the lesser of (1) 67% or more of the voting securities present at a
meeting of the Fund if more than 50% of the outstanding voting securities of the
Fund are present or represented by proxy or (2) more than 50% of the Fund's
outstanding voting securities. The investment restrictions of one Fund thus may
be changed without affecting those of any other Fund.
Under the restrictions, each Fund may not:
(1) Issue senior securities, except for borrowings described under
"Investment Restrictions" in the Trust's Prospectus and as permitted under
the 1940 Act;
(2) 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;
(3) Purchase or sell real estate unless acquired as a result of ownership
of securities or other instruments (but this shall not prevent investments
in securities secured by real estate or interests therein);
(4) 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; or
(5) Purchase or sell commodities or commodities contracts.
10
<PAGE>
ADDITIONAL RESTRICTIONS
The following restrictions are not considered to be fundamental policies of
the Funds. Nevertheless, the Trust and each Fund will comply with them if and so
long as they are required by any state where the Fund's shares are offered for
sale. These additional restrictions may be changed by the Board of Trustees
without notice to or approval by the shareholders.
Under the additional restrictions, each Fund may not:
(1) Pledge, mortgage or hypothecate its assets to any extent greater than
33 1/3% of the value of its total assets;
(2) Purchase or retain the securities of any issuer if any officer of the
Adviser or officer or Trustee of the Trust own individually more than 1/2%
of the outstanding securities of such issuer, and together beneficially own
more than 5% of such securities;
(3) 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 and make short sales against the box; for purposes
of this restriction, the deposit or repayment of initial or variation
margin in connection with financial futures contracts or related options
will not be deemed to be a purchase of securities on margin by a Fund;
(4) Purchase securities of other investment companies, except to the extent
permitted by applicable law;
(5) Purchase or sell puts, calls, straddles or spreads or any combination
thereof, except to the extent permitted by applicable law; or
(6) Purchase 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.
PORTFOLIO TRANSACTIONS
The Adviser, pursuant to an Investment Advisory Agreement (the "Advisory
Agreement"), and subject to the general control of the 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 combination of price and execution available. The Adviser
11
<PAGE>
will 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-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 Adviser, better prices and execution are
available elsewhere.
In the allocation of brokerage business used to purchase securities for the
Funds, preference may be given to those broker-dealers who provide research or
other services to the Adviser. Such research and other services may include, for
example: advice concerning the value of securities, the advisability of
investing in, purchasing, or selling securities, and the availability of
securities or the purchasers or sellers of securities; analyses and reports
concerning issuers, industries, securities, economic factors and trends,
portfolio strategy, and performance of accounts; and various functions
incidental to effecting securities transactions, such as clearance and
settlement. In return for such services, a Fund may pay to those brokers a
higher commission than may be charged by other brokers, provided that the
Adviser determines in good faith that such commission is reasonable in terms of
either that particular transaction or of the overall responsibility of the
Adviser to the Funds and its other clients. The receipt of research from broker-
dealers that execute transactions on behalf of the Trust may be useful to the
Adviser in rendering investment management services to other clients (including
affiliates of the Adviser), and conversely, such research provided by broker-
dealers who have executed transaction orders on behalf of other clients may be
useful to the Adviser in carrying out its obligations to the Trust. While such
research is available to and may be used by the Adviser in providing investment
advice to all its clients (including affiliates of the Adviser), not all of such
research may be used by the Adviser 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 Adviser, and the expenses of the Adviser will not necessarily be
reduced by the receipt of such supplemental research. See "The Trust's Adviser."
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 Adviser provides investment advice (including affiliates of the
Adviser). On occasions when the Adviser deems the purchase or sale of a security
to be in the best interest of the Trust, as well as the Adviser's other clients,
the Adviser, 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 Adviser 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.
12
<PAGE>
PORTFOLIO TURNOVER RATES
The rate of portfolio turnover in any of the Funds will not be a limiting
factor when the Adviser 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 rate of any Fund, other than the VA Money Market Fund, 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.
FURTHER DESCRIPTION OF TRUST SHARES
The Trust is authorized to issue shares of beneficial interest in separate
Funds. Five Funds have been established. Under the Master Trust Agreement
("Trust Agreement"), the Board of Trustees is authorized to create new Funds in
addition to those already existing without shareholder approval.
The assets of each Fund 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 Board of
Trustees determines to be fair and equitable. Each share of each Fund represents
an equal proportionate interest in that Fund with every other share of that Fund
and is entitled to dividends and distributions out of the net income and capital
gains belonging to that Fund when declared by the Board of Trustees. Upon
liquidation of the Fund, shareholders are entitled to share pro rata in the net
assets belonging to such Fund available for distribution.
Under the Bylaws of USAA Life Investment Trust (the "Trust Bylaws") no
annual or regular meeting of shareholders is required. Thus, there will
ordinarily be no shareholder meeting unless otherwise required by the 1940 Act.
Pursuant to the Trust Agreement, any Trustee may be removed by the vote of
two-thirds of the Trust shares then outstanding, cast in person or by proxy at
any meeting called for the
13
<PAGE>
purpose. Under the Trust Bylaws, the Trustees shall promptly call and give
notice of a meeting of shareholders for the purpose of voting upon removal of
any Trustee when requested to do so in writing by shareholders holding not less
then 10% of the shares then outstanding.
On any matter submitted to the shareholders, the holder of each Fund share
is entitled to one vote per share (with proportionate voting for fractional
shares) regardless of the relative NAV of the Fund's shares. However, on matters
affecting an individual Fund differently from the other Funds, a separate vote
of the shareholders of that Fund is required. Shareholders of a Fund are not
entitled to vote on any matter that does not affect that Fund but that requires
a separate vote of another Fund. Shares do not have cumulative voting rights,
which means the 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. Shareholders of a particular Fund might have the
power to elect all of the Trustees of the Trust because that Fund has a majority
of the total outstanding shares of the Trust.
When issued, each Fund's shares are fully paid and nonassessable, have no
pre-exemptive or subscription rights, and are fully transferable. There are no
conversion rights.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
Each Fund intends to qualify as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986 (the "Code"), as amended.
Accordingly, no Fund will 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 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. Each of the Funds intends to satisfy these requirements. To deduct
the dividends it pays, and therefore not be subject to federal income tax at the
Trust level, each Fund must pay dividends each taxable year equal to 90% of its
taxable income and 90% of its non-taxable income.
14
<PAGE>
As discussed in the Prospectus, each Fund is also subject to asset
diversification requirements set forth in Section 817(h) of the Code and Section
1.817-5 of the Treasury Regulations. Each of the Funds intends to conduct its
investment operations in such a manner as to comply with these diversification
requirements.
In addition to these rules, the Treasury has indicated that it might in the
future issue a regulation or a revenue ruling on the issue of whether a variable
contract owner is exercising impermissible "control" over the investments
underlying a segregated asset account, thereby causing the income earned on a
Contract to be taxed currently.
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 12-month period
ending on October 31, and (3) any prior amounts not distributed. Each Fund
intends to make such distributions as are necessary to avoid imposition of the
excise tax.
The VA World Growth Fund's 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 VA World Growth Fund invests 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 the Fund with respect to investments in PFICs would be
insignificant.
TRUSTEES AND OFFICERS OF THE TRUST
The Board of Trustees consists of five Trustees. Set forth below are the
Trustees and officers of the Trust, their ages and their respective offices and
principal occupations during the last five years. Unless otherwise indicated,
the business address of each is 9800 Fredericksburg Road, San Antonio, TX
78288. Asterisks denote Trustees who are interested persons of the Trust within
the meaning of the 1940 Act.
15
<PAGE>
<TABLE>
<CAPTION>
Principal Occupation During
Name, Address and Age Position with Trust the Past Five Years
- -------------------------- ------------------- --------------------------------------------
<S> <C> <C>
Edwin L. Rosane* Chairperson and Chief Executive Officer and President,
Age 59 President USAA Life, since 1993 and 1990,
respectively; prior thereto, Executive Vice
President, USAA Life
Michael J.C. Roth* Vice Chairperson Chief Executive Officer and President,
Age 54 USAA IMCO, since October 1993 and
January 1990, respectively; prior thereto,
Executive Vice President, USAA IMCO
June R. Reedy/1/ Trustee Chairman, Mayor's Task Force To
211 N. Presa Revitalize the Historic Civic Center of San
San Antonio, Texas Antonio; City Commissioner, Historic
78205, Design & Review, City of San Antonio
Age 65 (Volunteer)
Neil H. Stone Trustee Attorney (Associate), Gendry & Sprague,
10100 Reunion Place, P.C. (known as Gendry, Sprague &
Suite 850 Wachsmuth until November 1994), since
San Antonio, Texas December 1992; prior thereto, Attorney
78216, (Associate, Shareholder, Vice President),
Age 52 Coatney, Sprague & Wachsmuth, P.C.
Gary W. West Trustee President, Radiation Oncology of San
8038 Wurzbach, Antonio, Professional Association
Suite 870
San Antonio, Texas
78229,
Age 55
Kenneth McClure Vice President Senior Vice President, Life Operations,
Age 48 USAA Life, since January 1995; prior
thereto, Senior Vice President, Life &
Health Marketing, USAA Life, since
August 1992; prior thereto, Vice
President, Life & Health Sales, USAA Life
</TABLE>
16
<PAGE>
<TABLE>
<S> <C> <C>
John W. Douglas Vice President Senior Vice President, Life & Health
Age 51 Marketing, USAA Life, since January
1995; prior thereto, Senior Vice President,
Life Operations, USAA Life, since 1990;
prior thereto, Vice President, Life
Operations, USAA Life
John W. Saunders, Jr. Vice President Senior Vice President - Investments,
Age 60 USAA IMCO
Richard T. Halinski, Jr. Secretary Vice President, USAA, and Assistant
Age 43 Secretary, USAA Life, since November
1994 and April 1991, respectively; prior
thereto, Assistant Vice President, USAA
Life and USAA, since April 1991 and
November 1990, respectively; prior
thereto, Executive Director, USAA
James A. Robinson Treasurer Senior Vice President, Finance, USAA
Age 46 Life, since April 1992; prior thereto, Vice
President, Controller, USAA Life
Dwain A. Akins Assistant Secretary Assistant Vice President, USAA, since
Age 44 November 1994; Assistant Vice President
& Assistant Secretary since April,
1995,USAA Life, prior thereto, Executive
Director, USAA, since February 1991;
prior thereto, Senior Associate Counsel,
USAA
Larkin W. Fields Assistant Treasurer Vice President - Operational Accounting,
Age 41 USAA Life, since August 1993; prior
thereto, Assistant Vice President,
Operational Accounting, USAA Life, since
May 1990; prior thereto, Executive
Director, Asset/Liability Management,
USAA Life
</TABLE>
- ----------------
/1/ Ms. Reedy retired as a Vice President of USAA Life Insurance Company on
December 31, 1985.
17
<PAGE>
COMMITTEES OF THE BOARD OF TRUSTEES
The Trust has an Audit Committee, an Executive Committee and a Pricing and
Investment Committee. The duties of these three Committees and their present
membership are as follows:
AUDIT COMMITTEE: The members of the Audit Committee consult with the Trust's
independent public accountants if the accountants deem it desirable, and will
meet with the Trust's independent public accountants at least once annually to
discuss the scope and results of the annual audit of the Funds and such other
matters as the Committee members deem appropriate or desirable. Trustees Reedy,
Stone and West are members of the Audit Committee.
EXECUTIVE COMMITTEE: During intervals between meetings of the Board of
Trustees, the Executive Committee possesses and may exercise all of the powers
of the Board of Trustees in the management of the Trust except as to those
matters that specifically require action by the Board of Trustees. Trustees
Rosane, Roth and Reedy are members of the Executive Committee.
PRICING AND INVESTMENT COMMITTEE: During intervals between meetings of the
Board of Trustees, the Pricing and Investment Committee reviews each Fund's
investments and confers with USAA IMCO at such times and as to such matters as
the Committee members deem appropriate. Trustees Roth, Stone, and West are
members of the Pricing and Investment Committee.
As of the date of this SAI, the Trustees and officers, as a group, owned
less than 1% of the Trust's outstanding voting securities through any Contract.
There are no family relationships among the Trustees, officers, and managerial
level employees of the Trust or its Adviser.
No remuneration will be paid by the Trust to any Trustee or officer of the
Trust who is affiliated with USAA Life or the Adviser. Trustees' fees consisting
of an annual retainer of $3,500 for serving on the Board of Trustees, an annual
retainer of $500 for serving on one or more committees of the Board of Trustees,
and a $500 fee for each regular or special Board meeting will be paid to each
Trustee who is not an interested person of the Trust, presently Trustees Reedy,
Stone and West. The Trustees are also reimbursed for their expenses incurred in
attending any meeting of the Board of Trustees. The Board of Trustees generally
meets quarterly.
The following table sets forth the compensation of the current Trustees for
their services as Trustees for the period January 5, 1995 (the Trust's date of
inception), through June 30, 1995:
<TABLE>
<CAPTION>
AGGREGATE AGGREGATE COMPENSATION
COMPENSATION FROM THE USAA
TRUSTEE: FROM THE TRUST: FAMILY OF FUNDS(a):
- -------- --------------- ----------------------
<S> <C> <C>
Edwin L. Rosane(b)................ None None
Michael J.C. Roth(c).............. None None
June R. Reedy..................... $1,500 None
Neil H. Stone..................... $1,500 None
Gary W. West...................... $1,500 None
</TABLE>
It is estimated that, prior to the end of the fiscal year, Trustees Reedy,
Stone, and West will each receive an additional $1,000.00 in compensation from
the Trust for their attendance at regularly scheduled Board meetings.
(a) As of May 31, 1995, the USAA Family of Funds consisted of four registered
investment companies, not including the Trust, offering a total of 29
individual funds.
(b) Trustee Rosane is the President and CEO of USAA Life, which is affiliated
with the Trust's investment adviser, USAA IMCO, and, accordingly, receives
no remuneration from the Trust.
(c) Trustee Roth is affiliated with the Trust's investment adviser, USAA IMCO,
and, accordingly, receives no remuneration from the Trust or any other fund
within the USAA Family of Funds, although he presently serves on the board
of each registered investment company within the USAA Family of Funds.
THE TRUST'S ADVISER
As described in the Prospectus, USAA IMCO is the Adviser to the Trust and
provides services under the Advisory Agreement. USAA IMCO was organized in May
1970 and has
18
<PAGE>
served as adviser and distributor for the USAA Life Investment Trust from its
inception. USAA IMCO is a wholly-owned indirect subsidiary of United Services
Automobile Association.
In addition to providing investment advice to the Trust, the Adviser
advises and manages the investments for USAA and its affiliated companies as
well as those of USAA Investment Trust, USAA Mutual Fund, Inc., USAA Tax Exempt
Fund, Inc., and USAA State Tax-Free Trust. As of the date of this SAI, total
assets under management by the Adviser were in excess of $_____ billion, of
which approximately $____ billion were in mutual fund investments.
THE ADVISORY AGREEMENT
Under the Advisory Agreement, the Adviser provides an investment program,
carries out the investment policy and manages the portfolio assets for each
Fund. The Adviser is authorized, subject to the control of the Board of
Trustees, to determine the selection, amount and time to buy or sell securities
for each Fund. For these services under the Advisory Agreement, the Trust has
agreed to pay the Adviser a monthly fee equal to the annual rate of 0.20% of
each Fund's average monthly net assets. See "Management" in the Prospectus for
further details.
The Advisory Agreement was approved on December 14, 1994, by the Board of
Trustees and was submitted for approval by the initial shareholder of each Fund.
USAA Life, on behalf of the Separate Account, was the initial shareholder of
each Fund following its investment of the initial capitalization of each Fund.
The Advisory Agreement will remain in effect until January 3, 1997, with respect
to 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) and, in either event, a majority of the
Trustees who are not interested persons of the Adviser or of the Trust
(otherwise than as Trustees), at a meeting called for the purpose of voting on
such approval. The Advisory Agreement may be terminated, without penalty, at
any time by the Board of Trustees, the Adviser or, with respect to any Fund, by
vote of that Fund's shareholders, in each case on 60 days' written notice. It
will automatically terminate in the event of its assignment (as defined in the
1940 Act).
Pursuant to an Underwriting and Administrative Services Agreement, dated
December 16, 1994, USAA Life, out of its general account, has agreed to
permanently bear a number of the Trust's expenses, including its organizational
costs, and has agreed to pay or reimburse the Trust for its expenses to the
extent they exceed 0.65% of the monthly average net assets of the VA World
Growth Fund, and 0.35% of the monthly average net assets of each other Fund.
See "Management -- Expenses," in the Prospectus.
19
<PAGE>
PRINCIPAL HOLDERS OF SECURITIES
As of June 5, 1995, USAA Life, through the Separate Account, owned the
percentages of each Fund's outstanding shares as shown below. USAA Life will
vote such shares in accordance with instructions received from variable annuity
contract owners, annuitants and beneficiaries. If USAA Life determines, however,
that it is permitted to vote any such Fund Shares in its own right, it may elect
to do so, subject to the then-current interpretation of the 1940 Act and the
rules thereunder. The address of USAA Life is 9800 Fredericksburg Road, San
Antonio, Texas 78288. USAA Life, a Texas corporation, is wholly-owned by United
Services Automobile Association.
VA Money Market Fund 53.43%
-----
VA Income Fund 98.99%
-----
VA Growth & Income Fund 98.78%
-----
VA World Growth Fund 97.83%
-----
VA Diversified Assets Fund 98.79%
-----
CALCULATION OF PERFORMANCE DATA
Information regarding the total return and yield of the Funds is provided
under Performance Information in the Prospectus. See "Valuation of Securities"
in this SAI for a discussion of the manner in which the Funds' price per share
is calculated.
YIELD - VA MONEY MARKET FUND
When the VA Money Market Fund quotes a current annualized yield, it is
based on a specified recent seven day calendar period. It is computed by (1)
determining the net change, exclusive of capital changes, in the value of a
hypothetical pre-existing 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 by 52.14 (365/7). The resulting yield figure is
carried to the nearest hundredth of one percent.
The calculation includes the value of additional shares purchased with
dividends on the original share, and other dividends declared on both the
original share and any such additional shares. The calculation includes the
effect of all expense reimbursements to the Fund. The capital changes excluded
from the calculation are realized capital gains and losses from the sale of
securities and unrealized appreciation and depreciation.
The Fund's effective (compounded) yield will be computed by dividing
the seven-day annualized yield as defined above by 365, adding 1 to the
quotient, raising the sum to a power equal to 365 divided by seven, and
subtracting 1 from the result.
20
<PAGE>
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 - OTHER FUNDS
The Funds may advertise performance in terms of a 30-day yield quotation.
The 30-day yield quotation is computed by dividing the net investment income per
share earned during the period by the maximum offering price per share on the
last day of the period, according to the following formula:
[(a-b ) /6/ ]
YIELD = 2 [(----- +1) ]
[(cd ) - 1]
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
TOTAL RETURN
The Funds may each advertise performance in terms of average annual total
return for one, five and ten 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 prescribed by the SEC:
P(1 + T)/N/ = ERV
Where: P= a hypothetical initial investment of $1,000
T= average annual total return
n= number of years
ERV= ending redeemable value of a
hypothetical $1,000 investment made at
the beginning of the one, five or ten year
periods at the end of the year or period
21
<PAGE>
The calculation 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 Fund expenses, net of reimbursements.
In addition, the Funds may each advertise performance in terms of
cumulative total return. Cumulative total return reflects the total change in
value of an investment in the Fund over a specified period, including, but not
limited to, periods of one, five and ten years, or the period since the Fund's
inception through a stated ending date. The SEC has not prescribed a standard
formula for computing cumulative total return.
22
<PAGE>
USAA LIFE INVESTMENT TRUST
STATEMENTS OF ASSETS AND LIABILITIES
(IN THOUSANDS)
April 30, 1995
(Unaudited)
<TABLE>
<CAPTION>
USAA LIFE USAA LIFE USAA LIFE USAA LIFE
VA MONEY USAA LIFE VA GROWTH VA WORLD VA DIVERSIFIED
MARKET VA INCOME AND INCOME GROWTH ASSETS
FUND FUND FUND FUND FUND
-------- --------- ---------- --------- --------------
<S> <C> <C> <C> <C> <C>
ASSETS
Investments in securities, at market value
(identified cost of $3,937, $20,751, $20,341, $19,104, and
$20,265, respectively) $3,937 $21,661 $22,165 $19,882 $21,628
Cash 4 1 1 - 12
Cash denominated in foreign currencies (identified cost of $3) - - - 3 -
Receivables:
Capital shares sold 12 - 7 1 2
Dividends and interest 9 147 40 48 178
Securities sold - - 63 603 -
Foreign currency contracts held, at value - - - 287 -
------ ------- ------- ------- -------
Total assets 3,962 21,809 22,276 20,824 21,820
------ ------- ------- ------- -------
LIABILITIES
Securities purchased - 199 93 197 -
Foreign currency contracts held, at value - - - 285 -
Capital shares redeemed 21 - - - -
USAA Life Insurance Company 3 22 21 35 22
------ ------- ------- ------- -------
Total liabilities 24 221 114 517 22
------ ------- ------- ------- -------
Net assets applicable to capital shares outstanding $3,938 $21,588 $22,162 $20,307 $21,798
====== ======= ======= ======= =======
REPRESENTED BY:
Paid-in capital 3,938 $20,193 $20,134 $19,203 $20,074
Accumulated net investment income - 482 193 122 332
Accumulated net realized gain on investments - 3 11 204 29
Net unrealized appreciation of investments - 910 1,824 778 1,363
------ ------- ------- ------- -------
Net assets applicable to capital shares outstanding $3,938 $21,588 $22,162 $20,307 $21,798
====== ======= ======= ======= =======
Capital shares outstanding, unlimited number of shares authorized,
no par value 3,938 2,018 2,000 1,936 2,007
====== ======= ======= ======= =======
Net asset value, redemption price, and offering price per share $ 1.00 $ 10.70 $ 11.08 $ 10.49 $ 10.86
====== ======= ======= ======= =======
</TABLE>
See accompanying notes to financial statements.
<PAGE>
USAA LIFE VARIABLE ANNUITY MONEY MARKET FUND
PORTFOLIO OF INVESTMENTS IN SECURITIES
April 30, 1995
(Unaudited)
CERTIFICATES OF DEPOSIT (4.7%)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
- --------- -------- ---- -------- ------
<C> <S> <C> <C> <C>
$ 185 First Deposit National Bank
(cost: $185) 6.25% 8/03/95 $ 185
CORPORATE AND MUNICIPAL OBLIGATIONS (95.5%)
AUTO PARTS (6.4%)
100 Alabama IDA RB (Rehau Project) 6.25 10/01/19(e) 100(i)
150 Bardstown, KY, Taxable Notes, Series 1994 6.20 6/01/24(e) 150(i)
-------
250
-------
BUILDING MATERIALS GROUP (2.6%)
100 Sarasota County, FL, IDA RB, Series 1994 6.15 9/01/14(e) 100(i)
-------
BUILDINGS (2.6%)
100 MMR Funding I, DEB, Series A 6.08 9/01/10(e) 100(i)
-------
ELECTRIC POWER (2.6%)
100 Northern States Power Co. (Minn.) 5.97 5/02/95 100
-------
FINANCE - BUSINESS/COMMERCIAL (2.6%)
100 General Electric Capital Corp., CP 6.33 5/05/95 100
-------
FINANCE - CONSUMER (5.0%)
100 Ford Motor Credit Co., CP 6.55 7/05/95 99
100 Heller Financial Inc., CP 5.97 6/26/95 99
-------
198
-------
FINANCE - RECEIVABLES (11.8%)
150 Capital One Funding Corp., FRN, Series 1993A 6.08 6/02/08(e) 150(i)
100 Capital One Funding Corp., FRN, Series 1994D 6.08 10/01/24(e) 100(i)
100 Midwest Funding Corp., FRN, Series 1992A 6.08 5/01/07(e) 100(i)
114 Receivables Capital Corp., CP 6.00 5/22/95 113
-------
463
-------
FOODS (3.8%)
150 H.J. Heinz Co. 6.00 5/08/95 150
-------
HEALTHCARE - DIVERSIFIED (2.5%)
100 GMS Associates Partnership Project Health 6.20 5/15/24(e) 100(i)
Care RB, Series 1994 -------
HEALTHCARE - MISCELLANEOUS (2.5%)
100 Mason City Clinic, P.C., IA, Demand Bonds, 6.15 9/01/22(e) 100(i)
Series 1992 -------
</TABLE>
<PAGE>
USAA LIFE VARIABLE ANNUITY MONEY MARKET FUND
PORTFOLIO OF INVESTMENTS IN SECURITIES - (CONTINUED)
April 30, 1995
(Unaudited)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
- --------- -------- ---- -------- ------
<C> <S> <C> <C> <C>
HOSPITALS (2.5%)
100 Armstrong County Hospital Auth., RB, 6.20 9/01/17(e) $ 100(i)
Series 1993B ------
HOTEL - MOTEL (5.1%)
100 Howard County, MD, Taxable RB, Series 1994 6.15 10/01/09(e) 100(i)
100 Ramada Hotel Downtown, San Diego, CA, DEB 6.55 2/01/96(e) 100(i)
------
200
------
HOUSING - MULTI/FAMILY (2.5%)
100 Palm Desert Redevelopment Agency, CA, RB 6.38 8/01/22(e) 100(i)
------
LEASING (3.2%)
125 PHH Corp., CP 5.97 5/05/95 125
------
MACHINERY - DIVERSIFIED (2.5%)
100 DSL Funding Corp. FRN 6.19 12/01/09(e) 100(i)
------
NURSING CARE (3.8%)
150 Massachusetts Nursing Homes RB, 6.20 11/15/13(e) 150(i)
Series 1993 ------
SPECIAL ASSESSMENT/TAX/FEE (3.8%)
150 Community Redevelopment Agency, City 6.33 9/01/20(e) 150(i)
of Visalia, CA, DEB ------
U.S. GOVERNMENT (29.7%)
250 Federal Farm Credit Bank Consolidated, 5.86 5/22/95 249
Discount Notes
180 Federal Home Loan Bank Consolidated, 5.86 5/10/95 180
Discount Notes
170 Federal Home Loan Bank Consolidated, 5.85 5/18/95 169
Discount Notes
135 Federal Home Loan Mortgage Corp., 5.90 6/19/95 134
Discount Notes
305 Federal National Mortgage Association, 5.86 5/08/95 305
Discount Notes
130 Federal National Mortgage Association, 5.87 6/07/95 129
Discount Notes ------
1,166
------
Total corporate and municipal obligations (cost: $3,752) $3,752
------
Total investments (cost: $3,937) $3,937
======
</TABLE>
<PAGE>
USAA LIFE VARIABLE ANNUITY INCOME FUND
PORTFOLIO OF INVESTMENTS IN SECURITIES
April 30, 1995
(Unaudited)
<TABLE>
<CAPTION>
COMMON STOCKS (14.8%)
NUMBER VALUE
OF SHARES SECURITY (000)
- --------- -------- ------
<C> <S> <C>
14,000 Allegheny Power System, Inc. $ 329
9,000 American Electric Power Co., Inc. 295
13,000 CINergy Corp. 327
11,000 CIPSCO, Inc. 319
4,500 Entergy Corp. 98
11,000 General Public Utilities Corp. 313
3,300 Health Care Property Investors, Inc. 100
8,500 Houston Industries, Inc. 336
13,500 Northeast Utilities 295
4,000 NYNEX Corp. 163
6,000 PNC Bank Corp. 151
11,500 Public Service Enterprise Group, Inc. 316
5,000 Sun Co., Inc. 151
-------
Total common stocks (cost: $3,081) $ 3,193
-------
PREFERRED STOCKS (0.7%)
6,000 United Dominion Realty Trust, Inc. "A",
9.25%, Preferred Series A (cost: $150) 150
-------
</TABLE>
U.S. GOVERNMENT & AGENCY ISSUES (83.6%)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
(000) SECURITY (000)
- --------- -------- ------
<C> <S> <C>
FEDERAL NATIONAL MORTGAGE ASSOCIATION (35.7%)
1,520 6.50%, 4/01/24 $ 1,404
1,492 7.00%, 6/01/24 1,420
1,456 7.50%, 1/01/25 1,422
1,464 8.00%, 1/01/25 1,461
1,467 8.50%, 12/01/24 1,490
499 9.00%, 1/01/25 515
-------
7,712
-------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (36.2%)
1,709 6.50%, 3/15/24 - 4/15/24 1,563
1,458 7.00%, 8/15/23 1,379
1,460 7.50%, 8/15/23 1,423
1,454 8.00%, 5/15/24 1,453
1,467 8.50%, 12/15/24 1,496
489 9.00%, 1/15/25 507
-------
7,821
-------
U.S. TREASURY BOND (11.7%)
2,400 7.875%, 2/15/21 2,511
-------
Total U.S. Government & agency issues (cost: $17,246) $18,044
-------
</TABLE>
<PAGE>
USAA LIFE VARIABLE ANNUITY INCOME FUND
PORTFOLIO OF INVESTMENTS IN SECURITIES
April 30, 1995
(Unaudited)
SHORT-TERM (1.2%)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
- --------- -------- ------ -------- -------
<C> <S> <C> <C> <C>
COMMERCIAL PAPER
$ 274 General Motors Acceptance Corp., CP 5.97% 5/01/95 $ 274
(cost: $274) -------
Total investments (cost: $20,751) $21,661
=======
</TABLE>
*Non-income producing
<PAGE>
USAA LIFE VARIABLE ANNUITY GROWTH AND INCOME FUND
PORTFOLIO OF INVESTMENTS IN SECURITIES
April 30, 1995
(Unaudited)
COMMON STOCKS (97.2%)
<TABLE>
<CAPTION>
NUMBER VALUE
OF SHARES SECURITY (000)
--------- -------- ------
<C> <S> <C>
AEROSPACE/DEFENSE (5.8%)
4,000 B.F. Goodrich Co. $ 187
12,000 Boeing Co. 660
10,000 Rockwell International Corp. 436
------
1,283
------
ALUMINUM (1.5%)
7,400 Aluminum Co. of America 332
------
AUTOMOBILES (3.0%)
5,000 Chrysler Corp. 216
16,500 Ford Motor Co. 445
------
661
------
BANK HOLDING COMPANIES - MONEY CENTER (1.5%)
6,000 Bankers Trust New York Corp. 326
------
BANK HOLDING COMPANIES - OTHER MAJOR (2.0%)
9,000 BankAmerica Corp. 445
------
BROKERAGE FIRMS (1.9%)
10,000 Dean Witter, Discover & Co. 424
------
CHEMICALS (5.0%)
7,000 Dow Chemical Co. 487
6,000 Olin Corp. 335
9,000 Union Carbide Corp. 288
------
1,110
------
CHEMICALS - SPECIALTY (1.5%)
10,500 Morton International, Inc. 326
------
COMPUTER SOFTWARE & SERVICE (4.7%)
5,500 Computer Associates International, Inc. 354
5,000 First Financial Management Corp. 366
15,000 Novell, Inc.* 326
------
1,046
------
CONTAINERS - METALS & GLASS (2.0%)
13,000 Ball Corp. 445
------
DRUGS (1.3%)
6,500 Merck & Co., Inc. 279
------
</TABLE>
<PAGE>
USAA LIFE VA GROWTH AND INCOME FUND
PORTFOLIO OF INVESTMENTS IN SECURITIES
April 30, 1995
(Unaudited)
<TABLE>
<CAPTION>
NUMBER VALUE
OF SHARES SECURITY (000)
--------- -------- ------
<C> <S> <C>
ELECTRIC POWER (3.3%)
6,000 CINergy Corp. $ 151
7,000 Houston Industries, Inc. 276
15,000 Portland General Corp. 311
----
738
----
ENGINEERING & CONSTRUCTION (0.8%)
22,000 Morrison Knudsen Corp. 173
----
ENTERTAINMENT (1.3%)
8,000 Time Warner, Inc. 293
----
FOODS (2.9%)
6,000 CPC International, Inc. 352
10,500 Dean Foods Co. 299
----
651
----
GAMING COMPANIES (1.5%)
10,000 Circus Circus Enterprises, Inc.* 331
----
HEALTHCARE - DIVERSIFIED (2.1%)
6,000 American Home Products Corp. 463
----
HOMEBUILDING (1.6%)
15,000 Centex Corp. 360
----
HOUSEHOLD PRODUCTS (1.7%)
5,500 Procter & Gamble Co. 384
----
INSURANCE - MULTI/LINE COMPANIES (1.8%)
7,000 Aetna Life & Casualty Co. 399
----
INSURANCE - PROPERTY/CASUALTY (3.2%)
3,300 American International Group, Inc. 352
15,000 PartnerRe Holdings Ltd. 345
----
697
----
MACHINERY - DIVERSIFIED (1.6%)
20,000 BW/IP, Inc. 353
----
MANUFACTURING - DIVERSIFIED INDUSTRIES (0.4%)
2,800 Hillenbrand Industries, Inc. 83
----
</TABLE>
<PAGE>
USAA LIFE VARIABLE ANNUITY GROWTH AND INCOME FUND
PORTFOLIO OF INVESTMENTS IN SECURITIES (CONTINUED)
April 30, 1995
(Unaudited)
<TABLE>
<CAPTION>
NUMBER VALUE
OF SHARES SECURITY (000)
--------- -------- ------
<C> <S> <C>
MEDICAL PRODUCTS & SUPPLIES (4.1%)
16,000 Baxter International, Inc. $ 556
12,000 C.R. Bard, Inc. 349
------
905
------
NATURAL GAS DISTRIBUTION - PIPELINES (3.0%)
12,000 NICOR, Inc. 297
12,000 Sonat, Inc. 364
------
661
------
OFFICE EQUIPMENT & SUPPLIES (2.8%)
5,000 Xerox Corp. 616
------
OIL - DOMESTIC (3.5%)
20,000 Occidental Petroleum Corp. 460
11,000 Unocal Corp. 316
------
776
------
OIL - INTERNATIONAL (1.5%)
5,000 Texaco, Inc. 342
------
OIL WELL EQUIPMENT & SERVICE (1.7%)
6,000 Schlumberger Ltd. 377
------
PAPER & FOREST PRODUCTS (4.4%)
27,000 Fort Howard Corp.* 344
20,000 Jefferson Smurfit Corp.* 270
8,500 Weyerhaeuser Co. 357
------
971
------
POLLUTION CONTROL (1.7%)
14,000 WMX Technologies, Inc. 381
------
RAILROADS (1.7%)
5,500 Norfolk Southern Corp. 371
------
REAL ESTATE INVESTMENT TRUSTS (1.3%)
10,600 Developers Diversified Realty Corp. 292
------
RETAIL STORES - DEPARTMENT STORES (1.6%)
10,000 May Department Stores Co. 362
------
RETAIL STORES - GENERAL MERCHANDISING (1.6%)
6,500 Sears, Roebuck & Co. 353
------
</TABLE>
<PAGE>
USAA LIFE VA GROWTH AND INCOME FUND
PORTFOLIO OF INVESTMENTS IN SECURITIES (CONTINUED)
April 30, 1995
(Unaudited)
<TABLE>
<CAPTION>
NUMBER VALUE
OF SHARES SECURITY (000)
--------- -------- ------
<C> <S> <C>
RETAIL STORES - SPECIALTY (2.7%)
11,000 OfficeMax, Inc.* $ 282
21,000 Phillips-Van Heusen Corp. 323
-------
605
-------
TELEPHONES (8.1%)
7,000 American Telephone & Telegraph Co. 355
17,000 COMSAT Corp. 340
10,000 GTE Corp. 341
9,000 NYNEX Corp. 368
12,000 Sprint Corp. 396
-------
1,800
-------
TOBACCO (5.1%)
5,000 Philip Morris Companies, Inc. 339
10,400 RJR Nabisco Holdings Corp. 285
22,000 Universal Corp. 503
-------
1,127
-------
Total common stocks (cost: $19,770) 21,541
-------
PREFERRED STOCKS (1.7%)
4,500 National Semiconductor Corp. depositary
shares, $3.25 convertible (cost: $321) 374
-------
</TABLE>
SHORT-TERM (1.1%)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT COUPON
(000) RATE MATURITY
- --------- ------ --------
<C> <S> <C> <C> <C>
U.S. GOVERNMENT & AGENCY ISSUES
$ 250 Federal Home Loan Mortgage Corp.
(cost: $250) 5.85% 5/01/95 $ 250
-------
Total investments (cost: $20,341) $22,165
=======
</TABLE>
*Non-income producing.
<PAGE>
USAA LIFE VARIABLE ANNUITY WORLD GROWTH FUND
PORTFOLIO OF INVESTMENTS IN SECURITIES
April 30, 1995
(Unaudited)
FOREIGN SECURITIES (58.5%)
FOREIGN COMMON STOCKS (57.4%)
<TABLE>
<CAPTION>
NUMBER VALUE
OF SHARES SECURITY (000)
- --------- -------- ------
<C> <S> <C>
ARGENTINA (0.9%)
12,400 Compania Interamericana de Automobiles S.A. $ 58
6,000 YPF Sociedad Anonima 121
------
179
------
AUSTRALIA (0.9%)
90,000 CSL Ltd. 183
------
BRAZIL (0.9%)
15,100 Usinas Siderurgicas de Minas Gerais S.A.-USIMINAS ADS 181(h)
------
CANADA (1.8%)
15,000 Alliance Forest Products, Inc.* 270
3,200 Canadian Occidental Petroleum Ltd. 94
------
364
------
CHILE (1.8%)
2,000 Compania de Telefonos de Chile S.A. 138
7,900 Madeco S.A. ADS 230
------
368
------
DENMARK (2.6%)
2,200 Novo Nordisk A/S "B" 227
11,600 Tele Danmark A/S ADS 304
------
531
------
FINLAND (0.8%)
4,000 Nokia Corp. ADS 164
------
FRANCE (4.6%)
8,000 Coflexip ADS 241
5,000 Elf Aquitaine ADR 199
3,300 Eramet Group* 229
1,500 Essilor International 269
------
938
------
GERMANY (1.5%)
800 Veba AG 298
------
HONG KONG (3.5%)
84,400 Hong Kong Telecommunications Ltd. 165
50,000 Hutchison Whampoa Ltd. 217
20,000 Jardine Matheson Holdings Ltd. 159
120,000 Varitronix International Ltd. 175
------
716
------
</TABLE>
<PAGE>
USAA LIFE VARIABLE ANNUITY WORLD GROWTH FUND
PORTFOLIO OF INVESTMENTS IN SECURITIES
April 30, 1995
(Unaudited)
<TABLE>
<CAPTION>
NUMBER VALUE
OF SHARES SECURITY (000)
- --------- -------- ------
<C> <S> <C>
INDIA (1.3%)
15,000 Larsen & Toubro Ltd. GDR* $ 253
------
INDONESIA (1.7%)
110,000 PT Astra International, Inc. (Foreign) 140
5,700 PT Indonesian Satellite ADS 206
------
346
------
ITALY (1.3%)
116,800 STET 268
------
JAPAN (10.2%)
10,000 77Th Bank Ltd. 113
9,000 Canon, Inc. 149
13,000 Higo Bank 128
3,300 Kissei Pharmaceutical Co., Ltd. 130
12,000 Laox Co., Ltd. 179
3,000 Mabuchi Motor Co. 198
26,000 Minebea Co., Ltd.* 193
19,000 Mitsubishi Heavy Industries, Ltd. 138
14,000 Nissan Motor Co., Ltd. 102
6,000 Nomura Securities Co., Ltd. 121
5,000 Sanwa Bank Ltd. 108
14,000 Takashimaya Co., Ltd. 200
5,000 Tostem Corp. 182
4,000 Toyo Seikan Kaisha, Ltd. 138
------
2,079
------
MALAYSIA (1.8%)
13,000 Malaysian Assurance Alliance BHD (Foreign) 42
25,000 Resorts World BHD (Foreign) 132
32,000 United Engineers BHD (Foreign) 184
------
358
------
MEXICO (0.3%)
6,000 Bufete Industrial, S.A. de C.V. ADS 68
------
NETHERLANDS (4.2%)
2,000 EVC International N.V.* 88
1,250 Heineken N.V. 178
8,400 Royal PTT Nederland N.V. 293
2,700 Verenigd Bezit VNU 302
------
861
------
PHILIPPINES (1.1%)
400,000 Filinvest Land, Inc. (Foreign) 112
170,000 Petron Corp. (Foreign) 116
------
228
------
SINGAPORE (2.1%)
45,000 City Developments Ltd. (Foreign) 265
19,500 Keppel Corp. Ltd. (Foreign) 158
------
423
------
</TABLE>
<PAGE>
USAA LIFE VARIABLE ANNUITY WORLD GROWTH FUND
PORTFOLIO OF INVESTMENTS IN SECURITIES (CONTINUED)
April 30, 1995
(Unaudited)
<TABLE>
<CAPTION>
NUMBER VALUE
OF SHARES SECURITY (000)
- --------- -------- ------
<C> <S> <C>
SPAIN (1.1%)
6,200 Telefonica de Espana, S.A. ADR $ 228
------
SWEDEN (3.1%)
13,000 Arjo AB 202
5,300 Autoliv AB 240
10,000 Volvo AB 188
------
630
------
SWITZERLAND (0.9%)
200 Ciba Geigy AG* 137
65 Sulzer AG P.C. 39
------
176
------
THAILAND (1.1%)
25,600 Finance One Public Co. (Foreign) 141
15,000 TPI Polene Public Co. Ltd. (Foreign)* 75
------
216
------
UNITED KINGDOM (7.4%)
11,000 British Sky Broadcasting plc ADR 264
45,000 Cadbury Schweppes plc 325
50,500 Northern Ireland Electricity plc 282
20,000 Refuge Group plc 102
81,500 Tomkins plc 307
120,000 WPP Group plc 214
------
1,494
------
OTHER HOLDINGS (0.5%)
153,000 Central European Growth Fund plc 105
30,000 Central European Growth Fund plc Warrants* 4
------
109
------
Total foreign common stocks (cost: $11,356) 11,659
------
FOREIGN PREFERRED STOCKS (1.1%)
AUSTRALIA (1.1%)
100,000 Village Roadshow Ltd. (cost: $204) 229
------
Total foreign securities (cost: $11,560) 11,888
------
</TABLE>
<PAGE>
USAA LIFE VARIABLE ANNUITY WORLD GROWTH FUND
PORTFOLIO OF INVESTMENTS IN SECURITIES (CONTINUED)
April 30, 1995
(Unaudited)
<TABLE>
<CAPTION>
NUMBER VALUE
OF SHARES SECURITY (000)
- --------- -------- ------
<C> <S> <C>
DOMESTIC STOCKS (35.0%)
AEROSPACE/DEFENSE (2.5%)
1,500 B.F. Goodrich Co. $ 70
4,000 Boeing Co. 220
5,000 Rockwell International Corp. 218
------
508
------
ALUMINUM (0.4%)
2,000 Aluminum Co. of America 90
------
AUTOMOBILES (1.5%)
3,500 Chrysler Corp. 151
6,000 Ford Motor Co. 162
------
313
------
BANK HOLDING COMPANIES - MONEY CENTER (1.0%)
1,900 Bankers Trust New York Corp. 103
2,200 Citicorp 102
------
205
------
BIOTECHNOLOGY (0.7%)
2,000 Amgen, Inc.* 145
------
BROKERAGE FIRMS (0.4%)
2,000 Dean Witter, Discover & Co. 85
------
CHEMICALS (0.9%)
2,700 Dow Chemical Co. 188
------
CHEMICALS - SPECIALTY (0.6%)
4,000 Morton International, Inc. 124
------
COMMUNICATION - EQUIPMENT MANUFACTURERS (0.4%)
3,000 QualComm, Inc.* 79
COMPUTER SOFTWARE & SERVICE (2.9%)
1,800 First Financial Management Corp. 132
3,000 Microsoft Corp.* 246
4,900 Novell, Inc.* 106
3,250 Oracle Systems Corp. 99
------
583
------
CONTAINERS - METALS & GLASS (0.7%)
4,000 Ball Corp. 137
------
</TABLE>
<PAGE>
USAA LIFE VARIABLE ANNUITY WORLD GROWTH FUND
PORTFOLIO OF INVESTMENTS IN SECURITIES (CONTINUED)
April 30, 1995
(Unaudited)
<TABLE>
<CAPTION>
NUMBER VALUE
OF SHARES SECURITY (000)
- --------- -------- ------
<C> <S> <C>
DRUGS (0.4%)
2,100 Merck & Co., Inc. $ 90
ELECTRONICS - SEMI-CONDUCTORS (2.2%)
1,500 Intel Corp. 154
3,000 Motorola, Inc. 171
5,000 National Semiconductor Corp.* 114
------
439
------
ENTERTAINMENT (1.0%)
5,500 Time Warner, Inc. 201
------
FOODS (0.6%)
4,300 Dean Foods Co. 123
------
HEALTHCARE - DIVERSIFIED (1.0%)
3,200 Bristol-Myers Squibb Co. 208
------
HEALTHCARE - HMO (0.7%)
4,000 United HealthCare Corp. 145
------
HEALTHCARE - MISCELLANEOUS (0.7%)
2,500 Cerner Corp.* 133
------
HOUSEHOLD PRODUCTS (0.5%)
1,500 Procter & Gamble Co. 105
------
INSURANCE - PROPERTY/CASUALTY (1.1%)
2,000 American International Group, Inc. 213
------
MACHINERY - DIVERSIFIED (1.7%)
6,000 BW/IP, Inc. 106
2,900 Deere & Co. 238
------
344
------
MEDICAL PRODUCTS & SUPPLIES (1.2%)
4,100 C.R. Bard, Inc. 119
3,000 St. Jude Medical, Inc. 129
------
248
------
OFFICE EQUIPMENT & SUPPLIES (0.8%)
1,300 Xerox Corp. 160
------
OIL - DOMESTIC (0.4%)
3,000 Unocal Corp. 86
------
</TABLE>
<PAGE>
USAA LIFE VARIABLE ANNUITY WORLD GROWTH FUND
PORTFOLIO OF INVESTMENTS IN SECURITIES (CONTINUED)
April 30, 1995
(Unaudited)
<TABLE>
<CAPTION>
NUMBER VALUE
OF SHARES SECURITY (000)
- --------- -------- ------
<C> <S> <C>
OIL - EXPLORATION & PRODUCTION (0.6%)
4,100 Apache Corp. $ 111
------
OIL & GAS DRILLING (0.7%)
5,500 Sonat Offshore Drilling, Inc. 148
------
OIL WELL EQUIPMENT & SERVICE (0.6%)
3,400 Halliburton Co. 130
------
PAPER & FOREST PRODUCTS (1.8%)
8,600 Fort Howard Corp.* 110
6,000 Weyerhaeuser Co. 252
------
362
------
POLLUTION CONTROL (0.7%)
4,800 WMX Technologies, Inc. 131
------
REAL ESTATE INVESTMENT TRUSTS (0.7%)
5,000 Developers Diversified Realty Corp. 138
------
RESTAURANTS (0.4%)
5,000 Brinker International, Inc.* 86
------
RETAIL STORES - GENERAL MERCHANDISING (0.9%)
7,500 Dollar General Corp. 174
------
RETAIL STORES - SPECIALTY (1.0%)
4,000 OfficeMax, Inc.* 102
7,000 Phillips-Van Heusen Corp. 108
------
210
------
TELEPHONES (1.2%)
5,600 COMSAT Corp. 112
4,000 Sprint Corp. 132
------
244
------
TOBACCO (1.5%)
3,000 Philip Morris Companies, Inc. 203
3,800 RJR Nabisco Holdings Corp. 104
------
307
------
</TABLE>
<PAGE>
USAA LIFE VARIABLE ANNUITY WORLD GROWTH FUND
PORTFOLIO OF INVESTMENTS IN SECURITIES (CONTINUED)
April 30, 1995
(Unaudited)
<TABLE>
<CAPTION>
NUMBER VALUE
OF SHARES SECURITY (000)
- --------- -------- ------
<C> <S> <C>
TRANSPORTATION - MISCELLANEOUS (0.6%)
5,000 American President Companies, Ltd. $ 116
------
Total domestic stocks (cost: $6,659) 7,109
------
</TABLE>
U.S. GOVERNMENT & AGENCY ISSUES (4.4%)
<TABLE>
<CAPTION>
Principal Market
Amount Coupon Value
(000) Rate Maturity (000)
- ---------- ------ -------- ------
<C> <S> <C> <C> <C>
U.S. GOVERNMENT AGENCY ISSUES (4.4%)
$ 885 Federal Home Loan Mortgage Corp. 5.85% 5/01/95 $ 885
-------
Total investments (cost: $19,104) $19,882
=======
</TABLE>
*Non-income producing.
<PAGE>
USAA LIFE VARIABLE ANNUITY DIVERSIFIED ASSETS FUND
PORTFOLIO OF INVESTMENTS IN SECURITIES
April 30, 1995
(Unaudited)
BASIC VALUE STOCKS (60.3%)
<TABLE>
<CAPTION>
NUMBER VALUE
OF SHARES SECURITY (000)
--------- -------- ------
<C> <S> <C>
AEROSPACE/DEFENSE (6.5%)
10,000 Boeing Co. $ 550
25,000 EG & G, Inc. 422
10,000 Rockwell International Corp. 436
--------
1,408
--------
AUTO PARTS (1.5%)
14,000 Arvin Industries, Inc. 326
--------
AUTOMOBILES (1.6%)
13,000 Ford Motor Co. 351
--------
BANK HOLDING COMPANIES - MONEY CENTER (1.2%)
5,000 Bankers Trust New York Corp. 271
--------
CHEMICALS (4.2%)
6,000 Dow Chemical Co. 417
6,000 Monsanto Co. 499
--------
916
--------
DISTRIBUTION & PIPELINES (1.6%)
14,000 NICOR, Inc. 347
--------
DRUGS (1.7%)
10,000 Upjohn Co. 363
--------
ELECTRIC POWER (3.1%)
9,000 Houston Industries, Inc. 356
10,000 Texas Utilities Co. 326
--------
682
--------
ENGINEERING & CONSTRUCTION (0.9%)
25,000 Morrison Knudsen Corp. 197
--------
HEALTHCARE - DIVERSIFIED (3.6%)
5,000 American Home Products Corp. 385
6,000 Bristol-Myers Squibb Co. 391
--------
776
--------
INSURANCE - MULTI/LINE COMPANIES (1.8%)
7,000 Aetna Life & Casualty Co. 399
--------
INSURANCE - PROPERTY/CASUALTY (1.6%)
8,000 Hartford Steam Boiler Inspection & Insurance Co. 354
--------
</TABLE>
<PAGE>
USAA LIFE VARIABLE ANNUITY DIVERSIFIED ASSETS FUND
PORTFOLIO OF INVESTMENTS IN SECURITIES (CONTINUED)
April 30, 1995
(Unaudited)
<TABLE>
<CAPTION>
NUMBER VALUE
OF SHARES SECURITY (000)
--------- -------- ------
<C> <S> <C>
MACHINERY - DIVERSIFIED (1.2%)
3,200 Deere & Co. $ 262
--------
MANUFACTURING - DIVERSIFIED INDUSTRIES (1.6%)
6,000 Minnesota Mining & Manufacturing Co. 358
--------
OFFICE EQUIPMENT & SUPPLIES (1.7%)
3,000 Xerox Corp. 369
--------
OIL - DOMESTIC (5.8%)
7,000 Amerada Hess Corp. 354
4,000 Atlantic Richfield Co. 458
20,000 Occidental Petroleum Corp. 460
--------
1,272
--------
OIL - INTERNATIONAL (5.2%)
7,000 Chevron Corp. 332
4,000 Mobil Corp. 379
6,000 Texaco, Inc. 410
--------
1,121
--------
PAPER & FOREST PRODUCTS (2.1%)
17,000 James River Corp. 461
--------
Retail Stores - General Merchandising (3.3%)
20,000 Kmart Corp. 278
8,000 Sears, Roebuck & Co. 434
--------
712
--------
TELEPHONES (3.4%)
10,000 GTE Corp. 341
10,000 NYNEX Corp. 409
--------
750
--------
TOBACCO (5.1%)
9,000 American Brands, Inc. 365
6,000 Philip Morris Companies, Inc. 406
15,000 Universal Corp. 343
--------
1,114
--------
</TABLE>
<PAGE>
USAA LIFE VARIABLE ANNUITY DIVERSIFIED ASSETS FUND
PORTFOLIO OF INVESTMENTS IN SECURITIES (CONTINUED)
April 30, 1995
(Unaudited)
<TABLE>
<CAPTION>
NUMBER VALUE
OF SHARES SECURITY (000)
--------- -------- ------
<C> <S> <C>
TRANSPORTATION - MISCELLANEOUS (1.6%)
15,000 American President Companies, Ltd. $ 349
Total basic value stocks (cost: $11,934) $13,158
</TABLE>
CORPORATE AND MUNICIPAL OBLIGATIONS (22.7%)
<TABLE>
<CAPTION>
Principal Market
Amount Coupon Value
(000) Rate Maturity (000)
- --------- ------ -------- ------
<C> <S> <C> <C> <C>
BANKS (4.7%)
$ 1,000 Capital One Bank, Bank Notes 8.13% 2/27/98 $ 1,014
-------
ELECTRICAL EQUIPMENT (4.7%)
1,000 Westinghouse Electric Corp., Global Notes 8.88 6/01/01 1,032
-------
ENTERTAINMENT (4.6%)
1,000 Time Warner, Inc., Notes 7.95 2/01/00 1,003
-------
HEALTHCARE - MISCELLANEOUS (4.1%)
1,000 Caremark International, Inc., Notes 6.88 8/15/03 901
-------
HEAVY DUTY TRUCKS & PARTS (4.6%)
1,000 Missouri Economic Development Export IDA
RB 6.70 6/01/08(e) 1,000
--------
Total corporate and municipal obligations (cost: $4,863) 4,950
--------
U.S. GOVERNMENT & AGENCY ISSUES (15.5%)
U.S. GOVERNMENT (15.5%)
1,200 U.S. Treasury Bonds 6.25 8/15/23 1,037
2,265 U.S. Treasury Notes 7.50 2/15/05 2,336
--------
3,373
--------
Total U.S. Government & agency issues (cost: $3,321) 3,373
--------
SHORT-TERM (0.7%)
COMMERCIAL PAPER (0.7%)
147 Source One Mortgage Services Corporation 6.15 5/02/95 147
--------
Total investments (cost: $20,265) $ 21,628
========
</TABLE>
*Non-income producing.
<PAGE>
USAA LIFE INVESTMENT TRUST
NOTES TO PORTFOLIO OF INVESTMENTS IN SECURITIES
(IN THOUSANDS)
April 30, 1995
(Unaudited)
(a) Market values of securities are determined by procedures and practices
discussed in note 1 to the financial statements.
(b) The cost of securities for federal income tax purposes is approximately the
same as that reported in the financial statements.
(c) The percentages shown represent the percentage of the investments to
net assets.
(d) The following abbreviations are used in portfolio descriptions:
CP Commercial Paper
DEB Debentures
FRN Floating Rate Notes
IDA Industrial Development Authority/Agency
RB Revenue Bond
(e) Certain securities may be sold back to the issuing authority or its agent at
par, at the option of the Funds or upon specified dates prior to maturity.
The interest rate of most such securities may be adjusted periodically by
the issuer based on current market conditions. These securities are regarded
as having an effective maturity to the next possible sell option date or the
next interest rate adjustment date, rather than the final maturity.
(f) Rates change periodically.
(g) Securities designated as Foreign represent the foreign class of an issue
which has both a local and foreign class.
(h) Securities which are exempt from registration by Rule 144A under the
Securities Act of 1933. Any resale of these securities may occur in either
an exempt transaction in the United States to a qualified institutional
buyer or a transaction in the foreign markets. At April 30, 1995, the market
value of these securities in the USAA Life VA World Growth Fund was $181,
representing 0.90% of the Fund's net assets.
(i) A form of credit enhancement supports the underlying obligor's debt service
obligation. Either a high quality bank, corporation, or municipal bond
insurer provides the credit enhancement, effectively adding its financial
strength to the underlying obligor's. Typically, the rating agencies
evaluate the security based upon the credit standing of the credit
enhancement.
See accompanying notes to financial statements.
<PAGE>
USAA LIFE INVESTMENT TRUST
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
Four-month period ended April 30, 1995*
(Unaudited)
<TABLE>
<CAPTION>
USAA LIFE USAA LIFE USAA LIFE USAA LIFE
VA MONEY USAA LIFE VA GROWTH VA WORLD VA DIVERSIFIED
MARKET VA INCOME AND INCOME GROWTH ASSETS
FUND FUND FUND FUND FUND
-------- --------- ---------- ------- --------------
<S> <C> <C> <C> <C> <C>
Net investment income:
Income (net of foreign taxes withheld of $0,
$0, $0, $11, and $0, respectively):
Dividends $ - $ 62 $ 157 $ 92 $ 146
Interest 53 443 57 65 208
------- -------- --------- ------- ----------
Total income 53 505 214 157 354
------- -------- --------- ------- ----------
Expenses:
Management fees 2 13 12 11 13
Administrative fees 12 12 12 12 12
Custodian's fees 12 15 17 23 14
Audit fees 2 2 2 2 2
Legal fees 2 2 2 2 2
Miscellaneous 1 2 1 1 2
------- -------- --------- ------- ----------
Total expenses before reimbursement 31 46 46 51 45
Expenses reimbursed (28) (23) (25) (16) (23)
------- -------- --------- ------- ----------
Total expenses after reimbursement 3 23 21 35 22
------- -------- --------- ------- ----------
Net investment income 50 482 193 122 332
------- -------- --------- ------- ----------
Net realized and unrealized gain on investments and foreign currency:
Net realized gain on investments - 3 11 204 29
Change in net unrealized appreciation on investments - 910 1,824 778 1,363
------- -------- --------- ------- ----------
Net realized and unrealized gain - 913 1,835 982 1,392
------- -------- --------- ------- ----------
Increase in net assets resulting from operations $ 50 $ 1,395 $ 2,028 $ 1,104 $ 1,724
======= ======== ========= ======= ==========
</TABLE>
*Funds commenced operations January 5, 1995.
See accompanying notes to financial statements.
<PAGE>
USAA LIFE INVESTMENT TRUST
STATEMENTS OF CHANGES IN NET ASSETS
(IN THOUSANDS)
Four-month period April 30, 1995*
(Unaudited)
<TABLE>
<CAPTION>
USAA LIFE USAA LIFE USAA LIFE USAA LIFE
VA MONEY USAA LIFE VA GROWTH VA WORLD VA DIVERSIFIED
MARKET VA INCOME AND INCOME GROWTH ASSETS
FUND FUND FUND FUND FUND
-------- --------- ---------- --------- --------------
<S> <C> <C> <C> <C> <C>
From operations:
Net investment income $ 50 $ 482 $ 193 $ 122 $ 332
Net realized gain on investments - 3 11 204 29
Change in net unrealized appreciation on investments - 910 1,824 778 1,363
------- -------- -------- -------- -------------
Increase in net assets resulting from operations 50 1,395 2,028 1,104 1,724
------- -------- -------- -------- -------------
Distributions to shareholders from:
Net investment income (50) - - - -
------- -------- -------- -------- -------------
From capital share transactions:
Shares sold 5,114 20,198 20,134 19,205 20,075
Shares issued for dividends reinvested 50 - - - -
Shares redeemed (1,226) (5) - (2) (1)
------- -------- -------- -------- -------------
Increase in net assets from capital share transactions 3,938 20,193 20,134 19,203 20,074
------- -------- -------- -------- -------------
Net Increase in net assets 3,938 21,588 22,162 20,307 21,798
Net assets:
Beginning of period - - - - -
------- -------- -------- -------- -------------
End of period $ 3,938 $ 21,588 $ 22,162 $ 20,307 $ 21,798
======= ======== ======== ======== =============
Undistributed net investment income included in net assets:
Beginning of period $ - $ - $ - $ - $ -
======= ======== ======== ======== =============
End of period $ - $ 482 $ 193 $ 122 $ 332
======= ======== ======== ======== =============
Change in shares outstanding:
Shares sold 5,114 2,019 2,000 1,936 2,007
Shares issued for dividends reinvested 50 - - - -
Shares redeemed (1,226) (1) - - -
------- -------- -------- -------- -------------
Increase in shares outstanding 3,938 2,018 2,000 1,936 2,007
======= ======== ======== ======== =============
</TABLE>
- --------------
*Funds commenced operations January 5, 1995.
See accompanying notes to financial statements.
<PAGE>
USAA LIFE INVESTMENT TRUST
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS)
April 30, 1995
(Unaudited)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USAA LIFE INVESTMENT TRUST (the Trust), registered under the Investment Company
Act of 1940, is a diversified, open-end management investment company organized
as a Delaware business trust consisting of five separate Funds. Shares of the
Trust currently are offered only to the Separate Account of USAA Life Insurance
Company (the Separate Account) to serve as the funding medium for certain
variable annuity contracts offered by USAA Life Insurance Company (USAA Life).
A. Security valuation - The value of each security is determined (as of the
close of trading on the New York Stock Exchange on each business day the
Exchange is open) as set forth below:
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 latest bid price 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.
3. Securities purchased with maturities of 60 days or less are stated at
amortized cost which approximates market value.
4. Other debt and government securities are valued each business day by a
pricing service (the Service) approved by the Funds' Board of Trustees. The
Service uses the mean between quoted bid and asked prices or the last sale
price to price securities when, in the Service's judgement, 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 these 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.
<PAGE>
USAA LIFE INVESTMENT TRUST
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
(IN THOUSANDS)
April 30, 1995
(Unaudited)
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.
B. Federal taxes - The Funds' policy is to comply with the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of their income to their shareholders. Therefore,
no federal income or excise tax provision is required.
C. Investments in securities - As is common in the industry, security
transactions are accounted for on the date the securities are purchased or sold
(trade date). Gain or loss from sales of investment securities is computed on
the identified cost basis. Dividend income, less foreign taxes, if any, are
recorded on the ex-dividend date. If the ex-dividend date has passed, certain
dividends from foreign securities are recorded upon notification. Interest
income is recorded on the accrual basis. Discounts and premiums on short-term
securities are amortized over the life of the respective securities.
Amortization of market discounts on long-term securities is recognized as
interest income upon disposition of security to the extent there is a gain on
disposition.
D. Foreign currency translations and foreign currency contracts - The assets of
the USAA Life VA World Growth Fund may be invested in the securities of foreign
issuers. Since the accounting records of the Funds are maintained in U.S.
dollars, foreign currency amounts are translated into U.S. dollars on the
following basis:
1. Market value of securities, other assets, and liabilities at the mean
between the bid and asked translation rates of such currencies against U.S.
dollars.
2. Purchases and sales of securities, income, and expenses at the rate of
exchange quoted on the respective dates of such transactions. Net realized and
unrealized foreign currency gains/losses occurring during the holding period of
investments are a component of realized gain/loss on investments and unrealized
appreciation/depreciation on investments, respectively.
<PAGE>
USAA LIFE INVESTMENT TRUST
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
(IN THOUSANDS)
April 30, 1995
(Unaudited)
Net realized foreign currency gains/losses arise from sales of foreign currency,
currency gains/losses realized between the trade and settlement dates on
security transactions, and from the difference between amounts of dividends,
interest, and foreign withholding taxes recorded on the Funds' books and the
U.S. dollar equivalent of the amounts received. Net realized foreign currency
gains/losses have been reclassified from accumulated net realized gain/loss to
accumulated undistributed net investment income on the statement of assets and
liabilities as such amounts are treated as ordinary income for tax purposes.
Net unrealized foreign currency exchange gains/losses arise from changes in the
value of assets and liabilities other than investments in securities resulting
from changes in the exchange rate.
The USAA Life VA World Growth Fund may enter into foreign currency contracts.
The net U.S. dollar value of foreign currency underlying all contractual
commitments held by the Funds and the resulting unrealized foreign currency
gains/losses are determined using foreign currency exchange rates from an
independent pricing service.
(2) DISTRIBUTIONS
Distributions of realized gains from security transactions not offset by capital
losses are made in the succeeding fiscal year to the Separate Account.
USAA Life VA Money Market Fund:
Net investment income is accrued daily as dividends and distributed to the
Separate Account monthly. All net investment income available for distribution
has been distributed at April 30, 1995.
USAA Life VA Income, USAA Life VA Growth and Income, USAA Life VA World Growth,
and USAA Life VA Diversified Assets Funds:
Distributions of net investment income are made to the Separate Account annually
in the succeeding year.
<PAGE>
USAA LIFE INVESTMENT TRUST
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
(IN THOUSANDS)
April 30, 1995
(Unaudited)
(3) INVESTMENT TRANSACTIONS
Purchases and sales/maturities of securities, excluding short-term securities,
for the four-month period ended April 28, 1995, were as follows:
<TABLE>
<CAPTION>
USAA Life USAA Life
VA Income VA Growth and
Fund Income Fund
----------- --------------
<S> <C> <C>
Purchases $20,601 $20,182
Sales $ 134 -
USAA Life USAA Life
VA World VA Diversified
Growth Fund Assets Fund
----------- --------------
Purchases $21,097 $20,223
Sales $ 3,082 $ 1,134
</TABLE>
Purchases and sales/maturities of securities for the four-month period ended
April 30, 1995, for the USAA Life VA Money Market Fund were $10,647 and $6,730,
respectively.
Gross unrealized appreciation and depreciation of investments as of April 30,
1995, were as follows, in thousands.
<TABLE>
<CAPTION>
USAA Life USAA Life
VA Income VA Growth and
Fund Income Fund
--------- -------------
<S> <C> <C>
Unrealized:
Appreciation $ 920 $2,063
Depreciation $ 10 $ 239
USAA Life USAA Life
VA World VA Diversified
Growth Fund Assets Fund
----------- --------------
Unrealized:
Appreciation $1,362 $1,535
Depreciation $ 584 $ 172
</TABLE>
<PAGE>
USAA LIFE INVESTMENT TRUST
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
(IN THOUSANDS)
April 30, 1995
(Unaudited)
(4) FOREIGN CURRENCY CONTRACTS
At April 30, 1995, the USAA Life VA World Growth Fund was obligated under
foreign currency exchange contracts to deliver currencies at specified future
dates. Unrealized appreciation on these contracts is included in the
accompanying financial statements and amounts to $2. The terms of the open
contracts were as follows:
<TABLE>
<CAPTION>
U.S.Dollar U.S.Dollar
Value Value
Exchange Currency to be as of Currency to be as of
Date Delivered 4/30/95 Received 4/30/95
- ---------- ------------------ ---------- -------------- ----------
<S> <C> <C> <C> <C>
05-01-95 340 Nthlds Guilder 219 222 U.S. Dollar 222
05-03-95 21 U.S. Dollar 21 23 Swiss Franc 20
05-04-95 18 U.S. Dollar 18 21 Swiss Franc 18
05-02-95 10 U.S. Dollar 10 25 Malaysian Ringgit 10
05-05-95 7 U.S. Dollar 7 17 Malaysian Ringgit 7
05-09-95 10 U.S. Dollar 10 24 Malaysian Ringgit 10
-------- ----
$ 285 $287
======== ====
</TABLE>
(5) TRANSACTIONS WITH AFFILIATES
A. Management fees - The investment policy of the Funds and the management of
the Funds' portfolios are carried out by USAA Investment Management Company
(USAA IMCO). The Funds' management fees are computed at .20% of their annual
average net assets. USAA Life, out of its general account, has agreed to
reimburse USAA IMCO for the expenses it incurs in rendering services to the
Trust, but only to the extent these expenses exceed the amount of the above
advisory fees.
B. Administrative fees - As outlined in the Underwriting and Administrative
Services Agreement by and between USAA Life, USAA Life Investment Trust and USAA
IMCO, USAA Life provides certain management, administrative, legal, clerical,
accounting and record-keeping services necessary or appropiate to conduct the
Trust's business and operations.
C. Expenses reimbursed - USAA Life, out of its general account, has agreed to
pay directly or reimburse the Trust for Trust expenses to the extent that such
expenses exceed .65% of the monthly average net assets of the USAA Life VA World
Growth Fund and .35% of the monthly average net assets of each other Funds.
<PAGE>
USAA LIFE INVESTMENT TRUST
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
(IN THOUSANDS)
April 30, 1995
(Unaudited)
D. Underwriting and distribution agreement - The Trust has an agreement with
USAA IMCO for exclusive underwriting and distribution of the Funds' shares on a
continuing best efforts basis. This agreement provides that USAA IMCO will
receive no fee or other remuneration for such services.
E. Brokerage services - USAA Brokerage Services, a discount brokerage service
of USAA IMCO, may execute portfolio transactions for the Funds. The amount of
brokerage commissions paid to USAA Brokerage Services during the four-month
period ended April 30, 1995, was $5, $4, $1, and $3 for the Life VA Income, Life
VA Growth and Income, Life VA World Growth, and Life VA Diversified Assets
Funds, respectively.
F. Share ownership - At April 30, 1995, USAA Life, for the Separate Account,
owned 2,138 shares (54.3%) of the USAA Life VA Money Market Fund, 2,000 shares
(99.1%) of the USAA Life VA Income Fund, 1,988 shares (99.4%) of the USAA Life
VA Growth and Income Fund, 1,906 shares (98.4%) of the USAA Life VA World Growth
Fund, and 2,000 shares (99.7%) of the USAA Life VA Diversified Assets Fund.
<PAGE>
USAA LIFE INVESTMENT TRUST
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
Four-month period ended April 30, 1995*
(Unaudited)
(6) FINANCIAL HIGHLIGHTS
Per share operating performance for a share outstanding throughout each period
is as follows:
<TABLE>
<CAPTION>
USAA Life USAA Life USAA Life USAA Life USAA Life
VA Money VA Income VA Growth and VA World VA Diversified
Market Fund Fund Income Fund Growth Fund Assets Fund
----------- --------- ------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
Net asset value at beginning of period $ 1.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00
Net investment income 0.02 (a) 0.24(a) 0.11(a) 0.07(a) 0.17(a)
Net realized and unrealized gain - 0.46 0.97 0.42 0.69
Distributions from net investment income (0.02) - - - -
------ ------- ------- ------- -------
Net asset value at end of period $ 1.00 $ 10.70 $ 11.08 $ 10.49 $ 10.86
====== ======= ======= ======= =======
Total return 1.81%(b) 7.00%(b) 10.80%(b) 4.90%(b) 8.60%(b)
Net assets at end of period ($000) $3,938 $21,588 $22,162 $20,307 $21,798
Ratio of expenses to average net assets 0.34%(c,d) 0.34%(c,d) 0.34%(c,d) 0.64%(c,d) 0.34%(c,d)
Ratio of net investment income to average net
assets 5.67%(c,d) 7.26%(c,d) 3.14%(c,d) 2.16%(c,d) 5.03%(c,d)
Portfolio Turnover - 0.79 - 22.95 7.99
</TABLE>
(a) Calculated using weighted average shares.
(b) Total returns do not reflect expenses that apply at the Separate Account
level. These expenses would reduce the total return for the period shown.
(c) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
(d) The information contained in this table is based on actual expenses for the
period, after giving effect to reimbursements of expenses by USAA Life.
Absent such reimbursements, the following ratios would have been:
<TABLE>
<CAPTION>
USAA Life USAA Life USAA Life USAA Life USAA Life
VA Money VA Income VA Growth and VA World VA Diversified
Market Fund Fund Income Fund Growth Fund Assets Fund
----------- --------- ------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
Ratio of expenses to average net assets 3.46%(c) 0.68%(c) 0.76%(c) 0.92%(c) 0.68%(c)
Ratio of net investment income to average net
assets 2.55%(c) 6.92%(c) 2.72%(c) 1.88%(c) 4.69%(c)
</TABLE>
* Funds commenced operations January 5, 1995.
<PAGE>
APPENDIX A - LONG-TERM AND SHORT-TERM DEBT RATINGS
1. LONG-TERM DEBT RATINGS:
MOODY'S INVESTORS SERVICE, INC. ("MOODY'S")
Aaa Bonds that are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa Bonds that are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
"high grade bonds." They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A Bonds that are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa Bonds that are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
STANDARD & POOR'S RATINGS GROUP ("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.
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.
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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.
FITCH INVESTORS SERVICE, INC. ("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 an adverse impact on these
bonds, and therefore, impair timely payment.
DUFF & PHELPS, INC. ("D&P):
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 may vary slightly from time to time because of economic conditions.
A Protection factors are average but adequate. However, risk factors are
variable and greater in periods of economic stress.
BBB Below average protection factors but still considered sufficient for
prudent investment. Considerable variability in risk during economic cycles.
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2. SHORT-TERM DEBT RATINGS:
MOODY'S CORPORATE AND GOVERNMENT
Prime-1 Issuers have a superior ability for repayment of senior short term
debt obligations. Prime-1 repayment ability will often be evidenced by many of
the following characteristics:
. Leading market positions in well-established industries.
. High rates of return on funds employed.
. Conservative capitalization structure with moderate reliance on debt and
ample asset protection.
. Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
. Well-established access to a range of financial markets and assured sources
of alternate liquidity.
Prime-2 Issuers 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.
Prime-3 Issuers (or supporting institutions) have an acceptable capacity for
repayment of short-term promissory obligations. The effect of industry
characteristics and market composition may be more pronounced. Variability in
earnings and profitability may result in changes in the level of debt protection
measurements and the requirement for relatively high financial leverage.
Adequate alternate liquidity is maintained.
MOODY'S MUNICIPAL
MIG 1/VMIG 1 This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity support or demonstrated
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
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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.
A-3 Designation indicates a satisfactory capacity for timely payment. Issues
with this designation, however, are somewhat more vulnerable to the adverse
effects of changes in circumstances than obligations carrying the higher
designations.
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 for 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 payments, but the margin of safety is not as
great as the 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 change is likely to cause these securities to be rated below
investment grade.
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D&P
Duff 1+ Highest certainty of timely payment. Short-term liquidity, including
internal operating factors and/or ready access to alternative sources of funds,
is clearly outstanding, and safety is just below risk-free U.S. Treasury short-
term obligations.
Duff 1 Very high certainty of timely payment. Liquidity factors are excellent
and supported by good fundamental protection factors. Risk factors are minor.
Duff 1- High certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection factors. Risk factors are very small.
Duff 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.
Duff 3 Satisfactory liquidity and other protection factors qualify issue as to
investment grade. Risk factors are larger and subject to more variation.
Nevertheless, timely payment is expected.
THOMPSON BANKWATCH, INC. ("TBW")
TBW-1 The highest category; indicates a very high likelihood that principal
and interest will be paid on a timely basis.
TBW-2 The second highest category; while the degree of safety regarding
timely repayment of principal and interest is strong, the relative degree of
safety is not as high as for issues rated TBW-1.
TBW-3 The lowest investment grade category; indicates that while the
obligation is more susceptible to adverse developments (both internal and
external) than obligations with higher ratings, the capacity to service
principal and interest in a timely fashion is considered adequate.
IBCA INC.
A1 Obligations supported by the highest capacity for timely repayment.
Where issues possess a particularly strong credit feature, a rating of A1+ is
assigned.
A2 Obligations supported by a good capacity for timely repayment.
A3 Obligations supported by a satisfactory capacity for timely repayment.
<PAGE>
APPENDIX B - COMPARISON OF FUND PERFORMANCE
The Trust may make comparisons in advertising and sales literature between the
Funds contained in this SAI and other comparable funds in the industry. These
comparisons may include such topics as risk and reward, investment objectives,
investment strategies, and performance.
Fund performance also may be compared to the performance of broad groups of
mutual funds with similar investment goals or unmanaged indexes of comparable
securities. Evaluations of Fund performance made by independent sources also
may be used in advertisements concerning the Fund, including reprints of, or
selections from, editorials or articles about the Fund. The Fund or its
performance may also be compared to products and services not constituting
securities subject to registration under the 1933 Act such as, but not limited
to, certificates of deposit and money market accounts. Sources for performance
information and articles about the Fund may include 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 that may cover financial news.
Bank Rate Monitor, a service that publishes rates on various bank products such
as certificates of deposit, money market deposit accounts and credit cards.
Barron's, a Dow Jones and Company, Inc. business and financial weekly that
periodically reviews mutual fund performance data.
Business Week, a national business weekly that periodically reports the
performance rankings and ratings of a variety of mutual funds.
Chicago Tribune, a newspaper that may cover financial news.
Consumer Reports, a monthly magazine that from time to time reports on companies
in the mutual fund industry.
Dallas Morning News, a newspaper that may cover financial news.
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Denver Post, a newspaper that may quote financial news.
Financial Planning, a monthly magazine that may periodically review mutual fund
companies.
Financial Services Week, a weekly newspaper that covers financial news.
Financial World, a monthly magazine that periodically features companies in the
mutual fund industry.
Forbes, a national business publication that periodically reports the
performance of companies in the mutual fund industry.
Fortune, a national business publication that periodically rates the performance
of a variety of mutual funds.
Fund Action, a mutual fund news report.
Houston Chronicle, a newspaper that may cover financial news.
Houston Post, a newspaper that may cover financial news.
IBC/Donoghue's Moneyletter, a biweekly newsletter that covers financial news and
from time to time rates specific mutual funds.
IBC's Money Market Insight, a monthly money market industry analysis prepared by
IBC USA, Inc.
Income and Safety, a monthly newsletter that rates mutual funds.
InvesTech, a bi-monthly investment newsletter.
Investment Advisor, a monthly publication directed primarily to the adviser
community; includes ranking of mutual funds using a proprietary methodology.
<PAGE>
Investment Company Institute, the national association of the U.S. investment
company industry.
Investor's Business Daily, a newspaper that covers financial news.
Kiplinger's Personal Finance Magazine, a monthly investment advisory publication
that periodically features the performance of a variety of securities.
Lipper 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 monthly
publication of industry-wide mutual fund averages by type of fund.
Los Angeles Times, a newspaper that may cover financial news.
Louis Rukeyser's Wall Street, a publication for investors.
Medical Economics, a monthly magazine providing information to the medical
profession.
Money, a monthly magazine that features the performance of both specific funds
and the mutual fund industry as a whole.
Money Fund Report, a weekly publication of 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 First Tier Fund Average."
Morningstar 5 Star Investor, a monthly newsletter by Morningstar, Inc. that
covers financial news and rates mutual funds.
Mutual Fund Forecaster, a monthly newsletter that ranks mutual funds.
Mutual Fund Investing, a newsletter covering mutual funds.
<PAGE>
Mutual Fund Performance Report, a monthly publication of mutual fund performance
and rankings, produced by Morningstar, Inc.
Mutual Funds Magazine, a monthly publication reporting on mutual fund investing.
Mutual Fund Source Book, an annual publication produced by Morningstar, Inc.
that describes and rates mutual funds.
Mutual Fund Values, a biweekly guidebook to mutual funds produced by
Morningstar, Inc. (a data service which tracks open-end mutual funds).
Newsweek, a national news weekly that may cover business matters.
New York Times, a newspaper that may cover financial news.
No Load Fund Investor, a newsletter covering companies in the mutual fund
industry.
Personal Investor, a monthly magazine that from time to time features mutual
fund companies and the mutual fund industry.
San Antonio Business Journal, a weekly newspaper that periodically covers mutual
fund companies as well as financial news.
San Antonio Express-News, a newspaper that may cover financial news.
San Francisco Chronicle, a newspaper that may cover financial news.
Smart Money, a monthly magazine featuring news and articles on investing and
mutual funds.
USA Today, a newspaper 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 that covers
financial news.
<PAGE>
Washington Post, a newspaper that may cover financial news.
Weisenberger Mutual Funds Investment Report, a monthly newsletter that reports
on both specific mutual fund companies and the mutual fund industry as a whole.
World Monitor, The Christian Science Monitor Monthly.
Worth, a magazine that covers financial and investment subjects including mutual
funds.
Your Money, a monthly magazine directed toward the novice investor.
Among the organizations cited above, Lipper Analytical Services, Inc.'s
tracking results may be used. A Fund will be compared to Lipper's appropriate
fund category according to fund objective and portfolio holdings. The Growth &
Income Fund will be compared to Lipper's growth & income funds category, the
Income Fund to Lipper's fixed income or flexible income categories, the World
Growth Fund to Lipper's global fund category, the Diversified Assets Fund to
Lipper's balanced funds category, and the Money Market Fund to Lipper's taxable
money market funds category. Footnotes in advertisements and other marketing
literature will include the time period applicable for any rankings used.
For comparative purposes, unmanaged indexes of comparable securities may be
cited. Examples include the following:
- -Ibbotson Associates, Inc., Stocks, Bonds, Bills, and Inflation Yearbook;
- -Lehman Brothers 1-3 year Government/Corporate Index, an unmanaged index of all
the government, agency, and corporate bonds longer than one year and less than
three years;
- -Lehman Brothers Aggregate Bond Index, an unmanaged index of the
Government/Corporate Index, the Mortgage Backed Securities Index, and the Asset-
Backed Securities Index;
- -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;
- -NASDAQ Industrials, a composite index of approximately 3000 unmanaged
securities of industrial corporations traded over the counter;
- -S&P 500 Index, a broad based unmanaged composite index that represents the
average performance of a group of 500 securities widely held, publicly traded
stocks.
Other sources for total return and other performance data that may be used
by a Fund or by those publications listed previously are Morningstar, Inc.,
Schabaker Investment Management, and Investment Company Data, Inc. These are
services that collect and compile data on open-end mutual fund companies.
