[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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3B
Fund Objectives, Strategies, and Risks . . . . . . . . . . . . . . . 4B
USAA Life Money Market Fund . . . . . . . . . . . . . . . . . . . 4B
USAA Life Income Fund . . . . . . . . . . . . . . . . . . . . . . 6B
USAA Life Growth and Income Fund . . . . . . . . . . . . . . . . 8B
USAA Life World growth Fund . . . . . . . . . . . . . . . . . . . 10B
USAA Life Diversified Assets Fund . . . . . . . . . . . . . . . . 12B
USAA Life Aggressive Growth Fund. . . . . . . . . . . . . . . . . 14B
USAA Life International Fund. . . . . . . . . . . . . . . . . . . 16B
Fund Management. . . . . . . . . . . . . . . . . . . . . . . . . . . 18B
Purchase of Fund Shares. . . . . . . . . . . . . . . . . . . . . . . 18B
Redemption of Fund Shares. . . . . . . . . . . . . . . . . . . . . . 18B
Valuation of Fund Shares . . . . . . . . . . . . . . . . . . . . . . 18B
Dividends and Distributions. . . . . . . . . . . . . . . . . . . . . 19B
Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19B
Year 2000. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19B
Financial Highlights . . . . . . . . . . . . . . . . . . . . . . . . 20B
Appendix A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24B
1B
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2B
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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 $40 billion in total assets. For easier reading, USAA
Investment Management Company will be referred to as "we" or "us"
throughout this Prospectus.
3B
<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 Fund's principal investment strategy is to invest the Fund's 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,
banker's 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 fluctuate because of changes 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.
4B
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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. Also keep in mind, the total return calculations do not
include other costs associated with the annuity or life insurance policy; and
if they did, the Fund's performance would be lower.
[BAR CHART] The Fund's total return
for the three-month
CALENDAR TOTAL period ended March 31,
YEAR RETURN 1999, was 1.14%.
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 FUND'S 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.
5B
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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. This 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 fluctuate because of changes in interest rates.
* IF INTEREST RATES INCREASE: the yield of the Fund may increase and the
market value of the Fund's securities will likely decline, adversely
affecting the net asset value and total return.
* IF INTEREST RATES DECREASE: the yield of the Fund may decrease and the
market value of the Fund's securities may increase, which would likely
increase the Fund's net asset value and total return.
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.
6B
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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 in a down 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. Also keep in mind, the total return calculations do not
include other costs associated with the annuity or life insurance policy; and
if they did, the Fund's performance would be lower.
[BAR CHART] The Fund's total return
for the three-month
CALENDAR TOTAL period ended March 31,
YEAR RETURN 1999, was -1.29%.
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.
7B
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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. This 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 in a down 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.
8B
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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. Also keep in mind, the total return calculations do not
include other costs associated with the annuity or life insurance policy; and
if they did, the Fund's performance would be lower.
[BAR CHART] The Fund's total return
for the three-month
CALENDAR TOTAL period ended March 31,
YEAR RETURN 1999, was 5.07%.
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.
9B
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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. This 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 in a down 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
10B
<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. Also keep in mind, the total return calculations do not
include other costs associated with the annuity or life insurance policy; and
if they did, the Fund's performance would be lower.
[BAR CHART] The Fund's total return
for the three-month
CALENDAR TOTAL period ended March 31,
YEAR RETURN 1999, was 3.55%.
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.
11B
<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% 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, may in the long run potentially
return less (and entail less market risk) 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. This 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 in a down 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 fluctuate because of changes in interest rates.
* IF INTEREST RATES INCREASE: the yield of the Fund may increase and the
market value of the Fund's securities will likely decline, adversely
affecting the net asset value and total return.
* IF INTEREST RATES DECREASE: the yield of the Fund may decrease and the
market value of the Fund's securities may increase, which would likely
increase the Fund's net asset value and total return.
12B
<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. Also keep in mind, the total return calculations do not
include other costs associated with the annuity or life insurance policy; and
if they did, the Fund's performance would be lower.
[BAR CHART] The Fund's total return
for the three-month
CALENDAR TOTAL period ended March 31,
YEAR RETURN 1999, was 1.99%.
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.
13B
<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. This 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 in a down 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.
14B
<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 performance for the one-year
period, 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. Also
keep in mind, the total return calculations do not include other costs
associated with the annuity or life insurance policy; and if they did, the
Fund's performance would be lower.
[BAR CHART] The Fund's total return
for the three-month
CALENDAR TOTAL period ended March31,
YEAR RETURN 1999, was 8.94%.
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.
15B
<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. This 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 in a down 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.
16B
<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 performance for the one-year
period, 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. Also
keep in mind, the total return calculations do not include other costs
associated with the annuity or life insurance policy; and if they did, the
Fund's performance would be lower.
[BAR CHART] The Fund's total return
for the three-month
CALENDAR TOTAL period ended March 31,
YEAR RETURN 1999, was 0%.
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.
17B
<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 $40
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 by 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
18B
<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.
19B
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights tables are intended to help you understand each Fund's
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 Fund's 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 .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 assets, 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.
20B
<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.
21B
<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.
22B
<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.
23B
<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 Fund's 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 Fund's 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 Fund's net assets and up to 10% of the USAA
Life Money Market Fund's net assets in securities that are illiquid. Illiquid
securities are those securities which cannot be disposed of in the ordinary
course of business, seven days or less, at approximately the value at which the
Fund has valued the securities.
MASTER DEMAND NOTES
We may invest each Fund's 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 Fund's assets in investment-grade, U.S.
dollar-denominated debt securities that have remaining maturities of one year
or less. Such securities may include U.S. Government obligations, commercial
paper and other short-term corporate obligations, repurchase agreements
collateralized with U.S. Government securities, certificates of deposit,
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 Fund's 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).
24B
<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 Fund's assets in securities (including securities with
variable interest rates) that may be redeemed or sold back (put) to the issuer
of the security or a third party prior to stated maturity (put bonds). Such
securities will normally trade as if maturity is the earlier put date, even
though stated maturity is longer.
REPURCHASE AGREEMENTS
We may invest each Fund's assets in repurchase agreements that are
collateralized by obligations issued or guaranteed as to both principal and
interest by the U.S. Government, its agencies and instrumentalities. A
repurchase agreement is a transaction in which a security is purchased with a
simultaneous commitment to sell it back to the seller (a commercial bank or
recognized securities dealer) at an agreed upon price on an agreed upon date.
This date is usually not more than seven days from the date of purchase. The
resale price reflects the purchase price plus an agreed upon market rate of
interest, which is unrelated to the coupon rate or maturity of the purchased
security.
VARIABLE RATE SECURITIES
We may invest each Fund's assets in securities that bear interest at rates
which are adjusted periodically to market rates.
* These interest rate adjustments can both raise and lower the income
generated by such securities. These changes will have the same effect on the
income earned by the Fund depending on the proportion of such securities
held.
* 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 Fund's assets in new issues of debt securities offered on a
when-issued basis.
* Delivery and payment take place after the date of the commitment to
purchase, normally within 45 days. Both price and interest rate are fixed at
the time of commitment.
* The Fund does not earn interest on the securities until settlement, and the
market value of the securities may fluctuate between purchase and
settlement.
* Such securities can be sold before settlement date.
25B
<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 Trust's 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 Trust's 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
SEC's 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. 811-8672
26B
<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
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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, USAA IMCO 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.
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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.
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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
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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
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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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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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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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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 approximately $40 billion, of which
approximately $25 billion are in mutual fund portfolios.
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 USAA IMCO $214,196
to compensate USAA 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.
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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
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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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