As filed with the Securities and Exchange Commission on February 26, 1999.
1933 Act File No. 33-82270
1940 Act File No. 811-8672
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 X
Pre-Effective Amendment No. __
Post-Effective Amendment No. 7
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 X
Amendment No. 8
USAA LIFE INVESTMENT TRUST
-------------------------------------------------
(Exact Name of Registrant as Specified in Charter)
9800 Fredericksburg Road, San Antonio, TX 78288
------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code (210) 498-8000
RICHARD T. HALINSKI, JR., ESQ.
DWAIN A. AKINS, ESQ.
Life & Health Insurance Counsel
USAA Life Insurance company
9800 Fredericksburg Road, C-3-W
San Antonio, TX 78288
---------------------------------------
(Name and Address of Agent for Service)
Approximate Date of Proposed Public Offering: As soon as practicable after the
effective date of this Registration Statement.
It is proposed that this filing will become effective under Rule 485
- --- immediately upon filing pursuant to paragraph (b)
- --- on (date) pursuant to paragraph (b)
- --- 60 days after filing pursuant to paragraph (a)(1)
X on May 1, 1999, pursuant to paragraph (a)(1)
- --- 75 days after filing pursuant to paragraph (a)(2)
- --- on (date) pursuant to paragraph (a)(2)
If appropriate, check the following box:
- --- This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
Exhibit Index on Pages 61 - 63
Page 1 of 172
<PAGE>
USAA LIFE INVESTMENT TRUST
CROSS REFERENCE SHEET
PART A
FORM N-1A ITEM NO. SECTION IN PROSPECTUS
1. Front and Back Cover Pages....... Same
2. Risk/Return Summary: Investments,
Risks, and Performance......... Fund Objectives, Strategies, and Risks
3. Risk/Return Summary: Fee Table... Not Applicable
4. Investment Objectives, Principal
Investment Strategies, and
Related Risks.................. Fund Objectives, Strategies, and Risks
5. Management's Discussion
of Fund Performance............ Not Applicable
6. Management, Organization, and
Capital Structure.............. Fund Objectives, Strategies, and Risks
Fund Management
7. Shareholder Information.......... Purchase of Fund Shares
Redemption of Fund Shares
Valuation of Fund Shares
Dividends and Distributions
Taxes
Year 2000
8. Distribution Arrangements........ Not Applicable
9. Financial Highlights Information. Financial Highlights
<PAGE>
USAA LIFE INVESTMENT TRUST
CROSS REFERENCE SHEET
PART B
FORM N-1A ITEM NO. SECTION IN STATEMENT OF ADDITIONAL
INFORMATION
10. Cover Page and Table of Contents Same
11. Fund History................... General Information and History
12. Description of the Fund and
Its Investments and Risks.... Investment Policies and Techniques
Investment Restrictions
Portfolio Transactions
13. Management of the Fund......... Trustees and Officers of the Trust
The Trust's Adviser
14. Control Persons and Principal
Holders of Securities........ Principal Holders of Securities
15. Investment Advisory and
Other Services............... The Trust's Adviser
Custodian
Transfer Agent
Independent Auditors
16. Brokerage Allocation and
Other Practices.............. Portfolio Transactions
17. Capital Stock and
Other Securities............. Description of Trust Shares
18. Purchase, Redemption, and
Pricing of Shares............ Valuation of Securities
Additional Information Regarding
Redemption of Shares
19. Taxation of the Fund........... Certain Federal Income Tax
Considerations
20. Underwriters................... Distributor
21. Calculation of Performance Data Calculation of Performance Data
22. Financial Statements........... Cover Page
Financial Statements
<PAGE>
Part A
Prospectus for the
USAA Life Money Market Fund, USAA Life Income Fund,
USAA Life Growth & Income Fund, USAA Life World Growth Fund,
USAA Life Diversified Assets Fund, USAA Life Aggressive Growth Fund,
and USAA Life International Fund
is included herein
<PAGE>
[USAA EAGLE LOGO]
USAA LIFE INVESTMENT TRUST
9800 Fredericksburg Road
San Antonio, Texas 78288
USAA LIFE MONEY MARKET FUND USAA LIFE INCOME FUND
USAA LIFE GROWTH AND INCOME FUND USAA LIFE WORLD GROWTH FUND
USAA LIFE DIVERSIFIED ASSETS FUND USAA LIFE AGGRESSIVE GROWTH FUND
USAA LIFE INTERNATIONAL FUND
Prospectus
May 1, 1999
As with other mutual funds, the Securities and Exchange Commission has not
approved or disapproved of these Funds' shares or determined whether this
Prospectus is accurate or complete. Anyone who tells you otherwise is
committing a crime.
TABLE OF CONTENTS
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-3
Fund Objectives, Strategies, and Risks . . . . . . . . . . . . . . . B-4
USAA Life Money Market Fund . . . . . . . . . . . . . . . . . . . B-4
USAA Life Income Fund . . . . . . . . . . . . . . . . . . . . . . B-6
USAA Life Growth and Income Fund . . . . . . . . . . . . . . . . B-8
USAA Life World growth Fund . . . . . . . . . . . . . . . . . . . B-10
USAA Life Diversified Assets Fund . . . . . . . . . . . . . . . . B-12
USAA Life Aggressive Growth Fund. . . . . . . . . . . . . . . . . B-14
USAA Life International Fund. . . . . . . . . . . . . . . . . . . B-16
Fund Management. . . . . . . . . . . . . . . . . . . . . . . . . . . B-18
Purchase of Fund Shares. . . . . . . . . . . . . . . . . . . . . . . B-18
Redemption of Fund Shares. . . . . . . . . . . . . . . . . . . . . . B-18
Valuation of Fund Shares . . . . . . . . . . . . . . . . . . . . . . B-18
Dividends and Distributions. . . . . . . . . . . . . . . . . . . . . B-19
Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-19
Year 2000. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-19
Financial Highlights . . . . . . . . . . . . . . . . . . . . . . . . B-20
Appendix A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-24
B-1
<PAGE>
[THIS PAGE LEFT BLANK INTENTIONALLY]
B-2
<PAGE>
INTRODUCTION
OFFERING OF FUNDS' SHARES
Shares of these Funds are available to the public only through the
purchase of certain variable annuity contracts and variable life insurance
policies offered by USAA Life Insurance Company.
GENERAL RISKS OF INVESTING IN MUTUAL FUNDS
As with other mutual funds, you could lose money by investing in these
Funds. Investments in any of these Funds are not deposits of USAA Federal
Savings Bank, or any other bank, and are not insured or guaranteed by the
FDIC or any other government agency.
FUND MANAGEMENT
USAA Investment Management Company manages these Funds. USAA Investment
Management Company is an affiliate of United Services Automobile
Association (USAA) and as of the date of this Prospectus manages
approximately $____ billion in total assets. For easier reading, USAA
Investment Management Company will be referred to as "we" or "us"
throughout this Prospectus.
B-3
<PAGE>
FUND OBJECTIVES, STRATEGIES, AND RISKS
USAA LIFE MONEY MARKET FUND
OBJECTIVE
The highest level of current income consistent with preservation of capital and
maintenance of liquidity.
PRINCIPAL INVESTMENT STRATEGY
The Funds principal investment strategy is to invest the Funds assets in
high-quality, U.S. dollar-denominated debt securities of domestic and foreign
issuers that have been determined to present minimal credit risk, which may
include the following:
* obligations of the U.S. Government, its agencies and instrumentalities,
and repurchase agreements collateralized by such obligations;
* short-term corporate debt obligations such as notes, bonds, and
commercial paper;
* U.S. bank or foreign bank obligations, including certificates of deposit,
bankers acceptances, and time deposits;
* obligations of state and local governments and their agencies and
instrumentalities;
* municipal lease obligations;
* mortgage-backed securities;
* asset-backed securities;
* master demand notes;
* Eurodollar obligations;
* Yankee obligations; and
* other short-term debt securities.
The SEC has set certain diversification requirements for money market funds.
Generally, these requirements limit a money market fund's investments in
securities of any issuer to no more than 5% of the fund's assets. Also, strict
SEC guidelines do not permit us to invest, with respect to 75% of the Fund's
assets, greater than 10% of the Fund's assets in securities issued by or
subject to guarantees by the same institution. Purchases of securities issued
or guaranteed by the U.S. Government or its agencies or instrumentalities are
not counted toward these limitations.
The Fund's investments consist of high-quality securities that qualify as
"first-tier" securities under the SEC rules that apply to money market funds.
In general, a first-tier security is defined as a security that is:
* issued or guaranteed by the U.S. Government or any agency or
instrumentality thereof;
* rated or subject to a guarantee that is rated in the highest
category for short-term securities by at least two Nationally
Recognized Statistical Rating Organizations (NRSROs), or by one
NRSRO if the security is rated by only one NRSRO;
* unrated but issued by an issuer or guaranteed by a guarantor that
has other comparable short-term obligations so rated; or
* unrated but determined by us to be of comparable quality.
In addition, we must consider whether a particular investment presents minimal
credit risk. Current NRSROs include:
* Moody's Investors Service, Inc.; * Standard & Poor's Ratings Group; and
* Fitch IBCA, Inc.; * Duff & Phelps Inc.
* Thompson BankWatch, Inc.;
If the rating of a security is downgraded after purchase, we will determine
whether it is in the best interest of the Fund's shareholders to continue to
hold the security in the Fund's portfolio.
We balance factors such as credit quality and maturity to purchase the best
relative value available in the market at any given time. While rare, sell
decisions are usually based on a change in our credit analysis or to take
advantage of an opportunity to reinvest at a higher yield.
MAIN RISKS
While we will endeavor to maintain a constant Fund net asset value of $1 per
share, there is no assurance that we will be able to do so. Remember, the
shares are neither insured nor guaranteed by the U.S. Government. As such, the
Fund carries some risk. The primary risks of investing in this Fund are
interest rate risk and credit risk.
INTEREST RATE RISK involves the possibility that the value of the Fund's
investments will decline due to an increase in interest rates. We attempt to
minimize this interest rate risk by limiting the maturity of each security to
397 days or less and maintaining a dollar-weighted average portfolio maturity
for the Fund of 90 days or less. In fact, we typically invest in money market
instruments with relatively short maturities primarily to facilitate the
redemption of Fund shares following the "Free Look" period described in the
accompanying variable annuity contract or variable life insurance policy
prospectus.
* IF INTEREST RATES INCREASE: the yield of the Fund may increase, which
would likely increase the Fund's total return.
* IF INTEREST RATES DECREASE: the yield of the Fund may decrease, which may
decrease the Fund's total return.
B-4
<PAGE>
CREDIT RISK involves the possibility that a borrower cannot make timely
interest and principal payments on its securities. We attempt to minimize this
credit risk by investing only in securities rated in the highest category for
short-term securities, or, if not rated, of comparable quality, at the time of
purchase. Additionally, we will not purchase a security unless our analysts
have determined that the security presents minimal credit risk.
Money market funds are sometimes confused with savings accounts. A savings
account is a deposit with a bank. The bank is obligated to return the amount
deposited and to pay you interest for the use of your money. Up to a certain
dollar amount, the Federal Deposit Insurance Corporation (FDIC) will insure
that the bank meets its obligations.
The Fund is not a savings account but, rather, is a money market mutual fund
that issues and redeems its shares at the Fund's net asset value (NAV) per
share. The Fund always seeks to maintain a constant NAV of $1 per share. Just
as a savings account pays interest on the amount deposited, the Fund pays
dividends on Fund shares. The value of an account will grow over time when
these dividends are reinvested in the Fund.
WHO SHOULD CONSIDER INVESTING IN THIS FUND
This Fund is designed for the investor seeking to benefit from money market
yields consistent with safety of principal. The Fund does not constitute a
balanced investment program, but can be used in conjunction with other funds as
a component for the conservative investor for a long-term balanced investment
program. The securities in which the USAA Life 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
Fund is expected to provide a lower level of income and risk than other mutual
funds, such as the USAA Life Income Fund.
FUND PERFORMANCE
The bar chart shown below illustrates the Fund's volatility and performance
from year to year over the life of the Fund, while the table shows the Fund's
average annual total returns for the one-year period as well as the life of the
Fund. Remember, historical performance does not necessarily indicate what will
happen in the future.
[BAR CHART] The Fund's total return
for the three-month
CALENDAR TOTAL period ended March 31,
YEAR RETURN 1999, was _____.
1996* 5.25% During the periods shown
1997 5.35% in the bar chart, the
1998 5.29% highest total return
for a quarter was 1.35%
(quarter ending December
*Fund began operations on 31, 1997) and the lowest
January 5, 1995. total return for a quarter
was 1.24%(quarter ending
December 31, 1998).
========================================================================
AVERAGE ANNUAL TOTAL RETURNS (FOR THE PAST SINCE FUND'S INCEPTION
PERIODS ENDING DECEMBER 31, 1998) 1 YEAR ON JANUARY 5, 1995
USAA Life Money Market Fund 5.29% 5.39%
========================================================================
[SIDE BARS]
TOTAL RETURN MEASURES THE PRICE CHANGE IN A SHARE ASSUMING THE REINVESTMENT OF
ALL DIVIDEND INCOME AND CAPITAL GAIN DISTRIBUTIONS.
YIELD IS THE ANNUALIZED NET INCOME OF THE FUND DURING A SPECIFIED PERIOD AS A
PERCENTAGE OF THE FUNDS SHARE PRICE.
EFFECTIVE YIELD IS CALCULATED SIMILAR TO THE YIELD, HOWEVER, WHEN ANNUALIZED,
THE INCOME EARNED IS ASSUMED TO BE REINVESTED.
All mutual funds must use the same formulas to calculate yield and effective
yield. The Fund typically advertises performance in terms of a 7-day yield and
effective yield and may advertise total return. The 7-day yield quotation more
closely reflects current earnings of the Fund than the total return quotation.
The effective yield will be slightly higher than the yield because of the
compounding effect of the assumed reinvestment. Current yields and effective
yields fluctuate daily and will vary with factors such as interest rates and
the quality, length of maturities, and type of investments in the portfolio.
The Fund's 7-day yield for the period ended December 31, 1998, was 5.00%.
PORTFOLIO MANAGER
Pamela K. Bledsoe, Assistant Vice President of Money Market Funds, has managed
the Fund since June 10, 1996. Ms. Bledsoe has ten years investment management
experience and has worked for us for seven years.
B-5
<PAGE>
USAA LIFE INCOME FUND
OBJECTIVE
Maximum current income without undue risk of principal.
PRINCIPAL INVESTMENT STRATEGY
The Fund's principal investment strategy is to invest the Fund's assets
primarily in U.S. dollar-denominated securities that have been selected for
their high yields relative to the risk involved. Consistent with this policy,
when interest rates rise, we will invest a greater portion of the Fund's
portfolio in securities whose value we believe to be less sensitive to interest
rate changes. The Fund's portfolio may consist of any of the following:
* obligations of the U.S. Government, its agencies and instrumentalities,
and repurchase agreements collateralized by such obligations;
* mortgage-backed securities;
* asset-backed securities;
* corporate debt securities such as notes, bonds, and commercial paper;
* U.S. bank obligations, including certificates of deposit and banker's
acceptances;
* obligations of state and local governments and their agencies and
instrumentalities;
* master demand notes;
* Eurodollar obligations;
* Yankee obligations;
* other debt securities;
* convertible securities;
* equity and debt securities of real estate investment trusts;
* common stocks; and
* preferred stocks.
The debt securities must be investment grade at the time of purchase.
Investment-grade securities are those securities issued or guaranteed by the
U.S. Government, its agencies and instrumentalities; those rated or subject to
a guarantee that is rated within the four highest long-term rating categories
by:
* Moody's Investors Services, Inc., * Standard & Poor's Ratings Group, or
* Fitch IBCA, Inc., * Duff and Phelps;
or, if unrated by these agencies, we must determine that these securities are
of equivalent investment quality. You will find a complete description of the
above debt ratings in the Statement of Additional Information.
If the rating of a security is downgraded below investment grade, we will
determine whether it is in the best interest of the Fund's shareholders to
continue to hold the security in the Fund's portfolio. If downgrades result in
more than 5% of the Fund's net assets being invested in securities that are
less than investment-grade quality, we will take immediate action to reduce the
Fund's holdings in such securities to 5% or less of the Fund's net assets,
unless otherwise directed by the Board of Trustees.
In deciding which securities to buy and sell, we search for securities that
represent value at the time given current market conditions. For fixed income
securities, value is a combination of yield, credit quality, structure
(maturity, coupon, redemption features), and liquidity. Recognizing value is
the result of simultaneously analyzing the interaction of these factors among
the securities available in the market. We will sell a security if we become
concerned about its credit risk, we are forced by market factors to raise
money, or an attractive replacement security is available. For common stocks,
value involves selecting dividend-paying stocks, whose yields are sensitive to
interest rate levels when their dividend yields are close to bond yields, which
implies undervaluation. Such stocks are generally sold when their yields return
to a normal relationship versus bonds through price appreciation.
As a temporary defensive measure because of market, economic, political, or
other conditions, we may invest up to 100% of the Fund's assets in
investment-grade, short-term debt instruments, which may result in the Fund not
achieving its investment objective during the time it is in this temporary
defensive posture.
MAIN RISKS
The primary risks of investing in this Fund are interest rate risk, prepayment
risk, credit risk, and market risk.
INTEREST RATE RISK involves the possibility that the value of the Fund's
investments will decline because of an increase in interest rates.
* IF INTEREST RATES INCREASE: the yield of the Fund may increase and the
market value of the Fund's securities will likely decline, adversely
affecting the net asset value and total return.
* IF INTEREST RATES DECREASE: the yield of the Fund may decrease and the
market value of the Fund's securities may increase, which would likely
increase the Fund's net asset value and total return.
The price volatility of a bond also depends on its maturity. Generally, the
longer the maturity of a bond, the greater its sensitivity to interest rates.
To compensate investors for this higher risk, bonds with longer maturities
generally offer higher yields than bonds with shorter maturities.
PREPAYMENT RISK involves the possibility that prepayments of mortgages will
affect mortgage-backed securities held in the Fund's portfolio and require
reinvestment at lower interest rates, resulting in less interest income to the
Fund.
B-6
<PAGE>
CREDIT RISK involves the possibility that a borrower cannot make timely
interest and principal payments on its securities. We attempt to minimize the
Fund's credit risk by investing in securities considered investment grade at
the time of purchase. When evaluating potential investments for the Fund, our
analysts also assess credit risk and its impact on the Fund's portfolio.
Nevertheless, even investment-grade securities are subject to some credit risk.
Securities in the lowest-rated, investment-grade category have speculative
characteristics. Changes in economic conditions or other circumstances are more
likely to lead to a weakened capability to make principal and interest payments
on these securities than is the case for higher-rated securities. In addition,
the ratings of securities are estimates by the rating agencies of the credit
quality of the securities. The ratings may not take into account every risk
related to whether interest or principal will be repaid on a timely basis.
MARKET RISK involves the possibility that the Fund's investments in equity
securities will decline because of falls in the stock market, reducing the
value of the company's stock, regardless of the success or failure of the
company's operations. Stock markets tend to run in cycles, with periods when
stock prices generally go up, known as "bull" markets, and periods when stock
prices generally go down, referred to as "bear" markets. Equity securities tend
to go up and down more than bonds.
An additional risk of the Fund is the risk of investing in real estate
investment trusts (REITs).
REITs. Investing in REITs may subject the Fund to many of the same risks
associated with the direct ownership of real estate. Additionally, REITs are
dependent upon the capabilities of the REIT manager(s), have limited
diversification, and could be significantly impacted by changes in tax laws.
WHO SHOULD CONSIDER INVESTING IN THIS FUND
This Fund is designed primarily for the investor seeking to benefit from a
level of income higher than that available in the USAA Life Money Market Fund.
An investor in this Fund should also be willing to accept principal
fluctuation. Similar to the USAA Life Money Market Fund, the USAA Life Income
Fund should not be relied upon as a complete investment program.
FUND PERFORMANCE
The bar chart shown below illustrates the Fund's volatility and performance
from year to year over the life of the Fund, while the table shows the Fund's
average annual total returns for the one-year period as well as the life of the
Fund. Remember, historical performance does not necessarily indicate what will
happen in the future.
[BAR CHART] The Fund's total return
for the three-month
CALENDAR TOTAL period ended March 31,
YEAR RETURN 1999, was _____.
1996* .67% During the periods shown
1997 11.60% in the bar chart, the
1998 9.17% highest total return
for a quarter was 4.17%
(quarter ending September
*Fund began operations on 30, 1997) and the lowest
January 5, 1995. total return for a quarter
was (4.24)%(quarter ending
March 31, 1996).
[SIDE BAR]
TOTAL RETURN MEASURES THE PRICE CHANGE IN A SHARE ASSUMING THE REINVESTMENT OF
ALL DIVIDEND INCOME AND CAPITAL GAIN DISTRIBUTIONS.
============================================================================
AVERAGE ANNUAL TOTAL RETURNS (FOR THE PAST SINCE FUND'S INCEPTION
PERIODS ENDING DECEMBER 31, 1998) 1 YEAR ON JANUARY 5, 1995
USAA Life Income Fund 9.17% 11.03%
----------------------------------------------------------------------------
Lehman Bros. Aggregate Bond Index* 8.69% 9.92%
============================================================================
* THE LEHMAN BROS. AGGREGATE BOND INDEX IS AN UNMANAGED INDEX OF THE
GOVERNMENT/CORPORATE INDEX, THE MORTGAGE-BACKED SECURITIES INDEX, AND
THE ASSET-BACKED SECURITIES INDEX.
PORTFOLIO MANAGER
John W. Saunders, Jr., Senior Vice President of Fixed Income Investments, has
managed the Fund since its inception in January 1995. Mr. Saunders has 30 years
investment management experience and has worked for us for 29 years.
B-7
<PAGE>
USAA LIFE GROWTH AND INCOME FUND
OBJECTIVE
Capital growth and current income.
PRINCIPAL INVESTMENT STRATEGY
The Fund's principal investment strategy is to invest the Fund's assets
primarily in dividend-paying equity securities. We use the term "equity
securities" to include common stocks, securities convertible into common
stocks, securities that carry the right to buy common stocks, and real estate
investment trusts (REITs). We will limit the Fund's investment in convertible
securities to 5% of the value of the Fund's net assets at the time these
securities are purchased. We may also invest in nonconvertible debt securities
and nonconvertible preferred stock.
Additionally, we may invest up to 30% of the Fund's total assets in American
Depositary Receipts (ADRs) or similar forms of ownership interest in securities
of foreign issuers deposited with a depositary, and securities of foreign
issuers that are traded on U.S. securities exchanges or in U.S.
over-the-counter markets.
In deciding which securities to buy and sell, we appraise a stock's price in
relation to the company's earnings, cash flow, book value, and yield. We also
consider various qualitative factors such as the number of shares the company's
management owns, the attitude of investors in general toward the company, and
the quality of management. We use the same criteria in deciding which
securities to sell. For example, when a company's shares sell well above their
relative historical levels of valuation, we may decide to sell the stock.
As a temporary defensive measure because of market, economic, political, or
other conditions, we may invest up to 100% of the Fund's assets in
investment-grade, short-term debt instruments, which may result in the Fund not
achieving its investment objective during the time it is in this temporary
defensive posture.
MAIN RISKS
The primary risk of investing in this Fund is market risk.
MARKET RISK involves the possibility that the Fund's investments in equity
securities will decline because of falls in the stock market, reducing the
value of the company's stock, regardless of the success or failure of the
company's operations. Stock markets tend to run in cycles, with periods when
stock prices generally go up, known as "bull" markets, and periods when stock
prices generally go down, referred to as "bear" markets. Equity securities tend
to go up and down more than bonds.
Other risks of the Fund include the risks of foreign investing and investing in
real estate investment trusts (REITs).
FOREIGN INVESTING. Investing in securities of foreign issuers poses unique
risks: currency exchange rate fluctuations; increased price volatility;
different accounting, reporting, and disclosure requirements; and political or
social instability. In the past, equity and debt instruments of foreign issuers
have been more volatile than equity and debt instruments of U.S. issuers.
REITs. Investing in REITs may subject the Fund to many of the same risks
associated with the direct ownership of real estate. Additionally, REITs are
dependent upon the capabilities of the REIT manager(s), have limited
diversification, and could be significantly impacted by changes in tax laws.
WHO SHOULD CONSIDER INVESTING IN THIS FUND
This Fund is designed for the investor seeking to benefit from long-term growth
of capital and income. Because the Fund emphasizes investments in common
stocks, its value will fluctuate based on market conditions. Consequently, the
USAA Life Growth and Income Fund should not be relied upon for short-term
financial needs or short-term investment in the stock market.
B-8
<PAGE>
FUND PERFORMANCE
The bar chart shown below illustrates the Fund's volatility and performance
from year to year over the life of the Fund, while the table shows the Fund's
average annual total returns for the one-year period as well as the life of the
Fund. Remember, historical performance does not necessarily indicate what will
happen in the future.
[BAR CHART] The Fund's total return
for the three-month
CALENDAR TOTAL period ended March 31,
YEAR RETURN 1999, was _____.
1996* 24.13% During the periods shown
1997 26.43% in the bar chart, the
1998 6.93% highest total return
for a quarter was 17.33%
(quarter ending December
*Fund began operations on 31, 1998) and the lowest
January 5, 1995. total return for a quarter
was (17.02%)(quarter ending
September 30, 1998).
[SIDE BAR]
TOTAL RETURN MEASURES THE PRICE CHANGE IN A SHARE ASSUMING THE REINVESTMENT OF
ALL DIVIDEND INCOME AND CAPITAL GAIN DISTRIBUTIONS.
============================================================================
AVERAGE ANNUAL TOTAL RETURNS (FOR THE PAST SINCE FUND'S INCEPTION
PERIODS ENDING DECEMBER 31, 1998) 1 YEAR ON JANUARY 5, 1995
USAA Life Growth and Income Fund 6.93% 21.93%
---------------------------------------------------------------------------
S&P 500 Index* 28.60% 30.44%
============================================================================
* THE S&P 500 INDEX IS A BROAD-BASED COMPOSITE UNMANAGED INDEX THAT
REPRESENTS THE WEIGHTED AVERAGE PERFORMANCE OF A GROUP OF 500
WIDELY HELD, PUBLICLY TRADED STOCKS.
PORTFOLIO MANAGER
R. David Ullom, Assistant Vice President of Equity Investments, has managed the
Fund since its inception in January 1995. Mr. Ullom has 24 years investment
management experience and has worked for us for 13 years.
B-9
<PAGE>
USAA LIFE WORLD GROWTH FUND
OBJECTIVE
Long-term capital appreciation.
PRINCIPAL INVESTMENT STRATEGY
The Fund's principal investment strategy is to invest the Fund's assets
primarily in equity securities of both foreign and domestic issuers and in real
estate investment trusts (REITs). We use the term "equity securities" to
include common stocks, preferred stocks, securities convertible into common
stocks, and securities that carry the right to buy common stocks. We may invest
the remainder of the Fund's assets in investment-grade, short-term debt
instruments having the following characteristics:
* remaining maturities of less than one year that have been issued or
guaranteed as to both principal and interest by the U.S. Government or
its agencies or instrumentalities, or
* repurchase agreements collateralized by such securities.
There are no restrictions as to the types of businesses or operations of
companies in which the Fund's assets may be invested, except that we may not
invest more than 25% of the Fund's total assets in one industry. Under normal
market conditions, the Fund's investments will be diversified in at least three
countries.
We believe that international diversification may have a balancing impact with
regard to domestic investments during periods of adverse economic and market
conditions in the United States. Therefore, the Fund combines the advantages of
investing in a diversified international market and domestic market, with the
convenience and liquidity of a mutual fund based in the United States.
In deciding which foreign securities to buy and sell, we review countries and
regions for economic and political stability as well as future prospects. Then
we research individual companies looking for favorable valuations, growth
prospects, quality of management, and industry outlook. Securities are sold if
we believe they are overvalued or if the economic or political outlook
significantly deteriorates.
In deciding which domestic securities to buy and sell, we generally invest in
companies that are, or have the prospect of becoming, dominant in their
industry. We expect the sales and earnings of these companies to grow faster
than those of their industry peers. We consider a number of factors such as a
company's strategic position in its industry, sales and earnings growth, cash
flow, book value, and dividend yield. We will sell a security when we perceive
that our original investment thesis no longer holds.
As a temporary defensive measure because of market, economic, political, or
other conditions, we may invest up to 100% of the Fund's assets in
investment-grade, short-term debt instruments, which may result in the Fund not
achieving its investment objective during the time it is in this temporary
defensive posture.
MAIN RISKS
The primary risks of investing in this Fund are market risk and the risks of
foreign investing.
MARKET RISK involves the possibility that the Fund's investments in equity
securities will decline because of falls in the stock market, reducing the
value of the company's stock, regardless of the success or failure of the
company's operations. Stock markets tend to run in cycles, with periods when
stock prices generally go up, known as "bull" markets, and periods when stock
prices generally go down, referred to as "bear" markets. Equity securities tend
to go up and down more than bonds.
FOREIGN INVESTING RISK involves the possibility that the Fund's investments in
foreign stock, including American Depositary Receipts (ADRs) and Global
Depositary Receipts (GDRs), will decrease because of the following unique
risks: currency exchange rate fluctuations; foreign market illiquidity; control
regulations; foreign ownership limits; uncertain political conditions;
different accounting, reporting, and disclosure requirements; and difficulties
in obtaining legal judgments. In the past, equity and debt instruments of
foreign markets have been more volatile than equity and debt instruments of
U.S. securities markets.
* EMERGING MARKETS RISK. A country that is in the initial stages of its
industrial cycle is considered to be an emerging markets country.
Investments in developing countries involve exposure to economic
structures that are generally less diverse and mature than in the United
States and to political systems which may be less stable. In the past,
markets of developing countries have been more volatile than the markets
of developed countries.
* POLITICAL RISK. Political risk includes a greater potential for coups
d'etat, revolts, and expropriation by governmental organizations. For
example, we may invest the Fund's assets 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 which had
nationalized private industry. There is no guarantee that nationalization
may not occur again in this region or others in which we may invest the
Fund's assets, in which case, we may lose all or part of the Fund's
investment in that country's issuers.
* EURO CONVERSION RISK. Beginning January 1, 1999, countries participating
in the European Monetary Union began converting their currencies into a
new currency unit called the Euro. The conversion to the Euro, which will
continue in stages through 2002, is expected to reshape the financial
markets, banking systems, and monetary policies in Europe and
B-10
<PAGE>
other parts of the world and could adversely affect the Fund's
investments in these markets. In addition, a failure of the clearing and
settlement systems in these markets to handle the Euro conversion could
adversely affect the Fund.
An additional risk of the Fund is the risk of investing in real estate
investment trusts (REITs).
REITs. Investing in REITs may subject the Fund to many of the same risks
associated with the direct ownership of real estate. Additionally, REITs are
dependent upon the capabilities of the REIT manager(s), have limited
diversification, and could be significantly impacted by changes in tax laws.
WHO SHOULD CONSIDER INVESTING IN THIS FUND
This Fund is designed for the investor seeking to diversify by investing in
securities of both domestic and foreign issuers and who is prepared to bear the
risks of such investments. Because of the Fund's emphasis on equity securities
and securities of foreign issuers, the USAA Life World Growth Fund should not
be relied upon as a complete investment program.
FUND PERFORMANCE
The bar chart shown below illustrates the Fund's volatility and performance
from year to year over the life of the Fund, while the table shows the Fund's
average annual total returns for the one-year period as well as the life of the
Fund. Remember, historical performance does not necessarily indicate what will
happen in the future.
[BAR CHART] The Fund's total return
for the three-month
CALENDAR TOTAL period ended March 31,
YEAR RETURN 1999, was _____.
1996* 21.12% During the periods shown
1997 14.08% in the bar chart, the
1998 11.46% highest total return
for a quarter was 20.19%
(quarter ending December
*Fund began operations on 31, 1998) and the lowest
January 5, 1995. total return for a quarter
was (18.36)%(quarter ending
September 30, 1998).
[SIDE BAR]
TOTAL RETURN MEASURES THE PRICE CHANGE IN A SHARE ASSUMING THE REINVESTMENT OF
ALL DIVIDEND INCOME AND CAPITAL GAIN DISTRIBUTIONS.
============================================================================
AVERAGE ANNUAL TOTAL RETURNS (FOR THE PAST SINCE FUND'S INCEPTION
PERIODS ENDING DECEMBER 31, 1998) 1 YEAR ON JANUARY 5, 1995
USAA Life World Growth Fund 11.46% 16.49%
----------------------------------------------------------------------------
Morgan Stanley Capital
Index (MSCI) World* 24.34% 18.62%
============================================================================
* MORGAN STANLEY CAPITAL INDEX (MSCI) IS AN UNMANAGED INDEX, WHICH
REFLECTS THE MOVEMENTS OF WORLD STOCK MARKETS BY REPRESENTING A
BROAD SELECTION OF DOMESTICALLY LISTED COMPANIES WITHIN EACH MARKET.
PORTFOLIO MANAGERS
Foreign Securities
David G. Peebles, Senior Vice President of Equity Investments, is the asset
allocation manager for the USAA Life World Growth Fund and coordinates the
activities of the Managers. He has managed the Fund's investments in foreign
securities since its inception in January 1995. He has 33 years investment
management experience and has worked for us for 15 years. Since October 1,
1996, Albert C. Sebastian and W. Travis Selmier, II, have co-managed the Fund's
investments in foreign securities with Mr. Peebles. Albert C. Sebastian,
Assistant Vice President of Equity Investments, has 15 years investment
management experience and has worked for us for eight years. W. Travis Selmier,
II, Assistant Vice President of Equity Investments, has 12 years investment
management experience and has worked for us for eight years.
Domestic Securities
Curt Rohrman, Assistant Vice President of Equity Securities, has managed the
Fund's investments in domestic securities since October 1998. He has 11 years
investment management experience and has worked for us for four years. Prior to
joining us, Mr. Rohrman worked for CS First Boston Corporation from June 1988
to March 1995.
B-11
<PAGE>
USAA LIFE DIVERSIFIED ASSETS FUND
OBJECTIVE
Long-term capital growth, consistent with preservation of capital and balanced
by current income.
PRINCIPAL INVESTMENT STRATEGY
The Fund's principal investment strategy is to provide a diversified investment
program within one mutual fund by allocating the Fund's assets, under normal
market conditions, in approximately 60% equity securities (selected for their
potential return) and approximately 40% of the Fund's assets in debt securities
of varying maturities. We use the term "equity securities" to include common
stocks, preferred stocks, securities convertible into common stocks, and
securities that carry the right to buy common stocks. The equity securities
consist primarily of "basic value stocks" of U.S. companies that we believe are
undervalued in relation to such factors as the company's assets and current or
prospective earnings. We may also invest the Fund's assets in shares of real
estate investment trusts (REITs).
The fixed income component of the Fund will be made up of the same types of
debt securities in which the USAA Life Income Fund may invest. The Fund may
also invest in municipal lease obligations.
From time to time the stock and bond markets may fluctuate independently of
each other. In other words, a decline in the stock market may, in certain
instances, be offset by a rise in the bond market, or vice versa. As a result,
the Fund, with its mix of stocks and bonds, is expected in the long run to
entail less market risk (and potentially less return) than a mutual fund
investing exclusively in stocks.
In deciding which equity securities to buy and sell, we appraise a stock's
price in relation to the company's earnings, cash flow, book value, and yield.
We also consider various qualitative factors such as the number of shares the
company's management owns, the attitude of investors in general toward the
company, and the quality of management. We use the same criteria in deciding
which securities to sell. For example, when a company's shares sell well above
their relative historical levels of valuation, we may decide to sell the stock.
In deciding which debt securities to buy and sell, we search for securities
that represent value at the time given current market conditions. Value is a
combination of yield, credit quality, structure (maturity, coupon, redemption
features), and liquidity. Recognizing value is the result of simultaneously
analyzing the interaction of these factors among the securities available in
the market. We will sell a security if we become concerned about its credit
risk, we are forced by market factors to raise money, or an attractive
replacement is available.
As a temporary defensive measure because of market, economic, political, or
other conditions, we may invest up to 100% of the Fund's assets in
investment-grade, short-term debt instruments, which may result in the Fund not
achieving its investment objective during the time it is in this temporary
defensive posture.
MAIN RISKS
The primary risks of investing in this Fund are market risk, credit risk, and
interest rate risk.
MARKET RISK involves the possibility that the Fund's investments in stocks will
decline because of falls in the stock market, reducing the value of the
company's stock, regardless of the success or failure of the company's
operations. Stock prices in general may decline over short or even extended
periods, regardless of the success or failure of a company's operations. Stock
markets tend to run in cycles, with periods when stock prices generally go up,
known as "bull" markets, and periods when stock prices generally go down,
referred to as "bear" markets. Equity securities tend to go up and down more
than bonds.
CREDIT RISK involves the possibility that a borrower cannot make timely
interest and principal payments on its securities. We attempt to minimize the
Fund's credit risk by investing in securities considered investment grade at
the time of purchase. When evaluating potential investments for the Fund, our
analysts also assess credit risk and its impact on the Fund's portfolio.
Nevertheless, even investment-grade securities are subject to some credit risk.
Securities in the lowest-rated, investment-grade category have speculative
characteristics. Changes in economic conditions or other circumstances are more
likely to lead to a weakened capability to make principal and interest payments
on these securities than is the case for higher-rated securities. In addition,
the ratings of securities are estimates by the rating agencies of the credit
quality of the securities. The ratings may not take into account every risk
related to whether interest or principal will be repaid on a timely basis.
INTEREST RATE RISK involves the possibility that the value of the Fund's
investments will decline because of an increase in interest rates.
* IF INTEREST RATES INCREASE: the yield of the Fund may increase and the
market value of the Fund's securities will likely decline, adversely
affecting the net asset value and total return.
* IF INTEREST RATES DECREASE: the yield of the Fund may decrease and the
market value of the Fund's securities may increase, which would likely
increase the Fund's net asset value and total return.
B-12
<PAGE>
The price volatility of a bond also depends on its maturity. Generally, the
longer the maturity of a bond, the greater its sensitivity to interest rates.
To compensate investors for this higher risk, bonds with longer maturities
generally offer higher yields than bonds with shorter maturities.
Other risks of the Fund include the risk of investing in real estate investment
trusts (REITs) and prepayment risk.
REITs. Investing in REITs may subject the Fund to many of the same risks
associated with the direct ownership of real estate. Additionally, REITs are
dependent upon the capabilities of the REIT manager(s), have limited
diversification, and could be significantly impacted by changes in tax laws.
PREPAYMENT RISK involves the possibility that prepayments of mortgages will
affect mortgage-backed securities held in the Fund's portfolio and require
reinvestment at lower interest rates, resulting in less interest income to the
Fund.
WHO SHOULD CONSIDER INVESTING IN THIS FUND
This Fund is designed for the investor seeking the benefits of both long-term
capital appreciation and current income. Generally, this Fund is expected to
have less exposure to equity securities than the USAA Life Growth and Income
Fund.
FUND PERFORMANCE
The bar chart shown below illustrates the Fund's volatility and performance
from year to year over the life of the Fund, while the table shows the Fund's
average annual total returns for the one-year period as well as the life of the
Fund. Remember, historical performance does not necessarily indicate what will
happen in the future.
[BAR CHART] The Fund's total return
for the three-month
CALENDAR TOTAL period ended March 31,
YEAR RETURN 1999, was _____.
1996* 14.30% During the periods shown
1997 20.70% in the bar chart, the
1998 9.63% highest total return
for a quarter was 10.14%
(quarter ending June 30,
*Fund began operations on 1997) and the lowest total
January 5, 1995. return for a quarter was
(7.07)%(quarter ending
September 30, 1998).
[SIDE BAR]
TOTAL RETURN MEASURES THE PRICE CHANGE IN A SHARE ASSUMING THE REINVESTMENT OF
ALL DIVIDEND INCOME AND CAPITAL GAIN DISTRIBUTIONS.
============================================================================
AVERAGE ANNUAL TOTAL RETURNS (FOR THE PAST SINCE FUND'S INCEPTION
PERIODS ENDING DECEMBER 31, 1998) 1 YEAR ON JANUARY 5, 1995
USAA Life Diversified Assets Fund 9.63% 17.57%
----------------------------------------------------------------------------
S&P 500 Index* 28.60% 30.44%
============================================================================
* THE S&P 500 INDEX IS A BROAD-BASED COMPOSITE UNMANAGED INDEX THAT
REPRESENTS THE WEIGHTED AVERAGE PERFORMANCE OF A GROUP OF 500
WIDELY HELD, PUBLICLY TRADED STOCKS.
PORTFOLIO MANAGERS
Equity Securities
R. David Ullom, Assistant Vice President of Equity Investments, is the asset
allocation manager of the USAA Life Diversified Assets Fund. He has managed the
Fund's investments in equity securities since August 1998. Mr. Ullom has 24
years investment management experience and has worked for us for 13 years.
Fixed Income Securities
Paul H. Lundmark, Assistant Vice President of Fixed Income Investments, has
managed the Fund's investments in fixed income securities since its inception
in January 1995. Mr. Lundmark has 13 years investment management experience and
has worked for us for seven years.
B-13
<PAGE>
USAA LIFE AGGRESSIVE GROWTH FUND
OBJECTIVE
Appreciation of capital.
PRINCIPAL INVESTMENT STRATEGY
The Fund's principal investment strategy is to invest the Fund's assets
primarily in equity securities of companies with the prospect of rapidly
growing earnings. These investments will tend to be made in smaller,
less-recognized companies, but may include larger, more widely recognized
companies as well. We use the term "equity securities" to include common
stocks, preferred stocks, securities convertible into common stocks, and
securities that carry the right to buy common stocks. We may also invest up to
10% of the Fund's assets in shares of real estate investment trusts (REITs).
While most of the Fund's assets will be invested in U.S. securities, we may
also invest up to 30% of the Fund's total assets in foreign securities
purchased in either foreign or U.S. markets. These foreign holdings may include
securities issued in emerging markets as well as securities issued in
established markets.
We will not generally trade the Fund's securities for short-term profits;
however, if circumstances warrant, we may purchase and sell Fund securities
without regard to the length of time held. The Fund's portfolio turnover rate
will vary from year to year depending on market conditions, and it may exceed
100%. Because a high turnover rate increases transaction costs and may increase
taxable capital gains, we will carefully weigh the anticipated benefits of
trading.
In deciding which securities to buy and sell, we tend to invest in small
capitalization companies that have rapid sales and earnings growth potential.
We seek companies that are well positioned to take advantage of emerging
long-term social and economic trends and have ample financial resources to
sustain their growth. We may reduce or sell the Fund's investments in companies
if their stock prices appreciate excessively in relation to fundamental
prospects. We will sell or reduce large capitalization equity holdings in the
portfolio if those holdings comprise an excessive weighting of total assets.
Companies will also be sold if they fail to realize their growth potential or
if there are more attractive opportunities elsewhere.
As a temporary defensive measure because of market, economic, political, or
other conditions, we may invest up to 100% of the Fund's assets in
investment-grade, short-term debt instruments, which may result in the Fund not
achieving its investment objective during the time it is in this temporary
defensive posture.
MAIN RISKS
The primary risks of investing in this Fund are market risk and the risks of
investing in companies with small market capitalizations (small cap companies).
[SIDE BAR]
MARKET CAPITALIZATION IS THE TOTAL RETURN MARKET VALUE OF A COMPANY'S
OUTSTANDING SHARES OF COMMON STOCK.
MARKET RISK involves the possibility that the Fund's investments in equity
securities will decline because of falls in the stock market, reducing the
value of the company's stock, regardless of the success or failure of the
company's operations. Stock markets tend to run in cycles, with periods when
stock prices generally go up, known as "bull" markets, and periods when stock
prices generally go down, referred to as "bear" markets. Equity securities tend
to go up and down more than bonds.
SMALL CAP COMPANY RISK involves the greater risk of investing in smaller, less
well-known companies that may be more vulnerable than larger companies to
adverse business or economic developments. Securities of such companies may be
less liquid and more volatile than securities of larger companies or the market
averages in general and, therefore, may involve greater risk than investing in
larger companies. In addition, small cap companies may not be well-known to the
investing public, may not have institutional ownership, and may have only
cyclical, static, or moderate growth prospects.
Other risks of the Fund include the risks of foreign investing and investing in
real estate investment trusts (REITs).
FOREIGN INVESTING RISK involves the possibility that the Fund's investments in
foreign stock, including American Depositary Receipts (ADRs) and Global
Depositary Receipts (GDRs), will decrease because of the following unique
risks: currency exchange rate fluctuations; foreign market illiquidity; control
regulations; foreign ownership limits; uncertain political conditions;
different accounting, reporting, and disclosure requirements; and difficulties
in obtaining legal judgments. In the past, equity and debt instruments of
foreign markets have been more volatile than equity and debt instruments of
U.S. securities markets.
* EMERGING MARKETS RISK. A country that is in the initial stages of its
industrial cycle is considered to be an emerging markets country.
Investments in developing countries involve exposure to economic
structures that are generally less diverse and mature than in the United
States and to political systems which may be less stable. In the past,
markets of developing countries have been more volatile than the markets
of developed countries.
B-14
<PAGE>
* POLITICAL RISK. Political risk includes a greater potential for coups
d'etat, revolts, and expropriation by governmental organizations. For
example, we may invest the Fund's assets 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 which had
nationalized private industry. There is no guarantee that nationalization
may not occur again in this region or others in which we may invest the
Fund's assets, in which case, we may lose all or part of the Fund's
investment in that country's issuers.
REITs. Investing in REITs may subject the Fund to many of the same risks
associated with the direct ownership of real estate. Additionally, REITs are
dependent upon the capabilities of the REIT manager(s), have limited
diversification, and could be significantly impacted by changes in tax laws.
WHO SHOULD CONSIDER INVESTING IN THIS FUND
This Fund is designed for the investor seeking to benefit from long-term growth
of capital. Generally, this Fund is expected to have a greater potential for
long-term capital appreciation than the USAA Life Growth and Income Fund, but
is also significantly more volatile.
FUND PERFORMANCE
The bar chart shown below illustrates the Fund's volatility and performance
from year to year over the life of the Fund, while the table shows the Fund's
average annual total returns for the one-year period as well as the life of the
Fund. Remember, historical performance does not necessarily indicate what will
happen in the future.
[BAR CHART] The Fund's total return
for the three-month
CALENDAR TOTAL period ended March31,
YEAR RETURN 1999, was _____.
1998* 20.14% During the periods shown
in the bar chart, the
highest total return
for a quarter was 33.37%
(quarter ending December
*Fund began operations on 31, 1998) and the lowest
May 1, 1997. total return for a quarter
was (21.27)%(quarter ending
September 30, 1998).
[SIDE BAR]
TOTAL RETURN MEASURES THE PRICE CHANGE IN A SHARE ASSUMING THE REINVESTMENT OF
ALL DIVIDEND INCOME AND CAPITAL GAIN DISTRIBUTIONS.
============================================================================
AVERAGE ANNUAL TOTAL RETURNS (FOR THE PAST SINCE FUND'S INCEPTION
PERIODS ENDING DECEMBER 31, 1998) 1 YEAR ON MAY 1, 1997
USAA Life Aggressive Growth Fund 20.14% 23.45%
----------------------------------------------------------------------------
Russell 2000 Index* (2.55)% 14.30%
============================================================================
* THE RUSSELL 2000 INDEX IS AN INDEX THAT CONSISTS OF THE 2,000
SMALLEST COMPANIES IN THE RUSSELL 3000(R) INDEX, A WIDELY RECOGNIZED
SMALL CAP INDEX.
Portfolio Managers
John K. Cabell, Jr. and Eric M. Efron, Assistant Vice Presidents of Equity
Investments, have managed the Fund since its inception in May 1997. Mr. Cabell
has 21 years investment management experience and has worked for us for ten
years. Mr. Efron has 24 years investment management experience and has worked
for us for seven years.
B-15
<PAGE>
USAA LIFE INTERNATIONAL FUND
OBJECTIVE
Capital appreciation with a secondary objective of current income.
PRINCIPAL INVESTMENT STRATEGY
The Fund's principal investment strategy is to invest at least 80% of the
Fund's assets in equity securities of foreign companies. We use the term
"equity securities" to include common stocks, preferred stocks, securities
convertible into common stocks, and securities that carry the right to buy
common stocks. A foreign company is one organized under the laws of a foreign
country, and it must also have one of the following additional characteristics:
* the principal trading market for the stock is in a foreign country; or
* at least 50% of its revenues or profits are derived from operations
within foreign countries; or
* at least 50% of its assets are located within foreign countries.
We may invest the remainder of the Fund's assets in equity securities of
companies that meet any of the criteria as described in the definition of a
foreign company and in investment-grade, short-term debt instruments having the
following characteristics:
* remaining maturities of less than one year that have been issued or
guaranteed as to both principal and interest by the U.S. Government or
its agencies or instrumentalities, or
* repurchase agreements collateralized by such securities.
There are no restrictions as to the types of businesses or operations of
companies in which the Fund's assets may be invested, except that we may not
invest more than 25% of the Fund's total assets in one industry. The Fund's
investments will be diversified in at least four or more countries. We believe
the Fund combines the advantages of investment in diversified international
markets with the convenience and liquidity of a mutual fund based in the United
States.
In deciding which securities to buy and sell, we review countries and regions
for economic and political stability as well as future prospects. Then we
research individual companies looking for favorable valuations, growth
prospects, quality of management, and industry outlook. Securities are sold if
we believe they are overvalued or if the economic or political outlook
significantly deteriorates.
As a temporary defensive measure because of market, economic, political, or
other conditions, we may invest up to 100% of the Fund's assets in
investment-grade, short-term debt instruments, which may result in the Fund not
achieving its investment objective during the time it is in this temporary
defensive posture.
MAIN RISKS
The primary risks of investing in this Fund are market risk and the risk of
foreign investing.
MARKET RISK involves the possibility that the Fund's investments in equity
securities will decline because of falls in the stock market, reducing the
value of the company's stock, regardless of the success or failure of the
company's operations. Stock markets tend to run in cycles, with periods when
stock prices generally go up, known as "bull" markets, and periods when stock
prices generally go down, referred to as "bear" markets. Equity securities tend
to go up and down more than bonds.
FOREIGN INVESTING RISK involves the possibility that the Fund's investments in
foreign stock, including American Depositary Receipts (ADRs) and Global
Depositary Receipts (GDRs), will decrease because of the following unique
risks: currency exchange rate fluctuations; foreign market illiquidity; control
regulations; foreign ownership limits; uncertain political conditions;
different accounting, reporting, and disclosure requirements; and difficulties
in obtaining legal judgments. In the past, equity and debt instruments of
foreign markets have been more volatile than equity and debt instruments of
U.S. securities markets.
* EMERGING MARKETS RISK. A country that is in the initial stages of its
industrial cycle is considered to be an emerging markets country.
Investments in developing countries involve exposure to economic
structures that are generally less diverse and mature than in the United
States and to political systems which may be less stable. In the past,
markets of developing countries have been more volatile than the markets
of developed countries.
* POLITICAL RISK. Political risk includes a greater potential for coups
d'etat, revolts, and expropriation by governmental organizations. For
example, we may invest the Fund's assets 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 which had
nationalized private industry. There is no guarantee that nationalization
may not occur again in this region or others in which we may invest the
Fund's assets, in which case, we may lose all or part of the Fund's
investment in that country's issuers.
B-16
<PAGE>
* EURO CONVERSION RISK. Beginning January 1, 1999, countries participating
in the European Monetary Union began converting their currencies into a
new currency unit called the Euro. The conversion to the Euro, which will
continue in stages through 2002, is expected to reshape the financial
markets, banking systems, and monetary policies in Europe and other parts
of the world and could adversely affect the Fund's investments in these
markets. In addition, a failure of the clearing and settlement systems in
these markets to handle the Euro conversion could adversely affect the
Fund.
WHO SHOULD CONSIDER INVESTING IN THIS FUND
This Fund is designed for the investor seeking to benefit from greater exposure
to investments in foreign securities that is generally available through the
USAA World Growth Fund. Because of the Fund's greater emphasis on foreign
securities, the USAA Life International Fund can be expected to present a
greater level of risk than the USAA Life World Growth Fund and should not be
relied upon as a complete investment program.
FUND PERFORMANCE
The bar chart shown below illustrates the Fund's volatility and performance
from year to year over the life of the Fund, while the table shows the Fund's
average annual total returns for the one-year period as well as the life of the
Fund. Remember, historical performance does not necessarily indicate what will
happen in the future.
[BAR CHART] The Fund's total return
for the three-month
CALENDAR TOTAL period ended March 31,
YEAR RETURN 1999, was _____.
1998* 3.78% During the periods shown
in the bar chart, the
highest total return
for a quarter was 16.49%
(quarter ending December
*Fund began operations on 31, 1998) and the lowest
May 1, 1997. total return for a quarter
was (19.73)%(quarter ending
September 30, 1998).
TOTAL RETURN MEASURES THE PRICE CHANGE IN A SHARE ASSUMING THE REINVESTMENT OF
ALL DIVIDEND INCOME AND CAPITAL GAIN DISTRIBUTIONS.
============================================================================
AVERAGE ANNUAL TOTAL RETURNS (FOR THE PAST SINCE FUND'S INCEPTION
PERIODS ENDING DECEMBER 31, 1998) 1 YEAR ON MAY 1, 1997
USAA Life International Fund 3.78% 3.43%
----------------------------------------------------------------------------
Morgan Stanley Capital
Index (MSCI) World* 24.34% 18.62%
============================================================================
* MORGAN STANLEY CAPITAL INDEX (MSCI) IS AN UNMANAGED INDEX, WHICH
REFLECTS THE MOVEMENTS OF WORLD STOCK MARKETS BY REPRESENTING A
BROAD SELECTION OF DOMESTICALLY LISTED COMPANIES WITHIN EACH MARKET.
PORTFOLIO MANAGERS
David G. Peebles, Senior Vice President of Equity Investments, Albert C.
Sebastian, Assistant Vice President of Equity Investments, and W. Travis
Selmier, II, Assistant Vice President of Equity Investments, have managed the
Fund since its inception in May 1997.
Mr. Peebles has 33 years investment management experience and has worked for us
for 15 years. Mr. Sebastian has 15 years investment management experience and
has worked for us for eight years. Mr. Selmier has 12 years investment
management experience and has worked for us for eight years.
B-17
<PAGE>
FUND MANAGEMENT
The Trust has retained us, USAA Investment Management Company, to serve as the
manager and distributor for the Trust. We are an affiliate of United Services
Automobile Association (USAA), a large, diversified financial services
institution. As of the date of this Prospectus, we had approximately $____
billion in total assets under management. Our mailing address is 9800
Fredericksburg Road, San Antonio, TX 78288.
Although our officers and employees, as well as those of the Trust, may engage
in personal securities transactions, they are restricted by the procedures in a
Joint Code of Ethics adopted by the Trust and us.
ADVISORY FEES
We provide management services to the Funds pursuant to an Advisory Agreement.
We are responsible for managing the Funds' portfolios (including placement of
brokerage orders) and their business affairs, subject to the authority of and
supervision of the Board of Trustees. For our services, the Funds pay us an
annual fee. This fee, which is accrued daily and paid monthly, is computed as a
percentage of average net assets (ANA). For the Trust's most recent fiscal year
ended December 31, 1998, the fee for each Fund (other than the Aggressive
Growth Fund and the International Fund) was equal to an annualized rate of .20%
of the monthly ANA. With respect to the Aggressive Growth Fund and the
International Fund, we received fees equal to an annualized rate of .50% and
.65%, respectively, of each Fund's monthly ANA. We also provide services
related to selling the Funds' shares and receive no compensation for those
services.
PURCHASE OF FUND SHARES
The Trust currently sells shares of the Funds in a continuous offering only to
separate accounts funding benefits to variable annuity contracts and variable
life insurance policies issued by USAA Life Insurance Company. Each separate
account is divided into fund accounts, seven of which invest in a corresponding
Fund of the Trust, as directed by contract and policy owners. The fund accounts
that purchase Trust shares do so at the net asset value per share (NAV) of the
corresponding Funds, without a sales charge, next determined after USAA Life
Insurance Company receives instructions to invest from you or other contract
and policy owners (such as making a premium payment) or after the operation of
a contract or policy (such as deduction of fees and charges).
Investments in each Fund are credited to each corresponding Fund Account in the
form of full and fractional shares of the designated Fund. The Funds do not
issue share certificates. Initial and subsequent minimum premium payments
allocated to one or more specific Funds are in the prospectuses of the variable
annuity contract and variable life insurance policies.
REDEMPTION OF FUND SHARES
The fund accounts redeem shares of the appropriate Fund based on instructions
by you or other contract and policy owners to receive back monies under a
contract (such as surrendering a contract), or the operation of a contract
(such as deduction of fees and charges). Fund accounts may redeem any of the
Fund's shares on any day the NAV per share is calculated. Redemptions are
effective on the day instructions are received. However, if instructions are
received after the NAV per share calculation (generally 4:00 p.m. Eastern
Time), redemption will be effective on the next business day.
The Fund will make payment for redeemed shares within seven days after the
effective date of redemption. The amount received upon redemption 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.
In addition, the Trust may elect to suspend the redemption of shares or
postpone the date of payment in limited circumstances.
VALUATION OF FUND SHARES
[SIDE BAR]
NAV PER SHARE
EQUALS
TOTAL ASSETS
MINUS
LIABILITIES
DIVIDED BY
# OF SHARES
OUTSTANDING
The price at which Fund shares are purchased and redeemed by separate accounts
is equal to the net asset value (NAV) per share determined on the effective
date of the purchase or redemption. Separate accounts buy and sell Fund shares
at the NAV per share without a sales charge. The Fund's NAV per share is
calculated at the close of the regular trading session of the NYSE, which is
usually 4:00 p.m. Eastern Time.
VALUATION OF FUND SECURITIES FOR EACH FUND
(EXCEPT THE USAA LIFE MONEY MARKET FUND)
Portfolio securities, except as otherwise noted, traded primarily on a
securities exchange are valued at the last sales price on that exchange.
Portfolio securities traded primarily on foreign securities exchanges are
generally valued at the closing values of such securities on the exchange where
primarily traded. If no sale is reported, the average of the bid and asked
prices is generally used.
Securities trading in various foreign markets may take place on days when the
NYSE is closed. Further, when the NYSE is open, the foreign markets may be
closed. Therefore, the calculation of the Fund's NAV may not take place at the
same time the prices of certain securities held by the Fund are determined. In
most cases, events affecting the values of portfolio securities that occur
between the time their prices are determined and the close of normal trading on
the NYSE on a day the Fund's NAV is calculated will not be
B-18
<PAGE>
reflected in the Fund's NAV. If, however, we determine that a particular event
would materially affect the Fund's NAV, then we, under the general supervision
of the Board of Trustees, will use all relevant, available information to
determine a fair value for the affected portfolio securities.
Over-the-counter securities are generally priced at the last sales price or, if
not available, at the average of the bid and asked prices.
Debt securities purchased with maturities of 60 days or less are stated at
amortized cost, which approximates market value. Other debt securities are
valued each business day at their current market value as determined by a
pricing service approved by the Board of Trustees. Securities that cannot be
valued by these methods, and all other assets, are valued in good faith at fair
value using methods we have determined under the general supervision of the
Board of Trustees.
VALUATION OF THE USAA LIFE MONEY MARKET FUND SECURITIES
Securities are stated at amortized cost, which approximates market value. For
additional information on how securities are valued, see VALUATION OF
SECURITIES in the Trust's Statement of Additional Information.
DIVIDENDS AND DISTRIBUTIONS
Each Fund (except the USAA Life Money Market Fund) pays net investment income
dividends to separate accounts as shareholders at least once each year. Any net
capital gains generally will be distributed at least annually. The Fund will
make additional payments, if necessary, to avoid the imposition of any federal
income or excise tax.
With respect to the USAA Life Money Market Fund, net investment income is
accrued daily and paid on the last business day of the month. Daily dividends
are declared at the time the NAV per share is calculated. Dividends shall begin
accruing on shares purchased the day following the effective date and shall
continue to accrue to the effective date of redemption.
All income dividends and capital gain distributions will be paid in the form of
additional shares of that Fund at the NAV per share. The share price will be
the NAV of the Funds' shares computed on the ex-dividend date. Any income
dividends or capital gain distributions paid by the Funds will reduce the NAV
per share by the amount of the dividend or distribution.
TAXES
As mutual funds, the Funds themselves will not be subject to federal income tax
provided they distribute all of their income and net capital gains for each
taxable year in accordance with the Internal Revenue Code. Because the Funds
sell shares only to separate accounts funding benefits to variable annuity
contracts and variable life insurance policies, Internal Revenue Code
provisions applicable to separate accounts of variable insurance products
apply. As such, you should refer to the accompanying prospectus that describes
the variable annuity contract or variable life insurance policy, as applicable,
for the federal income tax treatment of the contract or policy and
distributions to you as a contract or policy owner and for the consequences of
the Trust's failure to meet Internal Revenue Code requirements.
YEAR 2000
Like other organizations around the world, the Funds could be adversely
affected if the computer systems used by the Funds, their service providers, or
companies in which the Funds invest do not properly process and calculate
information that relates to dates beginning on January 1, 2000, and beyond.
This situation may occur because for many years computer programmers used only
two digits to describe years, such as 98 for 1998. A program written in this
manner may not work when it encounters the year 00. The Trust has been advised
by USAA Life and us that to confront this situation, USAA companies have spent
much effort and money; and they expect to have our systems ready for the Year
2000 by mid-1999. In addition, we are actively assessing the Year 2000
readiness of the Trust's service providers, partners, and companies in whose
securities the Funds invest. It is not possible for the Trust to say that you
will experience no effect from this situation, but the Trust has been advised
that USAA companies are making a large effort to avoid any ill effects upon
contract and policy owners.
B-19
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights tables are intended to help you understand each Funds
financial performance since inception. Certain information reflects financial
results from a single Fund share. The total return in the table represents the
rate that an investor would have earned (or lost) on an investment in the Fund
(assuming reinvestment of all dividends and distributions). This information
has been audited by KPMG LLP, whose report, along with each Funds financial
statements, are included in the Annual Report, which is available upon request.
USAA LIFE MONEY MARKET FUND
===============================================================================
Year Ended December 31,
1998 1997 1996 1995*
- -------------------------------------------------------------------------------
Net asset value
at beginning of period $1.00 $1.00 $1.00 $1.00
- -------------------------------------------------------------------------------
Net investment income .05 .05 .05 .06(a)
- -------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) _ _ _ _
- -------------------------------------------------------------------------------
Distributions from net
investment income (.05) (.05) (.05) (.06)
- -------------------------------------------------------------------------------
Net asset value at end of period $1.00 $1.00 $1.00 $1.00
- -------------------------------------------------------------------------------
TOTAL RETURN (%)(b) 5.29 5.35 5.25 5.69
- -------------------------------------------------------------------------------
Net assets at end of period (000) $22,111 $15,131 $11,245 $7,802
- -------------------------------------------------------------------------------
Ratio of expenses to average
net assets (%) .35 .35 .35 .35(c)
- -------------------------------------------------------------------------------
Ratio of expenses to average
net assets, excluding
reimbursements (%) .80 .70 1.24 2.29(c)
- -------------------------------------------------------------------------------
Ratio of net investment income to
average net assets (%) 5.17 5.22 5.10 5.55(c)
===============================================================================
USAA LIFE INCOME FUND
===============================================================================
Year Ended December 31,
1998 1997 1996 1995*
- -------------------------------------------------------------------------------
Net asset value
at beginning of period $10.96 $10.51 $11.32 $10.00
- -------------------------------------------------------------------------------
Net investment income 1.66 .75 .92 .78(a)
- -------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) .35 .46 (.84) 1.61
- -------------------------------------------------------------------------------
Distributions from net
investment income (.66) (.76) (.89) (.76)
- -------------------------------------------------------------------------------
Distributions of realized
capital gains (.42) _ _ (.31)
- -------------------------------------------------------------------------------
Net asset value at end of period $10.89 $10.96 $10.51 $11.32
- -------------------------------------------------------------------------------
TOTAL RETURN (%)(b) 9.17 11.60 .67 23.88
- -------------------------------------------------------------------------------
Net assets at end of period (000) $41,249 $28,246 $24,049 $25,823
- -------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%) .35 .35 .35 .35(c)
- -------------------------------------------------------------------------------
Ratio of expenses to average
net ssets, excluding
reimbursements (%) .55 .52 .65 .65(c)
- -------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 6.62 7.16 6.99 7.07(c)
- -------------------------------------------------------------------------------
Portfolio Turnover (%) 61.79 30.77 97.74 55.08
===============================================================================
(a) Calculated using weighted average shares.
(b) The total return of a Fund refers to the percentage change in value of a
hypothetical investment, including the deduction of a proportional share
of fund expenses, and assumes all income and capital gain distributions
are reinvested. Total returns from the period do not reflect expenses that
apply at the Separate Account level including risk and expense charges.
These expenses would reduce the total return for the period shown.
(c) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
* Fund commenced operations on January 5, 1995.
B-20
<PAGE>
USAA LIFE GROWTH AND INCOME FUND
===============================================================================
Year Ended December 31,
1998 1997 1996 1995*
- -------------------------------------------------------------------------------
Net asset value
at beginning of period $17.98 $15.06 $12.60 $10.00
- --------------------------------------------------------------------------------
Net investment income .28 .28 .26 .34(a)
- -------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) .97 3.68 2.79 2.83
- -------------------------------------------------------------------------------
Distributions from net
investment income (.28) (.27) (.26) (.30)
- -------------------------------------------------------------------------------
Distributions of realized
capital gains (.80) (.77) (.33) (.27)
- -------------------------------------------------------------------------------
Net asset value at end of period $18.15 $17.98 $15.06 $12.60
- -------------------------------------------------------------------------------
TOTAL RETURN (%)(b) 6.93 26.43 24.13 31.72
- -------------------------------------------------------------------------------
Net assets at end of period (000) $100,438 $85,750 $55,932 $28,761
- -------------------------------------------------------------------------------
Ratio of expenses to average
net assets (%) .35 .34 .35 .35(c)
- -------------------------------------------------------------------------------
Ratio of expenses to average
net assets, excluding
reimbursements (%) .37 _ .53 .66
- -------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 1.55 1.80 2.25 2.82(c)
- -------------------------------------------------------------------------------
Portfolio Turnover (%) 37.75 20.26 14.55 17.73(c)
===============================================================================
USAA LIFE WORLD GROWTH FUND
===============================================================================
Year Ended December 31,
1998 1997 1996 1995*
- -------------------------------------------------------------------------------
Net asset value
at beginning of period $13.34 $12.77 $11.10 $10.00
- -------------------------------------------------------------------------------
Net investment income .16 .17 .18 .17(a)
- -------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) 1.37 1.62 2.16 1.79
- -------------------------------------------------------------------------------
Distributions from net
investment income (.16) (.17) (.16) (.16)
- -------------------------------------------------------------------------------
Distributions of realized
capital gains (.34) (1.05) (.51) (.70)
- -------------------------------------------------------------------------------
Net asset value at end of period $14.37 $13.34 $12.77 $11.10
- -------------------------------------------------------------------------------
TOTAL RETURN (%)(b) 11.46 14.08 21.12 19.55
- -------------------------------------------------------------------------------
Net assets at end of period (000) $42,080 $39,510 $37,535 $24,706
- -------------------------------------------------------------------------------
Ratio of expenses to average
net assets (%) .65 .59 .65 .65(c)
- -------------------------------------------------------------------------------
Ratio of expenses to average
net assets, excluding
reimbursements (%) .66 _ .82 .87(c)
- -------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 1.09 1.20 1.45 1.55(c)
- -------------------------------------------------------------------------------
Portfolio Turnover (%) 55.47 48.89 57.66 78.86
===============================================================================
(a) Calculated using weighted average shares.
(b) The total return of a Fund refers to the percentage change in value of a
hypothetical investment, including the deduction of a proportional share
of fund expenses, and assumes all income and capital gain distributions
are reinvested. Total returns from the period do not reflect expenses that
apply at the Separate Account level including risk and expense charges.
These expenses would reduce the total return for the period shown.
(c) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
* Fund commenced operations on January 5, 1995.
B-21
<PAGE>
USAA LIFE DIVERSIFIED ASSETS FUND
===============================================================================
Year Ended December 31,
1998 1997 1996 1995*
- -------------------------------------------------------------------------------
Net asset value
at beginning of period $14.48 $12.95 $11.96 $10.00
- -------------------------------------------------------------------------------
Net investment income .55 .50 .62 .55(a)
- -------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) .85 2.14 1.10 2.08
- -------------------------------------------------------------------------------
Distributions from net
investment income (.55) (.50) (.62) (.53)
- -------------------------------------------------------------------------------
Distributions of realized
capital gains (.26) (.61) (.11) (.14)
- -------------------------------------------------------------------------------
Net asset value at end of period $ 15.07 $14.48 $12.95 $11.96
- -------------------------------------------------------------------------------
TOTAL RETURN (%)(b) 9.63 20.70 14.30 26.33
- -------------------------------------------------------------------------------
Net assets at end of period (000) $60,570 $48,212 $30,390 $26,311
- -------------------------------------------------------------------------------
Ratio of expenses to average
net assets (%) .35 .35 .35 .35(c)
- -------------------------------------------------------------------------------
Ratio of expenses to average
net assets, excluding
reimbursements (%) .45 .42 .61 .64(c)
- -------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 3.72 4.02 4.46 4.93(c)
- -------------------------------------------------------------------------------
Portfolio Turnover (%) 29.67 19.19 43.75 58.87
===============================================================================
(a) Calculated using weighted average shares.
(b) The total return of a Fund refers to the percentage change in value of a
hypothetical investment, including the deduction of a proportional share
of fund expenses, and assumes all income and capital gain distributions
are reinvested. Total returns from the period do not reflect expenses that
apply at the Separate Account level including risk and expense charges.
These expenses would reduce the total return for the period shown.
(c) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
* Fund commenced operations on January 5, 1995.
B-22
<PAGE>
USAA LIFE AGGRESSIVE GROWTH FUND
==================================================================
Year Ended December 31,
1998 1997*
- ------------------------------------------------------------------
Net asset value
at beginning of period $11.70 $10.00
- ------------------------------------------------------------------
Net investment income (.05)(a) .01(a)
- ------------------------------------------------------------------
Net realized and unrealized
gain (loss) 2.39 1.83
- ------------------------------------------------------------------
Distributions from net
investment income _ _
- ------------------------------------------------------------------
Distributions of realized
capital gains (.17) (.12)
- ------------------------------------------------------------------
Net asset value at end of period $13.87 $11.70
- ------------------------------------------------------------------
TOTAL RETURN (%)(b) 20.14 18.26
- ------------------------------------------------------------------
Net assets at end of period (000) $29,201 $42,545
- ------------------------------------------------------------------
Ratio of expenses to average
net assets (%) .70 .70(c)
- ------------------------------------------------------------------
Ratio of expenses to average
net assets, excluding
reimbursements (%) .84 .85(c)
- ------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) (.41) (.15)(c)
- ------------------------------------------------------------------
Portfolio Turnover (%) 50.48 73.77
==================================================================
USAA LIFE INTERNATIONAL FUND
==================================================================
Year Ended December 31,
1998 1997*
- ------------------------------------------------------------------
Net asset value
at beginning of period $10.05 $10.00
- ------------------------------------------------------------------
Net investment income .11 .05(a)
- ------------------------------------------------------------------
Net realized and unrealized
gain (loss) .27 .15
- ------------------------------------------------------------------
Distributions from net
investment income (.11) (.05)
- ------------------------------------------------------------------
Distributions of realized
capital gains _ (.10)
- ------------------------------------------------------------------
Net asset value at end of period $10.32 $10.05
- ------------------------------------------------------------------
TOTAL RETURN (%)(b) 3.78 1.92
- ------------------------------------------------------------------
Net assets at end of period (000) $22,226 $21,582
- ------------------------------------------------------------------
Ratio of expenses to
average net assets (%) 1.10 1.10(c)
- ------------------------------------------------------------------
Ratio of expenses to average
net assets, excluding
reimbursements (%) 1.35 1.24(c)
- ------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 1.03 .70(c)
- ------------------------------------------------------------------
Portfolio Turnover (%) 42.30 30.57
==================================================================
(a) Calculated using weighted average shares.
(b) The total return of a Fund refers to the percentage change in value of a
hypothetical investment, including the deduction of a proportional share
of fund expenses, and assumes all income and capital gain distributions
are reinvested. Total returns from the period do not reflect expenses that
apply at the Separate Account level including risk and expense charges.
These expenses would reduce the total return for the period shown.
(c) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
* Fund commenced operations on May 1, 1997.
B-23
<PAGE>
APPENDIX A
THE FOLLOWING ARE DESCRIPTIONS OF CERTAIN TYPES OF SECURITIES IN WHICH WE MAY
INVEST ONE OR MORE FUNDS ASSETS:
AMERICAN DEPOSITARY RECEIPTS (ADRs)
We may invest the USAA Life World Growth, USAA Life International, USAA Life
Growth and Income, and USAA Life Aggressive Growth Funds assets in ADRs, which
are foreign shares held by a U.S. bank that issues a receipt evidencing
ownership. Dividends are paid in U.S. dollars.
CONVERTIBLE SECURITIES
We may invest each Funds assets, except the USAA Life Money Market Fund, in
convertible securities, which are bonds, preferred stocks, and other securities
that pay interest or dividends and offer the buyer the ability to convert the
security into common stock. The value of convertible securities depends
partially on interest rate changes and the credit quality of the issuer.
Because a convertible security affords an investor the opportunity, through its
conversion feature, to participate in the capital appreciation of the
underlying common stock, the value of convertible securities also depends on
the price of the underlying common stock.
EURODOLLAR AND YANKEE OBLIGATIONS
We may invest a portion of each Funds assets (except the USAA Life World
Growth, USAA Life International, and USAA Life Aggressive Growth Funds) in
dollar-denominated instruments that have been issued outside the U.S. capital
markets by foreign corporations and financial institutions and by foreign
branches of U.S. corporations and financial institutions (Eurodollar) as well
as dollar-denominated instruments that have been issued by foreign issuers in
the U.S. capital markets (Yankee). In addition, we may invest a portion of the
Funds assets in Eurodollar and Yankee obligations of investment-grade emerging
market countries.
FORWARD CURRENCY CONTRACTS
The USAA Life World Growth, USAA Life International, and USAA Life Aggressive
Growth Funds may enter into forward currency contracts, which means we may hold
securities denominated in foreign currencies. As a result, the value of the
securities will be affected by changes in the exchange rate between the dollar
and foreign currencies. In managing currency exposure, we may enter into
forward currency contracts. A forward currency contract involves an agreement
to purchase or sell a specified currency at a specified future date or over a
specified time period at a price set at the time of the contract. We only enter
into forward currency contracts when the Fund enters into a contract for the
purchase or sale of a security denominated in foreign currency and desires to
lock in the U.S. dollar price of that security.
GLOBAL DEPOSITARY RECEIPTS (GDRs)
We may invest the USAA Life World Growth, USAA Life International, and USAA
Life Aggressive Growth Funds assets in GDRs, which are foreign shares held by a
U.S. or foreign bank that issues a receipt evidencing ownership.
Dividends are paid in U.S. dollars.
ILLIQUID SECURITIES
We may invest up to 15% of each Funds net assets and up to 10% of the USAA Life
Money Market Funds net assets in securities that are illiquid. Illiquid
securities are those securities which cannot be disposed of in the ordinary
course of business, seven days or less, at approximately the value at which the
Fund has valued the securities.
MASTER DEMAND NOTES
We may invest each Funds assets (except the USAA Life World Growth, USAA Life
International, and USAA Life Aggressive Growth Funds) in master demand notes,
which are obligations that permit the investment of fluctuating amounts by the
Fund, at varying rates of interest using direct arrangements between the Fund,
as lender, and the borrower. These notes permit daily changes in the amounts
borrowed. The Fund has the right to increase the amount under the note at any
time up to the full amount provided by the note agreement, or to decrease the
amount, and the borrower may repay up to the full amount of the note without
penalty. Frequently, such obligations are secured by letters of credit or other
credit support arrangements provided by banks. Because master demand notes are
direct lending arrangements between the lender and borrower, these instruments
generally will not be traded, and there generally is no secondary market for
these notes, although they are redeemable (and immediately repayable by the
borrower) at face value, plus accrued interest, at any time. We will invest the
Funds assets in master demand notes only if the Board of Trustees or its
delegate has determined that they are of credit quality comparable to the debt
securities in which the Fund generally may invest.
MONEY MARKET INSTRUMENTS
We may hold a certain portion of each Funds assets in investment-grade, U.S.
dollar-denominated debt securities that have remaining maturities of one year
or less. Such securities may include U.S. Government obligations, commercial
paper and other short-term corporate obligations, repurchase agreements
collateralized with U.S. Government securities, certificates of deposit,
bankers acceptances, and other financial institution obligations. These
securities may carry fixed or variable interest rates.
MORTGAGE-BACKED AND ASSET-BACKED SECURITIES
We may invest each Funds assets (except the USAA Life World Growth, USAA Life
International, and USAA Life Aggressive Growth Funds) in mortgage-backed and
asset-backed securities. Mortgage-backed securities include, but are not
limited to, securities issued by the Government National Mortgage Association
(Ginnie Mae), the Federal National Mortgage Association (Fannie Mae) and the
Federal Home Loan Mortgage Corporation (Freddie Mac).
B-24
<PAGE>
These securities represent ownership in a pool of mortgage loans. They differ
from conventional bonds in that principal is paid back to the investor as
payments are made on the underlying mortgages in the pool. Accordingly, the
Fund receives monthly scheduled payments of principal and interest along with
any unscheduled principal prepayments on the underlying mortgages. Because
these scheduled and unscheduled principal payments must be reinvested at
prevailing interest rates, mortgage-backed securities do not provide an
effective means of locking in long-term interest rates for the investor. Like
other fixed income securities, when interest rates rise, the value of a
mortgage-backed security generally will decline; however, when interest rates
are declining, the value of mortgage-backed securities with prepayment features
may not increase as much as other fixed income securities.
Mortgage-backed securities also include collateralized mortgage obligations
(CMOs). CMOs are obligations fully collateralized by a portfolio of mortgages
or mortgage-related securities. CMOs are divided into pieces (tranches) with
varying maturities. The cash flow from the underlying mortgages is used to pay
off each tranche separately. CMOs are designed to provide investors with more
predictable maturities than regular mortgage securities but such maturities can
be difficult to predict because of the effect of prepayments. Failure to
accurately predict prepayments can adversely affect the Funds return on these
investments. CMOs may also be less marketable than other securities.
Asset-backed securities represent a participation in, or are secured by and
payable from, a stream of payments generated by particular assets, such as
credit card, motor vehicle, or trade receivables. They may be pass-through
certificates, which have characteristics very similar to mortgage-backed
securities, discussed above. They may also be in the form of asset-backed
commercial paper, which is issued by a special purpose entity, organized solely
to issue the commercial paper and to purchase interests in the assets. The
credit quality of these securities depends primarily upon the quality of the
underlying assets and the level of credit support and enhancement provided.
The weighted average life of such securities is likely to be substantially
shorter than their stated final maturity as a result of scheduled principal
payments and unscheduled principal prepayments.
MUNICIPAL LEASE OBLIGATIONS
We may invest the USAA Life Money Market and USAA Life Diversified Assets Funds
assets in a variety of instruments referred to as municipal lease obligations,
including:
* Leases,
* Installment purchase contracts, and
* Certificates of participation in such leases and contracts.
PUT BONDS
We may invest each Funds assets in securities (including securities with
variable interest rates) that may be redeemed or sold back (put) to the issuer
of the security or a third party prior to stated maturity (put bonds). Such
securities will normally trade as if maturity is the earlier put date, even
though stated maturity is longer.
REPURCHASE AGREEMENTS
We may invest each Funds assets in repurchase agreements that are
collateralized by obligations issued or guaranteed as to both principal and
interest by the U.S. Government, its agencies and instrumentalities. A
repurchase agreement is a transaction in which a security is purchased with a
simultaneous commitment to sell it back to the seller (a commercial bank or
recognized securities dealer) at an agreed upon price on an agreed upon date.
This date is usually not more than seven days from the date of purchase. The
resale price reflects the purchase price plus an agreed upon market rate of
interest, which is unrelated to the coupon rate or maturity of the purchased
security.
VARIABLE RATE SECURITIES
We may invest each Funds assets in securities that bear interest at rates which
are adjusted periodically to market rates.
* These interest rate adjustments can both raise and lower the income
generated by such securities. These changes will have the same effect on the
income earned by the Fund depending on the proportion of such securities
held.
* The value of variable rate securities is less affected than fixed-coupon
securities 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 a variable rate security usually tends toward par (100%
of face value) at interest rate adjustment time.
WHEN-ISSUED SECURITIES
We may invest each Funds assets in new issues of debt securities offered on a
when-issued basis.
* Delivery and payment take place after the date of the commitment to
purchase, normally within 45 days. Both price and interest rate are fixed at
the time of commitment.
* The Fund does not earn interest on the securities until settlement, and the
market value of the securities may fluctuate between purchase and
settlement.
* Such securities can be sold before settlement date.
B-25
<PAGE>
This Prospectus provides prospective purchasers of variable annuity contracts
and variable life insurance policies offered by USAA Life Insurance Company
with basic information regarding the Funds before allocating premium payments
to any Fund.
If you would like more information about these Funds, you may call
1-800-531-2923 to request a free copy of the Trusts Statement of Additional
Information (SAI), Annual or Semiannual Report, or to ask other questions about
the Funds. The SAI has been filed with the Securities and Exchange Commission
(SEC) and is legally a part of the Prospectus. In the Trusts Annual Report, you
will find a discussion of the market conditions and investment strategies that
significantly affected the Funds performance during the last fiscal year.
To view these documents, along with other related documents, you can visit the
SECs Internet web site (http://www.sec.gov) or the Commissions Public Reference
Room in Washington, D.C. Information on the operation of the public reference
room can be obtained by calling 1-800-SEC-0330. Additionally, copies of this
information can be obtained, for a duplicating fee, by writing the Public
Reference Section of the Commission, Washington, D.C. 20549-6009.
Investment Adviser, Underwriter and Distributor
USAA Investment Management Company
9800 Fredericksburg Road
San Antonio, Texas 78288
------------------------------------
Transfer Agent
USAA Life Insurance Company
9800 Fredericksburg Road
San Antonio, Texas 78288
------------------------------------
Custodian
State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02105
Investment Company Act File No. 811-2429
B-26
<PAGE>
Part B
Statement of Additional Information for the
USAA Life Money Market Fund, USAA Life Income Fund,
USAA Life Growth & Income Fund, USAA Life World Growth Fund,
USAA Life Diversified Assets Fund, USAA Life Aggressive Growth Fund,
and USAA Life International Fund
is included herein
<PAGE>
[USAA USAA LIFE STATEMENT OF
EAGLE LOGO] INVESTMENT TRUST ADDITIONAL INFORMATION
- -------------------------------------------------------------------------------
USAA LIFE INVESTMENT TRUST
MAY 1, 1999
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.
This SAI and the Prospectus are dated May 1, 1999, and may be amended from time
to time.
The financial statements of the Funds and the Independent Auditors' Report
thereon for the fiscal year ended December 31, 1998, are included in the
accompanying Annual Report of that date and are incorporated hereby by
reference.
You may obtain a free copy of the Prospectus and an Annual or Semiannual Report
by writing USAA Life Insurance Company at 9800 Fredericksburg Road, San
Antonio, Texas 78288, or by calling 1-800-531-2923.
- -------------------------------------------------------------------------------
TABLE OF CONTENTS
PAGE
GENERAL INFORMATION AND HISTORY........................................... 2
DISTRIBUTOR............................................................... 2
INVESTMENT ADVISER........................................................ 2
CUSTODIAN................................................................. 2
TRANSFER AGENT............................................................ 3
INDEPENDENT AUDITORS...................................................... 3
LEGAL MATTERS............................................................. 3
VALUATION OF SECURITIES................................................... 3
ADDITIONAL INFORMATION REGARDING REDEMPTION OF SHARES..................... 4
INVESTMENT POLICIES AND TECHNIQUES........................................ 4
Section 4(2) Commercial Paper and Rule 144A Securities............... 4
Liquidity Determinations............................................. 4
Lending of Securities................................................ 5
Forward Currency Contracts........................................... 5
When-Issued Securities............................................... 5
Real Estate Investment Trusts (REITs)................................ 5
Repurchase Agreements................................................ 6
Temporary Defensive Policy........................................... 6
INVESTMENT RESTRICTIONS................................................... 6
PORTFOLIO TRANSACTIONS.................................................... 7
Brokerage Commissions................................................ 7
Portfolio Turnover Rates............................................. 8
DESCRIPTION OF TRUST SHARES............................................... 9
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS................................. 9
TRUSTEES AND OFFICERS OF THE TRUST........................................ 11
Committees of the Board of Trustees.................................. 12
THE TRUST'S ADVISER....................................................... 13
The Advisory Agreement............................................... 13
The Underwriting and Administrative Services Agreement .............. 14
PRINCIPAL HOLDERS OF SECURITIES........................................... 15
CALCULATION OF PERFORMANCE DATA........................................... 15
Yield ............................................................... 16
Money Market Fund.................................................... 16
Other Funds.......................................................... 16
Total Return......................................................... 16
FINANCIAL STATEMENTS...................................................... 17
APPENDIX A - LONG-TERM AND SHORT-TERM DEBT RATINGS........................ 18
APPENDIX B - COMPARISON OF FUND PERFORMANCE............................... 20
<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 an 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 also serves as an
investment vehicle for premium payments received by the Company from the sale
of variable life insurance policies (the "Policies") funded through the Life
Insurance Separate Account of USAA Life Insurance Company (the "Life Insurance
Separate Account"). The Trust is currently made up of seven investment Funds:
USAA Life Money Market Fund (the "Money Market Fund"), USAA Life Income Fund
(the "Income Fund"), USAA Life Growth and Income Fund (the "Growth and Income
Fund"), USAA Life World Growth Fund (the "World Growth Fund"), USAA Life
Diversified Assets Fund (the "Diversified Assets Fund"), USAA Life Aggressive
Growth Fund (the "Aggressive Growth Fund"), and USAA Life International Fund
(the "International 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.
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 (contracts) and variable life insurance
policies (policies). The Trust does not foresee any disadvantage to purchasers
of variable contracts and policies arising out of these arrangements.
Nevertheless, differences in treatment under tax and other laws, as well as
other considerations, could cause the interest of various purchasers of
contracts and policies to conflict. For example, violation of the federal tax
laws by one separate account investing in the Trust could cause the contracts
or policies funded through another separate account to lose their tax-deferred
status, unless remedial action were taken. If a material, irreconcilable
conflict arises between separate accounts, a separate account may be required
to withdraw its participation in the Trust. If it becomes necessary for any
separate account to replace shares of the Trust with another investment, the
Trust may have to liquidate portfolio securities on a disadvantageous basis. At
the same time, we and the Trust are subject to conditions imposed by the SEC
designed to prevent or remedy any conflict of interest. In this connection, the
Board of Trustees has the obligation to monitor events in order to identify any
material, irreconcilable conflicts that may possibly arise and to determine
what action, if any, should be taken to remedy or eliminate the conflict.
DISTRIBUTOR
USAA Investment Management Company ("USAA IMCO" or the "Adviser"), serves
as principal underwriter for the Trust in the distribution of shares, pursuant
to an Underwriting and Administrative Services Agreement, dated December 16,
1994, as amended and restated as of February 18, 1998. USAA IMCO, an affiliate
of USAA Life, is registered as a broker-dealer with the SEC and a member of the
National Association of Securities Dealers, Inc. (the "NASD").
USAA IMCO also serves as distributor of the Contracts and Polices funded
by Trust shares. The Contracts and Policies are primarily sold in a continuous
offering by direct response through salaried sales account representatives who
are appropriately licensed under state law to sell variable annuity contracts
and variable life insurance policies and registered with the NASD as registered
representatives and/or principals.
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, each Fund's investments in
foreign securities 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.
2
<PAGE>
TRANSFER AGENT
USAA Life, the depositor of the Separate Account and the Life Insurance
Separate Account, serves as transfer agent for the Trust pursuant to a Transfer
Agent Agreement, as amended by a Letter Agreement, dated February 7, 1997, and
as further amended February 18, 1998. USAA Life may be reimbursed for its
expenses incurred in connection with providing services under the Transfer
Agent Agreement.
INDEPENDENT AUDITORS
KPMG LLP, 112 East Pecan, Suite 2400, San Antonio, Texas 78205,
independent auditors, will perform an annual audit of USAA Life Investment
Trust.
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 and the Life Insurance 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, Martin
Luther King Jr. 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 each Fund, other than the Money Market
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 average of the bid price and asked
prices 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 average of the bid price and asked prices 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 average of the bid price and asked prices is generally
used.
(7) Securities that 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.
3
<PAGE>
The value of the 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 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
Money Market Fund's price per share, as computed for the purpose of sales and
redemptions, at $1. There can be no assurance, however, that the Fund will at
all times be able to maintain a constant $1 NAV per share. Such procedures
include review of the Fund's holdings at such intervals as is deemed
appropriate to determine whether the Fund's NAV, calculated by using available
market quotations, deviates from $1 per share and, if so, whether such
deviation may result in material dilution, or is otherwise unfair to existing
shareholders. In the event that it is determined that such a deviation exists,
the Board of 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. Each Fund's objective(s) cannot be changed without
shareholder approval.
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 144A Securities for purposes of the
liquidity guidelines established by the Board of Trustees.
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
4
<PAGE>
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, and (4) the nature of the security
and the nature of the marketplace trades, including the time needed to dispose
of the security, the method of soliciting offers, and the mechanics of
transfer. Additional factors considered by the 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 therefor, 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.
FORWARD CURRENCY CONTRACTS
The World Growth Fund, Aggressive Growth Fund, and the International 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 is 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).
REAL ESTATE INVESTMENT TRUSTS (REITS)
Because each Fund (other than the Money Market Fund and International
Fund) may invest a portion of its assets in equity securities of REITs, each
Fund may also be subject to certain risks associated with direct investments in
REITs. In addition, the Income Fund, Growth and Income Fund, and Diversified
Assets Fund may invest their assets in the debt securities of REITs and
therefore, may be subject to certain other risks, such as credit risk,
associated with investment in the debt securities of REITs. REITs may be
affected by changes in the value of their underlying properties and by defaults
by borrowers or tenants. Furthermore, REITs are dependent upon specialized
management skills of their managers and may
5
<PAGE>
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.
REPURCHASE AGREEMENTS
Each Fund may invest in repurchase agreements that are collateralized by
obligations issued or guaranteed as to both principal and interest by the U.S.
Government, its agencies or instrumentalities. A repurchase agreement is a
transaction in which a security is purchased with a simultaneous commitment to
sell it back to the seller (a commercial bank or recognized securities dealer)
at an agreed upon price on an agreed upon date. This date is usually not more
than seven days from the date of purchase. The resale price reflects the
purchase price plus an agreed upon market rate of interest, which is unrelated
to the coupon rate or maturity of the purchased security. The obligation of the
seller to pay the agreed upon price is in effect secured by the value of the
underlying security. In these transactions, the securities purchased by a Fund
will have a total value equal to or in excess of the amount of the repurchase
obligation and will be held by the Fund's custodian until repurchased. If the
seller defaults and the value of the underlying security declines, the Fund may
incur a loss and may incur expenses in selling the collateral. If the seller
seeks relief under the bankruptcy laws, the disposition of the collateral may
be delayed or limited.
TEMPORARY DEFENSIVE POLICY
Each Fund may on a temporary basis because of market, economic, political,
or other conditions, invest up to 100% of its assets in investment-grade,
short-term debt instruments. Such securities may consist of obligations of the
U.S. Government, its agencies or instrumentalities, and repurchase agreements
secured by such instruments; certificates of deposit of domestic banks having
capital, surplus, and undivided profits in excess of $100 million; banker's
acceptances of similar banks; commercial paper and other corporate debt
obligations.
INVESTMENT RESTRICTIONS
The following investment restrictions have been adopted by the 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 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
restriction (6) 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.
(6) 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.
(7) 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 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.
(8) 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 the same industry. With respect to the
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.
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<PAGE>
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, or in addition to, those set
forth by S&P have unique investment characteristics, additional industries are
included as industry classifications. The Adviser classifies municipal
obligations by projects with similar characteristics, such as toll road revenue
bonds, housing revenue bonds or higher education revenue bonds.
PORTFOLIO TRANSACTIONS
The Adviser, pursuant to 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.
The Trust has no obligation to deal with any particular broker or group of
brokers in the execution of portfolio transactions. The Trust contemplates
that, consistent with obtaining the best combination of price and execution
available, brokerage transactions may be effected through USAA Brokerage
Services, a discount brokerage service of the Adviser. The Board of Trustees
has adopted procedures in conformity with the requirements of Rule 17e-1 under
the 1940 Act that are designed to ensure that all brokerage commissions paid to
USAA Brokerage Services are reasonable and fair. The Board of Trustees has
authorized the Adviser, as a member of the Chicago Stock Exchange, to effect,
through USAA Brokerage Services, portfolio transactions for the Trust on such
exchange and to retain compensation in connection with such transactions. Any
such transactions will be effected and related compensation paid only in
accordance with applicable SEC regulations.
In the allocation of brokerage business 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, 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.
BROKERAGE COMMISSIONS
During the fiscal year ended December 31, 1998, the Growth & Income Fund
purchased securities of Morgan Stanley, Dean Witter, Discover & Co., the World
Growth Fund purchased securities of Morgan Stanley, Dean Witter, Discover &
Co., and the Diversified Assets Fund purchased securities of Merrill Lynch &
Co., Inc., which are regular broker-dealers (the
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ten largest broker-dealers through whom the Fund purchased securities) or the
parents of regular broker-dealers. These securities had values of $1,988,000,
$355,000, and $1,002,000, respectively, as of December 31, 1998.
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.
During the last three fiscal years, the Funds paid the following amounts
in brokerage commissions.
FUND 1998 1997 1996
---- ---- ---- ----
Money Market Fund N/A N/A N/A
Income Fund N/A $ 3,515 $ 500
Growth and Income Fund $85,474 $46,551 $42,972
World Growth Fund $73,945 $67,645 $97,545
Diversified Assets Fund $19,194 $11,852 $14,825
Aggressive Growth Fund $29,385 $46,565 N/A
International Fund $42,894 $56,011 N/A
During the last three fiscal years, the Funds paid the following brokerage
fees to USAA Brokerage Services, a discount brokerage service of the Adviser:
FUND 1998* 1997 1996
---- ---- ---- ----
Money Market Fund N/A N/A N/A
Income Fund N/A N/A N/A
Growth and Income Fund $ 6,032 $ 484 $ 2,044
World Growth Fund $ 2,216 N/A $ 340
Diversified Assets Fund $ 3,564 $ 524 $ 3,592
Aggressive Growth Fund $ 1,016 $ 1,456 N/A
International Fund N/A N/A N/A
* Those amounts are 7.06%, 3%, 18.57% and 3.46%, respectively, of the
aggregate brokerage fees paid by the Growth and Income Fund, World Growth
Fund, Diversified Assets Fund, and Aggressive Growth Fund, respectively,
were effected through USAA Brokerage Services.
For the year ended December 31, 1998, 6.90%, 7.28%, 27.07% and 4.10% of
the aggregate dollar amounts of transactions involving the payment of
commissions by the Growth and Income Fund, World Growth Fund, Diversified
Assets Fund, and Aggressive Growth Fund, respectively, were effected through
USAA Brokerage Services.
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. For the Trust's most recently completed
fiscal year ended December 31, 1998, the amount of such brokerage transactions
and related commissions paid by these Funds were as follows:
TRANSACTION
FUND COMMISSIONS AMOUNTS
Money Market Fund N/A N/A
Income Fund N/A N/A
Growth and Income Fund $23,310 $23,308,147
World Growth Fund $ 5,839 $ 4,607,301
Diversified Assets Fund $ 5,630 $ 5,433,396
Aggressive Growth Fund $ 4,439 $ 2,229,020
International Fund N/A N/A
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 Money Market Fund and the Aggressive
Growth Fund, will exceed 100%.
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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.
DESCRIPTION OF TRUST SHARES
The Trust is authorized to issue shares of beneficial interest in separate
Funds. Seven Funds have been established. Under the Master Trust Agreement, as
amended February 7, 1997, and as further amended February 18, 1998 ("Trust
Agreement"), the Board of Trustees is authorized to create new Funds in
addition to those already existing without shareholder approval.
Each Fund's assets and all income, earnings, profits and proceeds thereof,
subject only to the rights of creditors, are specifically allocated to 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 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
meetings 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.
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. The
Trust will assist in communicating to other shareholders about the meeting.
The voting privileges of Contract Owners and Policy Owners, and
limitations on those privileges, are explained in the prospectus relating to
the Contracts or Policies. USAA Life, as the owner of the assets in the
Separate Account and Life Insurance Separate Account, will vote Fund shares
that are held in the Separate Accounts to fund benefits under the Contracts and
Policies in accordance with the instructions of Contract Owners and Policy
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 or Policy 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 and Policies 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.
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.
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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) and; (2) satisfy certain investment
diversification requirements at the close of each quarter of the Fund's taxable
year. Each of the Funds intends to satisfy both of 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, excluding net capital gain, and 90% of its
non-taxable interest income.
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.
In addition, shares of each Fund may be owned only by (a) separate
accounts of USAA Life (or other life insurance companies), (b) a life insurance
company general account, (c) USAA IMCO or an affiliate, in starting or managing
a Fund (in the case of (b) and (c) of this paragraph, there must be no
intention to sell shares to the general public), or (d) the trustee of a
qualified pension or retirement plan.
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 or Policy to be taxed currently.
Each Fund intends 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 and
Policies invested in the Funds would not be treated as annuity contracts or
life insurance for income tax purposes under the Code. In that case, Contract
owners and Policy owners would be taxed on the increases in value of any
Contract or Policy that invested through the separate accounts of USAA Life in
a Fund that failed these tests for the period of failure and subsequently.
Also, if the insured under a Policy died during a period of failure, a portion
of the death benefit would be taxable to the recipient.
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 4% excise tax applies where a Fund sells to a separate account,
ONLY where a general account of a life company or an adviser invests more than
$250,000 in the Fund.
The ability of the Aggressive Growth Fund, World Growth Fund and the
International Fund 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, 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.
The World Growth Fund and International Fund may be subject to foreign
withholding or other taxes. If more than 50% of the value of the Fund's total
assets at the close of any taxable year consists of securities of foreign
corporations, the Fund may file an election with the Internal Revenue Service
(the Foreign Election) that would permit USAA Life Insurance Company to take a
credit (or a deduction) for foreign income taxes paid by the Fund. If the
Foreign Election is made, USAA Life Insurance Company would include in its
gross income both dividends received from the Fund and foreign income taxes
paid by the Fund. As a shareholder of the Fund(s), USAA Life Insurance Company
would be entitled to treat the foreign income taxes withheld as a credit
against its U.S. federal income taxes, subject to the limitations set forth in
the Code with respect to the foreign tax credit generally. Alternatively, USAA
Life Insurance Company could, if it were to its advantage, treat the foreign
income taxes withheld as a deduction in computing taxable income rather than as
a tax credit. USAA Life Insurance Company will not be entitled to a foreign tax
credit for taxes paid to certain countries; however, if the Funds otherwise
qualify for the Foreign Election, a deduction for such taxes will be available
to it. It is anticipated that the Funds will make the Foreign Election.
If the World Growth Fund or the International 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.
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<PAGE>
TRUSTEES AND OFFICERS OF THE TRUST
The Board of Trustees consists of five Trustees who supervise the business
affairs of the Trust. 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.
Edwin L. Rosane*
Trustee, Chairman of the Board of Trustees, and President
Age 62
Chief Executive Officer USAA Life (9/93-present) and President USAA Life
(1/90-present).
Michael J.C. Roth*
Trustee and Vice Chairman of the Board of Trustees
Age: 57
Chief Executive Officer USAA IMCO (10/93-present); President, Director, and
Vice Chairman of the Board of Directors, IMCO (1/90-present). Mr. Roth serves
as President, Director/Trustee, and Vice Chairman of the Boards of
Directors/Trustees of each of the Funds within the USAA Family of Funds and
USAA Shareholder Account Services; Director of USAA Life Insurance Company;
Trustee and Vice Chairman of USAA Life Investment Trust.
June R. Reedy
Trustee
211 N. Presa
San Antonio, TX 78205
Age 69
Chairman, Mayor's Task Force To Revitalize the Historic Civic Center of San
Antonio; City Commissioner, Historic Design & Review, City of San Antonio
(Volunteer).
Neil H. Stone
Trustee
645 Lockhill Selma
San Antonio, TX 78216
Age 56
Attorney (Associate), Gendry & Sprague, P.C. (known as Gendry, Sprague &
Wachsmuth until November 1994) (12/92- present).
Gary W. West
Trustee
8038 Wurzbach, Suite 870
San Antonio, TX 78229
Age 59
President, Radiation Oncology of San Antonio, Professional Association
(12/94-present); physician, Radiation Oncology of San Antonio, Professional
Association (1983-12/94).
Kenneth McClure
Vice President
Age 51
Senior Vice President, Life & Health Marketing, USAA Life, (1/97-present);
Senior Vice President, Life Operations, USAA Life, (1/95-1/97); Senior Vice
President, Life & Health Marketing, USAA Life, (8/92-1/95).
John W. Saunders, Jr.
Vice President
Age: 64
Senior Vice President, Fixed Income Investments, IMCO (10/85-present). Mr.
Saunders serves as Director/Trustee and Vice President of each of the Funds
within the USAA Family of Funds; Director of IMCO; and Senior Vice President of
USAA Shareholder Account Services.
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<PAGE>
Richard T. Halinski, Jr.
Secretary
Age 47
Vice President, USAA Life & Health Insurance Counsel, USAA, (11/94-present);
Vice President and Assistant Secretary, USAA Life, (11/94-present); Assistant
Vice President and Assistant Secretary, USAA Life, (4/91-11/94); and Assistant
Vice President, USAA Life & Health Insurance Counsel, USAA (11/90-11/94).
Dwain A. Akins
Assistant Secretary
Age 48
Assistant Vice President, USAA Life & Health Insurance Counsel, USAA,
(11/94-present); Assistant Vice President and Assistant Secretary, USAA Life,
(4/95-present), and Executive Director, USAA Life & Health Insurance Counsel,
USAA, (2/91-11/94).
James A. Robinson
Treasurer
Age 49
Senior Vice President, Finance, USAA Life, (4/92-present).
Caryl Swann
Assistant Treasurer
Age: 51
Executive Director, Mutual Fund Analysis & Support, IMCO (10/98-present);
Director, Mutual Fund Portfolio Analysis & Support, IMCO (2/98-10/98); Manager,
Mutual Fund Accounting, IMCO (7/92-2/98). Ms. Swann serves as Assistant
Treasurer for each of the Funds in the USAA Family of Funds.
Jeanine A. Merrill
Assistant Treasurer
Age 40
Director, Life Policyholder Analysis, Tax & Accounting, USAA Life,
(11/98-present); Manager, Life Financial Analysis and Accounting, USAA Life,
(1/98-11/98); Manager, Life Financial Statement Reporting, USAA Life,
(8/97-1/98); Manager, Regulatory Reporting, USAA Life, (7/95-8/97); Mutual Fund
Accountant, Statement and Mutual Fund Accounting, USAA Life, (9/94-7/95); and
Mutual Fund Accountant, USAA IMCO, (7/90-9/94).
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.
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 $5,000 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.
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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 Trust's most recently completed fiscal
year ended December 31, 1998:
AGGREGATE AGGREGATE COMPENSATION
COMPENSATION FROM THE TRUST AND THE
TRUSTEE FROM THE TRUST USAA FAMILY OF FUNDS(a)
Edwin L. Rosane(b) None None
Michael J.C. Roth(c) None None
June R. Reedy $8,500 $8,500
Neil H. Stone $8,500 $8,500
Gary W. West $8,500 $8,500
(a) As of December 31, 1998, the USAA Family of Funds consisted of four
registered investment companies, not including the Trust, offering a total
of 35 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, a wholly owned
indirect subsidiary of United Services Automobile Association, was organized in
May 1970 and has served as adviser and distributor for the USAA Life Investment
Trust from its inception.
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 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 policies 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
the monthly average net assets of each Fund, other than the Aggressive Growth
Fund and the International Fund, for which the annual rates are 0.50% and
0.65%, respectively.
For the last three fiscal years, USAA IMCO received the following
investment advisory fees:
1998 1997 1996
---- ---- ----
Money Market Fund $ 36,491 $ 29,416 $ 22,871
Income Fund $ 68,324 $ 50,127 $ 55,992
Growth and Income Fund $ 193,906 $ 139,136 $ 81,31
World Growth Fund $ 83,004 $ 77,201 $ 62,425
Diversified Assets Fund $ 111,400 $ 79,446 $ 61,680
Aggressive Growth Fund $ 215,266 $ 130,483 N/A
International Fund $ 146,670 $ 92,044 N/A
The Advisory Agreement was most recently approved by the Board of Trustees
on November 18, 1998, for a term ending January 2, 2000. The Advisory Agreement
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
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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).
THE UNDERWRITING AND ADMINISTRATIVE SERVICES AGREEMENT
Pursuant to the Underwriting and Administrative Services Agreement, as
amended and restated as of November 19, 1998 ("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 and/or Policy 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 and Life Insurance
Separate Account periodic report to Contract Owners and Policy Owners),
advertising and other promotional material relating to either the Trust or the
Accounts and compensation paid to sales personnel.
In addition, pursuant to the Underwriting Agreement, USAA Life, out of its
General Account, has agreed to pay directly or reimburse the Trust for these
Trust expenses to the extent that such expenses, exceed 0.65% of the monthly
average net assets of the World Growth Fund, 0.70% of the monthly average net
assets of the Aggressive Growth Fund, 1.10% of the monthly average net assets
of the International Fund, and 0.35% of the monthly average net assets of each
other Fund. Subject to these expense limitations, the Trust will bear the
expense of providing all management, administrative, legal, clerical,
accounting, and recordkeeping services necessary or appropriate to conduct the
Trust's business and day-to-day operations, including: (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; (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 and in
preparing and or filing on behalf of the Trust (or assisting counsel and/or
auditors in the preparation of) all required tax returns and reports to and
other filings with the SEC (including, without limitation, the Trust's annual
report to the SEC), and any other governmental agency, together with the
preparation of related financial statements (the Underwriter and Trust agreeing
to supply or cause to be supplied to the Company all necessary financial and
other information in connection with the foregoing; (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 and/or Policy 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, and/or Policy Owners communications, and
proxy materials (including proxy statements, proxy cards and voting instruction
forms) relating to either the Trust or the Separate Accounts 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, and/or financial and share ownership
information including, but not limited to, the number and value of shares owned
by each Shareholder; and (o) postage. The Underwriting Agreement may be
terminated by any party thereto upon 120 day's written notice to the other
parties.
For the fiscal years ended December 31, 1998, 1997, and 1996, the Trust
paid USAA Life net amounts of $241,195, $31,409, and $0, respectively after
reimbursement of expenses exceeding amounts set forth above. Of these amounts,
for the fiscal year ended December 31, 1998, USAA Life paid IMCO $214,196 to
compensate IMCO for its costs in providing certain accounting services relating
to the Trust as delegated by USAA Life.
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PRINCIPAL HOLDERS OF SECURITIES
As of January 31, 1999, 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.
Money Market Fund -
Income Fund 50.02%
Growth and Income Fund 18.30%
World Growth Fund 35.41%
Diversified Assets Fund 23.23%
Aggressive Growth Fund 80.10%
International Fund 93.36%
As a result of its beneficial ownership, USAA Life may be presumed to
control (with the exception of the 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 and Life Insurance Separate Account in accordance
with instructions received from Contract Owners (or annuitants or
beneficiaries, to the extent provided in the Contracts) and Policy Owners,
respectively. If USAA Life determines, however, that it is permitted to vote
any Fund shares that it owns in its own right, either directly or through the
Separate Account or Life Insurance Separate Account, 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.
As of January 31, 1999, the Separate Account owned of record the
percentages of each Fund's outstanding shares attributable to the Contracts and
Policies as shown below. The Separate Account is located at 9800 Fredericksburg
Road, San Antonio, Texas 78288.
Money Market Fund 100%
Income Fund 49.98%
Growth and Income Fund 81.70%
World Growth Fund 64.59%
Diversified Assets Fund 76.77%
Aggressive Growth Fund 19.90%
International Fund 6.64%
Contract Owners and Policy 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. The following
table identifies all persons who as of January 31, 1999, held of record or
owned beneficially 5% or more of the Funds:
NAME AND ADDRESS
TITLE OF CLASS OF BENEFICIAL OWNER PERCENT OF CLASS
Money Market Fund Gary L. Harding 7.54%
Burbank, CA
Money Market Fund Howard M. Meyers 5.09%
Dallas, Tx
As of January 31, 1999, 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 of the Funds is provided in the
"Fund Performance" section for each Fund under "Fund Objectives, Strategies,
and Risks" 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.
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 Fund Account or charges and deductions
against the Contracts or Policies. The share price of the Income Fund, Growth
and Income Fund, World Growth
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Fund, Diversified Assets Fund, Aggressive Growth Fund, and International Fund
will vary and, when redeemed, may be worth more or less than the original
purchase price. The yield of the Money Market Fund will also vary.
Charges imposed under the Contract and Policies will affect the actual
return to Contract and Policy Owners. Charges imposed under the Contracts and
Policies are not included in the calculation of Yield or Total Return for the
Funds shown below. See the prospectuses for the Contracts and Policies for
further information.
YIELD
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 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.
MONEY MARKET FUND
When the 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, and any expenses and fees that
may be charged to the fund. 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 one to the quotient,
raising the sum to a power equal to 365 divided by seven, and subtracting one
from the result.
Current and effective yields fluctuate daily and will vary with factors
such as interest rates and the quality, length of maturities, and type of
investments in the portfolio.
Yield for 7-day Period ended December 31, 1998, was 5%.
Effective Yield for 7-day Period ended December 31. 1998, was 5.13%.
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:
Yield = 2[((a-b)/(cd)+1)^6 -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 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
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 investment
made at the beginning of the applicable 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.
16
<PAGE>
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. Cumulative total return is calculated
in a manner similar to standardized average annual total return, except that
the results are not annualized. The SEC has not prescribed a standard formula
for calculating cumulative total return. Cumulative total return is calculated
by finding the cumulative rates of return of a hypothetical initial investment
of $1,000 over various periods, according to the following formula, and then
expressing that as a percentage:
C = (ERV/P)-1
Where: P = a hypothetical initial investment of $1,000
C = cumulative total return
ERV = ending redeemable value of a hypothetical $1,000 investment
made at the beginning of the applicable period
The average annual and cumulative total returns* for each Fund that had
operations were as follows:
FUND AVERAGE ANNUAL CUMULATIVE
TOTAL RETURNS TOTAL RETURNS
FOR PERIODS FOR PERIODS
ENDED DECEMBER 31,1998 ENDED DECEMBER 31, 1998
ONE SINCE ONE SINCE
YEAR INCEPTION** YEAR SINCE INCEPTION**
Money Market Fund 5.29% 5.39% 5.29% 23.38%
Income Fund 9.17% 11.03% 9.17% 51.96%
Growth and Income Fund 6.93% 21.93% 6.93% 121.03%
World Growth Fund 11.46% 16.49% 11.46% 84.14%
Diversified Assets Fund 9.63% 17.57% 9.63% 91.08%
Aggressive Growth Fund 20.14% 23.45% 20.14% 42.07%
International Fund 3.78% 3.43% 3.78% 5.77%
- ----------------
* For the Money Market Fund, Income Fund, Growth and Income Fund, World
Growth Fund, and Diversified Assets Fund, these values reflect the
deduction of a .20% annual management fee and other Fund expenses, but do
not reflect Fund expenses that are voluntarily paid by USAA Life or
reimbursed by USAA Life. For the Aggressive Growth Fund and International
Fund, these values reflect the deduction of an annual management fee and
other Fund expenses, of .50% and .65%, respectively, 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.
** The date of inception for the Money Market Fund, Income Fund, Growth and
Income Fund, World Growth Fund and Diversified Assets Fund was January 5,
1995. The date of inception for the Aggressive Growth Fund and
International Fund was May 1, 1997.
FINANCIAL STATEMENTS
The most recent audited financial statements for each Fund of the Trust
and the report of the Trust's independent auditor thereon, are incorporated
into this SAI by reference to the Trust's Annual Report dated December 31,
1998, which accompanies this SAI.
Only those sections of the Annual Report that are specifically identified
immediately below are incorporated by reference into the SAI:
Independent Auditors' Report
Portfolios of Investments in Securities
Notes to Portfolios of Investments in Securities
Statements of Assets and Liabilities
Statements of Operations
Statements of Changes in Net Assets
Notes to Financial Statements
17
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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 edged." Interest payments are protected by a
large or by an exceptionally stable margin and principal is secure.
While the various protective elements are likely to change, such
changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa Bonds that are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are
generally known as "high-grade bonds." They are rated lower than the
best bonds because margins of protection may not be as large as in
Aaa securities or fluctuation of protective elements may be of
greater amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than in Aaa securities.
A Bonds that are rated A possess many favorable investment attributes
and are to be considered as upper-medium- grade obligations. Factors
giving security to principal and interest are considered adequate,
but elements may be present that suggest a susceptibility to
impairment sometime in the future.
Baa Bonds that are rated Baa are considered as medium-grade obligations,
(i.e., they are neither highly protected nor poorly secured).
Interest payments and principal security appear adequate for the
present but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
NOTE: MOODY'S APPLIES NUMERICAL MODIFIERS 1, 2, AND 3 IN EACH GENERIC RATING
CLASSIFICATION. THE MODIFIER 1 INDICATES THAT THE OBLIGATION RANKS IN THE
HIGHER END OF ITS GENERIC RATING CATEGORY, THE MODIFIER 2 INDICATES A MID-RANGE
RANKING, AND THE MODIFIER 3 INDICATES A RANKING IN THE LOWER END OF THAT
GENERIC RATING CATEGORY.
STANDARD & POOR'S RATINGS GROUP ("S&P")
AAA Debt rated AAA has the highest rating assigned by S&P. The obligor's
capacity to meet its financial commitment on the obligation is
extremely strong.
AA An obligation rated "AA" differs from the highest rated issues only
in small degree. The obligor's capacity to meet its financial
commitment on the obligation is very strong.
A An obligation rated "A" is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than
obligations in higher rated categories. However, the obligor's
capacity to meet its financial commitment on the obligation is still
strong.
BBB An obligation rated "BBB" exhibits adequate capacity to pay interest
and repay principal. However, adverse economic conditions or
changing circumstances are more likely to lead to a weakened
capacity of the obligor to meet its financial commitment on the
obligation.
PLUS (+) OR MINUS (-): THE RATINGS FROM "AA" TO "CCC" MAY BE MODIFIED BY THE
ADDITION OF A PLUS OR MINUS SIGN TO SHOW RELATIVE STANDING WITHIN THE MAJOR
RATING CATEGORIES.
FITCH IBCA, Inc. ("FITCH IBCA")
AAA Highest credit quality. `AAA' ratings denote the lowest expectation
of credit risk. They are assigned only in case of exceptionally
strong capacity for timely payment of financial commitments. This
capacity is highly unlikely to be adversely affected by foreseeable
events.
AA Very high credit quality. 'AA' ratings denote a very low expectation
of credit risk. They indicate very strong capacity for timely
payment of financial commitments. This capacity is not significantly
vulnerable to foreseeable events.
A High credit quality. 'A' ratings denote a low expectation of credit
risk. The capacity for timely payment of financial commitments is
considered strong. This capacity may, nevertheless, be more
vulnerable to changes in circumstances or in economic conditions
than is the case for higher ratings.
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BBB Good credit quality. 'BBB' ratings indicate that there is currently
a low expectation of credit risk. The capacity for timely payment of
financial commitments is considered adequate, but adverse changes in
circumstances and in economic conditions are more likely to impair
this capacity. This is the lowest investment-grade category.
PLUS (+) MINUS(-) SIGNS ARE USED WITH A RATING SYMBOL TO INDICATE THE RELATIVE
POSITION OF A CREDIT WITHIN THE RATING CATEGORY. PLUS AND MINUS SIGNS, HOWEVER,
ARE NOT USED IN THE AAA CATEGORY.
DUFF & PHELPS, 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 rated Prime - 1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1
repayment ability will often be evidenced by many of the following
characteristics:
* Leading market positions in well-established industries.
* High rates of return on funds employed.
* Conservative capitalization structure with moderate reliance on
debt and ample asset protection.
* Broad margins in earnings coverage of fixed financial charges and
high internal cash generation.
* Well-established access to a range of financial markets and
assured sources of alternate liquidity.
Prime-2 Issuers rated Prime - 2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This
will normally be evidenced by many of the characteristics cited
above but to a lesser degree. Earnings trends and coverage ratios,
while sound, may be more subject to variation. Capitalization
characteristics, while still appropriate, may be more affected by
external conditions. Ample alternate liquidity is maintained.
Prime-3 Issuers rated Prime - 3 (or supporting institutions) have an
acceptable ability for repayment of senior short-term obligations.
The effect of industry characteristics and market compositions may
be more pronounced. Variability in earnings and profitability may
result in changes in the level of debt protection measurements and
may require relatively high financial leverage. Adequate alternate
liquidity is maintained.
MOODY'S MUNICIPAL
MIG1/VMIG 1 This designation denotes best quality. There is present
strong protection by established cash flows, superior
liquidity support, or demonstrated broad-based access to the
market for refinancing.
MIG 2/VMIG 2 This designation denotes high quality. Margins of protection
are ample although not so large as in the preceding group.
MIG3/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.
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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 Issues carrying this designation have adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects
of changes in circumstances than obligations carrying the higher
designations.
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 IBCA, INC.
F-1 Highest credit quality. Indicates the strongest capacity for timely
payment of financial commitments; may have an added "+" to denote
any exceptionally strong credit feature.
F-2 Good credit quality. A satisfactory capacity for timely payment of
financial commitments, but the margin of safety is not as great as
in the case of the higher ratings.
F-3 Fair credit quality. The capacity for timely payment of financial
commitments is adequate; however, near-term adverse changes could
result in a reduction to non-investment grade.
D&P
D-1+ Highest certainty of timely payment. Short-term liquidity, including
internal operating factors and/or ready access to alternative
sources of funds, is outstanding, and safety is just below risk-free
U.S.
Treasury short-term obligations.
D-1 Very high certainty of timely payment. Liquidity factors are
excellent and supported by good fundamental protection factors. Risk
factors are minor.
D-1- High certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection factors. Risk factors are
very small.
D-2 Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge
total financing requirements, access to capital markets is good.
Risk factors are small.
D-3 Satisfactory liquidity and other protection factors qualify 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 those with higher ratings, the capacity
to service principal and interest in a timely fashion is considered
adequate.
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
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registration under the 1933 Act such as, but not limited to, certificates of
deposit and money market accounts. Sources for performance information and
articles about the Fund may include but are not restricted to the following:
AAII JOURNAL, a monthly association magazine for members of the American
Association of Individual Investors.
ARIZONA REPUBLIC, a newspaper 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.
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'S MONEYLETTER, a biweekly newsletter that covers financial news and from
time to time rates specific mutual funds.
IBC'S MONEY FUND REPORT, a weekly publication of IBC Financial Data, Inc.,
reporting on the performance of the nation's money market funds, summarizing
money market fund activity, and including certain averages as performance
benchmarks, specifically "IBC's Taxable First Tier Fund Average."
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 EQUITY FUND PERFORMANCE ANALYSIS, a monthly
publication of industry-wide mutual fund averages by type of fund.
LIPPER ANALYTICAL SERVICES, INC.'S FIXED INCOME FUND PERFORMANCE ANALYSIS, a
monthly publication of industry-wide mutual fund performance averages by type
of fund.
LOS ANGELES TIMES, a newspaper that may cover financial news.
LOUIS RUKEYSER'S WALL STREET, a publication for investors.
MEDICAL ECONOMICS, a monthly magazine providing information to the medical
profession.
MONEY, a monthly magazine that features the performance of both specific funds
and the mutual fund industry as a whole.
MORNINGSTAR 5 STAR INVESTOR, a monthly newsletter which covers financial news
and rates mutual funds, produced by Morningstar, Inc. (a data service which
tracks open-end mutual funds).
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MUTUAL FUND FORECASTER, a monthly newsletter that ranks mutual funds.
MUTUAL FUND INVESTING, a newsletter covering mutual funds.
MUTUAL FUND PERFORMANCE REPORT, a monthly publication of mutual fund
performance and rankings, produced by Morningstar, Inc.
MUTUAL FUNDS MAGAZINE, a monthly publication reporting on mutual fund
investing.
MUTUAL FUND SOURCE BOOK, an annual publication produced by Morningstar, Inc.
that describes and rates mutual funds.
MUTUAL FUND VALUES, a biweekly guidebook to mutual funds produced by
Morningstar, Inc.
NEWSWEEK, a national 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.
ORLANDO SENTINEL, a newspaper that may cover financial news.
PERSONAL INVESTOR, a monthly magazine that from time to time features mutual
fund companies and the mutual fund industry.
SAN ANTONIO BUSINESS JOURNAL, a weekly newspaper that periodically covers
mutual fund companies as well as financial news.
SAN ANTONIO EXPRESS-NEWS, a newspaper that may cover financial news.
SAN FRANCISCO CHRONICLE, a newspaper that may cover financial news.
SMART MONEY, a monthly magazine featuring news and articles on investing and
mutual funds.
USA TODAY, a newspaper 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.
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.
In addition to the sources above, performance of the Funds may also be
tracked by Lipper Analytical Services, Inc., ("Lipper"), Variable Annuity
Research & Data Service ("VARDS"), and Morningstar, Inc. ("Morningstar"). A
Fund will be compared to Lipper's, VARDS's, or Morningstar's appropriate fund
category according to its objective and portfolio holdings. Footnotes in
advertisements and other sales literature will include the time period
applicable for any rankings used.
For comparative purposes, unmanaged indexes of comparable securities 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
weighted average performance of a group of 500 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.
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USAA LIFE INVESTMENT TRUST
PART C. OTHER INFORMATION
ITEM 23. Exhibits
EXHIBIT
NO. DESCRIPTION OF EXHIBITS
(1) (a) Certificate of Trust of USAA Life Investment Trust. /1/
(b) (i) Master Trust Agreement of USAA Life Investment Trust. /7/
(c) (ii) Amendment to Master Trust Agreement of USAA Life Investment
Trust. /5/
(d) (iii) Second Amendment to Master Trust Agreement of USAA Life
Investment Trust. /7/
(2) Bylaws of USAA Life Investment Trust. /2/
(3) Not Applicable.
(4) (a) Investment Advisory Agreement by and between USAA Life
Investment Trust and USAA Investment Management Company,
dated December 16, 1994. /7/
(b) Amendment to Investment Advisory Agreement by and between
USAA Life Investment Trust, with respect to its Aggressive
Growth and International Funds, and USAA Investment
Management Company, dated February 7, 1997. /5/
(c) Second Amendment to Investment Advisory Agreement by and
between USAA Life Investment Trust and USAA Investment
Management Company, dated February 18, 1998. /7/
(5) Amended and Restated Underwriting and Administrative Services
Agreement by and between USAA Life Insurance Company, USAA Life
Investment Trust and USAA Investment Management Company, dated
December 16, 1994, amended as of February 7, 1997, and amended and
restated as of February 26, 1998, and amended and restated as of
November 18, 1998. (filed herewith)
(6) Not Applicable.
(7) (a) Custodian Agreement by and between USAA Life Investment Trust
and State Street Bank and Trust Company, dated December 16,
1994. (filed herewith)
(b) Amendment to Custodian Agreement by and between USAA Life
Investment Trust and State Street Bank and Trust Company,
dated December 16, 1994. (filed herewith)
(c) First Amendment to the Amendment to the Custodian Agreement
by and between USAA Life Investment Trust and State Street
Bank and Trust Company, dated July 24, 1996. /5/
(d) Second Amendment to Custodian Agreement by and between USAA
Life Investment Trust and State Street Bank and Trust
Company, dated April 24, 1997. /6/
(e) Third Amendment to Custodian Agreement by and between USAA
Life Investment Trust and State Street Bank and Trust
Company, dated February 18, 1998. /7/
(8) (a) Transfer Agent Agreement by and between USAA Life Investment
Trust and USAA Life Insurance Company, dated December 15,
1994. /7/
<PAGE>
(b) Letter Agreement by and between USAA Life Investment Trust
and USAA Life Insurance Company, dated February 7, 1997,
appointing USAA Life as the Transfer Agent and Dividend
Disbursing Agent for the Aggressive Growth and International
Funds. /7/
(c) Amendment to Transfer Agent Agreement by and between USAA
Life Investment Trust and USAA Life Insurance Company, dated
February 18, 1998. /7/
(9) (a) Opinion of Counsel concerning the Money Market, Income,
Growth and Income, World Growth and Diversified Assets Funds.
/3/
(b) Opinion of Counsel concerning the Aggressive Growth and
International Funds. /5/
(c) Consent of Counsel concerning the Money Market, Income,
Growth and Income, World Growth, Diversified Assets,
Aggressive Growth, and International Funds. (filed herewith)
(10) Consent of KPMG LLP, Independent Auditor. (filed herewith)
(11) Not Applicable.
(12) (a) Subscription Agreement by and between USAA Life Insurance
Company and USAA Life Investment Trust, with respect to its
Money Market, Income, Growth and Income, World Growth and
Diversified Assets Funds, dated December 16, 1994. /2/
(b) Ratification of Subscription Agreement Modification, approved
by the Trust's Board of Trustees on November 30, 1995. /4/
(c) Subscription Agreement by and between USAA Life Insurance
Company and USAA Life Investment Trust, with respect to its
Aggressive Growth and International Funds, dated February 7,
1997. /5/
(13) Not Applicable.
(14) Financial Data Schedule:
(a) USAA Life Money Market Fund (filed herewith)
(b) USAA Life Income Fund (filed herewith)
(c) USAA Life Growth and Income Fund (filed herewith)
(d) USAA Life World Growth Fund (filed herewith)
(e) USAA Life Diversified Assets Fund (filed herewith)
(f) USAA Life Aggressive Growth Fund (filed herewith)
(g) USAA Life International Fund (filed herewith)
(15) Not Applicable.
(16) (a) Powers of Attorney for: Edwin L. Rosane and James A.
Robinson. /1/
(b) Powers of Attorney for: Michael J.C. Roth, June R. Reedy,
Neil H. Stone and Gary W. West. /2/
- -----------------
/1/ Previously filed with the initial filing, on August 1, 1994, of
Registrant's Form N-1A Registration Statement.
<PAGE>
/2/ Previously filed on December 22, 1994, with Pre-Effective Amendment No. 1
to Registrant's Form N-1A Registration Statement.
/3/ Previously filed on July 3, 1995, with Post-Effective Amendment No. 1 to
the Registrant's Form N-1A Registration Statement.
/4/ Previously filed on April 29, 1996, with Post-Effective Amendment No. 2 to
the Registrant's Form N-1A Registration Statement.
/5/ Previously filed on February 14, 1997, with Post-Effective Amendment No. 3
to the Registrant's Form N-1A Registration Statement.
/6/ Previously filed April 29, 1997, with Post-Effective Amendment No. 4 to
Registrant's Form N-1A Registration Statement.
/7/ Previously filed on March 3, 1998, with Post-Effective Amendment No. 6 to
Registrant's Form N-1A Registration Statement.
<PAGE>
ITEM 24. Persons Controlled by or Under Common Control with Registrant
No person is controlled by Registrant. All of the outstanding shares of
beneficial interest of Registrant are owned of record by USAA Life Insurance
Company ("USAA Life"), which is a wholly owned subsidiary of United Services
Automobile Association ("USAA"), and the Separate Account and the Life
Insurance Separate Account of USAA Life Insurance Company (the "Separate
Accounts"), segregated asset accounts of USAA Life. USAA Life beneficially
owns, both directly and through the Separate Account, more than 25% of the
shares of each of Registrant's Funds (other than the Money Market Fund), and as
a result, may be deemed to control (with the exception of the Money Market
Fund) each Fund of the Registrant. Various companies affiliated with Registrant
may, therefore, be deemed to be under common control with each Fund (other than
the Money Market Fund) of the Registrant.
ITEM 25. Indemnification
Indemnification against liability is provided to the Trustees and officers
of the Registrant, the underwriter of the Registrant, and the following
affiliated persons of the Registrant, in the following ways:
(a) Directors' and Officers' Liability Policy: The Registrant and its
Trustees and officers are covered under a joint liability insurance
policy ("policy") along with USAA IMCO, other mutual funds managed by
USAA IMCO, and USAA Shareholder Account Services. The policy insures
against errors and omissions as described therein.
(b) Indemnification under the Master Trust Agreement, as amended: Under
Article V of the Registrant's Master Trust Agreement (incorporated
herein by reference to Exhibit (1) (b)(i) of this Registration
Statement), the Registrant has agreed to indemnify any Shareholder or
former Shareholder, and each of its Trustees and officers, including
persons serving at the Registrant's request as Directors, officers or
trustees of another organization in which the Registrant has any
interest as a shareholder, creditor or otherwise, against liability as
specified therein.
(c) Indemnification under the Amended and Restated Underwriting and
Administrative Services Agreement: Under Section 9 of the Amended and
Restated Underwriting and Administrative Services Agreement by and
between the Registrant, USAA Life and USAA IMCO (incorporated herein
by reference to Exhibit (5) of this Registration Statement), USAA Life
and USAA IMCO have agreed to indemnify the Registrant and one another,
and each of the Trustees, Directors and officers (or former Trustees,
Directors and officers) of each party, and any person who controls any
party, against liability as specified therein.
(d) Indemnification under the Custodian Agreement, as amended: Under
Section 2.12(6) and Section 8 of the Custodian Agreement by and
between the Registrant and State Street Bank and Trust Company ("State
Street") (incorporated herein by reference to Exhibit (7)(a) of this
Registration Statement), State Street has agreed to be responsible to
the Registrant for negligence or misconduct, as specified therein.
Under Section 9 of the Amendment to the Custodian Agreement by and
between the Registrant and State Street (incorporated herein by
reference to Exhibit (7)(b) of this Registration Statement), any
foreign banking institution employed by the Custodian
("Sub-Custodian") shall indemnify State Street and the Registrant,
against liability as specified therein. Under Section 10 of the
Amendment to the Custodian Agreement, the Custodian has agreed to be
liable for the acts or omissions of a foreign banking institution as
specified therein.
(e) Indemnification under the Transfer Agent Agreement, as amended: Under
Section 12 of the Transfer Agent Agreement between the Registrant and
USAA Life (incorporated herein by reference to Exhibit (8)(a) of this
Registration Statement), USAA Life has agreed to indemnify the
Registrant against liability as specified therein, and the Registrant
shall indemnify USAA Life against liability as specified therein.
(f) Indemnification under the Distribution and Administration Agreement,
as amended: Under Section 14 of the Distribution and Administration
Agreement by and between USAA Life and USAA IMCO
<PAGE>
(incorporated herein by reference to Exhibit 3 of Pre-Effective
Amendment No. 1 to the Form N-4 Registration Statement of the Separate
Account, filed on December 22, 1994), USAA Life, on its own behalf and
on behalf of the Separate Account, has agreed to indemnify USAA IMCO,
its agents, employees and any person who controls USAA IMCO, against
liability as specified therein, and USAA IMCO has agreed to indemnify
USAA Life, its Directors and officers, the Separate Account, and any
person who controls USAA Life, against liability as specified therein.
(g) Indemnification under the Bylaws of USAA Life: Under Article IX of the
Bylaws of USAA Life (incorporated herein by reference to Exhibit 6(b)
of the initial filing, on August 1, 1994, of the Form N-4 Registration
Statement of the Separate Account), USAA Life has agreed to indemnify
any Director, officer, former Director or former officer of USAA Life
against liability as specified therein.
(h) Indemnification under the Delaware Business Trust Act: Under Section
3803(b) of the Delaware Business Trust Act, except to the extent
otherwise provided in the governing instrument of a business trust, a
Trustee, when acting in such capacity, is not personally liable to any
person other than the business trust or a beneficial owner for any
act, omission or obligation of the business trust or any Trustee
thereof.
Insofar as indemnification for liabilities arising under Securities Act of
1933 (the "1933 Act") may be permitted to Trustees, officers and controlling
persons of the Registrant pursuant to the foregoing provisions or otherwise,
the Registrant has been advised that, in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as expressed
in the 1933 Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a Trustee, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such Trustee, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by a controlling
precedent, submit to a court of appropriate jurisdiction the question of
whether indemnification by it is against public policy as expressed in the 1933
Act and will be governed by the final adjudication of such issue.
ITEM 26. Business and Other Connections of Investment Adviser
Information in response to this item is incorporated by reference to Item
28 of Post-Effective Amendment No. 46 of the Registration Statement of USAA
Mutual Fund, Inc., filed September 30, 1997(File No. 2-49560).
ITEM 27. Principal Underwriters
(a) USAA IMCO acts as principal underwriter of the Registrant's shares on
a best-efforts basis and receives no fee or commission for its
underwriting services. USAA IMCO, an affiliate of USAA, also serves as
principal underwriter for the Separate Accounts, USAA Investment
Trust, USAA State Tax-Free Trust, USAA Mutual Fund, Inc., and USAA Tax
Exempt Fund, Inc.
(b) Set forth below is information concerning each director and executive
officer of USAA IMCO.
NAME AND PRINCIPAL BUSINESS POSITION AND OFFICES POSITION AND OFFICES
ADDRESS* WITH UNDERWRITER WITH REGISTRANT
Robert G. Davis Director and Chairman None
Michael J. C. Roth Director and Vice Trustee and
Chairman, Chief Executive Vice Chairman
Officer and President
<PAGE>
John W. Saunders, Jr. Director and Senior Vice Vice President
President,
Fixed Income Investments
David G. Peebles Senior Vice President, None
Equity Investments
John J. Dallahan Senior Vice President, None
Investment Services
Carl W. Shirley Senior Vice President, Insurance None
Company Portfolios
Michael D. Wagner Vice President, None
Secretary and Counsel
Alex M. Ciccone Vice President, Compliance
Compliance/Assistant Secretary Officer
Sherron A. Kirk Vice President and
Senior Financial Officer None
* The principal business address for all of the above Directors and officers
of USAA IMCO is 9800 Fredericksburg Road, San Antonio, TX 78288.
(c) Not Applicable.
ITEM 28. Location of Accounts and Records
The following entities prepare, maintain and preserve the records required
by Section 31(a) of the 1940 Act for the Registrant. These services are
provided to the Registrant through written agreements between the parties to
the effect that such records will be maintained on behalf of the Registrant for
the periods prescribed by the rules and regulations of the Commission under the
1940 Act and that such records are the property of the entity required to
maintain and preserve such records and will be surrendered promptly on request:
(1) USAA Life Insurance Company
9800 Fredericksburg Road
San Antonio, Texas 78288
(2) USAA Investment Management Company
10750 Robert F. McDermott Freeway
San Antonio, Texas 78288
(3) State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02110
ITEM 29. Management Services
Not Applicable.
ITEM 30. Undertakings
Not Applicable.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act and the Investment
Company Act, Registrant has duly caused this amended registration statement to
be signed on its behalf by the undersigned, duly authorized, in the city of San
Antonio and state of Texas on the 18th day of February, 1999.
USAA LIFE INVESTMENT TRUST
BY: /S/ EDWIN L. ROSANE
-------------------------
Edwin L. Rosane
President and Principal
Executive Officer
Pursuant to the requirements of the Securities Act, this amended
registration statement has been signed by the following persons in the
capacities and on the date indicated.
(SIGNATURE) (TITLE) (DATE)
/S/ EDWIN L. ROSANE
- ------------------------- President and Chairman of the February 18, 1999
Edwin L. Rosane Board of Trustees
(Principal Executive Officer)
/S/ MICHAEL J.C. ROTH
- ------------------------- Vice Chairman of the February 22, 1999
Michael J.C. Roth Board of Trustees
/S/ JAMES A. ROBINSON
- ------------------------- (Principal Financial and February 19, 1999
James A. Robinson Accounting Officer)
/S/ JUNE R. REEDY
- ------------------------- Trustee February 18, 1999
June R. Reedy
/S/ NEIL H. STONE
- ------------------------- Trustee February 18, 1999
Neil H. Stone
/S/ GARY W. WEST
- ------------------------- Trustee February 18, 1999
Gary W. West
<PAGE>
EXHIBIT
NO. DESCRIPTION OF EXHIBITS PAGE NO.
(1) (a) Certificate of Trust of USAA Life Investment Trust. /1/
(b) (i) Master Trust Agreement of USAA Life Investment
Trust. /7/
(c) (ii) Amendment to Master Trust Agreement of USAA Life
Investment Trust. /5/
(d) (iii) Second Amendment to Master Trust Agreement of
USAA Life Investment Trust. /7/
(2) Bylaws of USAA Life Investment Trust. /2/
(3) Not Applicable.
(4) (a) Investment Advisory Agreement by and between
USAA Life Investment Trust and USAA Investment
Management Company, dated December 16, 1994. /7/
(b) Amendment to Investment Advisory Agreement by and
between USAA Life Investment Trust, with respect
to its Aggressive Growth and International Funds,
and USAA Investment Management Company, dated
February 7, 1997. /5/
(c) Second Amendment to Investment Advisory Agreement
by and between USAA Life Investment Trust and USAA
Investment Management Company, dated February 18,
1998. /7/
(5) Amended and Restated Underwriting and Administrative Services
Agreement by and between USAA Life Insurance Company, USAA Life
Investment Trust and USAA Investment Management Company, dated
December 16, 1994, amended as of February 7, 1997, and amended
and restated as of February 26, 1998, and amended and restated
as of November 18, 1998. 64
(6) Not Applicable.
(7) (a) Custodian Agreement by and between USAA Life Investment
Trust and State Street Bank and Trust Company, dated
December 16, 1994. 93
(b) Amendment to Custodian Agreement by and between USAA
Life Investment Trust and State Street Bank and Trust
Company, dated December 16, 1994. 131
(c) First Amendment to the Amendment to the Custodian
Agreement by and between USAA Life Investment Trust
and State Street Bank and Trust Company,
dated July 24, 1996. /5/
(d) Second Amendment to Custodian Agreement by and between
USAA Life Investment Trust and State Street Bank and
Trust Company, dated April 24, 1997. /6/
(e) Third Amendment to Custodian Agreement by and between
USAA Life Investment Trust and State Street Bank and
Trust Company, dated February 18, 1998. /7/
(8) (a) Transfer Agent Agreement by and between USAA Life
Investment Trust and USAA Life Insurance Company, dated
December 15, 1994. /7/
(b) Letter Agreement by and between USAA Life Investment
Trust and USAA Life Insurance Company, dated February 7,
1997, appointing USAA Life as the Transfer Agent and
Dividend Disbursing Agent for the Aggressive Growth
and International Funds. /7/
<PAGE>
(c) Amendment to Transfer Agent Agreement by and between
USAA Life Investment Trust and USAA Life Insurance
Company, dated February 18, 1998. /7/
(9) (a) Opinion of Counsel concerning the Money Market, Income,
Growth and Income, World Growth and Diversified Assets
Funds. /3/
(b) Opinion of Counsel concerning the Aggressive Growth
and International Funds. /5/
(c) Consent of Counsel concerning the Money Market, Income,
Growth and Income, World Growth, Diversified Assets,
Aggressive Growth, and International Funds.
(filed herewith) 155
(10) Consent of KPMG LLP, Independent Auditor. (filed herewith) 157
(11) Not Applicable.
(12)(a) Subscription Agreement by and between USAA Life
Insurance Company and USAA Life Investment Trust,
with respect to its Money Market, Income, Growth and
Income, World Growth and Diversified Assets Funds,
dated December 16, 1994. /2/
(b) Ratification of Subscription Agreement Modification,
approved by the Trust's Board of Trustees on
November 30, 1995. /4/
(c) Subscription Agreement by and between USAA Life
Insurance Company and USAA Life Investment Trust,
with respect to its Aggressive Growth and International
Funds, dated February 7, 1997. /5/
(13) Not Applicable.
(14) Financial Data Schedule:
(a) USAA Life Money Market Fund (filed herewith) 159
(b) USAA Life Income Fund (filed herewith) 161
(c) USAA Life Growth and Income Fund (filed herewith) 163
(d) USAA Life World Growth Fund (filed herewith) 165
(e) USAA Life Diversified Assets Fund (filed herewith) 167
(f) USAA Life Aggressive Growth Fund (filed herewith) 169
(g) USAA Life International Fund (filed herewith) 171
(15) Not Applicable.
(16)(a) Powers of Attorney for: Edwin L. Rosane and James A.
Robinson. /1/
(b) Powers of Attorney for: Michael J.C. Roth, June R. Reedy,
Neil H. Stone and Gary W. West. /2/
- ------------------
/1/ Previously filed with the initial filing, on August 1, 1994, of
Registrant's Form N-1A Registration Statement.
<PAGE>
/2/ Previously filed on December 22, 1994, with Pre-Effective Amendment No. 1
to Registrant's Form N-1A Registration Statement.
/3/ Previously filed on July 3, 1995, with Post-Effective Amendment No. 1 to
the Registrant's Form N-1A Registration Statement.
/4/ Previously filed on April 29, 1996, with Post-Effective Amendment No. 2 to
the Registrant's Form N-1A Registration Statement.
/5/ Previously filed on February 14, 1997, with Post-Effective Amendment No. 3
to the Registrant's Form N-1A Registration Statement.
/6/ Previously filed April 29, 1997, with Post-Effective Amendment No. 4 to
Registrant's Form N-1A Registration Statement.
/7/ Previously filed on March 3, 1998, with Post-Effective Amendment No. 6 to
Registrant's Form N-1A Registration Statement.
EXHIBIT 5
<PAGE>
AMENDED AND RESTATED
UNDERWRITING AND ADMINISTRATIVE
SERVICES AGREEMENT
BY AND BETWEEN
USAA LIFE INSURANCE COMPANY
AND
USAA LIFE INVESTMENT TRUST
AND
USAA INVESTMENT MANAGEMENT COMPANY
<PAGE>
AMENDED AND RESTATED
UNDERWRITING AND ADMINISTRATIVE
SERVICES AGREEMENT
AGREEMENT made as of this 16th day of December, 1994, amended as of
the 7th day of February, 1997, amended and restated as of the 18th day of
February, 1998, and amended and restated as of the 18th day of November, 1998,
by and between USAA Life Insurance Company, a stock life insurance company
organized under the laws of Texas (the "Company"), on its own behalf and on
behalf of the Separate Account of USAA Life Insurance Company and the Life
Insurance Separate Account of USAA Life Insurance Company, each an investment
account organized under the laws of Texas ("Account"), USAA Life Investment
Trust, a Delaware business trust (the "Trust"), and USAA Investment Management
Company, a registered investment adviser and a registered broker-dealer
organized as a corporation under the laws of Delaware (the "Underwriter").
WHEREAS, the Company will be the issuer of certain variable annuity
contracts (the "Contracts") and certain variable life insurance policies (the
"Policies"), will fund the Contracts and Policies through the respective
Accounts, wishes to invest the assets of each Account in shares of the Trust
for the benefit of the owners of the Contracts and Policies (the
"Contractowners"), and wishes to provide, directly or through agents, certain
administrative and other services for the Trust; and
WHEREAS, the Company will serve as the depositor of each Account,
which will be a unit investment trust registered as an investment company under
the Investment Company Act of 1940 (the "1940 Act"), and the security interests
deemed to be issued by each Account under the respective Contracts and Policies
will be registered as securities under the Securities Act of 1933 (the "1933
Act"); and
<PAGE>
WHEREAS, the Trust will be an open-end management investment company
under the 1940 Act, whose shares will be registered under the 1933 Act, and
will make its shares available for purchase exclusively by each Account and
wishes to have the Underwriter serve as its principal underwriter and the
Company to provide, directly or through agents, certain administrative and
other services for the Trust; and
WHEREAS, the Contracts and Policies funded through the respective
Accounts will provide for the allocation of net amounts among certain
subaccounts of each Account (hereinafter referred to as the "Shareholders" of
the Trust) for investment in such shares of the corresponding underlying funds
of the Trust (the "Funds") as may be designated from time to time in the
prospectus and statement of additional information of each Account
(collectively, the "Account Prospectus") for the respective Contracts and
Policies, the selection of the particular subaccount or subaccounts is to be
made by the Contractowners, and such selection may be changed in accordance
with the terms of the Contracts and Policies; and
WHEREAS, the Underwriter, an affiliate of the Company's parent, has
agreed to serve as investment adviser for the Trust pursuant to an investment
advisory agreement with the Trust, wishes to serve as principal underwriter for
the Trust, and has agreed to serve as the distributor for the Contracts and
Policies pursuant to an Amended and Restated Distribution and Administration
Agreement with the Company; and
WHEREAS, the Company, the Trust, and the Underwriter wish to allocate
certain expenses among themselves regarding the Trust and certain services to
be provided to the Trust.
NOW, THEREFORE, WITNESSETH: That, in consideration for the Trust's
making its shares available for purchase by the Company for each of its
Accounts, for the Company's and the Underwriter's providing services to the
Trust and assuming expenses in connection with providing such services, and for
other good and valuable consideration the
2
<PAGE>
receipt and sufficiency of which is hereby acknowledged, it is hereby agreed
between the parties as follows:
1. APPOINTMENT OF UNDERWRITER.
The Trust hereby appoints the Underwriter as the principal underwriter
and distributor of the Trust to sell its shares to each Account, and the
Underwriter hereby accepts such appointment.
2. EXCLUSIVE NATURE OF DUTIES.
The Underwriter shall be the exclusive representative of the Trust to
act as principal underwriter and distributor.
3. SALE AND REDEMPTION OF SHARES OF THE TRUST.
3.1 The Trust, during the term of this Agreement, shall sell shares of
each available Fund that the Company orders on behalf of each Account, based on
transactions under Contracts or Policies, at net asset value as set forth in
the Trust's Prospectus and Statement of Additional Information, as amended and
in effect from time to time (collectively, the "Prospectus"), and upon the
terms and conditions set forth below.
3.2 Any orders to purchase shares of an available Fund based on
transactions under Contracts or Policies will be effected at the Fund's net
asset value per share as of the close of business on the Business Day the order
is received by the Company or its designee, as agent for the Trust, provided
that such order is received prior to the time the Fund calculates its net asset
value on that Business Day. If such order is received after that time, the
order will be effected at the Fund's net asset value as of the close of
business on the next Business Day. Business Day shall mean any day on which the
Trust calculates the net asset value of its Funds pursuant to rules of the SEC
and as described in the Trust's Prospectus. Any orders to
3
<PAGE>
purchase shares of an available Fund not based on transactions under Contracts
or Policies will be effected at the Fund's net asset value per share next
computed after the order is received by the Trust.
3.3 The Trust will redeem for cash from the Company those full or
fractional shares of each Fund that the Company requests from time to time. The
Trust will effect any orders to redeem shares of an available Fund based on
transactions under Contracts or Policies at the Fund's net asset value per
share computed as of the close of business on the Business Day the order is
received by the Company or its designee, as agent for the Trust, provided that
such order is received prior to the time the Fund calculates its net asset
value on that Business Day. If such order is received after that time, the
order will be effected at the Fund's net asset value as of the close of
business on the next Business Day. Any orders to redeem shares of an available
Fund not based on transactions under Contracts or Policies will be effected at
the Fund's net asset value per share next computed after the order is received
by the Trust.
3.4 The Trust reserves the right to pay any portion of a redemption in
kind of portfolio securities, if the Trust's board of trustees (the "Board of
Trustees") determines that it would be detrimental to the best interests of the
Shareholders to make a redemption wholly in cash.
3.5 No orders for the sale, redemption or repurchase of the Trust's
shares (nor payment for shares, in the case of a purchase) shall be transmitted
to the Underwriter. Sales, redemptions and repurchases shall be effected
directly by the Company or its designee as transfer agent of the Trust. Payment
for shares shall be transmitted by the Company or its designee directly to the
Trust's custodian. Redemption and repurchase proceeds shall be allocated by the
Company directly to the Trust's custodian.
3.6 The Trust shall have the right to suspend redemption of shares of
any Fund pursuant to the conditions set forth in the Prospectus. The Trust
shall also have the right to suspend the sale of shares of any or all of its
Funds at any time when it is authorized to
4
<PAGE>
suspend redemption of such shares, or at any other time when there shall have
occurred an extraordinary event or circumstance which, in the reasonable
judgment of the Trust, makes it impractical or inadvisable to continue to sell
any such shares.
3.7 The Trust shall give the Underwriter prompt notice of any such
suspension and shall promptly furnish such other information in connection with
the sale and redemption of Trust shares as the Underwriter reasonably requests.
3.8 The Board of Trustees may refuse to sell shares of any Fund to the
Company, or suspend or terminate the offering of shares of any Fund, if such
action is required by law or by regulatory authorities having jurisdiction or
is, in the sole discretion of the Trustees, acting in good faith and in light
of their fiduciary duties under Federal and any applicable state laws,
necessary in the best interests of the Shareholders of the Trust.
3.9 The Trust agrees that its shares shall be sold only to the
Company. No shares of any Fund may be sold to the general public or to any life
insurance company other than the Company.
3.10 Issuance and transfer of the Trust's shares shall be by book
entry only. Stock certificates shall not be issued to the Company. Shares
ordered from the Trust shall be recorded in an appropriate title for the
Company.
3.11 The Trust shall furnish notice promptly to the Company of any
income, dividends or capital gain distributions payable on the shares of any
Fund. The Company hereby elects to receive all such income, dividends and
capital gain distributions as are payable on Fund shares in additional shares
of that Fund. The Company reserves the right to revoke this election and to
receive all such income, dividends and capital gain distributions in cash. The
Trust shall notify the Company of the number of shares so issued as payment of
such income, dividends and distributions.
3.12 The Trust shall make the net asset value per share for each Fund
available to the Company or its designee each day Monday through Friday, except
days on which the New
5
<PAGE>
York Stock Exchange is closed, as soon as reasonably practical after the net
asset value per share is calculated.
3.13 The Trust may establish additional Funds to provide additional
funding media for the Contracts or Policies, or delete, combine, or modify
existing Funds. The shares of any additional Fund may be made available to an
Account by the Trust, pursuant to the terms of this Agreement, and any
applicable reference to any Fund, the Trust or its shares herein shall include
a reference to any such additional Fund.
4. LEGAL COMPLIANCE.
4.1 TAX LAWS.
(a) The Trust represents that it shall make every effort to qualify
and to maintain qualification of each Fund as a regulated investment company
("RIC") under Subchapter M of the Internal Revenue Code of 1986, as amended
(the "Code"), and the Trust or the Underwriter shall notify the Company
immediately upon having a reasonable basis for believing that a Fund has ceased
to so qualify or that it might not so qualify in the future.
(b) The Company represents that it believes, in good faith, that the
Contracts and Policies will be treated, respectively, as annuity contracts and
life insurance policies under applicable provisions of the Code and that it
will make every effort to maintain such treatment. The Company shall notify the
Trust and the Underwriter immediately upon having a reasonable basis for
believing that any of the Contracts or Policies have ceased to be so treated or
that they might not be so treated in the future.
(c) The Trust represents that it shall make every effort to comply and
to maintain each Fund's compliance with the diversification requirements set
forth in Section 817(h) of the Code and Section 1.817-5(b) of the regulations
under the Code, and the Trust or the Underwriter shall notify the Company
immediately upon having a reasonable basis for
6
<PAGE>
believing that a Fund has ceased to so comply or that a Fund might not so
comply in the future.
(d) The Company represents that it believes, in good faith, that each
Account is a "segregated asset account" and that interests in each Account are
offered exclusively through the purchase of or transfer into a "variable
contract," within the meaning of such terms under Section 817(h) of the Code
and the regulations thereunder. The Company shall make every effort to continue
to meet such definitional requirements, and it shall notify the Trust and the
Underwriter immediately upon having a reasonable basis for believing that such
requirements have ceased to be met or that they might not be met in the future.
(e) The Trust represents that, under the terms of its investment
advisory agreement with the Underwriter, which also serves as the investment
adviser to the Trust, the Underwriter is and shall be responsible for managing
the Trust in compliance with the Trust's investment objectives, policies and
restrictions as set forth in the Prospectus. The Trust represents that these
objectives, policies and restrictions do and shall include operating as (i) a
RIC in compliance with Subchapter M and (ii) in compliance with Section 817(h)
of the Code and regulations thereunder. The Trust has adopted and shall
maintain procedures for ensuring that the Trust is managed in compliance with
Subchapter M and Section 817(h) of the Code and the regulations thereunder. On
request, the Trust shall also provide the Company with such materials,
cooperation and assistance as may be reasonably necessary for the Company or
any person designated by the Company to review from time to time the procedures
and practices of the Underwriter, or any other provider of services to the
Trust for ensuring that the Trust is managed in compliance with Subchapter M
and Section 817(h) of the Code and the regulations thereunder.
(f) The Trust shall furnish to the Company on a regular basis reports
of all of the investments of each Fund in a form sufficient to permit the
Company to determine whether each Fund is in compliance with the
diversification requirements of Section 817(h) of the
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Code and the regulations thereunder and shall take immediate action, on
learning through its own monitoring, or on advice from the Company, that any
Fund is not in compliance with such requirements, to return to compliance with
such requirements.
(g) If any Fund is found not to comply with the diversification
requirements at the end of a calendar quarter and the 30-day grace period
allowed under the Code regulations, the Trust shall take all appropriate
efforts immediately to restore any such Fund to compliance and shall fully
cooperate with the Company in any effort to correct such diversification
failure under procedures now or hereafter established by the Internal Revenue
Service, including those set forth in Revenue Procedure 92-25.
(h) Any additional income tax that is payable by a Contractowner, with
any applicable interest and penalty thereon, as a result of the failure of any
Fund to comply with either Subchapter M or Section 817(h) of the Code and the
regulations thereunder, shall be borne by the Company.
4.2 INSURANCE AND CERTAIN OTHER LAWS.
(a) The Trust will use its best efforts to comply with any applicable
state insurance laws or regulations, to the extent specifically requested in
writing by the Company.
(b) The Company represents and warrants that (i) it is an insurance
company duly organized, validly existing and in good standing under the laws of
the State of Texas and has full corporate power, authority and legal right to
execute, deliver and perform its duties and comply with its obligations under
this Agreement, (ii) it has legally and validly established and maintains each
Account as a segregated asset account under the Texas Insurance Code, and (iii)
the Contracts or Policies comply in all material respects with all other
applicable Federal and state laws and regulations.
(c) The Company and the Underwriter represent and warrant that the
Underwriter is a business corporation duly organized, validly existing, and in
good standing under the laws of
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the State of Delaware and has full corporate power, authority and legal right
to execute, deliver, and perform its duties and comply with its obligations
under this Agreement.
(d) The Underwriter and the Trust represent and warrant that the Trust
is a business trust duly organized, validly existing, and in good standing
under the laws of Delaware and has full power, authority, and legal right to
execute, deliver, and perform its duties and comply with its obligations under
this Agreement.
4.3 SECURITIES LAWS.
(a) The Company represents and warrants that (i) it has registered
each Account as a unit investment trust in accordance with the provisions of
the 1940 Act to serve as a segregated investment account for its variable
annuity contracts and variable life insurance policies, respectively, (ii) each
Account shall comply in all material respects with the requirements of the 1940
Act and the rules thereunder, (iii) each Account's 1933 Act registration
statement relating, respectively, to the Contracts and Policies, together with
any amendments thereto, shall at all times comply in all material respects with
the requirements of the 1933 Act and the rules thereunder, and (iv) each
Account Prospectus shall at all times comply in all material respects with the
requirements of the 1933 Act and the rules thereunder.
(b) The Trust and the Underwriter represent and warrant that (i) Trust
shares sold pursuant to this Agreement shall be registered under the 1933 Act
to the extent required by the 1933 Act and duly authorized for issuance and
sold in compliance with Delaware law, (ii) the Trust is and shall remain
registered under the 1940 Act to the extent required by the 1940 Act, and (iii)
the Trust shall amend the registration statement for its shares under the 1933
Act and itself under the 1940 Act from time to time as required in order to
effect the continuous offering of its shares.
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(c) The Trust represents and warrants that (i) the Trust shall comply
in all material respects with the requirements of the 1940 Act and the rules
thereunder, (ii) its 1933 Act registration statement, together with any
amendments thereto, shall at all times comply in all material respects with the
requirements of the 1933 Act and rules thereunder, and (iii) the Prospectus
shall at all times comply in all material respects with the requirements of the
1933 Act and the rules thereunder.
(d) The Trust shall register and qualify its shares for sale in
accordance with the laws of any state or other jurisdiction only if and to the
extent reasonably deemed advisable by the Trust or the Company.
4.4 NOTICE OF CERTAIN PROCEEDINGS AND OTHER CIRCUMSTANCES.
The Underwriter or the Trust shall immediately notify the Company of
(i) the issuance by any court or regulatory body of any stop order, cease and
desist order, or other similar order with respect to the Trust's registration
statement under the 1933 Act or the Prospectus, (ii) any request by the
Securities and Exchange Commission (the "SEC") for any amendment to such
registration statement or Prospectus, (iii) the initiation of any proceedings
for that purpose or for any other purpose relating to the registration or
offering of the Trust's shares, or (iv) any other action or circumstances that
may prevent the lawful offer or sale of Trust shares in any state or
jurisdiction, including, without limitation, any circumstances in which (x) the
Trust's shares are not registered and, in all material respects, issued and
sold in accordance with applicable state and Federal law or (y) such law
precludes the use of such shares as an underlying investment medium of the
Contracts or Policies issued or to be issued by the Company. The Underwriter
and the Trust shall make every reasonable effort to prevent the issuance of any
stop order, cease and desist order or similar order and, if any such order is
issued, to obtain the lifting thereof at the earliest possible time.
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5. DUTIES OF THE TRUST.
5.1 The Trust shall furnish to and at the request of the Underwriter
(paid for by the Company as set forth in Section 8.3) copies of the Prospectus,
and all information, financial statements and other papers for use in
connection with the distribution of shares of the Trust directly to each
Account and, as conceptualized by the SEC, to the Contractowners.
5.2 The Trust shall furnish directly to Shareholders and, as
conceptualized by the SEC, to the Contractowners (paid for by the Company as
set forth in Section 8.3) copies of annual and interim reports of the Trust.
5.3 The Trust shall provide such documentation, including a copy of
any proxy material, reports to Shareholders, and other communications to
Shareholders and other assistance as is reasonably necessary in order for the
Company or its designee to timely distribute the proxy material, reports to
Shareholders, and other communications.
5.4 The Trust reserves the right to take all actions, including but
not limited to the dissolution, merger, and sale of all assets of the Trust
solely upon the authorization of its Board of Trustees.
5.5 The Trust shall furnish, or shall cause to be furnished, to the
Company or its designee, each piece of sales literature, advertising, or other
promotional material of the Trust in which the Company and/or either of its
Accounts is named, at least fifteen (15) days prior to its intended use. No
such material shall be used if the Company or its designee objects to such
intended use within fifteen (15) days after receipt of such material.
5.6 The Trust shall not give any information or make any
representations or statements on behalf of the Company or concerning the
Company, either of its Accounts or its Contracts or Policies other than the
information or representations contained in a registration statement or an
Account Prospectus, as such registration statement and Account Prospectus may
be amended or supplemented from time to time, or in published reports for an
Account that are in the public domain or approved by the Company for
distribution to
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Contract owners, or in sales literature, advertising, or other promotional
material approved by the Company or its designee, except with the permission of
the Company.
5.7 The Trust shall provide to the Company one complete copy of all
registration statements, Prospectuses, reports, proxy material, sales
literature and other promotional material, applications for exemptions,
requests for no-action letters, and all amendments to any of the above, that
relate to the Trust or its shares, contemporaneously with the filing of such
document with the SEC or other regulatory authorities.
6. DUTIES OF THE UNDERWRITER
6.1 The Underwriter shall be subject to the direction and control of
the Trust in the sale of its shares and shall not be obligated to sell any
specific number of shares in any Fund.
6.2 The Underwriter shall distribute the Prospectuses together with
Account Prospectuses, as required by the SEC.
6.3 In selling shares of the Trust, the Underwriter shall comply in
all respects with the requirements of all Federal and state laws and
regulations and the regulations of the National Association of Securities
Dealers, Inc. (the "NASD"), relating to the sale of Trust shares. Neither the
Underwriter nor any other person is authorized by the Trust to give any
information or to make any representations, other than those contained in the
Trust's registration statement or related Prospectus, as such registration
statement or Prospectus may be amended from time to time, and any sales
literature, advertising or other promotional materials authorized by
responsible officers of the Trust. The Underwriter shall cause any sales
literature, advertising, or other promotional materials to be filed and, if
necessary, approved by the NASD, the SEC, or any other required securities
regulatory body.
6.4 The Underwriter shall for all purposes herein be deemed to be an
independent contractor and shall, unless otherwise expressly provided or
authorized, have no authority to act for or represent the Trust in any way or
be deemed an employee.
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6.5 The Underwriter shall be responsible for its own conduct and the
employment, control and conduct of its agents and employees, and for injury to
such agents or employees or to others through its agents or employees. The
Underwriter shall assume full responsibility for its agents and employees under
applicable statutes and agrees to pay all employer taxes thereunder.
6.6 The Underwriter shall maintain, at its own expense, insurance
against public liability in such an amount as the Trust and the Underwriter may
from time to time agree.
6.7 The Underwriter agrees that it shall receive no compensation for
the performance of its duties hereunder, except as otherwise herein
specifically provided. No commission or other fee shall be charged or paid to
any person or entity in connection with the sale of Trust shares hereunder.
6.8 All services to be furnished by the Underwriter under this
Agreement may be furnished through the medium of any Directors, officers,
employees or agents of the Underwriter.
7. DUTIES OF THE COMPANY
7.1 The Company, on behalf of the Underwriter, shall keep records
showing the amount of any contribution to or withdrawal from any Account or
subaccount investing in the Trust, which does not reflect an automatic
transaction under a contract or policy (such as investments of net premium,
death of insureds, deductions of fees and charges, transfers, surrenders,
loans, loan repayments, deduction of loan interest, lapses, reinstatements, and
similar automatic transactions), which records shall also include the name of
the Company officer ordering the transaction and the date and time of day the
transaction was ordered. It is hereby agreed that any issuance, redemption or
repurchase of Trust shares relating to any such non-automatic transaction shall
be at the Trust's net asset value next computed after the date and time of said
order, and said order shall become irrevocable at the time as of which
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such value is next determined. The Company shall also maintain, on behalf of
the Underwriter, records of the dates and times of day at which all
transactions occur, with the share and dollar amounts of such transactions, and
all other records required by the Securities Exchange Act of 1934 and rules
thereunder with respect to the issuance, redemption or repurchase of Trust
shares. All records required by this paragraph to be maintained by the Company
shall (i) be maintained and preserved in conformity with the requirements of
Rules 17a-3 and 17a-4 under the Securities Exchange Act of 1934, (ii) be and
remain the property of the Underwriter, and (iii) be at all times subject to
inspection by the SEC in accordance with Section 17(a) of such Act, and (iv) be
surrendered promptly upon request without charge except for reimbursement of
reasonable expenses.
7.2 To the extent not required to be provided by the Underwriter
pursuant to its Investment Advisory Agreement with the Trust, the Company shall
provide all management, administrative, legal, clerical, accounting, and
recordkeeping services necessary or appropriate to conduct the Trust's business
and day-to-day operations (other than (A) investment advisory, custodial and
transfer agent services, which shall be provided to the Trust pursuant to
separate agreements and (B) services provided by outside legal counsel and
independent auditors retained by the Trust). These services shall include:
(i) overseeing the Trust's insurance relationships;
(ii) preparing and or filing on behalf of the Trust (or
assisting counsel and/or auditors in the preparation of) all required
tax returns, proxy statements and reports to the Trust's Shareholders
(and, as conceptualized by the SEC, Contractowners) and Trustees and
reports to and other filings with the SEC (including, without
limitation, the Trust's annual report to the SEC), and any other
governmental agency, including any filings necessary to maintain
registrations and qualifications of the Trust and its shares under
Federal and state law, together with the preparation of related
financial statements (the Underwriter and Trust agreeing to supply or
cause to be supplied to
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the Company all necessary financial and other information in connection
with the foregoing);
(iii) preparing and or filing on behalf of the Trust such
applications and reports as may be necessary to register or maintain
the Trust's registration and/or the registration of the shares of the
Trust under the securities or "Blue Sky" laws of the various states
selected by the Trust's distributor, together with the preparation of
related financial statements, (the Fund or Funds agreeing to pay all
filing fees or other similar fees in connection therewith);
(iv) overseeing all relationships between the Trust, and its
service providers, agents and/or designees, including any custodian,
transfer agent, and dividend disbursing agent, independent auditor and
outside legal counsel, including assistance in selection of such
service providers agents and/or designees, the negotiation of
agreements and the supervision of the performance of such agreements;
(v) authorizing and directing any of the Company's Directors,
officers and employees who may be elected as Trustees or officers of
the Trust to serve in the capacities in which they are elected; and
(vi) providing the services of individuals competent to
perform all of the Trust's executive, administrative, compliance and
clerical functions that are not performed by or through employees or
other persons, agents or designees engaged by the Trust.
7.3 In providing accounting services in connection with Section 7.2,
the Company may arrange with the Underwriter to delegate to the Underwriter the
performance of some or all of the accounting services.
7.4 In connection with the services furnished in Section 7.2, the
Company shall furnish personnel, and for the use of such personnel shall
furnish office space and all necessary office facilities, business equipment,
supplies, utilities and telephone service. In
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providing such services, the Company shall be at all times subject to the
supervision and review of the Board of Trustees and in compliance with all
applicable provisions, as in effect from time to time, of the Trust's Master
Trust Agreement, Bylaws, Prospectus, the 1940 Act and regulations thereunder,
and any other applicable laws and regulations. Trust records maintained by the
Company hereunder shall be and remain the property of the Trust and shall be
promptly surrendered or made available to the Trust or its designee, without
charge, except for reimbursement of expenses for surrender of such documents,
upon request by the Trust or upon termination of this Agreement.
7.5 The Company shall provide to the Trust one complete copy of all
registration statements, Account Prospectuses, reports, solicitations for
voting instructions, sales literature and other promotional material,
applications for exemptions, requests for no-action letters, and all amendments
to any of the above, that relate to either Account or its respective Contracts
or Policies, contemporaneously with the filing of such document with the SEC or
other regulatory authorities.
7.6 The Company shall mail or otherwise distribute such proxy cards
and other material supplied to it by the Trust in connection with Shareholder
meetings of the Trust and shall receive, examine and tabulate returned proxies
and voting instructions and certify the vote of each Fund of the Trust.
7.7 If and to the extent required by law, and so long as and to the
extent that the SEC continues to interpret the 1940 Act to require pass-through
voting privileges, the Company shall, subject to Section 8 below:
(i) prepare, set in type, print in quantity and distribute
proxy materials (including proxy statements, proxy cards and voting
instruction forms) relating to either the Trust or either Account and
the processing, including tabulation, of the results of voting
instruction and proxy solicitations;
(ii) solicit voting instructions from Contractowners;
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(iii) vote Fund shares in accordance with instructions
received from Contractowners;
(iv) vote Fund shares for which no instructions have been
received, as well as Fund shares attributable to the Company other
than under Contracts or Policies, in the same proportion as shares of
such Fund for which instructions have been received; The Company
reserves the right to vote Fund shares held in any segregated asset
account or in its general account in its own right, to the extent
permitted by law.
8. ALLOCATION OF EXPENSES.
8.1 Except as set forth below, each party to this Agreement shall
bear, or arrange for others to bear, the costs and expenses of performing its
obligations hereunder. Notwithstanding the foregoing:
8.2 Subject to Section 8.4 below, the Trust agrees to bear, or arrange
for others to bear, the expense of providing all management, administrative,
legal, clerical, accounting, and recordkeeping services necessary or
appropriate to conduct the Trust's business and day-to-day operations,
including the expenses of the services of individuals under Section 7.2(vi),
These expenses shall include the expense of:
(a) all charges, commissions and fees agreed to by it pursuant to the
Investment Advisory Agreement by and between the Trust and the Underwriter in
the Underwriter's capacity as investment adviser;
(b) the charges and expenses of independent auditors and outside legal
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;
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(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;
(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 Section 8.2(h), below;
(h) compensation and travel expenses of those Trustees of the Trust
who are not "interested persons" of the Trust 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 (other than any such expenses referred to in
Section 8.3 below) involved in registering and maintaining registrations of the
Trust and its shares with the Securities and Exchange Commission and various
states and other jurisdictions, and in preparing and or filing on behalf of the
Trust (or assisting counsel and/or auditors in the preparation of) all required
tax returns and reports to and other filings with the SEC (including, without
limitation, the Trust's annual report to the SEC), and any other governmental
agency, together with the preparation of related financial statements (the
Underwriter and Trust agreeing to supply or cause to be supplied to the Company
all necessary financial and other information in connection with the
foregoing);
(k) membership or association dues for the Investment Company
Institute or similar organization;
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(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, as
conceptualized by the SEC, Contractowners) of such materials as prospectuses,
statements of additional information, supplements to prospectuses and
statements of additional information, periodic reports to Shareholders (and, as
conceptualized by the SEC, Contractowners), communications, and proxy materials
(including proxy statements, proxy cards and voting instruction forms),
together with the preparation of related financial statements, relating to the
Trust and the processing, including tabulation, of the results of voting
instructions and proxy solicitations;
(n) furnishing, or causing to be furnished, to each Shareholder (to
the extent not provided elsewhere in this Section 8.2) statements of account
and/or financial and share ownership information including, but not limited to,
the number and value of shares owned by each Shareholder;
(o) postage; and
(p) the expenses of the services provided by the Company under Section
7.4, above.
8.3 To the extent not assumed by the Trust pursuant to Section 8.2
above, the Company, out of its general account, agrees to assume the expense
of:
(a) organizational expenses of 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;
(c) any activity that may be attributable to the Trust as primarily
intended to result in the sale of Trust shares to other than then current
Shareholders (and, as conceptualized by the SEC, Contractowners), including the
preparation, setting in type, printing in quantity and distribution of such
materials as prospectuses, statements of additional information,
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supplements to prospectuses and statements of additional information, sales
literature (including the Trust's periodic reports to Shareholders and any
Account periodic report to Contractowners), advertising and other promotional
material relating to either the Trust or either Account and compensation paid
to sales personnel;
8.4 The Company, out of its general account agrees to pay directly or
reimburse the Trust for the Trust's expenses set out in Section 8.2 above to
the extent that such expenses, on behalf of each of the following respective
Funds, exceed 0.65% of the monthly average net assets of USAA Life Variable
Annuity World Growth Fund, 0.70% of the monthly average net assets of USAA Life
Variable Annuity Aggressive Growth Fund, 1.10% of the monthly average net
assets of the USAA Life Variable Annuity International Fund, and 0.35% of the
monthly average net assets of each other Fund. (Effective May 1, 1998 (or such
date as the Securities and Exchange Commission may declare a post-effective
amendment to the Trust's registration statement regarding the matter effective
under the 1933 Act), the names of the foregoing Funds, as set out in this
Section 8.4, are changed to exclude the term "Variable Annuity.")
9. INDEMNIFICATION.
9.1 The Underwriter shall indemnify and hold harmless the Trust and
the Company and each of their Trustees, directors and officers (or former
Trustees, directors and officers) and each person, if any, who controls the
Trust or the Company within the meaning of Section 15 of the 1933 Act
(collectively, "Indemnitees") against any loss, liability, claim, damage, or
expense (including the reasonable cost of investigating and defending against
the same and any counsel fees reasonably incurred in connection therewith)
incurred by any Indemnitees under the 1933 Act or under common law or otherwise
which arise out of or are based upon (1) any untrue or alleged untrue statement
of a material fact contained in information furnished to the Trust by the
Underwriter for use in the Trust's registration
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statement, Prospectus, or annual or interim reports to Shareholders, (2) any
omission or alleged omission to state a material fact in connection with such
information furnished by the Underwriter to the Trust which is required to be
stated in any of such documents or necessary to make such information not
misleading, (3) any misrepresentation or omission or alleged misrepresentation
or omission to state a material fact on the part of the Underwriter or any
agent or employee of the Underwriter or any other person for whose acts the
Underwriter is responsible, unless such misrepresentation or omission or
alleged misrepresentation or omission was made in reliance on information
furnished by the Trust, or (4) the willful misconduct or failure to exercise
reasonable care and diligence on the part of the Underwriter or any agent or
employee of the Underwriter or any other person for whose acts the Underwriter
is responsible with respect to services rendered under this Agreement. This
indemnity provision, however, shall not operate to protect any officer or
Trustee of the Trust from any liability to the Trust or any shareholder by
reason of willful misfeasance, bad faith, gross negligence or reckless
disregard of his or her duties.
In case any action shall be brought against any Indemnitee, the
Underwriter shall not be liable under its indemnity agreement contained in this
paragraph with respect to any claim made against any Indemnitee, unless the
Indemnitee shall have notified the Underwriter in writing within a reasonable
time after the summons or other first legal process giving information of the
nature of the claim shall have been served upon the Indemnitee (or after the
Indemnitee shall have received notice of such service on any designated agent),
but failure to notify the Underwriter of any such claim shall not relieve it
from liability to the Indemnitees against whom such action is brought otherwise
than on account of this Section 9.1. The Underwriter will be entitled to
participate at its own expense in the defense, or, if it so elects, to assume
the defense of any suit brought to enforce any such liability, but if the
Underwriter elects to assume the defense, such defense shall be conducted by
counsel chosen by it and satisfactory to the Indemnitees which are defendants
in the suit. In the event the
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Underwriter elects to assume the defense of any such suit and retain such
counsel, the Indemnitees which are defendants in the suit shall bear the fees
and expenses of any additional counsel retained by them, but, in case the
Underwriter does not elect to assume the defense of any such suit, the
Underwriter will reimburse the Indemnitees which are defendants in the suit for
the reasonable fees and expenses of any counsel retained by them. The
Underwriter shall promptly notify the Trust and the Company of the commencement
of any litigation or proceedings in connection with the issuance or sales of
the shares.
9.2 The Company shall indemnify and hold harmless the Trust and the
Underwriter and each of their Trustees, directors and officers (or former
Trustees, directors and officers) and each person, if any, who controls the
Trust or the Underwriter within the meaning of Section 15 of the 1933 Act
(collectively, "Indemnitees") against any loss, liability, claim, damage, or
expense (including the reasonable cost of investigating and defending against
the same and any counsel fees reasonably incurred in connection therewith)
incurred by any Indemnitees under the 1933 Act or under common law or otherwise
which arise out of or are based upon (1) any untrue or alleged untrue statement
of a material fact contained in information furnished to the Trust for use in
the Trust's registration statement, Prospectus, or annual or interim reports to
Shareholders, (2) any omission or alleged omission to state a material fact in
connection with such information furnished by the Company to the Trust or the
Underwriter, which is required to be stated in any of such documents or
necessary to make such information not misleading, (3) any misrepresentation or
omission or alleged misrepresentation or omission to state a material fact on
the part of the Company or any agent or employee of the Company or any other
person for whose acts the Company is responsible, unless such misrepresentation
or omission or alleged misrepresentation or omission was made in reliance on
information furnished by the Trust or the Underwriter, or (4) the willful
misconduct or failure to exercise reasonable care and diligence on the part of
the Company or any agent or employee of the Company or any other person for
whose acts the Company is
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responsible with respect to services rendered under this Agreement. This
indemnity provision, however, shall not operate to protect the Underwriter or
any officer or Trustee of the Trust from any liability to the Trust or any
shareholder by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of their duties.
Notwithstanding Section 9.1, the Company shall indemnify and hold the
Trust and the Underwriter and each of its Trustees, directors and officers, (or
former Trustees, directors and officers) and each person, if any, who controls
the Trust within the meaning of Section 15 of the 1933 Act, harmless from all
loss, cost, damage, and expense, including reasonable attorneys' fees, incurred
by the Trust as a result of the failure at any time of any Fund of the Trust
(i) to operate as a regulated investment company in compliance with Subchapter
M of the Code and the regulations thereunder or (ii) to comply with the
investment diversification rules of Section 817(h) of the Code and the
regulations thereunder; or (iii) any error or omission in any accounting data
or calculation the collection and maintenance of which data or the production
of which calculation is made the responsibility of the Company under this
Agreement.
In case any action shall be brought against any Indemnitee, the
Company shall not be liable under its indemnity agreement contained in this
paragraph with respect to any claim made against any Indemnitee, unless the
Indemnitee shall have notified the Company in writing within a reasonable time
after the summons or other first legal process giving information of the nature
of the claim shall have been served upon the Indemnitee (or after the
Indemnitee shall have received notice of such service on any designated agent),
but failure to notify the Company of any such claim shall not relieve it from
liability to the Indemnitees against whom such action is brought otherwise than
on account of this Section 9.2. The Company will be entitled to participate at
its own expense in the defense, or, if it so elects, to assume the defense of
any suit brought to enforce any such liability, but if the Company elects to
assume the defense, such defense shall be conducted by counsel chosen
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by it and satisfactory to the Indemnitees which are defendants in the suit. In
the event the Underwriter elects to assume the defense of any such suit and
retain such counsel, the Indemnitees which are defendants in the suit shall
bear the fees and expenses of any additional counsel retained by them, but, in
case the Company does not elect to assume the defense of any such suit, the
Company will reimburse the Indemnitees that are defendants in the suit for the
reasonable fees and expenses of any counsel retained by them. The Company shall
promptly notify the Trust and the Underwriter of the commencement of any
litigation or proceedings in connection with the issuance or sales of the
shares.
10. REGULATORY REPORTS.
The Underwriter, the Company and the Trust agree to furnish to each
other, as appropriate, necessary cooperation, assistance and information in the
following matters (which shall nevertheless be primarily the responsibility of
the Company hereunder):
10.1 The preparation of all reports as required by Federal or state
law or regulations;
10.2 The furnishing of any information or reports in connection with
the services provided hereunder as may be requested by any state insurance
commissioner, which request is made to ascertain whether the operations of any
of the parties are being conducted in a manner consistent with applicable state
insurance laws or regulations.
10.3 The preparation of prospectuses, statements of additional
information, registration statements, and amendments thereto that may be
required by Federal or other laws or by the rules or regulations of any duly
authorized commission or administrative body.
11. DURATION AND TERMINATION OF AGREEMENT.
11.1 This Agreement shall become effective as of January 1, 1999 and
shall remain in force until January 1, 2001 and thereafter, but only so long as
such continuance is specifically approved at least annually by (i) the Board of
Trustees, or by the vote of a
24
<PAGE>
majority of the outstanding voting securities of the Trust, cast in person or
by proxy, and (ii) a majority of those Trustees who are not parties to this
Agreement or interested persons of any such party cast in person at a meeting
called for the purpose of voting on such approval. Notwithstanding the
foregoing, the Board of Trustees may, from time to time, establish a new
effective date for the continuance of this Agreement with respect to any
initial Fund and/or additional Fund; PROVIDED, that such new effective date
precedes the then current termination date of the Agreement.
11.2 This Agreement may be terminated at any time without the payment
of any penalty, by the Board of Trustees, by vote of a majority of the
outstanding voting securities of the Trust, or by the Underwriter or the
Company on 120 days written notice to the other party. This Agreement shall
automatically terminate in the event of its assignment or in the event of
termination of the Advisory Agreement between the Underwriter and any Fund of
the Trust.
11.3 The terms "assignment," "vote of a majority of the outstanding
voting securities" and "interested person," when used in this Agreement, shall
have the respective meanings specified in the 1940 Act.
12. GOVERNING LAW.
This Agreement shall be construed in accordance with the laws of the
State of Texas and the applicable provisions of the 1940 Act. To the extent the
applicable law of the State of Texas, or any of the provisions herein, conflict
with the applicable provisions of the 1940 Act, the latter shall control.
13. CONFIDENTIALITY.
Neither the Company nor the Underwriter shall disclose or use any
records or information obtained hereunder in any manner whatsoever except as
expressly authorized
25
<PAGE>
hereunder and, further, they shall keep confidential any information obtained
pursuant to their relationship with the Trust set forth herein, and disclose
such information only if the Trust has authorized such disclosure, or if such
disclosure is expressly required by applicable Federal or state regulatory
authorities.
14. COOPERATION UNDER THE AGREEMENT.
The Trust, Underwriter and Company represent and warrant that each
will fully coordinate and cooperate with each other in assuring compliance
under this Agreement with all federal and state laws and regulations.
26
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first set forth above.
USAA LIFE INSURANCE COMPANY
BY:/s/ EDWIN L. ROSANE
------------------------------
ATTEST: EDWIN L. ROSANE
President
/s. DWAIN A. AKINS
- -------------------------
DWAIN A. AKINS
Assistant Vice President and
Assistant Secretary
USAA LIFE INVESTMENT TRUST
BY:/s/EDWIN L. ROSANE
-----------------------------
ATTEST: EDWIN L. ROSANE
President
/s/DWAIN A. AKINS
- -------------------------
DWAIN A. AKINS
Assistant Secretary
USAA INVESTMENT
MANAGEMENT COMPANY
BY/s/MICHAEL J.C.ROTH
-------------------------------
ATTEST: MICHAEL J.C. ROTH
President
/s/MICHAEL D. WAGNER
- -------------------------
MICHAEL D. WAGNER
Secretary
65686
27
EXHIBIT 7(a)
<PAGE>
CUSTODIAN AGREEMENT
BY AND BETWEEN
USAA LIFE INVESTMENT TRUST
AND
STATE STREET BANK AND TRUST COMPANY
<PAGE>
TABLE OF CONTENTS
Page
Article 1. Employment of Custodian and Property
To Be Held By It 2
Article 2. Duties of Custodian with Respect to Property
of Trust Held by Custodian 2
Section 2.1 Holding Securities 2
Section 2.2 Delivery of Securities 3
Section 2.3 Registration of Securities 8
Section 2.4 Bank Accounts 9
Section 2.5 Payments for Shares 9
Section 2.6 Availability of Federal Funds 10
Section 2.7 Collection of Income 10
Section 2.8 Payment of Trust Monies 11
Section 2.9 Liability for Payment in Advance of
Receipt of Securities Purchased 14
Section 2.10 Payments for Repurchases or Redemptions
of Shares of Trust 14
Section 2.11 Appointment of Agents 15
Section 2.12 Deposit of Trust Assets in Securities System 15
Section 2.12A Trust Assets Held in Custodian's
Direct Paper System 18
Section 2.13 Segregated Account 20
Section 2.14 Ownership Certificates for Tax Purposes 21
Section 2.15 Proxies 21
Section 2.16 Communications Relating to Portfolio
Securities 22
Section 2.17 Proper Instructions 22
Section 2.18 Actions Permitted Without Express Authority 23
Section 2.19 Evidence of Authority 24
Section 2.20 Reports to Trust by Custodian on Insurance
or Bonding 24
Article 3. Duties of Custodian with Respect to Books of Account and
Calculation of Net Asset Value and Net Income 25
Article 4. Records 26
<PAGE>
Article 5. Opinion of Trust's Independent Public Accountants 26
Article 6. Reports to Trust by Independent Public Accountants 26
Article 7. Compensation of Custodian 27
Article 8. Responsibility of Custodian 27
Article 9. Effective Period, Termination and Amendment 29
Article 10. Successor Custodian 30
Article 11. Interpretive and Additional Provisions 32
Article 12. Additional Funds 33
Article 13. Massachusetts Law To Apply 33
Article 14. Prior Agreements 33
Article 15. Shareholder Communications 33
<PAGE>
CUSTODIAN AGREEMENT
This Custodian Agreement (the "Agreement") between USAA Life
Investment Trust (the "Trust"), a business trust organized and existing under
the laws of the State of Delaware, having its principal place of business at
9800 Fredericksburg Road, San Antonio, Texas 78288, and State Street Bank and
Trust Company (the "Custodian"), a Massachusetts trust company, having its
principal place of business at 225 Franklin Street, Boston, Massachusetts
02110.
WITNESSETH:
WHEREAS, the Trust is authorized to issue shares in separate Funds,
with each such Fund representing interests in a separate portfolio of
securities and other assets; and
WHEREAS, the Trust intends to initially offer shares in five Funds:
USAA Life Money Market Fund, USAA Life Income Fund, USAA Life Growth and Income
Fund, USAA Life World Growth Fund, and USAA Life Diversified Assets Fund (the
"Fund" or "Funds") such Funds together with all other Funds subsequently
established by the Trust and made subject to this Agreement in accordance with
Article 12.
NOW THEREFORE, in consideration of the mutual covenants and agreements
hereinafter contained, the parties hereto agree as follows:
1
<PAGE>
1. Employment of Custodian and Property To Be Held by It
The Trust hereby employs the Custodian as the custodian of the assets
of the Funds of the Trust pursuant to the provisions of the Master Trust
Agreement (the "Trust Agreement"). The Trust on behalf of the Funds agrees to
deliver to the Custodian all assets, including securities and cash, of the
Funds, and all payments of income, payments of principal or capital
distributions received by it with respect to all securities owned by the Funds
from time to time, and the cash consideration received by it for such new or
treasury shares of beneficial interest of the Trust representing interests in
the Funds, as may be issued or sold from time to time. The Custodian shall not
be responsible for any property of the Funds held or received by the Trust and
not delivered to the Custodian.
Upon receipt of "Proper Instructions" (within the meaning of Section
2.17), the Custodian shall on behalf of the applicable Fund or Funds from time
to time employ one or more sub-custodians, but only in accordance with and upon
receipt of certified copy of an approving resolution of the Board of Trustees
of the Trust on behalf of the applicable Fund or Funds, and provided that the
Custodian shall have no more or less responsibility or liability to the Trust
on account of any actions or omissions of any subcustodian so employed than any
such sub-custodian has to the Custodian.
2. Duties of Custodian with Respect to Property of Trust Held by
Custodian
2.1 Holding Securities. The Custodian shall hold and physically segregate
for the account of each Fund all non-cash property, including all
securities owned by such Fund, other than
2
<PAGE>
(a) securities which are maintained pursuant to Section 2.12 in a
clearing agency which acts as a securities depository or in a
book-entry system authorized by the U.S. Department of the Treasury,
collectively referred to herein as (the "Securities System") and (b)
commercial paper of an issuer for which the Custodian acts as issuing
and paying agent ("Direct Paper") which is deposited and/or maintained
in the Direct Paper System of the Custodian pursuant to Section 2.12A.
2.2 Delivery of Securities. The Custodian shall release and deliver
securities owned by the Funds held by the Custodian or in a Securities
System account of the Custodian or in the Custodian's Direct Paper
book entry system account ("Direct Paper System Account") only upon
receipt of Proper Instructions from the Trust on behalf of the
applicable Funds, which may be continuing instructions when deemed
appropriate by the parties, and only in the following cases.
(1) Upon sale of such securities for the account of the
Funds and receipt of payment therefore:
(2) Upon the receipt of payment in connection with any
repurchase agreement related to such securities entered
into by the Funds and, in the case of repurchases that
are effected through a Securities System, subject to
the requirements of Section 2.12 hereof;
3
<PAGE>
(3) In the case of a sale effected through a Securities
System, in accordance with the provisions of Section
2.12 hereof;
(4) To the depository agent in connection with tender or
other similar offers for securities of the Funds;
(5) To the issuer thereof or its agent when such securities
are called, redeemed, retired or otherwise become
payable; provided that, in any such case, the cash or
other consideration is to be delivered to the
Custodian;
(6) To the issuer thereof, or its agent, for transfer into
the name of the Funds or into the name of any nominee
or nominees of the Custodian or into the nominee name
of any agent appointed pursuant to Section 2.11 or into
the nominee name of any subcustodian appointed pursuant
to Article 1; or for exchange for a different number of
bonds, certificates or other evidence representing the
same aggregate face amount or number of units; provided
that, in any such case, the new securities are to be
delivered to the Custodian;
(7) Upon the sale of such securities for the account of the
Funds, to the broker or its clearing agent, against a
receipt, for examination in accordance with "street
delivery" custom; provided that in any such case, the
Custodian shall
4
<PAGE>
have no responsibility or liability for any loss
arising from the delivery of such securities prior to
receiving payment for such securities except as may
arise from the Custodian's own negligence or willful
misconduct;
(8) For exchange or conversion pursuant to any plan of
merger, consolidation, recapitalization, reorganization
or readjustment of the securities of the issuer of such
securities, or pursuant to provisions for conversion
contained in such securities, or pursuant to any
deposit agreement; provided that, in any such case, the
new securities and cash, if any, are to be delivered to
the Custodian;
(9) In the case of warrants, rights or similar securities,
the surrender thereof in the exercise of such warrants,
rights or similar securities or the surrender of
interim receipts or temporary securities for definitive
securities; provided that, in any such case, the new
securities and cash, if any, are to be delivered to the
Custodian;
(10) For delivery in connection with any loans of securities
made by the Funds, but only against receipt of adequate
collateral as agreed upon from time to time by the
Custodian and the Trust on behalf of the Funds, which
may be in the form of cash or obligations issued by the
United States government, its agencies or
instrumentalities, except that in connection with any
loans for
5
<PAGE>
which collateral is to be credited to the Custodian's
account in the book-entry system authorized by the U.S.
Department of the Treasury, the Custodian will not be
held liable or responsible for the delivery of
securities owned by the Funds prior to the receipt of
such collateral;
(11) For delivery as security in connection with any
borrowing by the Trust on behalf of the Funds
requiring a pledge of assets by the Trust on behalf of
the Funds, but only against receipt of amounts
borrowed;
(12) For delivery in accordance with the provisions of
any agreement by the Trust on behalf of the Funds,
the Custodian and a broker-dealer registered under
the Securities Exchange Act of 1934 (the "Exchange
Act") and a member of the National Association of
Securities Dealers, Inc. ("NASD"), relating to
compliance with the rules of the Options Clearing
Corporation and of any registered national
securities exchange, or of any similar organization
or organizations, regarding escrow or other
arrangements in connection with transactions by the
Funds of the Trust;
(13) For delivery in accordance with the provisions of
any agreement by the Trust on behalf of the Funds,
the Custodian, and a Futures Commission Merchant
registered under the Commodity Exchange Act,
relating to compliance with the rules of the
Commodity Futures Trading Commission
6
<PAGE>
and/or any Contract Market, or any similar
organization or organizations, regarding account
deposits in connection with transactions by the
Funds of the Trust;
(14) For any other proper trust purpose, but only upon
receipt of, in addition to Proper Instructions from
the Trust on behalf of the applicable Fund or Funds,
a certified copy of a resolution of the Board of
Trustees or of the Executive Committee of the Board
signed by an Officer of the Trust and certified by
the Secretary or an Assistant Secretary, specifying
the securities of the Funds to be delivered, setting
forth the purpose for which such delivery is to be
made, declaring such purpose to be a proper trust
purpose, and naming the person or persons to whom
delivery of such securities shall be made.
In delivering any securities pursuant to this Section 2.2,
the Custodian shall credit to the Account of the Fund which
held such securities the cash or other property received
thereof, except to the extent that the Custodian may be
instructed otherwise by certified resolution meeting the
requirements of paragraph (14) of this Section 2.2.
2.3 Registration of Securities. Securities held by the Custodian
(other than bearer securities) shall be registered in the
name of the Trust or in the name of any
7
<PAGE>
nominee of the Trust or in the name of any nominee of the
Custodian which nominee shall be assigned exclusively to the
Trust, unless the Trust has authorized in writing the
appointment of a nominee to be used in common with other
registered investment companies having the same investment
adviser as the Trust, or m the nominee name of any agent
appointed pursuant to Section 2.11 or in the nominee name of
any subcustodian appointed pursuant to Article 1, in either
of which case, the nominee name shall be one used exclusively
for the Trust. The Custodian shall clearly record on its
records the Fund for which each security of the Trust is
being held. All securities accepted by the Custodian on
behalf of the Trust under the terms of this Agreement shall
be in "street name" or other good delivery form.
If, however, the Trust directs the Custodian to maintain
securities in "street name", the Custodian shall utilize its
best efforts only to timely collect income due the Trust on
such securities and to notify the Trust on a best efforts
basis only of relevant corporate actions including, without
limitation, pendency of calls, maturities, tender or exchange
offers.
2.4 Bank Accounts. The Custodian shall open and maintain a
separate bank account or accounts in the name of each Fund of
the Trust, subject only to draft or order by the Custodian
acting pursuant to the terms of this Agreement, and shall
hold in such account or accounts, subject to the provisions
hereof, all cash received by
8
<PAGE>
it from or for the accounts of the Trust, other than cash
maintained by the Trust in a bank account established and
used in accordance with Rule 17f-3 under the Investment
Company Act of 1940 (The "1940 Act"). Funds held by the
Custodian for a Fund may be deposited by it to its credit as
Custodian in the Banking Department of the Custodian or in
such other banks or trust companies as it may in its
discretion deem necessary or desirable; provided, however,
that every such bank or trust company shall be qualified to
act as a custodian under The 1940 Act and that each such bank
or trust company and the funds to be deposited with each such
bank or trust company shall on behalf of each applicable Fund
be approved by vote of a majority of the Board of Trustees of
the Trust. Such funds shall be deposited by the Custodian in
its capacity as Custodian and shall be withdrawable by the
Custodian only in that capacity.
2.5 Payments for Shares. The Custodian shall receive from the
applicable separate account of USAA Life Insurance Company
(the "Separate Account"), and, on the date of receipt,
deposit into the account of the appropriate Fund such
payments for shares of that Fund issued or sold from time to
time by the Trust. USAA Life or a third party administrator
on its behalf shall cause such payments to be made to the
Custodian. The Custodian will provide timely notification to
the Trust and the Trust's Transfer Agent of any receipt by it
of payments for shares of such Funds and the identity of the
fund to which each such payment relates.
9
<PAGE>
2.6 Availability of Federal Funds. Upon mutual agreement between
the Trust on behalf of each applicable Fund and the
Custodian, the Custodian shall, upon die receipt of Proper
Instructions from the Trust on behalf of a Fund, make federal
funds available to such Fund as of specified times agreed
upon from time to time by the Trust and the Custodian in the
amount of checks received in payment for shares of such Fund
which are deposited into the Fund's account.
2.7 Collection of Income. Subject to the provisions of Section
2.3, the Custodian shall collect on a timely basis all income
and other payments with respect to registered securities held
hereunder to which each Fund shall be entitled either by law
or pursuant to custom in the securities business, and shall
collect on a timely basis all income and other payments with
respect to bearer securities if, on the date of payment by
the issuer, such securities are held by the Custodian or its
agent, or are held in a Securities System on such date of
payment, and shall credit such income, as collected, to such
Fund's custodian account. Without limiting the generality of
the foregoing, the Custodian shall detach and present for
payment all coupons and other income items requiring
presentation as and when they become due and shall collect
interest when due on securities held hereunder. Income due
each Fund on securities loaned pursuant to the provisions of
Section 2.2 (10) shall be the responsibility of the Trust.
The Custodian will have no duty or responsibility in
connection therewith, other than to provide the Trust with
such information or data as may be necessary to assist the
Trust in arranging for
10
<PAGE>
the timely delivery to the Custodian of the income to which
the Fund is properly entitled.
2.8 Payment of Trust Monies. Upon receipt of Proper Instructions
from the Trust on behalf of the applicable Fund, which may be
continuing instructions when deemed appropriate by the
parties, the Custodian shall pay out monies of a Fund in the
following cases only:
(1) Upon purchase of securities, options, futures
contracts or options on futures contracts for the
account of the Funds but only (a) against the delivery
of such securities or evidence of title to such
options, futures contracts or options on futures
contracts to the Custodian (or any bank, banking firm
or trust company doing business in the United States
or abroad which is qualified under the 1940 Act, as
amended, to act as a custodian and has been designated
by the Custodian as its agent for this purpose
pursuant to Section 2.11 hereof, registered in the
manner required for such instruments to be held
pursuant to this Agreement or in proper form for
transfer; (b) in the case of a purchase effected
through a Securities System, in accordance with the
conditions set forth in Section 2.12 hereof; (c) in
the case of a purchase involving the Direct Paper
System, in accordance with the
11
<PAGE>
conditions set forth in Section 2.12A; (d) in the case
of repurchase agreements entered into between the
Trust on behalf of the Funds and the Custodian, or
another bank, or a broker-dealer which is a member of
NASD, (i) against delivery of the securities either in
certificate form or for securities purchased through a
Securities System, in accordance with the conditions
set forth in Section 2.12 hereof or (ii) through
agreement by the Custodian or other bank or
broker-dealer to repurchase such securities from the
Funds or (iii) for transfer to a time deposit account
of the Trust in any bank, whether domestic or foreign;
such transfer may be effected prior to receipt of a
confirmation from a broker and/or the applicable bank
pursuant to Proper Instructions from the Trust as
defined in Section 2.17;
(2) In connection with conversion, exchange or surrender
of securities owned by the Funds as set forth in
Section 2.2 hereof;
(3) For the redemption or repurchase of Shares issued by
the Funds as set forth in Section 2.10 hereof;
(4) For the payment of any expense or liability incurred
by the Funds, including but not limited to the
following payments for the account of the Funds:
interest, taxes, management, accounting, transfer
agent and
12
<PAGE>
legal fees, and operating expenses of the Trust
whether or not such expenses are to be in whole or
part capitalized or treated as deferred expenses;
(5) For the payment of any dividends on shares of the
Funds declared pursuant to the governing documents of
the Trust;
(6) For payment of the amount of dividends received in
respect of securities sold short by a Fund;
(7) For any other proper purpose, but only upon receipt
of, in addition to Proper Instructions from the Trust
on behalf of the Funds, a certified copy of a
resolution of the Board of Trustees or of the
Executive Committee of the Trust signed by an Officer
of the Trust and certified by its Secretary or
Assistant Secretaries, specifying the amount of such
payment, setting forth the purpose for which such
payment is to be made, declaring such purpose, and
naming the person or persons to whom such payment is
to be made.
2.9 Liability for Payment in Advance of Receipt of Securities
Purchased. Except as specifically stated otherwise in this
Agreement, in any and every case where payment for purchase
of securities for the account of a Fund is made by the
13
<PAGE>
Custodian in advance of receipt of the securities purchased
(i.e., in advance of the time specified in Section 2.8(1)) in
the absence of specific written instructions from the Trust
on behalf of such Fund or Funds to so pay in advance, the
Custodian shall be absolutely liable to the Trust for such
securities to the same extent as if the securities had been
received by the Custodian.
2.10 Payments for Repurchases or Redemptions of Shares of Trust.
From such funds as may be available for the purpose but
subject to the limitations of the Trust Agreement and any
applicable votes of the Board of Trustees of the Trust
pursuant thereto, the Custodian shall, upon receipt of Proper
Instructions, make funds available for payment to holders of
shares who have delivered to the Trust's Transfer Agent a
request for redemption or repurchase of the shares. In
connection with the redemption or repurchase of shares of a
Fund, the Custodian is authorized upon receipt of Proper
Instructions to wire funds to or through a commercial bank
designated by the redeeming shareholders.
2.11 Appointment of Agents. The Custodian may at any time or times
in its discretion appoint (and may at any time remove) any
other bank or trust company which is itself qualified under
the 1940 Act, as amended, to act as a custodian, as its agent
to carry out such of the provisions of this Article 2 as the
Custodian may from time to time direct; provided, however,
that the appointment of any agent shall not relieve the
Custodian of its responsibilities or liabilities hereunder.
14
<PAGE>
2.12 Deposit of Trust Assets in Securities System. The Custodian
may deposit and/or maintain securities owned by a Fund in a
clearing agency registered with the Securities and Exchange
Commission (the "Commission") under Section 17A of the
Exchange Act, which acts as a securities depository, or in
the book entry system authorized by the U.S. Department of
the Treasury and certain federal agencies, known as
Securities System in accordance with applicable Federal
Reserve Board and Commission rules and regulations, if any,
and subject to the following provisions:
(1) The Custodian may keep securities of the Funds in a
Securities System provided that such securities are
represented in an account ("Account") of the
Custodian in the Securities System which shall not
include any assets of the Custodian other than
assets held as fiduciary, custodian or otherwise for
customers;
(2) The records of the Custodian with respect to
securities of the Funds which are maintained in a
Securities System shall identity by book entry those
securities belonging to the Funds;
(3) The Custodian shall pay for securities purchased for
the account of the Funds upon (i) receipt of written
advice from the Securities System that such
securities have been transferred to the Account, and
(ii) the making of
15
<PAGE>
an entry on the records of the Custodian to reflect
such payment and transfer for the account of the
Funds. The Custodian shall transfer securities sold
for the account of the Funds upon (i) receipt of
written advice from the Securities System that
payment for such securities has been transferred to
the Account, and (ii) the making of an entry on the
records of the Custodian to reflect such transfer
and payment for the account of the Fund. Copies of
all advice from the Securities System of transfers
of securities for the account of the Funds shall
identity the Fund, be maintained for the Funds by
the Custodian and be provided to the Trust at its
request. Upon request, the Custodian shall furnish
the Trust on behalf of the Funds confirmation of
each transfer to or from the account of the Funds in
the form of a written advice or notice and shall
furnish to the Trust on behalf of the Funds copies
of daily transaction sheets reflecting each day's
transactions in the Securities System for the
account of the Fund. The Custodian shall comply with
all requirements of Rule 17f-4(d)(3) under the 1940
Act;
(4) The Custodian shall provide the Trust for the Funds
with any report obtained by the Custodian on the
Securities System's accounting system, internal
accounting control and procedures for safeguarding
securities deposited in the Securities System. The
Custodian shall send to the Trust such reports on
their own systems of internal accounting control as
the Trust
16
<PAGE>
may reasonably request from time to time; the
Custodian shall send to the Trust such reports
automatically whenever there is a material change in
any such system;
(5) The Custodian shall have received from the Trust on
behalf of the Funds the initial certificate required
by Article 9 hereof;
(6) Anything to the contrary in this Agreement
notwithstanding, the Custodian shall be liable to
the Trust for the benefit of the Funds for any loss
or damage to the Funds resulting from use of the
Securities System by reason of any negligence,
misfeasance or misconduct of the Custodian or any of
its agents or of any of its or their employees or
from failure of the Custodian or any such agent to
enforce effectively such rights as it or the Trust
may have against the Securities System or any
guaranty or insurance fund; at the election of the
Trust, it shall be entitled to be subrogated to the
rights of the Custodian or any agent with respect to
any claim against the Securities System or any other
person or fund which the Custodian or agent may have
as a consequence of any such loss or damage if and
to the extent that the Funds have not been made
whole for any such loss or damage.
2.12A Trust Assets Held in Custodian's Direct Paper System. The
Custodian may deposit and/or maintain securities owned by a
Fund in the Direct Paper System
17
<PAGE>
of the Custodian subject to the following provisions:
(1) No transaction relating to securities in the Direct
Paper System will be effected in the absence of
Proper Instructions from the Trust on behalf of the
Funds;
(2) The Custodian may keep securities of the Funds in
the Direct Paper System only if such securities are
represented in an Account of the Custodian in the
Direct Paper System which shall not include any
assets of the Custodian other than assets held as a
fiduciary, custodian or otherwise for customers;
(3) The records of the Custodian with respect to
securities of the Funds which are maintained in the
Direct Paper System shall identify by book-entry
those securities belonging to the Funds;
(4) The Custodian shall pay for securities purchased for
the account of the Funds upon the making of an entry
on the records of the Custodian to reflect such
payment and transfer of securities to the account of
the Funds. The Custodian shall transfer securities
sold for the account of the Funds upon the making of
an entry on the records of the Custodian to reflect
such transfer and receipt of payment for the account
of the Funds;
18
<PAGE>
(5) The Custodian shall furnish the Trust on behalf of
the Funds confirmation of each transfer to or from
the account of the Funds, in the form of a written
advice or notice, in the Direct Paper System on the
next business day following such transfer and shall
furnish to the Trust on behalf of the Funds copies
of daily transaction sheets reflecting each day's
transactions in the Securities System for the
account of the Funds;
(6) The Custodian shall provide the Trust on behalf of
the Funds with any report on its system of internal
accounting control as the Trust may reasonably
request from time to time.
2.13 Segregated Account. The Custodian shall upon receipt of
Proper Instructions from the Trust on behalf of each
applicable Fund establish and maintain a segregated account
or accounts for and on behalf of each such Fund, into which
account or accounts may be transferred cash and/or
securities, including securities maintained in an account by
the Custodian pursuant to Section 2.12 or 2.12A hereof, (i)
in accordance with the provisions of any agreement by the
Trust on behalf of the Funds, the Custodian, and a
broker-dealer registered under the Exchange Act and a member
of the NASD (or any futures commission merchant registered
under the Commodity Exchange Act), relating to compliance
with the rules of the Options Clearing Corporation and of any
registered national securities exchange (or the Commodity
Futures Trading Commission or any registered
19
<PAGE>
contract market), or of any similar organization or
organizations, regarding escrow or other arrangements in
connection with transactions by the Funds, (ii) for purposes
of segregating cash or government securities in connection
with options purchased, sold or written by the Funds or
commodity futures contracts or options thereon purchased or
sold by the Funds, (iii) for the purposes of compliance by
the Trust and Funds with the procedures required by
Investment Company Act Release No. 10666, or any subsequent
release or releases of the Commission relating to the
maintenance of segregated accounts by registered investment
companies, (iv) to hold securities subject to repurchase
agreements, to the extent that certificates for such
securities are held in physical custody, and (v) for other
proper trust purposes, but only, in the case of clause (v)
upon receipt of, in addition to Proper Instructions from the
Trust on behalf of the applicable Fund, a certified copy of a
resolution of the Board of Trustees or of the Executive
Committee signed by an Officer of the Trust and certified by
the Secretary or Assistant Secretaries, setting forth the
purpose or purposes of such segregated account and declaring
such purposes to be proper trust purposes.
2.14 Ownership Certificates for Tax Purposes. The Custodian shall
execute ownership and other certificates and affidavits for
all federal and state tax purposes in connection with receipt
of income or other payments with respect to securities of
each Fund held by it and in connection with transfers of
securities.
20
<PAGE>
2.15 Proxies. The Custodian shall, with respect to the securities
held hereunder, cause to be promptly executed by the
registered holder of such Securities, if the securities are
registered otherwise than in the name of the Funds or a
nominee of the Funds, all proxies, without indication of the
manner in which such proxies are to be voted, and shall
promptly deliver to the Funds such proxies, all proxy
soliciting materials and all notices relating to such
securities.
2.16 Communications Relating to Portfolio Securities. Subject to
the provisions of Section 2.3, the Custodian shall transmit
promptly to the Trust for each Fund all written information
(including, without limitation, pendency of calls and
maturities of securities and expirations of rights in
connection therewith and notices of exercise of call and put
options written by the Trust on behalf of the Funds and the
maturity of future contracts purchased or sold by the Funds)
received by the Custodian from issuers of the securities
being held for the Funds. With respect to tender or exchange
offers, the Custodian shall transmit promptly to the Funds
all written information received by the Custodian from
issuers of the securities whose tender or exchange is sought
and from the party (or his agents) making the tender or
exchange offer. If the Funds desire to take action with
respect to any tender offer, exchange offer or any other
similar transaction, the Funds shall notify the Custodian at
least three business days prior to the date on which the
Custodian is to take such action.
21
<PAGE>
2.17 Proper Instructions. Proper Instructions as used throughout
this Article 2 means a writing signed or initialed by one or
more person or persons as the Board of Trustees shall have
from time to time authorized. Each such writing shall set
forth the specific transaction or type of transaction
involved, including a specific statement of the purpose for
which such action is requested. Oral instructions will be
considered Proper Instructions if the Custodian reasonably
believes them to have been given by a person authorized to
give such instructions with respect to the transaction
involved. The Trust shall cause all oral instructions to be
confirmed in writing. Upon receipt of a certificate of the
Secretary or Assistant Secretaries as to the authorization by
the Board of Trustees of the Trust accompanied by a detailed
description of procedures approved by the Board of Trustees,
Proper Instructions may include communications effected
directly between electro-mechanical or electronic devices
provided that the Board of Trustees and the Custodian are
satisfied that such procedures afford adequate safeguards for
the Funds' assets. For purposes of this Section, Proper
Instructions shall include instructions received by the
Custodian pursuant to any three-party agreement which
requires a segregated asset account in accordance with
Section 2.13.
2.18 Actions Permitted Without Express Authority. The Custodian
may in its discretion, without express authority from the
Trust on behalf of each applicable Fund:
22
<PAGE>
(1) make payments (not to exceed $3,000 with respect to
any Fund before an accounting shall be made to the
Trust) to itself or others for minor expenses of
handling securities or other similar items relating
to its duties under this Contract, provided that all
such payments shall be accounted for to the Trust on
behalf of the Funds;
(2) surrender securities in temporary form for
securities in definitive form;
(3) endorse for collection, in the name of the Funds,
checks, drafts and other negotiable instruments; and
(4) in general, attend to all non-discretionary details
in connection with the sale, exchange, substitution,
purchase, transfer and other dealings with the
securities and property of the Funds except as
otherwise directed by the Board of Trustees of the
Trust.
2.19 Evidence of Authority. The Custodian shall be protected in
acting upon any instructions, notice, request, consent,
certificate or other instrument or paper reasonably believed
by it to be genuine and to have been properly executed by an
authorized person by or on behalf of the Trust. The Custodian
may receive and accept a certified copy of a vote of the Board
of Trustees of the Trust as conclusive evidence (a) of the
authority of any person to act in accordance with
23
<PAGE>
such vote or (b) of any determination or of any actions by the
Board of Trustees pursuant to the Trust Agreement as described
in such vote, and such vote may be considered as in full force
and effect until receipt by the Custodian of written notice to
the contrary.
2.20 Reports to Trust by Custodian on Insurance or Bonding. The
Custodian shall furnish annually to the Trust information
concerning what insurance or bonding coverage is applicable
to the Trust's securities. Such information shall be similar
in kind and scope to that furnished to the Trust in
connection with the initial approval of this Agreement. In
addition, the Custodian will promptly inform the Trust in the
event of any material adverse change in its financial
condition or any material loss of the assets of the Trust.
3. Duties of Custodian with Respect to Books of Account and
Calculation of Net Asset Value and Net Income
The Custodian shall cooperate with and supply necessary
information to the entity or entities appointed by the Board of
Trustees of the Trust to keep the books of account of each Fund and/or
compute the net asset value per share of the outstanding shares of
each Fund or, if directed in writing to do so by the Trust on behalf
of the Funds, shall itself keep such books of account and/or compute
such net asset value per share. If so directed, the Custodian shall
also calculate daily the net income of the Funds as described in the
Trust's currently effective
24
<PAGE>
Prospectus related to such Funds and shall advise the Trust and the
TPA for the Separate Account daily of the total amounts of such net
income and, if instructed in writing by an Officer of the Trust to do
so, shall advise the TPA for the Separate Account periodically of the
division of such net income among its various components. The
calculations of the net asset value per share and the daily income of
each Fund shall be made at the time or times described from time to
time in the Fund's currently effective prospectus related to such
Fund.
4. Records
The Custodian shall with respect to each Fund create and
maintain all records relating to its activities and obligations under
this Agreement in such manner as will meet the obligations of the
Trust under the 1940 Act, with particular attention to Section 31
thereof and Rules 31a-1 and 3 la-2 thereunder. All such records shall
be the property of the Trust and shall at all times during the regular
business hours of the Custodian be open for inspection by duly
authorized Officers, employees or agents of the Trust and employees
and agents of the Commission. The Custodian shall, at the Trust's
request, supply the Trust with a tabulation of securities owned by
each Fund and held by the Custodian and shall, when requested to do so
by the Trust and for such compensation as shall be agreed upon between
the Trust and the Custodian, include certificate numbers in such
tabulations or provide such other information as the Trust may
reasonably request.
5. Opinion of Trust's Independent Public Accountants
The Custodian shall take all reasonable action, as the Trust
on behalf of each applicable
25
<PAGE>
Fund may from time to time request, to obtain from year to year
favorable opinions from the Trust's independent accountants with
respect to its activities hereunder in connection with the preparation
of the Trust's Form N-lA and Form N-SAR or other annual reports to the
Commission and with respect to any other requirements of such
Commission.
6. Reports to Trust by Independent Public Accountants
The Custodian shall provide the Trust, on behalf of each of
the Funds at such times as the Trust may reasonably require, with
reports by the Custodian or by independent public accountants on the
accounting system, internal accounting control and procedures for
safeguarding securities, futures contracts and options on future
contracts, including securities deposited and/or maintained in a
Securities System, relating to the services provided by the Custodian
under this Agreement; such reports shall be of sufficient scope and in
sufficient detail, as may reasonably be required by the Trust to
provide reasonable assurance that any material inadequacies would be
disclosed by such examination, and, if there are no such inadequacies,
the report shall so state.
7. Compensation of Custodian
The Custodian shall be entitled to reasonable compensation
for its services and expenses as Custodian, as agreed upon in writing
from time to time between the Trust on behalf of each applicable Fund
and the Custodian.
26
<PAGE>
8. Responsibility of Custodian
So long as and to the extent that it is in the exercise of
reasonable care; the Custodian shall not be responsible for the title,
validity or genuineness of any property or evidence of title thereto
received by it or delivered by it pursuant to this Agreement and shall
be held harmless in acting upon any notice, request, consent,
certificate or other instrument reasonably believed by it to be
genuine and to be signed by the proper party or parties, including any
future commission merchant acting pursuant to the terms of a
three-party future or options agreement. Notwithstanding anything to
the contrary elsewhere in this Agreement, the Custodian shall be
responsible for all damages and expenses actually incurred as a result
of the negligent action, negligent inaction, or willful misconduct of
the Custodian, any agent appointed by the Custodian pursuant to
Section 2.11, or any of their officers, agents, nominees, or
employees, in the performance of any function hereunder, including,
without limitation, reasonable attorney fees and investigation
expenses; but the Custodian shall be indemnified by and shall be
without liability to the Trust for any action taken or omitted by it
in good faith without negligence. It shall be entitled to rely on and
may act upon advice of counsel reasonably acceptable to the Trust (who
may be counsel for the Trust) on all matters, and shall be without
liability for any action reasonably taken or omitted pursuant to such
advice.
If the Trust on behalf of a Fund requires the Custodian to
take any action with respect to securities, which action involves the
payment of money or which action may, in the opinion of the Custodian,
result in the Custodian or its nominee assigned to the Trust or the
Funds being liable for the payment of money or incurring liability of
some other form, the Trust on behalf
27
<PAGE>
of the Funds, as a prerequisite to requiring the Custodian to take
such action, shall provide indemnity to the Custodian in an amount and
form satisfactory to it.
If the Trust requires the Custodian, its affiliates,
subsidiaries or agents, to advance cash or securities for any purpose
(including but not limited to securities settlements, foreign exchange
contracts and assumes settlement) for the benefit of a Fund or in the
event that the Custodian or its nominee shall incur or be assessed any
taxes, charges, expenses, assessments, claims or liabilities
(excluding the Custodian's operating overhead and taxes arising
generally out of the Custodian's business) in connection with the
performance of this Agreement, except such as may arise from its or
its officers', employees', agent's or nominee's own negligent action,
negligent failure to act or willful misconduct, any property at any
time held for the account of the applicable Fund shall be security
therefore and should the Trust fail to repay the Custodian promptly,
the Custodian shall be entitled to utilize available cash and to
dispose of such Fund's assets to the extent necessary to obtain
reimbursement.
9. Effective Period, Termination and Amendment
This Agreement shall become effective as of its execution,
shall continue in full force and effect until terminated as
hereinafter provided, may be amended at any time by mutual agreement
of the parties hereto and may be terminated by either party by an
instrument m writing delivered or mailed by registered mail, postage
prepaid to the other party, such termination to take effect not sooner
than thirty days after the date of such delivery or mailing; provided,
however, that the Custodian shall not with respect to a Fund act under
Section 2.12
28
<PAGE>
hereof in the absence of receipt of an initial certificate of the
Secretary or Assistant Secretaries that the Board of Trustees of the
Trust has approved the initial use of a particular Securities System
by such Fund as required in each case by Rule 17f-4 under The 1940
Act, as amended, and that the Custodian shall not with respect to a
Fund act under Section 2.12A hereof in the absence of receipt of an
initial certificate of the Secretary or Assistant Secretaries that the
Board of Trustees has approved the initial use of the Direct Paper
System by such Fund; provided further, however, that the Trust shall
not amend or terminate this Agreement in contravention of any
applicable federal or state regulations, or any provision of the Trust
Agreement, and further provided, that the Trust on behalf of one of
more of the Funds may be at any time by action of its Board of
Trustees (i) substitute another bank or trust company for the
Custodian by giving notice as described above to the Custodian, or
(ii) immediately terminate this Agreement in the event of the
appointment of a conservator or receiver for the Custodian by the
Comptroller of the Currency or upon the happening of a like event at
the direction of an appropriate regulatory agency or court of
competent jurisdiction.
Upon termination of the Agreement, the Trust on behalf of
each applicable Fund shall pay to the Custodian such compensation as
may be due as of the date of such termination and shall Likewise
reimburse the Custodian for its costs, expenses and disbursements in
discharging its responsibilities hereunder, excluding the Custodian's
operating overhead.
10. Successor Custodian
If a successor custodian for the Trust or one or more of the Funds
shall be appointed by
29
<PAGE>
the Board of trustees of the Trust, the Custodian shall, upon
termination, deliver to such successor custodian at the office of the
Custodian, duly endorsed and in the form for transfer, all securities
or other assets of each applicable Fund then held by it its agents, or
subcustodians hereunder, shall transfer to an account of the successor
custodian or subcustodian all of the securities of each such Fund held
in a Securities System, and shall cause all securities held by
sub-custodians to be transferred to the accounts of the successor
custodian or its sub-custodians, as the successor custodian may
direct.
If no such successor custodian shall he appointed, the Custodian
shall, in like manner, upon receipt of a certified copy of a vote of
the Board of Trustees of the Trust, deliver at the office of the
Custodian and transfer such securities, funds and other properties in
accordance with such vote.
In the event that no written order designating a successor
custodian or certified copy of a vote of the Board of Trustees shall
have been delivered to the Custodian on or before the date when such
termination shall become effective, then the Custodian shall have the
right to deliver to a bank or trust company, which is a "bank" as
defined in the 1940 Act, doing business in Boston, Massachusetts, of
its own selection, having an aggregate capital, surplus, and undivided
profits, as shown by its last published report, of not less than
$25,000,000, all securities, funds and other properties held by the
Custodian on behalf of each applicable Fund and all instruments held
by the Custodian relative thereto and all other property held by it
under this Agreement, on behalf of each applicable Fund and to
transfer to an account of such successor custodian all of
30
<PAGE>
the securities of each such Fund held in any Securities System.
Thereafter, such bank or trust company shall be the successor of the
Custodian under this Agreement.
In the event that securities, funds and other properties
remain in the possession of the Custodian, or in the Custodian's
account with a Securities System, after the date of termination hereof
owing to failure of the Trust to procure the certified copy of the
vote referred to or of the Board of Trustees to appoint a successor
custodian, the Custodian shall be entitled to fair compensation for
its services during such period as the Custodian retains possession of
such securities, funds and other properties and the provisions of this
Agreement relating to the duties and obligations of the Custodian
shall remain in full force and effect.
11. Interpretive and Additional Provisions
In connection with the operation of this Agreement, the
Custodian and the Trust on behalf of each of the Funds, may from time
to time agree on such provisions interpretive of or in addition to the
provisions of this Agreement as may in their joint opinion be
consistent with the general tenor of this Agreement. Any such
interpretive or additional provisions shall be in writing signed by
both parties and shall be annexed hereto, provided that no such
interpretive or additional provisions shall contravene any applicable
federal or state regulations or any provision of the Trust Agreement.
No interpretive or additional provisions made as provided in the
preceding sentence shall be deemed to be an amendment of this
Agreement.
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<PAGE>
12. Additional Funds.
In the event that the Trust establishes one or more series of
shares in a Fund or Funds in addition to USAA Life Money Market Fund,
USAA Life Income Fund, USAA Life Growth and Income Fund, USAA Life
World Growth Fund, and USAA Life Diversified Assets Fund with respect
to which it desires to have the Custodian render services as Custodian
under the terms hereof, it shall so notify the Custodian in writing,
and if the Custodian agrees in writing to provide such services, such
series of shares shall become a Fund hereunder.
13. Massachusetts Law To Apply
This Agreement shall be construed and the provisions thereof
interpreted under and in accordance with laws of the Commonwealth of
Massachusetts.
14. Prior Agreements
This Agreement supersedes and terminates, as of the date
hereof, all prior Agreements between the Trust on behalf of each of
the Funds and the Custodian relating to the custody of the Trust's
assets.
15. Shareholder Communications
Rule 14b-2 under the Exchange Act requires banks which hold
securities for the account of customers to respond to requests by
issuers of securities for the names, addresses and holding of
beneficial owners of securities of that issuer held by the bank unless
the beneficial owner has expressly objected to disclosure of this
information. In order to comply with the rule, the
32
<PAGE>
Custodian needs the Trust to indicate whether it authorizes the
Custodian to provide the Trust's name, address, and share position to
requesting companies whose securities the Trust owns. If the Trust
tells the Custodian "no," the Custodian will not provide this
information to requesting companies. If the Trust tells the Custodian
"yes" or does not check either "yes" or "no" below, the Custodian is
required by the rule to treat the Trust as consenting to disclosure of
this information for all securities owned by the Trust or any Funds or
Accounts established by the Trust. For the Trust's protection, the
Rule prohibits the requesting company from using the Trust's name and
address for any purpose other than corporate communications. Please
indicate below whether the Fund consents or objects by checking one of
the alternatives below.
YES [ ] The Custodian is authorized to release the Fund's
Fund's name, address, and share positions.
NO [X ] The Custodian is not authorized to release the
Fund's name, address, and share positions.
33
<PAGE>
IN WITNESS WHEREOF, each of the parties has caused this
instrument to be executed in its s name and on its behalf by its duly
authorized representative as of the date below.
Dated: ATTEST USAA LIFE INVESTMENT TRUST
This 16th By: /s/ R.T. Halinski, Jr. By: /s/ Edwin L. Rosane
---- ------------------ --------------------
Day of Dec. R.T. Halinski, Jr. Edwin L. Rosane
1994. Secretary President & CEO
Dated: ATTEST STATE STREET
BANK AND TRUST COMPANY
This 14th By: /s/(illegible) By: /s/ Ronald E. Logue
Day of Nov. ----------------- --------------------
1994. Ronald E. Logue
45707
<PAGE>
EXHIBIT 7(b)
<PAGE>
AMENDMENT TO THE CUSTODIAN AGREEMENT
BY AND BETWEEN
USAA LIFE INVESTENNT TRUST
AND
STATE STREET BANK AND TRUST COMPANY
<PAGE>
TABLE OF CONTENTS
AMENDMENT TO THE CUSTODIAN AGREEMENT
Section 1. Appointment of Foreign Sub-Custodians 2
Section 2. Assets To Be Held 2
Section 3. Foreign Securities Depositories 3
Section 4. Segregation of Securities 3
Section 5. Agreements with Foreign Banking Institutions 4
Section 6. Access of Independent Accountants of the Trust 5
Section 7. Reports by Custodian 5
Section 8. Transactions in Foreign Custody Account 6
Section 9. Liability of Foreign Sub-Custodians 7
Section 10. Liability of Custodian 8
Section 11. Reimbursement for Advances 9
Section 12. Monitoring Responsibilities 9
Section 13. Branches of U.S. Banks 13
Section 14. Applicability of Custodian Agreement 14
<PAGE>
AMENDMENT TO THE CUSTODIAN AGREEMENT
AGREEMENT made by and between the State Street Bank and Trust Company
(the "Custodian") and USAA Life Investment Trust (the "Trust").
WHEREAS, the Custodian and the Trust are parties to a Custodian Agreement
dated ___________ 1994, (the "Agreement") governing the terms and conditions
under which the Custodian maintains custody of the securities and other assets
of the Trust; and
WHEREAS, the Custodian and the Trust desire to amend the Trust's
Agreement to provide for the maintenance of the foreign securities, and cash
incidental to transactions in such securities, in the custody of certain
foreign banking institutions and foreign securities depositories acting as
sub-custodians in conformity with the requirements of Rule 17f-5 under
Investment Company Act of 1940 (the "1940 Act");
NOW THEREFORE, in consideration of the premises and covenants contained
herein, the Custodian and the Trust hereby amend the Agreement by the addition
of the following terms conditions:
1
<PAGE>
1. Appointment of Foreign Sub-Custodians
The Trust hereby authorizes and instructs the Custodian to employ as
subcustodians for the Trust's securities and other assets maintained outside
the United States the foreign banking institutions and foreign securities
depositories specifically approved by the Trust's Board of Trustees and
authorized by the Trust's Board of Trustees, as evidenced by a certified
resolution to be designated on Schedule A hereto ("foreign sub-custodians").
Upon receipt of "Proper Instructions", as defined in Section 2.17 of the
Agreement, together with a certified resolution of the Trust's Board of
Trustees, the Custodian and the Trust may agree to amend Schedule A hereto from
time to time to designate additional foreign banking institutions and foreign
securities depositories to act as sub-custodians. By delivery of Proper
Instructions, the Trust may instruct the Custodian to cease the employment of
any one or more of such sub-custodians for maintaining custody of the Trust's
assets.
2. Assets To Be Held
The Custodian shall limit the securities and other assets maintained
in the custody of the foreign sub-custodians to: (a) "foreign securities", as
defined in paragraph (c)(1) of Rule
2
<PAGE>
17f-5 under the 1940 Act, and (b) cash and cash equivalents in such amounts as
the Custodian or the Trust may determine to be reasonably necessary to effect
the Trust's foreign securities transactions. The Custodian shall cause cash
held by foreign sub-custodians to be in interest bearing accounts, to the
extent practicable.
3. Foreign Securities Depositories
Except as may otherwise be agreed upon in writing by the
Custodian and the Trust, assets of the Trust shall be maintained in foreign
securities depositories only through arrangements implemented by the foreign
banking institutions serving as sub-custodians pursuant to the terms hereof.
Where possible, such arrangements shall include entry into agreements
containing the provisions set forth in Section 5 hereof.
4. Segregation of Securities
The Custodian shall identify on its books as belonging to
each applicable Fund of the Trust, the foreign securities of such Fund held by
each foreign sub-custodian. Each agreement pursuant to which the Custodian
employs a foreign banking institution shall require
<PAGE>
that such institution establish a custody account for the Custodian on behalf
of the Trust for each applicable Fund and physically segregate in that account,
securities and other assets of the Trust, and in the event that such
institution deposits the Trust's securities in a foreign securities depository,
that it shall identify on its books as belonging to the Custodian, as agent for
the Trust, the securities so deposited.
5. Agreements with Foreign Banking Institutions
Each agreement with a foreign banking institution shall be
substantially in the form set forth in Exhibit 1 hereto and shall provide that:
(a) the Trust's assets will not be subject to any right, charge, security
interest, lien or claim of any kind in favor of the foreign banking institution
or its creditors or agents, except a claim of payment for their safe custody or
administration; (b) beneficial ownership for the Trust's assets will be freely
transferable without the payment of money or value other than for custody or
administration; (c) adequate records will be maintained identifying the assets
as belonging to each applicable Fund of the Trust; (d) officers of or auditors
employed by, or other representatives of the Custodian, including to the extent
permitted under applicable law the independent public accountants for the
Trust, will be given access to the books and records of the foreign banking
institution relating
4
<PAGE>
to its actions under its agreement with the Custodian; and (e) assets of the
Trust held by the foreign sub-custodian will be subject only to the
instructions of the Custodian or its agents. The procedures established by the
Custodian for giving "Instructions" (as defined in its agreements with foreign
sub-custodians) to foreign sub-custodians shall provide that the foreign
sub-custodian may rely only on instructions that bear the signature of an
authorized person or are accompanied by an appropriate identification code or
test key established by the Custodian and the foreign sub-custodian. Any
instructions given otherwise than in hard copy form will be promptly confirmed
by duplicate hard copy instructions from the Custodian to the foreign
sub-custodian.
6. Access of Independent Accountants of the Trust
Upon request of the Trust, the Custodian will use its best
efforts to arrange for the independent public accountants of the Trust to be
afforded access to the books and records of any foreign banking institution
employed as a foreign sub-custodian insofar as such books and records relate to
the performance of such foreign banking institution under its agreement with
the Custodian.
5
<PAGE>
7. Reports by Custodian
The Custodian will supply to the Trust from time to time, as
mutually agreed upon, statements in respect of the securities and other assets
of the Trust held by foreign sub-custodians, including but not limited to an
identification of entities having possession of each Fund's securities and
other assets and advices or notifications of any transfers of securities to or
from each custodial account maintained by a foreign banking institution for the
Custodian on behalf of each applicable Fund indicating, as to securities
acquired for a Fund, the identity of the entity having physical possession of
such securities.
8. Transactions in Foreign Custody Account
(a) Except as otherwise provided in paragraph (b) of this
Section 8, the provisions of Section 2.2 and 2.8 of the Agreement shall apply,
mutatis mutandis to the foreign securities of the Trust held outside the United
States by foreign sub-custodians.
(b) Notwithstanding any provision of the Agreement to the
contrary,
6
<PAGE>
settlement and payment for securities received for the account of the Trust and
delivery of securities maintained for the account of the Trust may be effected
in accordance with the customary established securities trading or securities
processing practices and procedures in the jurisdiction or market in which the
transaction occurs, including, without limitation, delivering securities to the
purchaser thereof or to a dealer therefor (or an agent for such purchaser or
dealer) against a receipt with the reasonable expectation of receiving later
payment for such securities from such purchaser or dealer.
(c) Securities maintained in the custody of a foreign
sub-custodian may be maintained in the name of such entity's nominee to the
same extent as set forth in Section 2.3 of the Agreement, and the Trust agrees
to hold any such nominee harmless from any liability arising solely out of its
status as a holder of record of such securities, provided that such liability
did not result from the negligence or willful misconduct of the Custodian,
sub-custodian, nominee, or any of their officers, employees or agents.
9. Liability of Foreign Sub-Custodians
Each agreement pursuant to which the Custodian employs a
foreign banking
7
<PAGE>
institution as foreign sub-custodian shall require the institution to exercise
reasonable care in the performance of its duties and to indemnify, and hold
harmless, the Custodian and the Trust from and against any loss, damage, cost,
expense, liability or claim arising out of or in connection with the
institution's performance of such obligations. At the election of the Trust, it
shall be entitled to be subrogated to the rights of the Custodian with respect
to any claims against a foreign banking institution or foreign securities
depository or guaranty or insurance fund as a consequence of any such loss,
damage, cost, expense, liability or claim if and to the extent that the Trust
has not been made whole for any such loss, damage, cost, expense, liability or
claim.
10. Liability of Custodian
The Custodian shall be liable for the acts or omissions of a
foreign banking institution or foreign securities depository to the same extent
as set forth with respect to sub- custodians generally in the Agreement and,
regardless of whether assets are maintained in the custody of a foreign banking
institution, a foreign securities depository or a branch of a U.S. bank as
contemplated by Section 13 hereof, the Custodian shall not be liable for any
loss, damage, cost, expense, liability or claim resulting from nationalization,
expropriation, currency restrictions, or acts of war or terrorism or any loss
where the sub-custodian has otherwise exercised reasonable care.
Notwithstanding the foregoing provisions of this Section 10, in
8
<PAGE>
delegating custody duties to State Street London Ltd., the Custodian shall not
be relieved of any responsibility to the Trust for any loss due to such
delegation, except such loss as may result from (a) political risk (including,
but not limited to, exchange control restrictions, confiscation, expropriation,
nationalization, insurrection, civil strife or armed hostilities) or (b) other
losses (excluding a bankruptcy or insolvency of State Street London Ltd. not
caused by political risk) due to Acts of God, nuclear incident or other losses
under circumstances where the Custodian and State Street London Ltd. have
exercised reasonable care.
11. Reimbursement for Advances
If the Trust requires the Custodian to advance cash or
securities for any purpose for the benefit of a Fund including the purchase or
sale of foreign exchange or of contracts for foreign exchange, or in the event
that the Custodian or its nominee shall incur or be assessed any taxes,
charges, expenses, assessments, claims or liability (excluding the Custodian's
operating overhead and taxes arising generally out of the conduct of the
Custodian's business) in connection with the performance of this Agreement,
except such as may arise from its or its officers', employees', agent's or
nominee's own negligent action, negligent failure to act or willful misconduct,
any property at any time held for the account of the applicable Fund shall
9
<PAGE>
be security therefore and should the Trust fall to repay the Custodian
promptly, the Custodian shall be entitled to utilize available cash and to
dispose of such Fund's assets to the extent necessary to obtain reimbursement.
12. Monitoring Responsibilities
The Custodian shall furnish annually to the Trust, during the
month of June, information concerning the foreign sub-custodians employed by
the Custodian, which shall include information concerning what insurance or
bonding coverage is applicable to the Trust's foreign securities. Such
information shall be similar in kind and scope to that furnished to the Trust
in connection with the initial approval of this amendment to the Agreement. In
addition, the Custodian will promptly inform the Trust in the event that the
Custodian learns of a material adverse change in the financial condition of a
foreign sub-custodian or any material loss of the assets of the Trust or in the
case of any foreign sub-custodian not the subject of an exemptive order from
the Securities and Exchange Commission if notified by such foreign
sub-custodian that there appears to be a substantial likelihood that its
shareholders' equity will decline below $200 million (U.S. dollars or the
equivalent thereof) or that its shareholders' equity has declined below $200
million (in each case computed in accordance with generally accepted U.S.
10
<PAGE>
accounting principles).
The Custodian shall use its best efforts to cause each foreign
sub-custodian to:
(i) take such steps as may be necessary to secure or otherwise prevent
the loss of rights attached to or otherwise relating to the Trust's foreign
securities;
(ii) collect dividend, interest and other income payments made and
stock dividends, rights and similar securities paid or issued with respect to
the Trust's foreign securities and collect and hold all such payments, stock
dividends, rights and similar items for the account of the Trust;
(iii) present for payment the Trust's foreign securities that are
called, redeemed, or retired or otherwise become payable and all coupons and
other income items that call for payment upon presentation and hold the amounts
received for the account of the Trust;
(iv) execute such ownership and other certificates as may be required
to obtain payment in respect of the Trust's foreign securities; and
11
<PAGE>
(v) exchange interim receipts or temporary securities for the Trust's
foreign securities for definitive securities.
The Custodian shall promptly notify the Trust if it becomes aware that any
foreign sub-custodian has failed or is failing to take any of the foregoing
actions, or has attempted but unsuccessfully to take any of the foregoing
actions.
The Custodian shall also promptly notify the Trust if it becomes aware
of any failure of a foreign sub-custodian to fulfill any of its other
obligations under its agreement with the Custodian, any circumstances that
might cause the continued use of a foreign sub-custodian to be inconsistent
with the requirements of Rule 17f-5 under the 1940 Act or with any action of
the Trust's Board of Trustees in connection therewith, of any other
circumstances or information of which the Custodian becomes aware and which
might materially increase the risk of loss to the Trust of continuing to use a
sub-custodian or continuing to maintain assets in a foreign country.
The Custodian shall promptly furnish the Trust with a copy of any
reports received by the Custodian in connection with any foreign
sub-custodian's system of internal accounting
12
<PAGE>
controls as they relate to the Trust's assets.
The Custodian will promptly notify the Trust upon receiving notices,
reports or proxies or otherwise becoming aware of corporate developments
affecting assets held by foreign subcustodians (including, but not limited to,
calls for redemption, notices of maturities, mergers, consolidations,
reorganizations, recapitualizations, tender offers, rights offerings,
exchanges, subscriptions, and other offerings) and promptly transmit to the
Trust copies of all communications and information received by the Custodian in
these regards. The Custodian will do all things reasonably within its control
in order to assure that proxies relating to the Trust's assets held by the
foreign sub-custodian may be voted, to the extent that the Trust may legally do
so.
13. Branches of U.S. Banks
(a) Except as other wise set forth in this amendment to the
Agreement, the provisions hereof shall not apply where the custody of the
Trust's assets is maintained in a foreign branch of a banking institution that
is a "bank" as defined by Section 2(a)(5) of the 1940 Act meeting the
qualification set forth in Section 26(a) of the said 1940 Act. The appointment
13
<PAGE>
of any such branch as a sub-custodian shall be governed by Article 1 of the
Agreement.
(b) Cash held for the Trust in the United Kingdom shall be
maintained in an interest bearing account established for the Trust with the
Custodian's London Branch, which Account shall be subject to the direction of
the Custodian, State Street London Ltd. or both.
14. Applicability of Custodian Agreement
Except as specifically superseded or modified herein, the
terms and provisions of the Agreement shall continue to apply with full force
and effect.
14
<PAGE>
IN WITNESS WHEREOF, each of the parties has caused this instrument to
be executed in its name and on its behalf by its duly authorized representative
as of the date below.
Dated: ATTEST USAA LIFE INVESTMENT TRUST
This 16th By:/s/R.T. Halinski, Jr. By: /s/Edwin L. Rosane
day of Dec. ---------------------- ----------------------
1994. R.T. Halinski, Jr Edwin L. Rosane
Secretary President & CEO
STATE STREET
Dated: ATTEST BANK AND TRUST COMPANY
This 14th By: /s/(illegible) By: /s/ Ronald E. Logue
day of Nov. --------------------- --------------------
1994.
15
<PAGE>
EXHIBIT I
SUBCUSTODIAN AGREEMENT
AGREEMENT made this ___ day of _________, 19___ , between State Street
Bank and Trust Company, A massachusetts Trust Company (hereinafter referred to
as the "Custodian"), having its principal place of business at 225 Franklin
Street, Boston, MA, _________________________________ and (hereinafter referred
to as the "Subcustodian") , a organized under the laws of
___________________and having an office at
WHEREAS, Custodian has been appointed to act as Trustee, Custodian or
Subcustodian of securities and monies on behalf of certain of its customers
including, without limitation, collective investment undertakings, investment
companies subject to the U.S. Investment Company Act of 1940, as amended, and
employee benefit plans subject to the U.S. Employee Retirement Income Security
Act of 1974, as amended;
WHEREAS, Custodian wishes to establish Account (the "Account") with
the Subcustodian to hold and maintain certain property for which Custodian is
responsible as custodian; and
WHEREAS, Subcustodian agrees to establish the Account and to hold and
maintain all Property in the Account in accordance with the terms and
conditions herein set forth.
NOW THEREFORE, in consideration of the mutual covenants and agreements
hereinafter contained, the Custodian and the Subcustodian agree as follows:
I. THE ACCOUNT
A. ESTABLISHMENT OF THE ACCOUNT. Custodian hereby requests that
Subcustodian establish for each client of the Custodian an Account which shall
be composed of:
1. A Custody Account for any and all Securities (as
hereinafter defined) from time to time received by Subcustodian therefor, and
2. A Deposit Account for any and all Cash (as hereinafter
defined) from time to time received by Subcustodian therefor.
B. USE OF THE ACCOUNT. The Account shall be used exclusively to hold,
acquire, transfer or otherwise care for, on behalf of Custodian as custodian
and the customers of Custodian and not for Custodian's own interest, Securities
and such Cash or cash equivalents as are transferred to Subcustodian or as are
received in payment of any transfer of, or as payment on, or interest on, or
dividend from, any such Securities (herein collectively called "Cash").
C. TRANSFER OF PROPERTY IN THE ACCOUNT. Beneficial ownership of the
Securities and Cash in the Account shall be freely transferable without payment
of money or value other than for safe custody and administration.
D. OWNERSHIP AND SEGREGATION OF PROPERTY IN THE ACCOUNT. The ownership
of the property in the Account, whether Securities, Cash or both, and whether
any such property is held by Subcustodian in an Eligible Depository, shall be
clearly recorded on Subcustodian's books as belonging to Custodian on behalf of
Custodian's customers, and not for Custodian's own interest and, to the extent
that Securities are physically held in the Account, such Securities shall also
be physically segregated from the general assets of Subcustodian, the assets of
Custodian in its individual capacity and the assets of Subcustodian's other
<PAGE>
customers. In addition, Subcustodian shall maintain such other records as may
be necessary to identify the property hereunder as belonging to each Account.
E. REGISTRATION OF SECURITIES IN THE ACCOUNT. Securities which are
eligible for deposit in a depository as provided for in Paragraph III may be
maintained with the depository in an account for Subcustodian's customers.
Securities which are not held in a depository and that are ordinarily held in
registered form will be registered in the name of Subcustodian or in the name
of Subcustodian's nominee, unless alternate Instructions are furnished by
Custodian.
II. SERVICES TO BE PROVIDED BY THE SUBCUSTODIAN
The services Subcustodian will provide to Custodian and the manner in
which such services will be performed will be as set forth below in this
Agreement.
A. SERVICES PERFORMED PURSUANT TO INSTRUCTIONS. All transactions
involving the Securities and Cash in the Account shall be executed solely in
accordance with Custodian's Instructions as that term is defined in Paragraph
IV hereof, except those described in paragraph B below.
B. SERVICES TO BE PERFORMED WITHOUT INSTRUCTIONS. Subcustodian will,
unless it receives Instructions from Custodian to the contrary:
1. COLLECT CASH. Promptly collect and receive all dividends,
income, principal, proceeds from transfer and other payments with respect to
property held in the Account, and present for payment all Securities held in
the Account which are called, redeemed or retired or otherwise become payable
and all coupons and other income items which call for payment upon
presentation, and credit Cash receipts therefrom to the Deposit Account.
2. EXCHANGE SECURITIES. Promptly exchange Securities where
the exchange is purely ministerial including, without limitation, the exchange
of temporary Securities for those in definitive form and the exchange of
warrants, or other documents of entitlement to Securities, for the Securities
themselves.
3. SALE OF RIGHTS AND FRACTIONAL INTERESTS. Whenever
notification of a rights entitlement or a fractional interest resulting from a
rights issue, stock dividend or stock split is received for the Account and
such rights entitlement or fractional interest bears an expiration date,
Subcustodian will promptly endeavor to obtain Custodian's Instructions, but
should these not be received in time for Subcustodian to take timely action,
Subcustodian is authorized to sell such rights entitlement or fractional
interest and to credit the Account.
4. EXECUTE CERTIFICATES. Execute in Custodian's name for the
Account, whenever Subcustodian deems it appropriate, such ownership and other
certificates as may be required to obtain the payment of income from the
Securities held in the account.
5. PAY TAXES AND RECEIVE REFUNDS. To pay or cause to be paid
from the Account any and all taxes and levies in the nature of taxes imposed on
the property in the Account by any governmental authority, and to take all
steps necessary to obtain all tax exemptions, privileges or other benefits,
including reclaiming and recovering any foreign withholding tax, relating to
the Account and to execute any declaration, affidavits, or certificates of
ownership which may be necessary in connection therewith.
6. PREVENT LOSSES. Take such steps as may be reasonably
necessary to secure or otherwise prevent the loss of, entitlements attached to
or otherwise relating to property held in the Account.
2
<PAGE>
C. ADDITIONAL SERVICES
1. TRANSMISSION OF NOTICES OF CORPORATE ACTION. By such means
as will permit Custodian to take timely action with respect thereto,
Subcustodian will promptly notify Custodian upon receiving notices or reports,
or otherwise becoming aware, of corporate action affecting Securities held in
the Account (including, but not limited to, calls for redemption, mergers,
consolidations, reorganizations, recapitalizations, tender offers, rights
offerings, exchanges, subscriptions and other offerings) and dividend, interest
and other income payments relating to such Securities.
2. COMMUNICATIONS REGARDING THE EXERCISE OF ENTITLEMENTS.
Upon request by Custodian, Subcustodian will promptly deliver, or cause any
Eligible Depository authorized and acting hereunder to deliver, to Custodian
all notices, proxies, proxy soliciting materials and other communications that
call for voting or the exercise of rights or other specific action (including
material relative to legal proceedings intended to be transmitted to security
holders) relating to Securities held in the Account to the extent received by
Subcustodian or said Eligible Depository, such proxies or any voting
instruments to be executed by the registered holder of the Securities, but
without indicating the manner in which such Securities are to be voted.
3. MONITOR FINANCIAL SERVICE. In furtherance of its
obligations under this Agreement, Subcustodian will monitor a leading financial
service with respect to announcements and other information respecting property
held in the Account, including announcements and other information with respect
to corporate actions and dividend, interest and other income payments.
III. USE OF SECURITIES DEPOSITORY
Subcustodian may, with the prior written approval of Custodian, maintain all or
any part of the Securities in the Account with a securities depository or
clearing agency which is incorporated or organized under the laws of a country
other than the United States of America and is supervised or regulated by a
government agency or regulatory authority in the foreign jurisdiction having
authority over such depositories or agencies, and which operates (a) the
central system for handling of designated securities or equivalent book entries
in ____________________________________________________________________________
or (b) a transnational system for the central handling of securities or
equivalent book entries (herein called "Eligible Depository"), provided
however, that, while so maintained, such Securities shall be subject only to
the directions of Subcustodian, and that Subcustodian duties, obligations and
responsibilities with regard to such Securities shall be the same as if such
Securities were held by Subcustodian on its premises.
IV. CLAIMS AGAINST PROPERTY IN THE ACCOUNT
The property in the account shall not be subject to any right, charge, security
interest, lien or claim of any kind (collectively "Charges") in favor of
Subcustodian or any Eligible Depository or any creditor of Subcustodian or of
any Eligible Depository except a claim for payment for such property's safe
custody or administration in accordance with the terms of this Agreement.
Subcustodian will immediately notify Custodian of any attempt by any party to
assert any Charge against the property held in the Account and shall take all
lawful actions to protect such property from such Charges until Custodian has
had a reasonable time to respond to such notice.
V. SUBCUSTODIAN'S WARRANTY
Subcustodian represents and warrants that:
(A) It is a branch of a "qualified U.S. bank" or an "eligible foreign
custodian" as those terms are defined in Rule 17f-5 of the Investment Company
Act
3
<PAGE>
of 1940, a copy of which is attached hereto as Attachment A (the "Rule"), and
Subcustodian shall immediately notify Custodian, in writing or by other
authorized means, in the event that there appears to be a substantial
likelihood that Subcustodian will cease to qualify under the Rule as currently
in effect or as hereafter amended, or
(B) It is the subject of an exemptive order issued by the United
States Securities and Exchange Commission which order permits Custodian to
employ Subcustodian notwithstanding the fact that Subcustodian fails to qualify
under the terms of the Rule, and Subcustodian shall immediately notify
Custodian, in writing or by other authorized means, if for any reason it is no
longer covered by such exemptive order.
Upon receipt of any such notification required under (A) or (B) of this
section, Custodian may terminate this Agreement immediately without prior
notice to Subcustodian.
VI. DEFINITIONS
A. INSTRUCTIONS. The term "Instructions" means:
1. instructions in writing signed by authorized individuals
designated as such by Custodian;
2. telex or tested telex instructions of Custodian;
3. other forms of instructions in computer readable form as
shall customarily be used for the transmission of like information, and
4. such other forms of communication as from time to time may
be agreed upon by Custodian and Subcustodian, which Subcustodian believes in
good faith to have been given by Custodian or which are transmitted with proper
testing or authentication pursuant to terms and conditions which Custodian may
specify.
Unless otherwise expressly provided, all Instructions shall continue in full
force and effect until canceled or superseded. Subcustodian shall act in
accordance with Instructions and shall not be liable for any act or omission in
respect of any Instruction except in the case of willful default, negligence,
fraud, bad faith, willful misconduct, or reckless disregard of duties on the
part of Subcustodian. Subcustodian in executing all Instructions will take
relevant action in accordance with accepted industry practice and local
settlement practice.
B. ACCOUNT. The term "Account" means collectively the Custody Account,
and the Deposit Account.
C. SECURITIES. The term "Securities" includes, without limitation,
stocks, shares, bonds, debentures, debt securities (convertible or
non-convertible), notes, or other obligations or securities and any
certificates, receipts, futures contracts, foreign exchange contracts, options,
warrants, scrip or other instruments representing rights to receive, purchase
or subscribe for the same, or evidencing or representing any other rights or
interests therein, or in any property or assets.
VII. MISCELLANEOUS PROVISIONS
A. STATEMENTS REGARDING THE ACCOUNT. Subcustodian will supply
Custodian with such statements regarding the Account as Custodian may request,
including the identity and location of any Eligible Depository authorized and
acting hereunder. In addition, Subcustodian will supply Custodian an advice or
notification of any transfers of Securities to or from the Account indicating,
4
<PAGE>
as to Securities acquired for the Account, if applicable, the Eligible
Depository having physical possession of such Securities.
B. EXAMINATION OF BOOKS AND RECORDS. Subcustodian agrees that its
books and records relating to the Account and Subcustodian's actions under this
Agreement shall be open to the physical, on-premises inspection and audit at
reasonable times by officers of, auditors employed by or other representatives
of Custodian including (to the extent permitted under the law of ______________
________________________) the independent public accountants for any customer
of Custodian whose property is being held hereunder and such books and records
shall be retained for such period as shall be agreed upon by Custodian and
Subcustodian.
As Custodian may reasonably request from time to time, Subcustodian will
furnish its auditor's reports on its system of internal controls, and
Subcustodian will use its best efforts to obtain and furnish similar reports of
any Eligible Depository authorized and acting hereunder.
C. STANDARD OF CARE. In holding, maintaining, servicing and disposing
of Property under this Agreement, and in fulfilling any other obligations
hereunder, Subcustodian shall exercise the same standard of care that it
exercises over its own assets, PROVIDED that Subcustodian shall exercise at
least the degree of care and maintain adequate insurance as expected of a
prudent professional Subcustodian for hire and shall assume the burden of
proving that it has exercised such care in its maintenance of Property held by
Subcustodian in its Account. The maintenance of the Property in an Eligible
Depository shall not affect Subcustodian's standard of care, and Subcustodian
will remain as fully responsible for any loss or damage to such securities as
if it had itself retained physical possession of them. Subcustodian shall also
indemnify and hold harmless Custodian and each of Custodian's customers from
and against any loss, damage, cost, expense, liability or claim (including
reasonable attorney's fees) arising out of or in connection with the improper
or negligent performance or the nonperformance of the duties of Subcustodian.
Subcustodian shall be responsible for complying with all provisions of the law
of , or any other law, applicable to Subcustodian in connection with its duties
hereunder, including (but not limited to) the payment of all transfer taxes or
other taxes and compliance with any currency restrictions and securities laws
in connection with its duties as Subcustodian.
D. LOSS OF CASH OR SECURITIES. Subcustodian agrees that, in the even
of any loss of Securities or Cash in the Account, Subcustodian will use its
best efforts to ascertain the circumstances relating to such loss and will
promptly report the same to Custodian and shall use every legal means available
to it to effect the quickest possible recovery.
E. COMPENSATION OF SUBCUSTODIAN. Custodian agrees to pay to
Subcustodian from time to time such compensation for its services and such
out-of-pocket or incidental expenses of Subcustodian pursuant to this Agreement
as may be mutually agreed upon in writing from time to time.
F. OPERATING REQUIREMENTS. The Subcustodian agrees to follow such
Operating Requirements as the Custodian may establish from time to time. A copy
of the current Operating Requirements is attached as Attachment B to this
Agreement.
G. TERMINATION. This Agreement may be terminated by Subcustodian or
Custodian on 60 days' written notice to the other party, sent by registered
mail, provided that any such notice, whether given by Subcustodian or
Custodian, shall be followed within 60 days by Instructions specifying the
names of the persons to whom Subcustodian shall deliver the Securities in the
Account and to whom the Cash in the account shall be paid. If within 60 days
following the giving of such notice of termination, Subcustodian does not
receive such Instructions,
5
<PAGE>
Subcustodian shall continue to hold such Securities and Cash subject to this
Agreement until such Instructions are given. The obligations of the parties
under this Agreement shall survive the termination of this Agreement.
G. NOTICES. Unless otherwise specified in this Agreement, all notices
and communications with respect to matters contemplated by this Agreement shall
be in writing, and delivered by mail, postage prepaid, telex, SWIFT, or other
mutually agreed telecommunication methods to the following addresses (or to
such other address as either party hereto may from time to time designate by
notice duly given in accordance with this paragraph)
To Subcustodian:
To Custodian: State Street Bank and Trust Company
Securities Operations/
Network Administration
P.O. Box 1631
Boston, MA 02105
H. CONFIDENTIALITY. Subcustodian and Custodian shall each use its best
efforts to maintain the confidentiality of the property in the Account and the
beneficial owners thereof, subject, however, to the provisions of any laws,
requiring disclosure. In addition, Subcustodian shall safeguard any test keys,
identification codes or other security devices which Custodian shall make
available to it. The Subcustodian further agrees it will not disclose the
existence of this Agreement or any current business relationship unless
compelled by applicable law or regulation or unless it has secured the
Custodian's written consent.
I. ASSIGNMENT. This Agreement shall not be assignable by either party
but shall bind any successor in interest of Custodian and Subcustodian
respectively.
J. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of . To the extent inconsistent with this Agreement or
Custodian's Operating Requirements as attached hereto, Subcustodian's rules and
conditions regarding accounts generally or custody accounts specifically shall
not apply.
CUSTODIAN: STATE STREET BANK AND TRUST COMPANY
By:________________________
Date_______________________
AGREED TO BY SUBCUSTODIAN
By:_________________________
Date:_______________________
6
EXHIBIT 9(c)
<PAGE>
LAW OFFICES
FREEDMAN, LEVY, KROLL & SIMONDS
WASHINGTON SQUARE BUILDING
1050 CONNECTICUT AVENUE, N.W., SUITE 825
WASHINGTON, D.C. 20036-5366
(202) 457-5100
CABLE ATTORNEYS
TELECOPIER (202) 457-5151
February 25, 1999
USAA Life Investment Trust
USAA Building
9800 Fredericksburg Road
San Antonio, Texas 78288
Ladies and Gentlemen:
We hereby consent to the reference in Post-Effective Amendment No. 7
(the "Amendment") to the Registration Statement (No. 33-82270) on Form N-1A of
USAA Life Investment Trust (the "Registrant"), a business Trust formed under
the laws of the State of Delaware, to (i) our opinion, dated June 22, 1995,
with respect to the legality of the Registrant's authorized shares of
beneficial interest in the Money Market Fund, Income Fund, Growth and Income
Fund, World Growth Fund, and Diversified Assets Fund, which opinion was filed
with Post-Effective Amendment No. 1 to the Registration Statement, and (ii) our
opinion, dated February 13, 1997, with respect to the legality of the
Registrant's authorized shares of beneficial interest in the Aggressive Growth
Fund and International Fund, which opinion was filed with Post-Effective
Amendment No. 3 to the Registration Statement.
We also hereby consent to the reference to this firm in the Statement
of Additional information under the heading "Legal Matters" which forms a part
of the Amendment and to the filing of this consent as an exhibit to the
Amendment.
Very truly yours,
/s/ Freedman, Levy, Kroll & Simonds
-----------------------------------
Freedman, Levy, Kroll & Simonds
67088/328004
EXHIBIT 10
<PAGE>
Exhibit 10
The Shareholders and Board of Trustees
USAA Life Investment Trust:
We consent to the use of our report dated February 5, 1999, incorporated herein
by reference and to the reference to our firm under the headings "Financial
Highlights" in the prospectus and "Independent Auditors" in the statement of
additional information.
/s/ KPMG LLP
San Antonio, Texas
February 22, 1999
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 1
<NAME> LIFE MONEY MARKET FUND
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<INVESTMENTS-AT-COST> 17,437
<INVESTMENTS-AT-VALUE> 17,437
<RECEIVABLES> 39
<ASSETS-OTHER> 1
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 17,477
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 198
<TOTAL-LIABILITIES> 198
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 17,279
<SHARES-COMMON-STOCK> 17,279
<SHARES-COMMON-PRIOR> 15,131
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 17,279
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 500
<OTHER-INCOME> 0
<EXPENSES-NET> (31)
<NET-INVESTMENT-INCOME> 469
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 469
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (469)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 15,883
<NUMBER-OF-SHARES-REDEEMED> (14,204)
<SHARES-REINVESTED> 469
<NET-CHANGE-IN-ASSETS> 2,148
<ACCUMULATED-NII-PRIOR> 0
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<AVERAGE-NET-ASSETS> 17,996
<PER-SHARE-NAV-BEGIN> 1.00
<PER-SHARE-NII> 0.03
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<PER-SHARE-DIVIDEND> (0.03)
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</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 2
<NAME> LIFE INCOME FUND
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<INVESTMENTS-AT-COST> 31,824
<INVESTMENTS-AT-VALUE> 33,990
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<ASSETS-OTHER> 2
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<TOTAL-ASSETS> 34,346
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<TOTAL-LIABILITIES> 40
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 30,847
<SHARES-COMMON-STOCK> 2,998
<SHARES-COMMON-PRIOR> 2,578
<ACCUMULATED-NII-CURRENT> 1,052
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 241
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 2,166
<NET-ASSETS> 34,306
<DIVIDEND-INCOME> 152
<INTEREST-INCOME> 960
<OTHER-INCOME> 0
<EXPENSES-NET> (53)
<NET-INVESTMENT-INCOME> 1,059
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<APPREC-INCREASE-CURRENT> 78
<NET-CHANGE-FROM-OPS> 1,446
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (39)
<DISTRIBUTIONS-OF-GAINS> (50)
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<NUMBER-OF-SHARES-SOLD> 504
<NUMBER-OF-SHARES-REDEEMED> (92)
<SHARES-REINVESTED> 8
<NET-CHANGE-IN-ASSETS> 6,060
<ACCUMULATED-NII-PRIOR> 32
<ACCUMULATED-GAINS-PRIOR> (18)
<OVERDISTRIB-NII-PRIOR> 0
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<GROSS-EXPENSE> 78
<AVERAGE-NET-ASSETS> 30,929
<PER-SHARE-NAV-BEGIN> 10.96
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<PER-SHARE-DIVIDEND> (0.01)
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<EXPENSE-RATIO> 0.35
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</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 3
<NAME> LIFE GROWTH AND INCOME FUND
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<INVESTMENTS-AT-COST> 79,051
<INVESTMENTS-AT-VALUE> 106,198
<RECEIVABLES> 459
<ASSETS-OTHER> 7
<OTHER-ITEMS-ASSETS> 0
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<PAYABLE-FOR-SECURITIES> 458
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 126
<TOTAL-LIABILITIES> 584
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 75,843
<SHARES-COMMON-STOCK> 5,436
<SHARES-COMMON-PRIOR> 4,769
<ACCUMULATED-NII-CURRENT> 768
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 2,322
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 27,147
<NET-ASSETS> 106,080
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<INTEREST-INCOME> 70
<OTHER-INCOME> 0
<EXPENSES-NET> (167)
<NET-INVESTMENT-INCOME> 762
<REALIZED-GAINS-CURRENT> 2,322
<APPREC-INCREASE-CURRENT> 5,582
<NET-CHANGE-FROM-OPS> 8,666
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<DISTRIBUTIONS-OF-INCOME> (24)
<DISTRIBUTIONS-OF-GAINS> (1,230)
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<NUMBER-OF-SHARES-REDEEMED> (147)
<SHARES-REINVESTED> 64
<NET-CHANGE-IN-ASSETS> 20,330
<ACCUMULATED-NII-PRIOR> 30
<ACCUMULATED-GAINS-PRIOR> 1,230
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<PER-SHARE-NII> 0.14
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</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 4
<NAME> LIFE WORLD GROWTH FUND
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<INVESTMENTS-AT-COST> 33,238
<INVESTMENTS-AT-VALUE> 45,331
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<TOTAL-ASSETS> 45,646
<PAYABLE-FOR-SECURITIES> 740
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<TOTAL-LIABILITIES> 809
<SENIOR-EQUITY> 0
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<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 12,093
<NET-ASSETS> 44,837
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<NET-INVESTMENT-INCOME> 351
<REALIZED-GAINS-CURRENT> 348
<APPREC-INCREASE-CURRENT> 4,624
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<DISTRIBUTIONS-OF-GAINS> (144)
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<NET-CHANGE-IN-ASSETS> 5,327
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<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 5
<NAME> LIFE DIVERSIFIED FUND
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<INVESTMENTS-AT-COST> 45,307
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<TOTAL-LIABILITIES> 78
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 43,974
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<ACCUMULATED-NII-CURRENT> 1,018
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<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 13,218
<NET-ASSETS> 58,907
<DIVIDEND-INCOME> 371
<INTEREST-INCOME> 739
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<EXPENSES-NET> (94)
<NET-INVESTMENT-INCOME> 1,016
<REALIZED-GAINS-CURRENT> 696
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<NUMBER-OF-SHARES-REDEEMED> (48)
<SHARES-REINVESTED> 3
<NET-CHANGE-IN-ASSETS> 10,695
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<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 6
<NAME> LIFE AGGRESSIVE GROWTH FUND
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<INVESTMENTS-AT-COST> 40,272
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<PAID-IN-CAPITAL-COMMON> 39,174
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<ACCUMULATED-NII-CURRENT> (94)
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<OVERDISTRIBUTION-GAINS> 0
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<NET-INVESTMENT-INCOME> (94)
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<NUMBER-OF-SHARES-REDEEMED> (74)
<SHARES-REINVESTED> 50
<NET-CHANGE-IN-ASSETS> 6,947
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<PER-SHARE-NII> (0.03)
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<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 7
<NAME> LIFE INTERNATIONAL FUND
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<INVESTMENTS-AT-COST> 22,165
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<REALIZED-GAINS-CURRENT> (550)
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<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> (10)
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<NUMBER-OF-SHARES-REDEEMED> (39)
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<AVG-DEBT-PER-SHARE> 0
</TABLE>
