<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
-----------------------------------
USAA LIFE INVESTMENT TRUST
MAY 1, 1996
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 May 1, 1996, and may be amended from
time to time.
1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
CAPTION PAGE
- ------- ----
<S> <C>
GENERAL INFORMATION AND HISTORY......................................... 3
DISTRIBUTOR............................................................. 3
INVESTMENT ADVISER...................................................... 3
CUSTODIAN............................................................... 3
TRANSFER AGENT.......................................................... 4
INDEPENDENT AUDITORS.................................................... 4
LEGAL MATTERS........................................................... 4
VALUATION OF SECURITIES................................................. 4
ADDITIONAL INFORMATION REGARDING REDEMPTION OF SHARES................... 6
INVESTMENT POLICIES AND TECHNIQUES...................................... 6
Section 4(2) Commercial Paper and Rule 144A Securities................ 6
Liquidity Determinations.............................................. 7
Lending of Securities................................................. 7
Forward Currency Contracts............................................ 8
When-Issued Securities................................................ 8
REITS................................................................. 8
Limitations on Holdings of Foreign Securities......................... 9
INVESTMENT RESTRICTIONS................................................. 9
Additional Restrictions............................................... 10
PORTFOLIO TRANSACTIONS.................................................. 10
Portfolio Turnover Rates.............................................. 12
FURTHER DESCRIPTION OF TRUST SHARES..................................... 12
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS............................... 13
TRUSTEES AND OFFICERS OF THE TRUST...................................... 14
Committees of the Board of Trustees................................... 17
THE TRUST'S ADVISER..................................................... 17
The Advisory Agreement................................................ 17
PRINCIPAL HOLDERS OF SECURITIES......................................... 19
CALCULATION OF PERFORMANCE DATA......................................... 20
Yield - VA Money Market Fund.......................................... 20
Yield - Other Funds................................................... 21
Total Return.......................................................... 21
FINANCIAL STATEMENTS.................................................... 22
APPENDIX A - LONG-TERM AND SHORT-TERM DEBT RATINGS...................... 23
APPENDIX B - COMPARISON OF FUND PERFORMANCE............................. 28
</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.
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.
3
<PAGE>
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, the
Separate Account, the Trust and USAA IMCO. 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 Simonds, 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 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.
4
<PAGE>
(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.
(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
5
<PAGE>
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 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.
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
6
<PAGE>
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
municipal lease obligations, Section 4(2) Commercial Paper, Rule 144A
Securities, and certain restricted debt securities that are subject to
unconditional put or demand features exercisable within seven days ("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 municipal lease obligations, 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. Additional factors considered
by the Adviser in determining the liquidity of a municipal lease obligation are:
(1) whether the lease obligation is of a size that will be attractive to
institutional investors, (2) whether the lease obligation contains a non-
appropriation clause and the likelihood that the obligor will fail to make an
appropriation thereof, and (3) 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.
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.
7
<PAGE>
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).
REITS
Because the VA Income Fund, 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.
8
<PAGE>
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
In addition to the restrictions described in the prospectus, 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.
With respect to the Funds' concentration policy as described in the
Prospectus, the Adviser uses industry classifications for industries based on
categories established by Standard & Poor's Corporation (S&P) for the Standard &
Poor's 500 Composite Index, with certain modifications. Because the Adviser has
determined that certain categories within those set forth by S&P have unique
investment characteristics, additional industries are included as industry
classifications, such as air freight, biotechnology, coal, gaming companies,
nursing care, real estate investment trust, and water utilities. In addition,
the Adviser classifies municipal obligations by projects with similar
characteristics, such as toll road revenue bonds, housing revenue bonds or
electric power project revenue bonds.
9
<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
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
10
<PAGE>
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, and in accordance with procedures approved by the Board of Trustees. 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.
Brokerage commissions paid by each of the Funds listed below were as
follows for the period from January 5, 1995 (the Trust's date of inception)
through December 31, 1995:
VA Money Market Fund N/A
VA Income Fund $ 5,212
VA Growth & Income Fund $ 42,257
VA World Growth Fund $103,114
VA Diversified Assets Fund $ 23,619
- ---------
Includes $5,212, $3,880, $1,700, and $4,240 paid by the VA Income Fund, VA
Growth & Income Fund, VA World Growth Fund, and VA Diversified Assets Fund,
respectively, to USAA Brokerage Services, a service of the Adviser. These
amounts are 100%, 9.2%, 1.6%, and 18.0%, respectively, of brokerage fees paid by
each Fund.
11
<PAGE>
Certain Funds paid brokerage commissions in connection with brokerage
transactions that were directed to brokers because of brokerage and research
services provided by such brokers. During the period from January 5, 1995 (the
Trust's date of inception) through December 31, 1995, the amount of such
brokerage transactions and related commissions paid by these Funds were as
follows:
<TABLE>
<CAPTION>
Transaction
Commissions Amounts
----------- -----------
<S> <C> <C>
VA Income Fund $ 0 $ 0
VA Growth & Income Fund $22,923 $16,044,149
VA World Growth Fund $ 8,740 $ 5,818,652
VA Diversified Assets Fund $13,159 $ 8,877,352
</TABLE>
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.
12
<PAGE>
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 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.
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.
13
<PAGE>
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.
<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
Michael J.C. Roth* Vice Chairperson Chief Executive Officer and President,
Age 54 USAA IMCO, since October 1993 and
January 1990, respectively
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
Principal Occupation During
Name, Address and Age Position with Trust the Past Five Years
- -------------------------- ------------------- --------------------------------------------
<S> <C> <C>
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 66 (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 53 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 56
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
John W. Douglas Vice President Senior Vice President, Life & Health
Age 52 Marketing, USAA Life, since January
1995; prior thereto, Senior Vice President,
Life Operations, USAA Life, since 1990
John W. Saunders, Jr. Vice President Senior Vice President - Investments,
Age 61 USAA IMCO
Richard T. Halinski, Jr. Secretary Vice President, USAA, and Assistant
Age 44 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
James A. Robinson Treasurer Senior Vice President, Finance, USAA
Age 46 Life, since April 1992; prior thereto, Vice
President, Controller, USAA Life
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
Principal Occupation During
Name, Address and Age Position with Trust the Past Five Years
- -------------------------- ------------------- --------------------------------------------
<S> <C> <C>
Dwain A. Akins Assistant Secretary Assistant Vice President, USAA, since
Age 45 November 1994; Assistant Vice President
& Assistant Secretary since April,
1995, USAA Life, prior thereto, Executive
Director, USAA, since February 1991
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
Layne Roetzel Assistant Treasurer Director - Financial Statement Reporting,
Age 37 USAA Life, since September 1995; prior
thereto, Director - Management Accounting,
USAA Life, since December 1992; prior
thereto, Director - Financial Statement
Reporting, USAA Life
</TABLE>
- ----------------
/1/ Ms. Reedy retired as a Vice President of USAA Life Insurance Company on
December 31, 1985.
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 from time to time regarding financial and
accounting matters pertaining to the Trust and 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.
16
<PAGE>
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 December 31, 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..................... $4,500 None
Neil H. Stone..................... $4,500 None
Gary W. West...................... $4,500 None
</TABLE>
(a) As of April 1, 1996, the USAA Family of Funds consisted of four registered
investment companies, not including the Trust, offering a total of 32
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 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.
17
<PAGE>
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 $29 billion, of
which approximately $17 billion of which are in publicly available mutual
funds.
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.
USAA IMCO received the following investment advisory fees for the period
January 5, 1995 (the Trust's date of inception) through December 31, 1995:
VA Money Market Fund $ 8,901
VA Income Fund $44,882
VA Growth & Income Fund $46,130
VA World Growth Fund $41,899
VA Diversified Assets Fund $45,323
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, ("Underwriting Agreement") - USAA Life, out of its General
Account, assumes 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
18
<PAGE>
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.
In addition, pursuant to the Underwriting Agreement, 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 subject to the expense limitation described in the preceding
paragraph, 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) 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; (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
19
<PAGE>
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.
PRINCIPAL HOLDERS OF SECURITIES
As of April 1, 1996, USAA Life, either directly or through the
Separate Account, owned of record and beneficially the percentages of each
Fund's outstanding shares as shown below. As a result of such beneficial
ownership, USAA Life may be presumed to control (with the exception of the VA
Money Market Fund) each Fund of the Trust. Such control may dilute the effect
of the votes of other shareholders of each Fund presumed to be controlled. USAA
Life will vote its fund shares owned through the Separate Account 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 19.79%
VA Income Fund 86.22%
VA Growth & Income Fund 82.89%
VA World Growth Fund 88.00%
VA Diversified Assets Fund 91.86%
As of April 1, 1996, the Separate Account owned of record the percentages
of each Fund's outstanding shares attributable to the Contracts as shown below.
The Separate Account is located at 9800 Fredericksburg Road, San Antonio, Texas
78288. Contract Owners may be deemed to beneficially own shares of one or more
of the Funds, to the extent that they are given the right to provide voting
instructions with regard to shares in those Funds. To the knowledge of the
Trust, no Contract Owner beneficially owns five percent or more of any Fund.
VA Money Market Fund 80.21%
VA Income Fund 13.78%
VA Growth & Income Fund 17.11%
VA World Growth Fund 12.00%
VA Diversified Assets Fund 8.14%
20
<PAGE>
As of April 1, 1996, 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.
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.
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.
For the seven days ended December 31, 1995, the current yield of the VA
Money Market Fund was 5.53%.
YIELD - OTHER FUNDS
The Funds may advertise performance in terms of a 30-day (or one month)
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) - 1]
[(cd ) ]
21
<PAGE>
Where:
a= dividends and interest earned during the period
b= expenses accrued for the period (net of reimbursement)
c= the average daily number of shares outstanding during the period that were
entitled to receive dividends
d= the maximum offering price per share on the last day of the period
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
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>
For the period from January 5, 1995 (the Trust's date of inception) through
December 31, 1995, the average annual total return* for each Fund was as
follows:
Fund Average Annual
Total Return*
VA Money Market Fund 5.69%
VA Income Fund 23.88%
VA Growth & Income Fund 31.72%
VA World Growth Fund 19.55%
VA Diversified Assets Fund 26.33%
* [The cumulative total return for each Fund for the period specified
above would be the same as the average annual total return for each Fund.]
Additionally, these values reflect the deduction of a .20% annual
management fee, but do not reflect Fund expenses that are voluntarily paid
by USAA Life or reimbursed by USAA Life. Without the payment or
reimbursement of expenses by USAA Life, these total returns would have
been lower.
FINANCIAL STATEMENTS
The financial statements for each Fund of the Trust for the period January
5, 1995 (the Trust's date of inception) through December 31, 1995, and the
report of the Trust's independent auditors thereon, are incorporated into this
SAI by reference from the Trust's Annual Report.
Only those sections of the Annual Report that are specifically identified
immediately below are incorporated by reference into this SAI:
Independent Auditors' Report
Portfolios of Investments in Securities
Notes to Portfolios of Investments in Securities
Statements of Assets and Liabilities
Statement of Operations
Statements of Changes in Net Assets
Notes to Financial Statements
23
<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.
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.
24
<PAGE>
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.
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.
25
<PAGE>
. 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
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.
26
<PAGE>
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.
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.
27
<PAGE>
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.
28
<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.
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.
29
<PAGE>
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.
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.
30
<PAGE>
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.
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.
Washington Post, a newspaper that may cover financial news.
31
<PAGE>
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 corporate debt-A rated category, 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.
32
