UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR/A
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT
INVESTMENT COMPANIES
Investment Company Act file number: 811-4019
Exact name of registrant as specified in charter: USAA INVESTMENT TRUST
Address of principal executive offices and zip code: 9800 FREDERICKSBURG ROAD
SAN ANTONIO, TX 78288
Name and address of agent for service: MARK S. HOWARD
USAA INVESTMENT TRUST
9800 FREDERICKSBURG ROAD
SAN ANTONIO, TX 78288
Registrant's telephone number, including area code: (210) 498-0226
Date of fiscal year end: MAY 31
Date of reporting period: MAY 31, 2004
ITEM 1. REPORT TO STOCKHOLDERS.
USAA INVESTMENT TRUST, INTERNATIONAL FUND - ANNUAL REPORT FOR PERIOD ENDING
MAY 31, 2004
[LOGO OF USAA]
USAA(R)
USAA INTERNATIONAL Fund
[GRAPHIC OF USAA INTERNATIONAL FUND]
A n n u a l R e p o r t
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MAY 31, 2004
Table of CONTENTS
- --------------------------------------------------------------------------------
MESSAGE FROM THE PRESIDENT 2
INVESTMENT OVERVIEW & MANAGERS' COMMENTARY 5
FINANCIAL INFORMATION
Distributions to Shareholders 14
Report of Independent Registered Public Accounting Firm 15
Portfolio of Investments 16
Notes to Portfolio of Investments 21
Financial Statements 22
Notes to Financial Statements 25
DIRECTORS' AND OFFICERS' INFORMATION 37
THIS REPORT IS FOR THE INFORMATION OF THE SHAREHOLDERS AND OTHERS WHO HAVE
RECEIVED A COPY OF THE CURRENTLY EFFECTIVE PROSPECTUS OF THE FUND, MANAGED BY
USAA INVESTMENT MANAGEMENT COMPANY. IT MAY BE USED AS SALES LITERATURE
ONLY WHEN PRECEDED OR ACCOMPANIED BY A CURRENT PROSPECTUS, WHICH PROVIDES
FURTHER DETAILS ABOUT THE FUND.
(C)2004, USAA. All rights reserved.
2
M E S S A G E
==============------------------------------------------------------------------
from the PRESIDENT
"
FIRST-QUARTER EARNINGS WERE STRONG . . .
[PHOTO OF CHRISTOPHER W. CLAUS] SECOND-QUARTER EARNINGS SHOULD
CONTINUE TO IMPRESS.
"
- --------------------------------------------------------------------------------
As I write to you in early June, the U.S. economy continues to
improve. The country has seen job growth for nine consecutive
months, including 248,000 new jobs created in May. The gross
domestic product (GDP) is also growing at a healthy pace - up
3.9% during the first quarter - and I expect the economy to be
reasonably strong throughout 2004. First-quarter earnings were
strong, exceeding expectations by a record number. Second-
quarter earnings should continue to impress.
Despite the good news, the financial markets have been
volatile and nervous. The primary concerns are the price of
oil, Iraq, the pending presidential election, inflation, and
rising interest rates. In the case of oil, demand is
outstripping supply, with buyers now paying a "terrorist
premium." A disruption in oil production would make oil prices
spike, and if oil costs more than $40 a barrel, the price
increase could wipe out about one-half percent of world GDP.
Iraq is likely to remain a difficult situation for years to
come as democracy in the Middle East strives to take root. And
while markets tend to perform fairly well during presidential
elections - perhaps an expression of voters' optimism - no one
knows quite what to expect this time around. On the inflation
front, our expectation is that inflation will remain moderate
and under control, even though the price of oil and some foods
may rise. The Federal Reserve Board (the Fed) is expected to
raise short-term interest rates, but we believe any rate
increases in the near future
3
. . . C O N T I N U E D
========================--------------------------------------------------------
will occur at a "measured pace." If inflation does rise above
the level expected, the Fed is likely to move more quickly and
aggressively in an effort to combat long-term inflation.
Going forward, we expect stock prices to end the year higher
than they are now. Short-term interest rates should rise,
making money market funds a more attractive choice for people
holding cash. Longer-term investors will feel the initial
pinch of rate increases, but should be rewarded in time with
the potential for higher yields and the compounding of
interest payments.
Regardless of what occurs in the coming months, we remain
committed to helping you achieve your investment goals. Our
market-tested portfolio management team will continue to
provide you with a range of resources, including quality
service and no-load mutual funds that have no sales loads,
12b-1 fees, or long-term contractual plans.
On behalf of everyone at USAA, thank you for your business.
Sincerely,
/s/ Christopher W. Claus
Christopher W. Claus
President and Vice Chairman of the Board
CONSIDER THE INVESTMENT OBJECTIVES, RISKS, CHARGES, AND
EXPENSES OF THE USAA MUTUAL FUNDS CAREFULLY BEFORE INVESTING.
CONTACT US FOR A PROSPECTUS CONTAINING THIS AND OTHER
INFORMATION ABOUT THE FUNDS FROM USAA INVESTMENT MANAGEMENT
COMPANY, DISTRIBUTOR. READ IT CAREFULLY BEFORE INVESTING.
AN INVESTMENT IN A MONEY MARKET FUND IS NOT INSURED OR
GUARANTEED BY THE FDIC OR ANY OTHER GOVERNMENT AGENCY.
ALTHOUGH THE FUND SEEKS TO PRESERVE THE VALUE OF YOUR
INVESTMENT AT $1 PER SHARE, IT IS POSSIBLE TO LOSE MONEY BY
INVESTING IN THE FUND.
MUTUAL FUND OPERATING EXPENSES APPLY AND CONTINUE THROUGHOUT
THE LIFE OF THE FUND.
5
I N V E S T M E N T
====================------------------------------------------------------------
OVERVIEW
USAA INTERNATIONAL FUND
OBJECTIVE
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Capital appreciation with current income as a secondary
objective.
TYPES OF INVESTMENTS
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Invests at least 80% of the Fund's assets in equity securities
of foreign (including emerging market) companies.
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5/31/04 5/31/03
- --------------------------------------------------------------------------------
Net Assets $479.5 Million $347.5 Million
Net Asset Value Per Share $20.45 $16.15
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AVERAGE ANNUAL TOTAL RETURNS AS OF 5/31/04
- --------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS
27.65% 3.44% 6.02%
THE PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE AND IS
NO GUARANTEE OF FUTURE RESULTS. CURRENT PERFORMANCE MAY BE
HIGHER OR LOWER THAN THE PERFORMANCE DATA QUOTED. THE RETURN
AND PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE, SO THAT
AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS
THAN THEIR ORIGINAL COST. FOR PERFORMANCE DATA CURRENT TO THE
MOST RECENT MONTH-END, VISIT USAA.COM.
TOTAL RETURN MEASURES THE PRICE CHANGE IN A SHARE ASSUMING THE
REINVESTMENT OF ALL NET INVESTMENT INCOME DIVIDEND AND
REALIZED CAPITAL GAIN DISTRIBUTIONS. THE TOTAL RETURNS QUOTED
DO NOT REFLECT THE DEDUCTION OF TAXES THAT A SHAREHOLDER WOULD
PAY ON FUND DISTRIBUTIONS OR THE REDEMPTION OF FUND SHARES.
6
. . . C O N T I N U E D
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OVERVIEW
CUMULATIVE PERFORMANCE COMPARISON
[CHART OF CUMULATIVE PERFORMANCE COMPARISON]
USAA
INTERNATIONAL LIPPER INTERNATIONAL LIPPER INTERNATIONAL MSCI-EAFE
FUND FUNDS INDEX FUNDS AVERAGE INDEX
------------- -------------------- -------------------- ---------
5/31/1994 $10,000 $10,000 $10,000 $10,000
6/30/1994 9,908 9,842 9,864 10,141
7/31/1994 10,149 10,146 10,154 10,239
8/31/1994 10,618 10,496 10,455 10,481
9/30/1994 10,560 10,226 10,190 10,151
10/31/1994 10,682 10,408 10,395 10,489
11/30/1994 10,223 9,922 9,916 9,985
12/31/1994 10,106 9,790 9,827 10,048
1/31/1995 9,418 9,304 9,378 9,662
2/28/1995 9,320 9,302 9,418 9,634
3/31/1995 9,580 9,547 9,712 10,235
4/30/1995 9,983 9,897 10,035 10,620
5/31/1995 10,249 9,995 10,151 10,493
6/30/1995 10,327 10,033 10,184 10,309
7/31/1995 10,857 10,584 10,732 10,951
8/31/1995 10,603 10,406 10,511 10,533
9/30/1995 10,727 10,580 10,695 10,739
10/31/1995 10,525 10,359 10,499 10,450
11/30/1995 10,610 10,468 10,614 10,741
12/31/1995 10,944 10,771 10,919 11,174
1/31/1996 11,305 11,026 11,150 11,220
2/29/1996 11,502 11,073 11,211 11,257
3/31/1996 11,711 11,246 11,402 11,497
4/30/1996 12,229 11,612 11,762 11,831
5/31/1996 12,269 11,599 11,743 11,613
6/30/1996 12,354 11,705 11,825 11,678
7/31/1996 11,763 11,310 11,407 11,337
8/31/1996 12,118 11,458 11,568 11,362
9/30/1996 12,339 11,714 11,827 11,664
10/31/1996 12,292 11,667 11,779 11,544
11/30/1996 12,949 12,216 12,317 12,004
12/31/1996 13,040 12,325 12,382 11,849
1/31/1997 13,455 12,341 12,361 11,435
2/28/1997 13,523 12,564 12,527 11,622
3/31/1997 13,543 12,630 12,557 11,664
4/30/1997 13,632 12,685 12,596 11,726
5/31/1997 14,320 13,401 13,359 12,489
6/30/1997 15,048 14,044 13,991 13,177
7/31/1997 15,528 14,495 14,411 13,391
8/31/1997 14,699 13,450 13,388 12,391
9/30/1997 15,669 14,313 14,234 13,085
10/31/1997 14,586 13,227 13,179 12,079
11/30/1997 14,108 13,116 13,079 11,956
12/31/1997 14,218 13,219 13,201 12,060
1/31/1998 14,218 13,538 13,533 12,612
2/28/1998 15,150 14,398 14,430 13,421
3/31/1998 16,089 15,180 15,170 13,834
4/30/1998 16,466 15,413 15,401 13,944
5/31/1998 16,222 15,444 15,434 13,876
6/30/1998 15,860 15,309 15,319 13,981
7/31/1998 15,783 15,543 15,535 14,123
8/31/1998 13,111 13,307 13,314 12,373
9/30/1998 12,652 12,893 12,867 11,994
10/31/1998 13,823 13,841 13,832 13,244
11/30/1998 14,221 14,535 14,550 13,922
12/31/1998 14,780 14,892 14,994 14,472
1/31/1999 14,987 14,983 15,141 14,429
2/28/1999 14,451 14,597 14,753 14,085
3/31/1999 14,765 15,083 15,263 14,673
4/30/1999 15,561 15,786 15,974 15,268
5/31/1999 15,147 15,199 15,322 14,481
6/30/1999 15,737 15,920 16,099 15,046
7/31/1999 16,300 16,276 16,497 15,493
8/31/1999 16,472 16,404 16,649 15,550
9/30/1999 16,472 16,457 16,704 15,706
10/31/1999 16,611 17,031 17,327 16,294
11/30/1999 17,560 18,281 18,548 16,861
12/31/1999 19,014 20,527 20,767 18,374
1/31/2000 18,268 19,325 19,629 17,206
2/29/2000 18,998 20,600 20,833 17,670
3/31/2000 19,492 20,653 20,938 18,355
4/30/2000 18,544 19,343 19,613 17,389
5/31/2000 18,065 18,812 19,021 16,964
6/30/2000 18,957 19,683 19,845 17,627
7/31/2000 18,315 19,045 19,183 16,888
8/31/2000 18,597 19,367 19,492 17,035
9/30/2000 17,632 18,238 18,384 16,206
10/31/2000 16,906 17,619 17,754 15,823
11/30/2000 16,214 16,875 17,036 15,229
12/31/2000 16,957 17,505 17,678 15,771
1/31/2001 17,239 17,608 17,766 15,763
2/28/2001 16,018 16,373 16,494 14,581
3/31/2001 14,865 15,222 15,280 13,609
4/30/2001 16,009 16,148 16,277 14,555
5/31/2001 15,565 15,756 15,851 14,041
6/30/2001 15,010 15,311 15,307 13,467
7/31/2001 14,917 14,913 14,916 13,222
8/31/2001 14,789 14,614 14,547 12,887
9/30/2001 13,243 13,022 13,001 11,581
10/31/2001 13,593 13,375 13,323 11,878
11/30/2001 14,131 13,874 13,834 12,316
12/31/2001 14,486 14,122 14,034 12,389
1/31/2002 13,985 13,552 13,448 11,731
2/28/2002 14,244 13,742 13,535 11,813
3/31/2002 15,021 14,468 14,243 12,509
4/30/2002 15,073 14,570 14,305 12,535
5/31/2002 15,219 14,778 14,472 12,693
6/30/2002 14,736 14,195 13,909 12,188
7/31/2002 13,243 12,778 12,534 10,985
8/31/2002 13,320 12,788 12,505 10,960
9/30/2002 12,327 11,411 11,193 9,783
10/31/2002 13,061 12,003 11,724 10,309
11/30/2002 13,303 12,571 12,235 10,777
12/31/2002 13,171 12,169 11,836 10,414
1/31/2003 12,614 11,723 11,375 9,979
2/28/2003 12,309 11,376 11,110 9,750
3/31/2003 12,196 11,098 10,883 9,559
4/30/2003 13,362 12,196 11,876 10,496
5/31/2003 14,050 12,980 12,587 11,132
6/30/2003 14,250 13,286 12,864 11,401
7/31/2003 14,398 13,659 13,173 11,677
8/31/2003 14,564 14,053 13,503 11,959
9/30/2003 14,938 14,335 13,778 12,327
10/31/2003 15,643 15,190 14,601 13,096
11/30/2003 16,157 15,495 14,894 13,387
12/31/2003 17,373 16,549 15,950 14,433
1/31/2004 17,645 16,905 16,224 14,637
2/29/2004 18,127 17,291 16,575 14,975
3/31/2004 18,004 17,376 16,625 15,059
4/30/2004 17,785 16,858 16,129 14,718
5/31/2004 17,934 16,848 16,142 14,749
[END CHART]
DATA FROM 5/31/94 THROUGH 5/31/04.
PAST PERFORMANCE DOES NOT PREDICT FUTURE PERFORMANCE, AND THE
CUMULATIVE PERFORMANCE QUOTED DOES NOT REFLECT THE DEDUCTION
OF TAXES THAT A SHAREHOLDER WOULD PAY ON FUND DISTRIBUTIONS OR
THE REDEMPTION OF FUND SHARES.
7
. . . C O N T I N U E D
========================--------------------------------------------------------
The graph illustrates the comparison of a $10,000 hypothetical
investment in the USAA International Fund to the following
benchmarks:
o The Lipper International Funds Index, which tracks the total
return performance of the 30 largest funds within the Lipper
International Funds category.
o The Lipper International Funds Average, an average
performance level of all international funds, reported by
Lipper Inc., an independent organization that monitors the
performance of mutual funds.
o The Morgan Stanley Capital International Europe, Australia
and Far East (MSCI-EAFE) Index, an unmanaged index that
reflects the movements of stock markets in Europe,
Australia, and the Far East by representing a broad
selection of domestically listed companies within each
market.
8
M A N A G E R ' S
==================--------------------------------------------------------------
COMMENTARY on the Fund
DAVID R. MANNHEIM MARCUS L. SMITH
MFS Investment Management MFS Investment Management
- --------------------------------------------------------------------------------
HOW DID THE FUND PERFORM?
The USAA International Fund had a total return of 27.65% for
the year ended May 31, 2004. This compares to a return of
28.54% for the Lipper International Funds Average, 29.80% for
the Lipper International Funds Index, and 32.50% for the
Morgan Stanley Capital International Europe, Australia and Far
East (MSCI-EAFE) Index for the period.
* * * *
THE FUND'S PERFORMANCE RECEIVED AN OVERALL MORNINGSTAR
RATING(TM) OF 4 STARS IN THE FOREIGN LARGE BLEND FUNDS CATEGORY
(377 FUNDS IN CATEGORY) AS OF MAY 31, 2004. THE OVERALL
MORNINGSTAR RATING FOR A FUND IS DERIVED FROM A WEIGHTED
AVERAGE OF THE PERFORMANCE FIGURES ASSOCIATED WITH ITS THREE-,
FIVE-, AND 10-YEAR (IF APPLICABLE) MORNINGSTAR RATING METRICS.
With respect to the foreign large blend funds, the USAA
International Fund received a Morningstar Rating of 5 stars
for the three-year period among 377 funds and 4 stars for the
five- and 10-year periods among 282 and 79 funds,
respectively, through May 31, 2004. Ratings are based on
risk-adjusted returns.
REFER TO PAGE 7 FOR BENCHMARK DEFINITIONS.
FOREIGN INVESTING IS SUBJECT TO ADDITIONAL RISKS, SUCH AS
CURRENCY FLUCTUATIONS, MARKET ILLIQUIDITY, AND POLITICAL
INSTABILITY.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. FOR EACH
FUND WITH AT LEAST A THREE-YEAR HISTORY, MORNINGSTAR
CALCULATES A MORNINGSTAR RATING(TM) BASED ON A MORNINGSTAR
RISK-ADJUSTED RETURN MEASURE THAT ACCOUNTS FOR VARIATION IN A
FUND'S MONTHLY PERFORMANCE (INCLUDING THE EFFECTS OF SALES
CHARGES, LOADS, AND REDEMPTION FEES), PLACING MORE EMPHASIS ON
DOWNWARD VARIATIONS AND REWARDING CONSISTENT PERFORMANCE. THE
TOP 10% OF THE FUNDS IN EACH BROAD ASSET CLASS RECEIVE 5
STARS, THE NEXT 22.5% RECEIVE 4 STARS, THE NEXT 35% RECEIVE 3
STARS, THE NEXT 22.5% RECEIVE 2 STARS, AND THE BOTTOM 10%
RECEIVE 1 STAR.
9
. . . C O N T I N U E D
========================--------------------------------------------------------
[LOGO OF LIPPER LEADER [LOGO OF LIPPER LEADER
CONSISTENT RETURN] PRESERVATION]
The Fund is listed as a Lipper Leader for Consistent Return
and Preservation of 670 funds and 7,310 funds, respectively,
within the Lipper International Funds category for the overall
period ending May 31, 2004.
HOW WOULD YOU CHARACTERIZE THE MARKET ENVIRONMENT?
Through the end of 2003, lower-quality stocks with a high
degree of leverage to the global economic recovery led the
market higher, causing the Fund--with its focus on
higher-quality companies--to lag. As the period progressed,
investors focused increasingly on individual company
fundamentals, and this shift helped the Fund outperform the
MSCI-EAFE Index in the second half of the reporting year.
LIPPER RATINGS FOR CONSISTENT RETURN REFLECT FUNDS' HISTORICAL
RISK-ADJUSTED RETURNS, ADJUSTED FOR VOLATILITY, RELATIVE TO
PEERS AS OF MAY 31, 2004. THE USAA INTERNATIONAL FUND IN
LIPPER'S INTERNATIONAL FUNDS CATEGORY RECEIVED A LIPPER LEADER
RATING FOR CONSISTENT RETURN AMONG 670 FUNDS AND 484 FUNDS FOR
THE THREE- AND FIVE-YEAR PERIODS, RESPECTIVELY, AND A SCORE OF
4 FOR THE 10-YEAR PERIOD AMONG 112 FUNDS. LIPPER RATINGS FOR
PRESERVATION REFLECT FUNDS' HISTORICAL LOSS AVOIDANCE RELATIVE
TO OTHER FUNDS WITHIN THE SAME ASSET CLASS, AS OF MAY 31,
2004. PRESERVATION RATINGS ARE RELATIVE, RATHER THAN ABSOLUTE,
MEASURES, AND FUNDS NAMED LIPPER LEADERS FOR PRESERVATION MAY
STILL EXPERIENCE LOSSES PERIODICALLY; THOSE LOSSES MAY BE
LARGER FOR EQUITY AND MIXED-EQUITY FUNDS THAN FOR FIXED-INCOME
FUNDS. THE FUND RECEIVED A LIPPER LEADER RATING FOR
PRESERVATION AMONG 7,310 FUNDS AND 5,007 FUNDS FOR THE THREE-
AND FIVE-YEAR PERIODS, RESPECTIVELY, AND A SCORE OF 2 FOR THE
10-YEAR PERIOD AMONG 1,526 FUNDS. RATINGS ARE SUBJECT TO
CHANGE EVERY MONTH AND ARE BASED ON AN EQUAL-WEIGHTED AVERAGE
OF PERCENTILE RANKS FOR THE CONSISTENT RETURN AND PRESERVATION
METRICS OVER THREE-, FIVE-, AND 10-YEAR PERIODS (IF
APPLICABLE). THE HIGHEST 20% OF FUNDS IN EACH PEER GROUP ARE
NAMED LIPPER LEADERS, THE NEXT 20% RECEIVE A SCORE OF 2, THE
MIDDLE 20% ARE SCORED 3, THE NEXT 20% ARE SCORED 4, AND THE
LOWEST 20% ARE SCORED 5. LIPPER RATINGS ARE NOT INTENDED TO
PREDICT FUTURE RESULTS, AND LIPPER DOES NOT GUARANTEE THE
ACCURACY OF THIS INFORMATION. MORE INFORMATION IS AVAILABLE AT
WWW.LIPPERLEADERS.COM. LIPPER LEADER COPYRIGHT 2004, REUTERS,
ALL RIGHTS RESERVED.
10
. . . C O N T I N U E D
========================--------------------------------------------------------
COMMENTARY on the Fund
HOW WAS THE FUND'S STOCK SELECTION?
Overall, our stock selection contributed positively to
performance, while our sector allocations were slightly
negative. The biggest positive contributor to performance was
stock selection within the financial services sector.
Specifically, we owned two banks that benefited from their
exposure to Eastern Europe - Erste Bank (Austria) and OTP Bank
Ltd. GDR (Hungary). Also contributing positively were banking
institution Depfa Bank plc (Ireland) and insurer QBE Insurance
Group Ltd. (Australia). Our stock selection in the retail
sector also helped performance, because Esprit Holdings Ltd.
(Hong Kong) was up more than 100%. Retailer Next plc (U.K.)
also recorded a big gain. The fact that we did not own Royal
Dutch/Shell (U.K.) boosted performance, relatively speaking,
because the large index holding suffered from several downward
restatements of its oil reserves.
Our stock selection in utilities and communications was a
primary detractor. We owned BCE, Inc. (Canada), a
telecommunications company not in the MSCI-EAFE Index that was
relatively weak during the period due to regulatory and
competitive concerns. We continued to hold the stock, however,
because we believe its price fully reflected these concerns.
Other holdings that detracted from performance in the sector
were Brasil Telecom Participacoes S.A. ADR and France Telecom
S.A. In the basic materials sector, one of our top holdings,
L'Air Liquide S.A. (France), lagged other stocks in its group.
Although the company continues to deliver solid earnings
growth, it was less interesting to investors who were focused
on companies with more cyclical exposure in the sector. We
continue to like L'Air Liquide S.A. as a long-term investment.
YOU WILL FIND A COMPLETE LIST OF SECURITIES THAT THE FUND OWNS
ON PAGES 16-20.
FRANCE TELECOM S.A. WAS SOLD OUT OF THE FUND PRIOR TO MAY 31,
2004.
11
. . . C O N T I N U E D
========================--------------------------------------------------------
HOW WAS THE FUND POSITIONED AT THE END OF THE PERIOD?
On a sector level, our biggest overweight position was in
leisure, primarily through media companies. Our biggest
underweight position was in financial services. By country, we
ended the reporting year underweight in Japan and Great
Britain and just slightly overweight in continental Europe. We
also had holdings in Canada and Latin America, areas not
represented in the MSCI-EAFE Index. Overall, we believe that
valuations are reasonable because, while we expect interest
rates to increase, corporate profits appear solid for the rest
of 2004 and into 2005. We appreciate your trust and will
continue to work hard on your behalf.
12
P O R T F O L I O
==================--------------------------------------------------------------
HIGHLIGHTS
- --------------------------------------------
TOP 10 INDUSTRIES
(% OF NET ASSETS)
- --------------------------------------------
Pharmaceuticals 9.0%
Diversified Banks 7.3%
Integrated Telecommunication Services 6.1%
Regional Banks 4.4%
Apparel Retail 4.3%
Broadcasting & Cable TV 3.8%
Electrical Components & Equipment 3.4%
Multi-Line Insurance 3.4%
Automobile Manufacturers 3.3%
Household Products 3.3%
- --------------------------------------------
- --------------------------------------------
TOP 10 EQUITY HOLDINGS
(% OF NET ASSETS)
- --------------------------------------------
Reckitt Benckiser plc 3.3%
Vodafone Group plc 2.6%
L'Air Liquide S.A. 2.5%
AXA S.A. 2.4%
Roche Holdings AG 2.2%
Canon, Inc. 2.1%
News Corp. Ltd. 2.1%
Hennes & Mauritz AB "B" 2.0%
Schneider Electric S.A. 2.0%
Total S.A. ADR 2.0%
- --------------------------------------------
YOU WILL FIND A COMPLETE LIST OF SECURITIES THAT THE FUND OWNS ON
PAGES 16-20.
13
. . . C O N T I N U E D
========================--------------------------------------------------------
ASSET ALLOCATION
5/31/04
[PIE CHART OF ASSET ALLOCATION]
Other* 20.4%
United Kingdom 19.4%
France 15.2%
Japan 15.1%
United States 12.6%
Switzerland 9.7%
Sweden 6.3%
Spain 3.7%
Australia 3.7%
Canada 3.1%
[END PIE CHART]
*INCLUDES COUNTRIES WITH LESS THAN 3% OF THE PORTFOLIO AND
MONEY MARKET INSTRUMENTS.
PERCENTAGES ARE OF THE NET ASSETS OF THE FUND AND MAY NOT
EQUAL 100%.
FOREIGN INVESTING IS SUBJECT TO ADDITIONAL RISKS, SUCH AS
CURRENCY FLUCTUATIONS, MARKET ILLIQUIDITY, AND POLITICAL
INSTABILITY.
YOU WILL FIND A COMPLETE LIST OF SECURITIES THAT THE FUND OWNS
ON PAGES 16-20.
14
D I S T R I B U T I O N S
==========================------------------------------------------------------
to SHAREHOLDERS (unaudited)
USAA INTERNATIONAL FUND
The following federal tax information related to the Fund's
fiscal year ended May 31, 2004, is provided for information
purposes only and should not be used for reporting to federal
or state revenue agencies. Federal tax information for the
calendar year will be reported to you on Form 1099-DIV in
January 2005.
The Fund has elected under Section 853 of the Internal Revenue
Code to pass through the credit for taxes paid in foreign
countries. The gross income derived from foreign sources and
foreign taxes paid during the fiscal year by the Fund are
$10,300,000 and $1,196,000, respectively.
The Fund has designated a portion of the amount paid to
redeeming shareholders, in the amount of $1,125,000, as a
distribution for tax purposes.
15
R E P O R T O F I N D E P E N D E N T R E G I S T E R E D
========================--------------------------------------------------------
Public ACCOUNTING Firm
THE SHAREHOLDERS AND BOARD OF TRUSTEES OF
USAA INTERNATIONAL FUND:
We have audited the accompanying statement of assets and
liabilities of the USAA International Fund (a portfolio of
USAA Investment Trust), including the portfolio of
investments, as of May 31, 2004, and the related statement of
operations for the year then ended, and the statements of
changes in net assets and financial highlights for each of the
two years in the period then ended. These financial statements
and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on
these financial statements and financial highlights based on
our audits. The financial highlights for each of the periods
presented through May 31, 2002, were audited by other auditors
whose report dated July 5, 2002, expressed an unqualified
opinion on those statements and financial highlights.
We conducted our audits in accordance with the standards of
the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial
statements and financial highlights are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the
financial statements. Our procedures included confirmation of
securities owned as of May 31, 2004, by correspondence with
the custodian and brokers or by other appropriate auditing
procedures where replies from brokers were not received. An
audit also includes assessing the accounting principles used
and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial
highlights referred to above present fairly, in all material
respects, the financial position of USAA International Fund as
of May 31, 2004, the results of its operations for the year
then ended, and the changes in its net assets and financial
highlights for each of the two years in the period then ended,
in conformity with U.S. generally accepted accounting
principles.
/S/ ERNST & YOUNG LLP
San Antonio, Texas
July 9, 2004
16
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
USAA INTERNATIONAL FUND
MAY 31, 2004
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
- ------------------------------------------------------------------------------------------
STOCKS (96.6%)
AUSTRALIA (3.7%)
1,095,269 News Corp. Ltd. (Movies & Entertainment) $ 10,052
872,252 QBE Insurance Group Ltd. (Property & Casualty Insurance) 7,788
--------
17,840
--------
AUSTRIA (1.6%)
50,200 Erste Bank der oesterreichischen Sparkassen AG (Regional Banks) 7,758
--------
BRAZIL (2.1%)
130,500 Brasil Telecom Participacoes S.A. ADR (Preferred)
(Integrated Telecommunication Services) 3,760
126,400 Companhia Vale Do Rio Doce ADR (Diversified Metals & Mining) 6,408
--------
10,168
--------
CANADA (3.1%)
230,770 BCE, Inc. (Integrated Telecommunication Services) 4,590
130,391 Canadian National Railway Co. (Railroads) 5,148
135,220 Encana Corp. (Integrated Oil & Gas) 5,293
--------
15,031
--------
CAYMAN ISLANDS (0.1%)
1,803,000 Semiconductor Manufacturing International Corp. (Semiconductors)* 449
--------
FRANCE (15.2%)
567,100 AXA S.A. (Multi-Line Insurance) 11,639
268,800 Credit Agricole S.A. (Regional Banks)(a) 6,610
69,140 L'Air Liquide S.A. (Industrial Gases) 12,129
71,600 L'Oreal S.A. (Personal Products) 5,559
103,420 Sanofi-Synthelabo S.A. (Pharmaceuticals)(a) 6,835
142,254 Schneider Electric S.A. (Electrical Components & Equipment)(a) 9,576
118,107 Societe Television Francaise 1 (Broadcasting & Cable TV)(a) 3,669
102,833 Total S.A. ADR (Integrated Oil & Gas) 9,675
266,100 Veolia Environnement (Multi-Utilities & Unregulated Power)(a) 7,119
--------
72,811
--------
GERMANY (2.6%)
168,250 Bayerische Motoren Werke AG (Automobile Manufacturers) 7,132
93,700 Schering AG (Pharmaceuticals) 5,111
--------
12,243
--------
17
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA INTERNATIONAL FUND
MAY 31, 2004
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
- ------------------------------------------------------------------------------------------
HONG KONG (2.1%)
8,877,500 CNOOC Ltd. (Oil & Gas Exploration & Production) $ 3,816
1,437,000 Esprit Holdings Ltd. (Apparel Retail) 6,305
--------
10,121
--------
HUNGARY (1.4%)
160,400 OTP Bank Ltd. GDR (Regional Banks)* 6,487
--------
IRELAND (2.3%)
517,100 Depfa Bank plc (Specialized Finance) 7,738
222,080 Irish Life & Permanent plc (Other Diversified Financial Services) 3,378
--------
11,116
--------
ITALY (1.0%)
267,800 RAS S.p.A. (Multi-Line Insurance) 4,806
--------
JAPAN (15.1%)
283,000 Bridgestone Corp. (Tires & Rubber) 4,738
204,000 Canon, Inc. (Electronic Equipment Manufacturers) 10,088
426,400 Chugai Pharmaceutical Co. Ltd. (Pharmaceuticals) 6,481
421,000 Citizen Watch Co. (Apparel, Accessories, & Luxury Goods) 4,416
1,264 KDDI Corp. (Integrated Telecommunication Services) 7,386
114,400 Murata Manufacturing Co. Ltd. (Electrical Components & Equipment) 6,613
164,400 Seiko Epson Corp. (Office Electronics) 5,654
432,000 Sekisui Chemical Co. Ltd. (Homebuilding) 3,191
112,000 Shinsei Bank (Diversified Banks) 758
170,300 Tokyo Broadcasting System, Inc. (Broadcasting & Cable TV) 3,035
1,929,000 Tokyo Gas Co. Ltd. (Gas Utilities) 6,809
235,000 Toyota Motor Corp. (Automobile Manufacturers) 8,530
310,100 Yamaha Corp. (Consumer Electronics) 4,710
--------
72,409
--------
KOREA (2.3%)
13,020 Samsung Electronics Co. Ltd. (Semiconductors) 5,814
46,410 Samsung SDI Co. Ltd. (Computer Storage & Peripherals) 5,121
--------
10,935
--------
MEXICO (0.9%)
105,400 Grupo Televisa S.A. de C.V. ADR (Broadcasting & Cable TV) 4,454
--------
NETHERLANDS (1.1%)
376,680 Reed Elsevier N.V. (Publishing) 5,260
--------
18
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA INTERNATIONAL FUND
MAY 31, 2004
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
- ------------------------------------------------------------------------------------------
NORWAY (0.2%)
178,300 DNB Holdings ASA (Diversified Banks) $ 1,130
--------
SINGAPORE (2.3%)
447,000 DBS Group Holdings Ltd. (Diversified Banks) 3,710
4,046,000 Singapore Telecommunications Ltd. (Integrated
Telecommunication Services) 5,216
269,000 United Overseas Bank Ltd. (Diversified Banks) 2,058
--------
10,984
--------
SPAIN (3.7%)
356,800 Banco Bilbao Vizcaya Argentaria S.A. (Diversified Banks) 4,725
234,240 Iberdrola S.A. (Electric Utilities) 4,727
556,011 Telefonica S.A. (Integrated Telecommunication Services)(a) 8,069
10,643 Telefonica S.A. ADR (Integrated Telecommunication Services) 465
--------
17,986
--------
SWEDEN (6.3%)
173,300 Atlas Copco AB "A" (Industrial Machinery) 6,397
2,652,700 Ericsson LM "B" (Communications Equipment)* 7,407
388,000 Hennes & Mauritz AB "B" (Apparel Retail)(a) 9,609
207,000 Sandvik AB (Industrial Machinery) 7,030
--------
30,443
--------
SWITZERLAND (9.7%)
207,000 Credit Suisse Group (Diversified Banks)* 7,110
17,995 Nestle S.A. (Packaged Foods & Meat) 4,681
123,700 Novartis AG (Pharmaceuticals) 5,547
99,100 Roche Holdings AG (Pharmaceuticals) 10,437
11,100 Straumann AG (Health Care Supplies) 2,294
41,222 Syngenta AG (Specialty Chemicals)* 3,277
35,400 Synthes, Inc. (Health Care Equipment) 4,166
123,580 UBS AG (Diversified Banks) 8,865
--------
46,377
--------
TAIWAN (0.4%)
1,420,000 Compal Electronics, Inc. (Computer Hardware) 1,747
--------
UNITED KINGDOM (19.4%)
1,178,400 Amvescap plc (Investment Banking & Brokerage) 7,899
187,200 AstraZeneca plc (Pharmaceuticals) 8,718
309,800 BG Group plc (Oil & Gas Exploration & Production) 1,885
19
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA INTERNATIONAL FUND
MAY 31, 2004
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
- ------------------------------------------------------------------------------------------
206,630 BOC Group plc (Diversified Chemicals) $ 3,371
619,420 British Sky Broadcasting Group plc (Broadcasting & Cable TV) 6,965
84,670 Capital Radio plc (Broadcasting & Cable TV) 705
547,840 Diageo plc (Distillers & Vintners) 7,270
5,900 GlaxoSmithKline plc ADR (Pharmaceuticals) 251
1,577,958 Kingfisher plc (Home Improvement Retail) 8,271
185,780 Next plc (Apparel Retail) 4,719
589,960 Reckitt Benckiser plc (Household Products) 15,981
227,375 Royal Bank Scotland Group plc (Diversified Banks) 6,864
5,203,750 Vodafone Group plc (Wireless Telecommunication Services) 12,232
775,000 William Hill plc (Casinos & Gaming) 7,684
--------
92,815
--------
Total stocks (cost: $382,839) 463,370
--------
MONEY MARKET INSTRUMENTS (12.6%)
MONEY MARKET FUNDS (1.3%)
577,309 AIM Short-Term Investment Co. Liquid Assets Portfolio, 1.01%(b,c) 577
5,848,438 Merrill Lynch Premier Institutional Fund, 0.99%(b,c) 5,849
--------
6,426
--------
PRINCIPAL
AMOUNT
(000)
- ---------
U.S. GOVERNMENT (2.7%)
$12,971 Federal Home Loan Bank(f), 0.81%, 6/01/2004 12,971
--------
REPURCHASE AGREEMENTS (8.6%)
6,500 Banc One Capital Markets, Inc., 1.02%, acquired on 5/28/2004
and due 6/01/2004 at $6,500 (collateralized by $6,640 of Fannie
Mae Notes(f), 0.99%, due 9/6/2005; market value $6,634)(b,d) 6,500
7,000 Bear Stearns & Co., Inc., 1.00%, acquired on 5/28/2004 and
due 6/01/2004 at $7,000 (collateralized by $7,260 of Freddie
Mac Notes(f), 6.00%, due 8/27/2018; market value $7,404)(b,d) 7,000
7,000 CS First Boston LLC, 1.03%, acquired on 5/28/2004 and due
6/01/2004 at $7,000 (collateralized by $23,720 of U.S.
Treasury STRIPS, 5.75%(e), due 8/15/2025; market value $7,140)(b,d) 7,000
20
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA INTERNATIONAL FUND
MAY 31, 2004
PRINCIPAL MARKET
AMOUNT VALUE
(000) SECURITY (000)
- ------------------------------------------------------------------------------------------
$6,500 Deutsche Bank Securities, Inc., 1.00%, acquired on 5/28/2004
and due 6/01/2004 at $6,500 (collateralized by $6,514 of
Freddie Mac Notes(f), 2.05%, due 7/15/2031; market value
$6,630)(b,d) $ 6,500
7,000 Lehman Brothers, Inc., 1.01%, acquired on 5/28/2004 and due
6/01/2004 at $7,000 (collateralized by $2,305 of FICO STRIPS,
5.80%(e), due 11/30/2017; market value $1,072 and $6,080 of
Freddie Mac Notes(f), 1.62%, due 6/6/2008; market value
$6,068)(b,d) 7,000
7,000 Morgan Stanley & Co., Inc., 1.01%, acquired on 5/28/2004 and due
6/01/2004 at $7,000 (collateralized by $7,225 of Fannie Mae
Discount Notes(f), due 2/04/2005; market value $7,140)(b,d) 7,000
--------
41,000
--------
Total money market instruments (cost: $60,397) 60,397
--------
TOTAL INVESTMENTS (COST: $443,236) $523,767
========
21
N O T E S
==========----------------------------------------------------------------------
to Portfolio of INVESTMENTS
USAA INTERNATIONAL FUND
MAY 31, 2004
GENERAL NOTES
- --------------------------------------------------------------------------------
Market values of securities are determined by procedures and practices
discussed in Note 1 to the financial statements.
The percentages shown represent the percentages of the investments to
net assets and, in total, may not equal 100%.
ADR - American depositary receipts are receipts issued by a U.S. bank
evidencing ownership of foreign shares. Dividends are paid in U.S.
dollars.
GDR - Global depositary receipts are receipts issued by a U.S. or
foreign bank evidencing ownership of foreign shares. Dividends are
paid in U.S. dollars.
SPECIFIC NOTES
- --------------------------------------------------------------------------------
(a) The security or a portion thereof was out on loan as of May 31,
2004.
(b) Investment was purchased with the cash collateral proceeds
received from securities loaned.
(c) Rate represents the money market fund annualized seven-day yield
at May 31, 2004.
(d) Collateral on repurchase agreements is received by the Fund upon
entering into the repurchase agreement. The collateral is marked-
to-market daily to ensure its market value is equal to or in
excess of the repurchase agreement price plus accrued interest.
(e) Zero-coupon security. Rate represents the effective yield at date
of purchase.
(f) U.S. government agency issues. Securities issued by government-
sponsored enterprises (GSEs) are supported only by the credit
of the issuing agency, instrumentality, or corporation, and are
neither issued nor guaranteed by the U.S. government.
* Non-income-producing security for the year ended May 31, 2004.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
22
S T A T E M E N T
==================--------------------------------------------------------------
of ASSETS and LIABILITIES
(in thousands)
USAA INTERNATIONAL FUND
MAY 31, 2004
ASSETS
Investments in securities, at market value (including securities on loan
of $45,036) (identified cost of $443,236) $523,767
Cash 122
Cash denominated in foreign currencies (identified cost of $1,227) 1,240
Receivables:
Capital shares sold 175
USAA Transfer Agency Company 2
Dividends and interest 1,856
Securities sold 251
Other 136
--------
Total assets 527,549
--------
LIABILITIES
Payables:
Upon return of securities loaned 47,426
Securities purchased 65
Capital shares redeemed 154
Unrealized depreciation on foreign currency contracts held, at value 1
Accrued management fees 322
Accrued transfer agent's fees 9
Other accrued expenses and payables 95
--------
Total liabilities 48,072
--------
Net assets applicable to capital shares outstanding $479,477
========
NET ASSETS CONSIST OF:
Paid-in capital $369,671
Accumulated undistributed net investment income 3,546
Accumulated net realized gain on investments 25,681
Net unrealized appreciation of investments 80,531
Net unrealized appreciation on foreign currency translations 48
--------
Net assets applicable to capital shares outstanding $479,477
========
Capital shares outstanding, unlimited number of shares authorized,
no par value 23,446
========
Net asset value, redemption price, and offering price per share $ 20.45
========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
23
S T A T E M E N T
==================--------------------------------------------------------------
of OPERATIONS
(in thousands)
USAA INTERNATIONAL FUND
YEAR ENDED MAY 31, 2004
INVESTMENT INCOME
Dividends (net of foreign taxes withheld of $1,196) $ 8,801
Interest 93
Securities lending 219
-------
Total income 9,113
-------
EXPENSES
Management fees 3,236
Administrative and servicing fees 619
Transfer agent's fees 931
Custody and accounting fees 364
Postage 78
Shareholder reporting fees 37
Trustees' fees 6
Registration fees 62
Professional fees 47
Other 12
-------
Total expenses 5,392
Expenses paid indirectly (43)
-------
Net expenses 5,349
-------
NET INVESTMENT INCOME 3,764
-------
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS AND FOREIGN CURRENCY
Net realized gain (loss) on:
Investments 37,376
Foreign currency transactions (153)
Change in net unrealized appreciation/depreciation of:
Investments 55,707
Foreign currency translations (33)
-------
Net realized and unrealized gain 92,897
-------
Increase in net assets resulting from operations $96,661
=======
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
24
S T A T E M E N T S
====================------------------------------------------------------------
of Changes in NET ASSETS
(in thousands)
USAA INTERNATIONAL FUND
YEARS ENDED MAY 31,
2004 2003
--------------------------
FROM OPERATIONS
Net investment income $ 3,764 $ 2,570
Net realized gain on investments 37,376 7,960
Net realized loss on foreign currency transactions (153) (260)
Change in net unrealized appreciation/depreciation of:
Investments 55,707 (39,257)
Foreign currency translations (33) 25
--------------------------
Increase (decrease) in net assets resulting
from operations 96,661 (28,962)
--------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (2,281) (2,667)
Net realized gains (1,058) -
--------------------------
Distributions to shareholders (3,339) (2,667)
--------------------------
FROM CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold 167,465 180,895
Reinvested dividends 3,186 2,536
Cost of shares redeemed (132,039) (186,718)
--------------------------
Increase (decrease) in net assets from capital
share transactions 38,612 (3,287)
--------------------------
Net increase (decrease) in net assets 131,934 (34,916)
NET ASSETS
Beginning of period 347,543 382,459
--------------------------
End of period $ 479,477 $ 347,543
==========================
Accumulated undistributed net investment income:
End of period $ 3,546 $ 2,211
==========================
CHANGE IN SHARES OUTSTANDING
Shares sold 9,100 12,111
Shares issued for dividends reinvested 164 169
Shares redeemed (7,344) (12,443)
--------------------------
Increase (decrease) in shares outstanding 1,920 (163)
==========================
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
25
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
USAA INTERNATIONAL FUND
MAY 31, 2004
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
USAA INVESTMENT TRUST (the Trust), registered under the Investment
Company Act of 1940, as amended, is a diversified, open-end management
investment company organized as a Massachusetts business trust
consisting of nine separate funds. The information presented in this
annual report pertains only to the USAA International Fund (the Fund).
The Fund's primary investment objective is capital appreciation with
current income as a secondary objective.
A. SECURITY VALUATION - The value of each security is determined (as
of the close of trading on the New York Stock Exchange (NYSE)
on each business day the exchange is open) as set forth below:
1. Portfolio securities, except as otherwise noted, traded
primarily on a domestic securities exchange or the Nasdaq
over-the-counter markets are valued at the last sales price
or official closing price on the exchange or primary market
on which they trade. Portfolio securities traded primarily on
foreign securities exchanges or markets are valued at the
last quoted sales price, or the most recently determined
official closing price calculated according to local market
convention, available at the time the Fund is valued. If no
last sale or official closing price is reported or available,
the average of the bid and asked prices is generally used.
2. 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 net asset value (NAV) may not take
place at the same time the prices of certain foreign
securities held by the Fund are determined. In most cases,
events affecting the values of foreign securities that occur
between the time of their last quoted sales or official
closing prices and the close of normal trading on the NYSE on
a day the Fund's NAV is calculated will not be reflected in
the value of the Fund's foreign securities. However, USAA
Investment Management Company (the Manager), an affiliate of
the Fund, and the
26
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA INTERNATIONAL FUND
MAY 31, 2004
Fund's subadviser, if applicable, will monitor for events
that would materially affect the value of the Fund's foreign
securities and, if necessary, the Manager will value the
foreign securities in good faith, considering such available
information that the Manager deems relevant, under valuation
procedures approved by the Trust's Board of Trustees. In
addition, the Fund may use information from an external
vendor or other sources to adjust the foreign market closing
prices of foreign equity securities to reflect what the Fund
believes to be the fair value of the securities as of the
close of the NYSE. Fair valuation of affected foreign equity
securities may occur frequently based on an assessment that
events that occur on a fairly regular basis (such as U.S.
market movements) are significant.
3. Investments in open-end investment companies are valued at
their net asset value at the end of each business day.
4. Debt securities purchased with maturities of 60 days or less
are stated at amortized cost, which approximates market value.
Repurchase agreements are valued at cost.
5. Securities for which market quotations are not readily
available or are considered unreliable, or whose values have
been materially affected by events occurring after the close
of their primary markets but before the pricing of the Fund,
are valued in good faith at fair value, using methods
determined by the Manager, in consultation with the Fund's
subadviser, if applicable, under valuation procedures
approved by the Trust's Board of Trustees.
B. FEDERAL TAXES - The Fund's policy is to comply with the
requirements of the Internal Revenue Code applicable to
regulated investment companies and to distribute substantially
all of its income to its shareholders. Therefore, no federal
income tax provision is required.
C. INVESTMENTS IN SECURITIES - Security transactions are accounted
for on the date the securities are purchased or sold (trade
date).
27
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA INTERNATIONAL FUND
MAY 31, 2004
Gain or loss from sales of investment securities is computed on
the identified cost basis. Dividend income, less foreign taxes,
if any, is recorded on the ex-dividend date. If the ex-dividend
date has passed, certain dividends from foreign securities are
recorded upon notification. Interest income is recorded on the
accrual basis. Discounts and premiums on short-term securities
are amortized on a straight-line basis over the life of the
respective securities.
D. REPURCHASE AGREEMENTS - The Fund may enter into repurchase
agreements with commercial banks or recognized security dealers.
These agreements are collateralized by obligations issued or
guaranteed as to both principal and interest by the U.S.
government, its agencies, or its instrumentalities. Government-
sponsored enterprises (GSEs), such as Federal National Mortgage
Association (Fannie Mae) and Federal Home Loan Mortgage
Corporation (Freddie Mac), are supported only by the credit of
the issuing U.S. government agency, and are neither issued nor
guaranteed by the U.S. government. Obligations pledged as
collateral are required to maintain a value equal to or in
excess of the repurchase agreement price plus accrued interest
and are held by the Fund, either through its regular custodian
or through a special "tri-party" custodian that maintains
separate accounts for both the Fund and its counterparty, until
maturity of the repurchase agreement. The Fund's Manager
monitors the creditworthiness of sellers with which the Fund may
enter into repurchase agreements.
E. FOREIGN CURRENCY TRANSLATIONS - The Fund's assets may be invested
in the securities of foreign issuers and may be traded in
foreign currency. Since the Fund's accounting records are
maintained in U.S. dollars, foreign currency amounts are
translated into U.S. dollars on the following basis:
1. Purchases and sales of securities, income, and expenses at the
exchange rate obtained from an independent pricing service
on the respective dates of such transactions.
28
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA INTERNATIONAL FUND
MAY 31, 2004
2. Market value of securities, other assets, and liabilities at
the exchange rate obtained from an independent pricing service
on a daily basis.
The Fund does not isolate that portion of the results of
operations resulting from changes in foreign exchange rates on
investments from the fluctuations arising from changes in market
prices of securities held. Such fluctuations are included with
the net realized and unrealized gain or loss from investments.
Separately, net realized foreign currency gains/losses may arise
from sales of foreign currency, currency gains/losses realized
between the trade and settlement dates on security transactions,
and from the difference between amounts of dividends, interest,
and foreign withholding taxes recorded on the Fund's books and
the U.S. dollar equivalent of the amounts received. These net
realized foreign currency gains/losses have been reclassified
from accumulated net realized gain/loss to accumulated
undistributed net investment income on the statement of assets
and liabilities as such amounts are treated as ordinary
income/loss for tax purposes. Net unrealized foreign currency
exchange gains/losses arise from changes in the value of assets
and liabilities other than investments in securities resulting
from changes in the exchange rate.
F. EXPENSES PAID INDIRECTLY - A portion of the brokerage commissions
that the Fund pays may be reimbursed and used to reduce the
Fund's expenses. In addition, through other fee-offset
arrangements with certain of the Fund's service providers,
realized credits, if any, are used to reduce the Fund's
expenses. For the year ended May 31, 2004, these fee-offset
arrangements reduced the Fund's expenses by $43,000.
G. INDEMNIFICATIONS - Under the Trust's organizational documents,
its officers and trustees are indemnified against certain
liability arising out of the performance of their duties to the
Trust. In addition, in the normal course of business the Trust
enters into contracts that contain a variety of representations
and warranties that provide
29
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA INTERNATIONAL FUND
MAY 31, 2004
general indemnifications. The Trust's maximum exposure under
these arrangements is unknown, as this would involve future
claims that may be made against the Trust that have not yet
occurred. However, the Trust expects the risk of loss to be
remote.
H. USE OF ESTIMATES - The preparation of financial statements in
conformity with U.S. generally accepted accounting principles
requires management to make estimates and assumptions that may
affect the reported amounts in the financial statements.
(2) LINES OF CREDIT
- --------------------------------------------------------------------------------
The Fund participates with other USAA funds in two joint, short-term,
revolving, committed loan agreements totaling $500 million: $400
million with USAA Capital Corporation (CAPCO), an affiliate of the
Manager, and $100 million with Bank of America and State Street Bank
and Trust Company (State Street), under which Bank of America and
State Street have each committed $50 million. The purpose of the
agreements is to meet temporary or emergency cash needs, including
redemption requests that might otherwise require the untimely
disposition of securities.
Subject to availability under its agreement with CAPCO, the Fund may
borrow from CAPCO an amount up to 5% of the Fund's total assets at
CAPCO's borrowing rate with no markup. Subject to availability under
its agreement with Bank of America and State Street, the Fund may
borrow from Bank of America and State Street, at the federal funds
rate plus a 0.50% markup, an amount which, when added to outstanding
borrowings under the CAPCO agreement, does not exceed 25% of the
Fund's total assets.
The USAA funds that are party to the loan agreements are assessed
facility fees in aggregate by Bank of America and State Street in an
annual amount equal to 0.09% of the $100 million loan agreement,
whether used or not, and by CAPCO based on the funds' assessed
proportionate share of CAPCO's operating expenses related to obtaining
and maintaining CAPCO's funding programs in total (in no event to
exceed 0.09% annually of the $400 million loan agreement). The
facility
30
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA INTERNATIONAL FUND
MAY 31, 2004
fees are allocated among the funds based on their respective average
net assets for the period. For the year ended May 31, 2004, the Fund
paid CAPCO facility fees of $2,000. The Fund had no borrowings under
either of these agreements during the year ended May 31, 2004.
(3) DISTRIBUTIONS
- --------------------------------------------------------------------------------
The character of distributions made during the year from net
investment income or net realized gains is determined in accordance
with federal tax regulations and may differ from those determined in
accordance with U.S. generally accepted accounting principles. Also,
due to the timing of distributions, the fiscal year in which amounts
are distributed may differ from the year that the income or realized
gains were recorded by the Fund.
During the current fiscal year, permanent differences between book-
and tax-basis accounting resulted in reclassifications made to the
statement of assets and liabilities to increase paid-in capital by
$1,125,000, decrease accumulated undistributed net investment income
by $148,000, and decrease accumulated net realized gain on investments
by $977,000. This includes differences in the accounting for foreign
currency gains and losses, other security transactions, and the
utilization of earnings and profits distributed to shareholders on
redemptions of shares as part of the dividends-paid deduction for
federal income tax purposes. This reclassification has no effect on
net assets.
The tax character of distributions paid during the years ended May 31,
2004, and 2003, was as follows:
2004 2003
----------------------------
Ordinary income* $2,281,000 $2,667,000
Long-term realized capital gains 2,183,000 -
*Includes distribution of short-term realized capital gains, if any,
which are taxable as ordinary income.
For the fiscal year ended May 31, 2004, certain dividends paid by the
Fund may be subject to a maximum tax rate of 15%, as provided for by
the Jobs and Growth Tax Relief Reconciliation Act of 2003. Of the
31
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA INTERNATIONAL FUND
MAY 31, 2004
distributions paid during the fiscal year, the maximum amount that may
be considered qualified dividend income is $2,281,000. The information
and distributions reported herein may differ from the information and
distributions reported to shareholders for the calendar year ending
December 31, 2004, which will be reported in conjunction with the 2004
Form 1099-DIV.
As of May 31, 2004, the components of net assets representing
distributable earnings on a tax basis were as follows:
Undistributed ordinary income $ 9,060,000
Undistributed long-term capital gains 21,052,000
Accumulated capital and other losses (134,000)
Unrealized appreciation of investments 79,780,000
Unrealized appreciation on foreign currency translations 49,000
The difference between book-basis and tax-basis appreciation of
investments is due to differences in the timing of recognition of
gains and losses on investments for tax and book purposes. The Fund's
unrealized appreciation difference is attributable to the tax deferral
of losses on wash sales.
Distributions of net investment income and realized gains from
security transactions not offset by capital losses are made annually
in the succeeding fiscal year or as otherwise required to avoid the
payment of federal taxes. For the year ended May 31, 2004, the Fund
utilized capital loss carryovers of $7,723,000 to offset capital
gains. At May 31, 2004, the Fund had a current post-October currency
loss of $134,000, for federal income tax purposes. The post-October
loss will be recognized on the first day of the following fiscal year.
(4) INVESTMENT TRANSACTIONS
- --------------------------------------------------------------------------------
Cost of purchases and proceeds from sales of securities, excluding
short-term securities, for the year ended May 31, 2004, were
$269,936,000 and $235,395,000, respectively.
32
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA INTERNATIONAL FUND
MAY 31, 2004
The cost of securities at May 31, 2004, for federal income tax
purposes, was $443,987,000.
Gross unrealized appreciation and depreciation of investments as of
May 31, 2004, for federal income tax purposes, were $85,957,000 and
$6,177,000, respectively, resulting in net unrealized appreciation of
$79,780,000.
(5) FOREIGN CURRENCY CONTRACTS
- --------------------------------------------------------------------------------
A forward currency contract (currency contract) is a commitment to
purchase or sell a foreign currency at a specified date, at a
negotiated price. The Fund may enter into currency contracts in
connection with the purchase or sale of a security denominated in a
foreign currency. These contracts allow the Fund to "lock in" the
U.S. dollar price of the security. The Fund may also enter into
currency contracts to hedge against foreign currency exchange risks on
the non-U.S. dollar denominated securities held in the Fund's
portfolio. Currency contracts are valued on a daily basis using
foreign currency exchange rates obtained from an independent pricing
service. Risks of entering into currency contracts include the
potential inability of the counterparty to meet the terms of the
contract and the Fund's giving up the opportunity for potential
profit.
At May 31, 2004, the terms of open foreign currency contracts were as
follows (in thousands):
FOREIGN CURRENCY CONTRACTS TO BUY
- -----------------------------------------------------------------------------------------------
U.S. DOLLAR UNREALIZED
EXCHANGE CONTRACTS TO VALUE AS OF IN EXCHANGE APPRECIATION
DATE RECEIVE 5/31/2004 FOR U.S. DOLLAR (DEPRECIATION)
- -----------------------------------------------------------------------------------------------
6/01/2004 7,204 $65 $65 $-
Japanese Yen
- -----------------------------------------------------------------------------------------------
33
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA INTERNATIONAL FUND
MAY 31, 2004
FOREIGN CURRENCY CONTRACTS TO SELL
- -----------------------------------------------------------------------------------------------
U.S. DOLLAR UNREALIZED
EXCHANGE CONTRACTS TO VALUE AS OF IN EXCHANGE APPRECIATION
DATE DELIVER 5/31/2004 FOR U.S. DOLLAR (DEPRECIATION)
- -----------------------------------------------------------------------------------------------
6/01/2004 540 $395 $395 $ -
Canadian Dollar
6/01/2004 20 37 37 -
Pound Sterling
6/01/2004 815 121 120 (1)
Norwegian Krone
6/03/2004 621 92 92 -
Norwegian Krone
- -----------------------------------------------------------------------------------------------
$645 $644 $(1)
- -----------------------------------------------------------------------------------------------
(6) LENDING OF PORTFOLIO SECURITIES
- --------------------------------------------------------------------------------
The Fund may lend its securities to qualified financial institutions,
such as certain broker-dealers, to earn additional income. The
borrowers are required to secure their loans continuously with cash
collateral in an amount at least equal, at all times, to the fair
value of the securities loaned. Cash collateral is invested in
high-quality short-term investments. The Fund retains a portion of
income from the investment of cash received as collateral. Risks to
the Fund in securities-lending transactions are that the borrower may
not provide additional collateral when required or return the
securities when due, and that the value of the short-term investments
will be less than the amount of cash collateral required to be
returned to the borrower. As of May 31, 2004, the Fund loaned
securities having a fair market value of approximately $45,036,000 and
received cash collateral of $47,426,000 for the loans. The cash
collateral was invested in money market instruments, as noted in the
Fund's portfolio of investments.
(7) TRANSACTIONS WITH MANAGER
- --------------------------------------------------------------------------------
A. MANAGEMENT FEES - The Manager carries out the Fund's
investment policies and provides portfolio management oversight
34
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA INTERNATIONAL FUND
MAY 31, 2004
of the Fund's assets managed by a subadviser. The investment
management fee for the Fund is composed of a base fee and a
performance adjustment that increases or decreases the base fee
depending upon the performance of the Fund relative to the
performance of the Lipper International Funds Index, which
tracks the total return performance of the 30 largest funds in
the Lipper International Funds category. The Fund's base fee is
accrued daily and paid monthly at an annualized rate of 0.75% of
the Fund's average net assets.
The performance adjustment is calculated monthly by comparing
the Fund's performance to that of the Lipper index over the
performance period. The performance period for the Fund
commenced on August 1, 2001, and will consist of the current
month plus the preceding months through that date until a period
of 36 months is included in the performance period. Thereafter,
the performance period will consist of the current month plus
the previous 35 months.
The annual performance adjustment rate is multiplied by the
average net assets of the Fund over the entire performance
period, which is then multiplied by a fraction, the numerator of
which is the number of days in the month and the denominator of
which is 365 (366 in leap years). The resulting amount is then
added to (in the case of overperformance) or subtracted from (in
the case of underperformance) the base fee, as referenced in the
following chart:
OVER/UNDER PERFORMANCE ANNUAL ADJUSTMENT RATE
RELATIVE TO INDEX(1) AS A % OF THE FUND'S AVERAGE NET ASSETS
- ---------------------------------------------------------------------------------
+/- 1.00% to 4.00% +/- 0.04%
+/- 4.01% to 7.00% +/- 0.05%
+/- 7.01% and greater +/- 0.06%
(1)Based on the difference between average annual performance of the Fund and
its relevant index, rounded to the nearest 0.01%.
35
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA INTERNATIONAL FUND
MAY 31, 2004
For the year ended May 31, 2004, the Fund incurred total
management fees, paid or payable to the Manager, of $3,236,000,
which included a performance adjustment of $142,000 that
increased the base management fee of 0.75% by 0.03%.
B. SUBADVISORY ARRANGEMENTS - The Manager has entered into an
investment subadvisory agreement with MFS Investment Management
(MFS), under which MFS directs the investment and reinvestment
of the Fund's assets (as allocated from time to time by the
Manager). The Manager (not the Fund) pays MFS a subadvisory fee.
C. ADMINISTRATIVE AND SERVICING FEES - The Manager provides certain
administrative and shareholder servicing functions for the Fund.
For such services, the Manager receives a fee accrued daily and
paid monthly at an annualized rate of 0.15% of the Fund's
average net assets. For the year ended May 31, 2004, the Fund
incurred administrative and servicing fees, paid or payable to
the Manager, of $619,000.
D. TRANSFER AGENT'S FEES - USAA Transfer Agency Company, d/b/a
USAA Shareholder Account Services, an affiliate of the Manager,
provides transfer agent services to the Fund based on an annual
charge of $23 per shareholder account plus out-of-pocket
expenses. For the year ended May 31, 2004, the Fund incurred
transfer agent's fees, paid or payable to USAA Transfer Agency
Company, of $931,000. Additionally, the Fund recorded a
receivable from USAA Transfer Agency Company of $2,000 at May
31, 2004.
E. UNDERWRITING SERVICES - The Manager provides exclusive
underwriting and distribution of the Fund's shares on a
continuing best-efforts basis. The Manager receives no
commissions or fees for this service.
36
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA INTERNATIONAL FUND
MAY 31, 2004
(8) TRANSACTIONS WITH AFFILIATES
- --------------------------------------------------------------------------------
Certain trustees and officers of the Fund are also directors,
officers, and/or employees of the Manager. None of the affiliated
trustees or Fund officers received any compensation from the Fund.
(9) FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
Per share operating performance for a share outstanding throughout each period
is as follows:
YEAR ENDED MAY 31,
-------------------------------------------------------------------------
2004 2003 2002 2001 2000
-------------------------------------------------------------------------
Net asset value at beginning of period $ 16.15 $ 17.63 $ 18.23 $ 22.28 $ 19.79
-------------------------------------------------------------------------
Income (loss) from investment operations:
Net investment income .15 .11 .14 .16 .11
Net realized and unrealized gain (loss) 4.30 (1.46) (.56) (3.01) 3.70
-------------------------------------------------------------------------
Total from investment operations 4.45 (1.35) (.42) (2.85) 3.81
-------------------------------------------------------------------------
Less distributions:
From net investment income (.10) (.13) (.18) (.11) (.18)
From realized capital gains (.05) - - (1.09) (1.14)
-------------------------------------------------------------------------
Total distributions (.15) (.13) (.18) (1.20) (1.32)
-------------------------------------------------------------------------
Net asset value at end of period $ 20.45 $ 16.15 $ 17.63 $ 18.23 $ 22.28
=========================================================================
Total return (%)* 27.63 (7.63) (2.22) (13.84) 19.26
Net assets at end of period (000) $479,477 $347,543 $382,459 $419,236 $533,305
Ratio of expenses to average
net assets (%)** 1.31(a) 1.42(a) 1.32(a) 1.14(a) 1.11
Ratio of net investment income to average
net assets (%)** .91 .79 .78 .84 .73
Portfolio turnover (%) 58.70 148.14 35.63 32.75 39.75
* Assumes reinvestment of all net investment income and realized capital gain distributions during the period.
Calculated using net assets adjusted for last day trades and could differ from the Lipper reported return.
** For the year ended May 31, 2004, average net assets were $413,042,000.
(a)Reflects total expenses, excluding any expenses paid indirectly, which decreased the Fund's expense ratios
as follows:
(.01%) (.01%) - - N/A
37
D I R E C T O R S ' A N D O F F I C E R S '
===================-------------------------------------------------------------
INFORMATION
DIRECTORS* AND OFFICERS OF THE COMPANY
- --------------------------------------------------------------------------------
The Board of Directors of the Company consists of seven
Directors. These Directors and the Company's Officers
supervise the business affairs of the USAA family of funds. The
Board of Directors is responsible for the general oversight of
the funds' business and for assuring that the funds are managed
in the best interests of each fund's respective shareholders.
The Board of Directors periodically reviews the funds'
investment performance as well as the quality of other services
provided to the funds and their shareholders by each of the
fund's service providers, including USAA Investment Management
Company (IMCO) and its affiliates. The term of office for each
Director shall be fifteen (15) years or until the Director
reaches age 70. All members of the Board of Directors shall be
presented to shareholders for election or reelection, as the
case may be, at least once every five years. Vacancies on the
Board of Directors can be filled by the action of a majority of
the Directors, provided that at least two-thirds of the
Directors have been elected by the shareholders.
Set forth below are the Directors and Officers of the Company,
their respective offices and principal occupations during the
last five years, length of time served, and information
relating to any other directorships held. Each serves on the
Board of Directors of the USAA family of funds consisting of
four registered investment companies offering 38 individual
funds as of May 31, 2004. Unless otherwise indicated, the
business address of each is 9800 Fredericksburg Road, San
Antonio, TX 78288.
If you would like more information about the funds' Directors,
you may call (800) 531-8181 to request a free copy of the
funds' statement of additional information (SAI).
* FOR SIMPLICITY THROUGHOUT THIS SECTION, THE BOARDS OF
DIRECTORS AND BOARDS OF TRUSTEES OF THE FOUR LEGAL ENTITIES
THAT COMPRISE THE USAA FAMILY OF FUNDS WILL BE IDENTIFIED AS
THE BOARD OF DIRECTORS.
38
. . . C O N T I N U E D
========================--------------------------------------------------------
INFORMATION
INTERESTED DIRECTORS(1)
- --------------------------------------------------------------------------------
ROBERT G. DAVIS (2)
Director and Chairman of the Board of Directors
Born: November 1946
Year of Election or Appointment: 1996
Chairman, Chief Executive Officer, and President of United
Services Automobile Association (USAA) (10/02-present);
President and Chief Executive Officer of USAA (4/00-10/02);
President and Chief Operating Officer of USAA (6/99-3/00);
Director of USAA (2/99-present); Deputy Chief Executive
Officer for Capital Management of USAA (6/98-5/99);
President, Chief Executive Officer, Director, and Chairman
of the Board of Directors of USAA Capital Corporation
(CAPCO) and several of its subsidiaries and affiliates
(1/97-present); and President, Chief Executive Officer,
Director, and Chairman of the Board of Directors of USAA
Financial Planning Services (FPS) (1/97-7/03). Mr. Davis
serves as a Director/Trustee and Chairman of the Boards of
Directors/Trustees of the USAA family of funds. He also
serves as a Director and Chairman of the Boards of Directors
of USAA Investment Management Company (IMCO), USAA Life
Insurance Company, USAA Federal Savings Bank, USAA Real
Estate Company (RealCo), and USAA Financial Advisors, Inc.
(FAI).
CHRISTOPHER W. CLAUS (2,4)
Director, President, and Vice Chairman of the Board of
Directors
Born: December 1960
Year of Election or Appointment: 2001
President and Chief Executive Officer, Director, and Vice
Chairman of the Board of Directors, IMCO (2/01-present).
Senior Vice President of Investment Sales and Service, IMCO
(7/00-2/01); Vice President, Investment Sales and Service,
IMCO (12/94-7/00). Mr. Claus serves as President,
Director/Trustee, and Vice Chairman of the Boards of
Directors/Trustees of the USAA family of funds. He also
serves as President, Director, and Chairman of the Board of
Directors of USAA Shareholder Account Services. He also
holds the Officer position of Senior Vice President of USAA
Life Investment Trust, a registered investment company
offering five individual funds.
39
. . . C O N T I N U E D
========================--------------------------------------------------------
INFORMATION
NON-INTERESTED (INDEPENDENT) DIRECTORS
- --------------------------------------------------------------------------------
BARBARA B. DREEBEN (3,4,5,6)
Director
Born: June 1945
Year of Election or Appointment: 1994
President, Postal Addvantage (7/92-present), a postal mail list
management service. Mrs. Dreeben serves as Director/Trustee of
the USAA family of funds. Mrs. Dreeben holds no other
directorships of any publicly held corporations or other
investment companies outside the USAA family of funds.
ROBERT L. MASON, PH.D. (3,4,5,6)
Director
Born: July 1946
Year of Election or Appointment: 1997
Institute Analyst, Southwest Research Institute (3/02-present);
Staff Analyst, Southwest Research Institute (9/98-3/02), which
focuses in the fields of technological research. Dr. Mason
serves as a Director/Trustee of the USAA family of funds. Dr.
Mason holds no other directorships of any publicly held
corporations or other investment companies outside the USAA
family of funds.
MICHAEL F. REIMHERR (3,4,5,6)
Director
Born: August 1945
Year of Election or Appointment: 2000
President of Reimherr Business Consulting (5/95-present), an
organization that performs business valuations of large
companies to include the development of annual business plans,
budgets, and internal financial reporting. Mr. Reimherr serves
as a Director/Trustee of the USAA family of funds. Mr. Reimherr
holds no other directorships of any publicly held corporations
or other investment companies outside the USAA family of funds.
40
. . . C O N T I N U E D
========================--------------------------------------------------------
INFORMATION
LAURA T. STARKS, PH.D. (3,4,5,6)
Director
Born: February 1950
Year of Election or Appointment: 2000
Charles E. and Sarah M. Seay Regents Chair Professor of
Finance, University of Texas at Austin (9/96-present).
Dr. Starks serves as a Director/Trustee of the USAA family of
funds. Dr. Starks holds no other directorships of any publicly
held corporations or other investment companies outside the
USAA family of funds.
RICHARD A. ZUCKER (2,3,4,5,6)
Director
Born: July 1943
Year of Election or Appointment: 1992
Vice President, Beldon Roofing Company (7/85-present).
Mr. Zucker serves as a Director/Trustee of the USAA family of
funds. Mr. Zucker holds no other directorships of any publicly
held corporations or other investment companies outside the
USAA family of funds.
(1) INDICATES THOSE DIRECTORS WHO ARE EMPLOYEES OF USAA
INVESTMENT MANAGEMENT COMPANY OR AFFILIATED COMPANIES AND
ARE CONSIDERED "INTERESTED PERSONS" UNDER THE INVESTMENT
COMPANY ACT OF 1940.
(2) MEMBER OF EXECUTIVE COMMITTEE
(3) MEMBER OF AUDIT COMMITTEE
(4) MEMBER OF PRICING AND INVESTMENT COMMITTEE
(5) MEMBER OF CORPORATE GOVERNANCE COMMITTEE
(6) THE ADDRESS FOR ALL NON-INTERESTED DIRECTORS IS THAT OF THE
USAA FUNDS, P.O. BOX 659430, SAN ANTONIO, TX 78265-9430.
41
. . . C O N T I N U E D
========================--------------------------------------------------------
INFORMATION
INTERESTED OFFICERS(1)
- --------------------------------------------------------------------------------
CLIFFORD A. GLADSON
Vice President
Born: November 1950
Year of Appointment: 2002
Senior Vice President, Fixed Income Investments, IMCO
(9/02-present); Vice President, Fixed Income Investments, IMCO
(5/02-9/02); Vice President, Mutual Fund Portfolios, IMCO
(12/99-5/02); Assistant Vice President, Fixed Income
Investments, IMCO (11/94-12/99). Mr. Gladson also holds the
Officer position of Vice President of USAA Life Investment
Trust, a registered investment company offering five individual
funds.
STUART WESTER
Vice President
Born: June 1947
Year of Appointment: 2002
Vice President, Equity Investments, IMCO (1/99-present); Vice
President, Investment Strategy and Analysis, CAPCO (6/96-1/99).
Mr. Wester also holds the Officer position of Vice President of
USAA Life Investment Trust, a registered investment company
offering five individual funds.
MARK S. HOWARD
Secretary
Born: October 1963
Year of Appointment: 2002
Senior Vice President, Life/IMCO/FPS General Counsel, USAA
(10/03-present); Senior Vice President, Securities Counsel,
USAA (12/02-10/03); Senior Vice President, Securities Counsel &
Compliance, IMCO (1/02-12/02); Vice President, Securities
Counsel & Compliance, IMCO (7/00-1/02); and Assistant Vice
President, Securities Counsel, USAA (2/98-7/00). Mr. Howard
also holds the Officer positions of Senior Vice President,
Secretary, and Counsel for USAA Life Insurance Company, IMCO,
FAI, FPS, and USAA Shareholder Account Services; and Secretary
for USAA Life Investment Trust, a registered investment company
offering five individual funds.
DAVID M. HOLMES
Treasurer
Born: June 1960
Year of Appointment: 2001
Senior Vice President, Life/IMCO/FPS Senior Financial Officer,
USAA (12/02-present); Senior Vice President, Senior Financial
Officer,
42
. . . C O N T I N U E D
========================--------------------------------------------------------
INFORMATION
IMCO (6/01-12/02); Vice President, Senior Financial Officer,
RealCo (12/97-5/01). Mr. Holmes also holds the Officer
positions of Senior Vice President, Senior Financial Officer of
USAA Life Insurance Company, IMCO, USAA Shareholder Account
Services, FAI, and FPS; and Treasurer of USAA Life Investment
Trust, a registered investment company offering five individual
funds.
EILEEN M. SMILEY
Assistant Secretary
Born: November 1959
Year of Appointment: 2003
Vice President, Securities Counsel, USAA (2/04-present);
Assistant Vice President, Securities Counsel, USAA (1/03-2/04);
Attorney, Morrison & Foerster, LLP (1/99-1/03). Ms. Smiley also
holds the Officer position of Vice President and Assistant
Secretary of IMCO, FAI, and FPS; and Assistant Secretary of
USAA Life Investment Trust, a registered investment company
offering five individual funds.
ROBERTO GALINDO, JR.
Assistant Treasurer
Born: November 1960
Year of Appointment: 2000
Assistant Vice President, Portfolio Accounting/Financial
Administration, USAA (12/02-present); Assistant Vice President,
Mutual Fund Analysis & Support, IMCO (10/01-12/02); Executive
Director, Mutual Fund Analysis & Support, IMCO (6/00-10/01);
Director, Mutual Fund Analysis, IMCO (9/99-6/00); Vice
President, Portfolio Administration, Founders Asset Management
LLC (7/98-8/99). Mr. Galindo also holds the Officer position
of Assistant Treasurer of USAA Life Investment Trust, a
registered investment company offering five individual funds.
(1) INDICATES THOSE OFFICERS WHO ARE EMPLOYEES OF USAA
INVESTMENT MANAGEMENT COMPANY OR AFFILIATED COMPANIES AND
ARE CONSIDERED "INTERESTED PERSONS" UNDER THE INVESTMENT
COMPANY ACT OF 1940.
43
N O T E S
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TRUSTEES Robert G. Davis, CHAIRMAN OF THE BOARD
Christopher W. Claus, VICE CHAIRMAN OF THE BOARD
Barbara B. Dreeben
Robert L. Mason, Ph.D.
Michael F. Reimherr
Laura T. Starks, Ph.D.
Richard A. Zucker
ADMINISTRATOR, USAA Investment Management Company
INVESTMENT ADVISER, P.O. Box 659453
UNDERWRITER, San Antonio, Texas 78265-9825
AND DISTRIBUTOR
TRANSFER AGENT USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, Texas 78288
CUSTODIAN State Street Bank and Trust Company
P.O. Box 1713
Boston, Massachusetts 02105
INDEPENDENT Ernst & Young LLP
REGISTERED PUBLIC 100 West Houston St., Suite 1900
ACCOUNTING FIRM San Antonio, Texas 78205
TELEPHONE Call toll free - Central time
ASSISTANCE HOURS Monday - Friday, 7 a.m. to 10 p.m.
Saturday, 8:30 a.m. to 5 p.m.
Sunday, 10:30 a.m. to 7 p.m.
FOR ADDITIONAL 1-800-531-8181, in San Antonio 456-7200
INFORMATION ABOUT For account servicing, exchanges,
MUTUAL FUNDS or redemptions
1-800-531-8448, in San Antonio 456-7202
RECORDED MUTUAL 24-hour service (from any phone)
FUND PRICE QUOTES 1-800-531-8066, in San Antonio 498-8066
MUTUAL FUND (from touch-tone phones only)
USAA TOUCHLINE For account balance, last transaction, fund
prices, or to exchange or redeem fund shares
1-800-531-8777, in San Antonio 498-8777
INTERNET ACCESS USAA.COM
THROUGH OUR ONGOING EFFORTS TO REDUCE EXPENSES, YOUR REPORT MAILINGS ARE
STREAMLINED. WE DEVELOP MAILING LISTS USING CRITERIA SUCH AS ADDRESS, MEMBER
NUMBER, AND SURNAME TO SEND ONE REPORT TO EACH HOUSEHOLD INSTEAD OF SENDING A
REPORT TO EVERY REGISTERED OWNER. THIS PRACTICE IS DESIGNED TO REDUCE DUPLICATE
COPIES AND SAVE PAPER AND POSTAGE COSTS TO THE FUND. IF YOU PREFER NOT TO
PARTICIPATE IN STREAMLINING AND WOULD LIKE TO CONTINUE RECEIVING ONE REPORT PER
REGISTERED ACCOUNT OWNER, PLEASE CALL US AND WE WILL BEGIN YOUR INDIVIDUAL
DELIVERY WITHIN 30 DAYS OF YOUR REQUEST.
COPIES OF THE FUND'S PROXY VOTING POLICIES AND PROCEDURES ARE AVAILABLE WITHOUT
CHARGE (I) BY CALLING 1-800-531-8448; (II) AT USAA.COM; AND (III) ON THE SEC'S
WEB SITE AT HTTP://WWW.SEC.GOV.
[LOGO OF RECYCLED PAPER]
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- --------------------------------------------------------------------------------
[LOGO OF USAA] 9800 Fredericksburg Road -------------
USAA(R) San Antonio, Texas 78288 PRSRT STD
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USAA ----------------------------------
INSURANCE o MEMBER SERVICES
23409-0704 (C)2004, USAA. All rights reserved.
ITEM 2. CODE OF ETHICS.
On June 25, 2003, the Board of Trustees of USAA Investment Trust approved a Code
of Ethics (Sarbanes Code) applicable solely to its senior financial officers,
including its principal executive officer (President), as defined under the
Sarbanes-Oxley Act of 2002 and implementing regulations of the Securities and
Exchange Commission. A copy of the Sarbanes Code is attached as an Exhibit to
this Form N-CSR.
No amendments have been made to the Sarbanes Code since it was adopted, and no
waivers (explicit or implicit) from a provision of the Sarbanes Code have been
granted.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
Dr. Laura T. Starks, Ph.D. has been designated as an audit committee financial
expert for USAA Investment Trust. Dr. Starks has served as a professor of
Finance at the University of Texas at Austin since 1987, and has served as the
Chair Professor of Finance since 1996. Dr. Starks also has served as a
consultant to numerous clients, including accounting firms, on a range of
finance, accounting and auditing issues. Dr. Starks is an independent director
who serves as a member of the Audit Committee, Pricing and Investment Committee
and the Corporate Governance Committee of the Board of Trustees of USAA
Investment Trust.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
(a) AUDIT FEES. The Registrant, USAA Investment Trust, consists of 9 funds. The
aggregate fees accrued or paid by the Registrant to its independent auditor,
Ernst & Young LLP, for professional services rendered for the audit of the
Registrant's annual financial statements and services provided in connection
with statutory and regulatory filings by the Registrant for fiscal years ended
May 31, 2003 and 2004 were $140,400 and $154,195, respectively.
(b) AUDIT RELATED FEE. The aggregate fees accrued or paid by the Funds' transfer
agent for professional services rendered by Ernst & Young LLP for audit-related
services related to the annual study of its internal controls for fiscal years
ending May 31, 2003 and May 31, 2004 were $15,000 and $15,500, respectively.
The Registrant did not accrue or pay Ernst & Young LLP any audit-related fees.
(c) TAX FEES. The aggregate fees paid or accrued by the Registrant for
professional services rendered by Ernst & Young, LLP for tax services are
detailed in the table below:
Review of Analysis Review of
Federal, State of Passive US/UK Tax
and City Income Foreign Quarterly Treaty and
and tax returns Investment Diversification issues related
and excise tax Company Review under to grantor
calculations Status Subchapter M trust TOTAL
- ---------------------------------------------------------------------------------------------
FYE 5/31/2003 $38,395 -0- -0- -0- $38,395
FYE 5/31/2004 $39,700 $4,583 $5,400 $1,547 $51,230
- ---------------------------------------------------------------------------------------------
TOTAL $78,095 $4,583 $5,400 $1,547 $89,625
- ---------------------------------------------------------------------------------------------
All tax services were preapproved by the Audit Committee of the Registrant.
(d) ALL OTHER FEES. The Funds' investment adviser and transfer agent, USAA
Investment Management Company (IMCO) and USAA Transfer Agency Company (dba USAA
Shareholder Account Services) (SAS) paid Ernst & Young LLP aggregate fees of
$21,036 for non-audit services related to the Funds for the fiscal year ended
May 31, 2003. The services are detailed in the table below:
- --------------------------------------------------------------------------------
DESCRIPTION OF OTHER SERVICES - 5/31/2003
- --------------------------------------------------------------------------------
DESCRIPTION OF SERVICE AMOUNT PAID PARTY PAYING
- --------------------------------------------------------------------------------
Review of Corporate $ 7,960 IMCO
Governance Procedures
Review of Anti-Money $ 2,500 IMCO
Laundering Procedures
As of Review $ 4,000 SAS
Reporting and Oversight Review $ 6,576 IMCO
- --------------------------------------------------------------------------------
TOTAL $21,036
- --------------------------------------------------------------------------------
These services provided in the fiscal year ending May 31, 2003 were not
pre-approved by the Audit Committee because the engagements occurred prior to
the rule's effectiveness requiring such pre-approval. Any such other non-audit
fees to be provided to the Funds' investment adviser or transfer agent (or other
affiliated service provider to the Funds) directly related to fund operations
will be subject to the pre-approval requirement. No such fees were paid in the
fiscal year ending May 31, 2004.
(e)(1) AUDIT COMMITTEE PRE-APPROVAL POLICY. All audit and non-audit services to
be performed for the Registrant by Ernst & Young LLP must be pre-approved by the
Audit Committee. The Audit Committee Charter also permits the Chair of the Audit
Committee to pre-approve any permissible non-audit service that must be
commenced prior to a scheduled meeting of the Audit Committee. All non-audit
services were pre-approved by the Audit Committee or its Chair, consistent with
the Audit Committee's preapproval procedures.
(2) Not applicable.
(f) Not applicable.
(g) The total aggregate non-audit fees accrued or paid to Ernst & Young for
services rendered to the Registrant, and the Registrant's investment adviser,
IMCO, and transfer agent, SAS, for the fiscal years ending May 31, 2003 and May
31, 2004 were $114,431 and $88,730, respectively.
(h) Ernst & Young LLP provided non-audit services to IMCO in 2003 and 2004 that
were not required to be pre-approved by the Registrant's Audit Committee because
the services were not directly related to the operations of the Registrant's
funds. The Board of Directors/Trustees will consider Ernst & Young LLP's
independence and will consider whether the provision of these non-audit services
to IMCO is compatible with maintaining Ernst & Young LLP's independence.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not Applicable.
ITEM 6. SCHEDULE OF INVESTMENTS.
Filed as part of the report to shareholders.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
Not Applicable.
ITEM 8. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not Applicable.
ITEM 9. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Corporate Governance Committee selects and nominates candidates for
membership on the Board as independent directors. Currently, there is no
procedure for shareholders to recommend candidates to serve on the Board.
ITEM 10. CONTROLS AND PROCEDURES
The chief executive officer and chief financial officer of USAA Investment Trust
(Trust) have concluded that the Trust's disclosure controls and procedures are
sufficient to ensure that information required to be disclosed by the Trust in
this Form N-CSR was recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission's rules and forms,
based upon such officers' evaluation of these controls and procedures as of a
date within 90 days of the filing date of the report.
There were no significant changes or corrective actions with regard to
significant deficiencies or material weaknesses in the Trust's internal controls
or in other factors that could significantly affect the Trust's internal
controls subsequent to the date of their evaluation.
ITEM 11. EXHIBITS.
(a)(1). Code of Ethics pursuant to Item 2 of Form N-CSR is filed hereto exactly
as set forth below:
CODE OF ETHICS
FOR PRINCIPAL EXECUTIVE OFFICER
AND SENIOR FINANCIAL OFFICERS
USAA MUTUAL FUND, INC.
USAA TAX-EXEMPT FUND, INC.
USAA INVESTMENT TRUST
USAA STATE TAX-FREE TRUST
USAA LIFE INVESTMENT TRUST
I. PURPOSE OF THE CODE OF ETHICS
USAA Mutual Fund, Inc., USAA Tax-Exempt Fund, Inc., USAA Investment
Trust, USAA State Tax-Free Trust and USAA Life Investment Trust (collectively,
the Funds, and each a Company) have adopted this code of ethics (the Code) to
comply with Section 406 of the Sarbanes-Oxley Act of 2002 (the Act) and
implementing regulations of the Securities and Exchange Commission (SEC). The
Code applies to each Company's Principal Executive Officer, Principal Financial
Officer and Principal Accounting Officer (each a Covered Officer), as detailed
in Appendix A.
The purpose of the Code is to promote:
o honest and ethical conduct, including the ethical handling of actual or
apparent conflicts of interest between the Covered Officers' personal
and professional relationships;
o full, fair, accurate, timely and understandable disclosure in reports
and documents that each Company files with, or submits to, the SEC and
in other public communications made by each Company;
o compliance with applicable laws and governmental rules and regulations;
o prompt internal reporting of violations of the Code to the Chief Legal
Officer of each Company, the President of each Company (if the
violation concerns the Treasurer) and the Chairman of the Board of
Directors/Trustees of each Company; and
o accountability for adherence to the Code.
Each Covered Officer should adhere to a high standard of business
ethics and should be sensitive to actual and apparent conflicts of interest.
II. CONFLICTS OF INTEREST
A. DEFINITION OF A CONFLICT OF INTEREST.
A conflict of interest exists when a Covered Officer's private interest
influences, or reasonably appears to influence, the Covered Officer's judgment
or ability to act in the best interests of the Funds and their shareholders. For
example, a conflict of interest could arise if a Covered Officer, or an
immediate family member, receives personal benefits as a result of his or her
position with the Funds.
Certain conflicts of interest arise out of relationships between
Covered Officers and the Funds and are already subject to conflict of interest
provisions in the Investment Company Act of 1940 (the 1940 Act) and the
Investment Advisers Act of 1940 (the Advisers Act). For example, Covered
Officers may not individually engage in certain transactions with the Funds
because of their status as "affiliated persons" of the Funds. The USAA Funds'
and USAA Investment Management Company's (IMCO) compliance programs and
procedures are designed to prevent, or identify and correct, violations of these
provisions. This Code does not, and is not intended to, repeat or replace these
programs and procedures, and such conflicts fall outside of the parameters of
this Code.
Although typically not presenting an opportunity for improper personal
benefit, conflicts could arise from, or as a result of, the contractual
relationships between the Funds and IMCO of which the Covered Officers are also
officers or employees. As a result, this Code recognizes that the Covered
Officers will, in the normal course of their duties (whether formally for the
Funds or for IMCO, or for both), be involved in establishing policies and
implementing decisions that will have different effects on IMCO and the Funds.
The participation of Covered Officers in such activities is inherent in the
contractual relationship between the Funds and IMCO and is consistent with the
performance by the Covered Officers of their duties as officers of the Funds.
Thus, if performed in compliance with the provisions of the 1940 Act and the
Advisers Act, such activities will be deemed to have been handled ethically. In
addition, it is recognized by each Company's Board of Directors/Trustees (each a
Board, and collectively the Boards) that the Covered Officers also may be
officers or employees of one or more other investment companies covered by this
joint USAA Funds' Code.
B. GENERAL RULE. Covered Officers Should Avoid Actual and
Apparent Conflicts of Interest.
Conflicts of interest, other than the conflicts described in the two
preceding paragraphs, are covered by the Code. The following list provides
examples of conflicts of interest under the Code, but Covered Officers should
keep in mind that these examples are not exhaustive. The overarching principle
is that the personal interest of a Covered Officer should not be placed
improperly before the interest of the Funds and their shareholders.
Each Covered Officer must not engage in conduct that constitutes an
actual conflict of interest between the Covered Officer's personal interest and
the interests of the Funds and their shareholders. Examples of actual conflicts
of interest are listed below but are not exclusive. Each Covered Officer must
not:
o use his personal influence or personal relationships improperly to
influence investment decisions or financial reporting by the Funds
whereby the Covered Officer would benefit personally to the detriment
of the Funds and their shareholders;
o cause the Funds to take action, or fail to take action, for the
individual personal benefit of the Covered Officer rather than the
benefit of the Funds and their shareholders.
o accept gifts, gratuities, entertainment or any other benefit from any
person or entity that does business or is seeking to do business with
the Funds during contract negotiations.
o accept gifts, gratuities, entertainment or any other benefit with a
market value over $100 per person, per year, from or on behalf of any
person or entity that does, or seeks to do, business with or on behalf
of the Funds.
o EXCEPTION. Business-related entertainment such as meals, and
tickets to sporting or theatrical events, which are infrequent
and not lavish are excepted from this prohibition. Such
entertainment must be appropriate as to time and place,
reasonable and customary in nature, modest in cost and value,
incidental to the business, and not so frequent as to raise any
question of impropriety (Customary Business Entertainment).
Certain situations that could present the appearance of a conflict of
interest should be discussed with, and approved by, or reported to, an
appropriate person. Examples of these include:
o service as a director on the board or an officer of any public or
private company, other than a USAA company or a Company, must be
approved by the USAA Funds' and IMCO's Code of Ethics Committee and
reported to each affected Company.
o the receipt of any non-nominal (i.e., valued over $25) gifts from any
person or entity with which a Company has current or prospective
business dealings must be reported to the Chief Legal Officer. For
purposes of this Code, the individual holding the title of Secretary of
a Company shall be considered the Chief Legal Officer of a Company.
o the receipt of any business-related entertainment from any person or
entity with which the Funds have current or prospective business
dealings must be approved in advance by the Chief Legal Officer unless
such entertainment qualifies as Customary Business Entertainment.
o any ownership interest in, or any consulting or employment relationship
with, any of the Company's service providers, other than IMCO or any
other USAA company, must be approved by the Chairman of the Board of
the Directors/Trustees and reported to each affected Board.
o any material direct or indirect financial interest in commissions,
transaction charges or spreads paid by the Funds for effecting
portfolio transactions or for selling or redeeming shares other than an
interest arising from the Covered Officer's employment, such as
compensation or equity ownership should be approved by the Chairman of
the Board of Directors/Trustees and reported to each affected Board.
III. DISCLOSURE AND COMPLIANCE REQUIREMENTS
o Each Covered Officer should familiarize himself with the disclosure
requirements applicable to the Funds, and the procedures and policies
implemented to promote full, fair, accurate, timely and understandable
disclosure by each Company.
o Each Covered Officer should not knowingly misrepresent, or cause others
to misrepresent, facts about the Funds to others, whether within or
outside the Funds, including to the Funds' Directors/Trustees and
auditors, and to government regulators and self-regulatory
organizations.
o Each Covered Officer should, to the extent appropriate within his area
of responsibility, consult with other officers and employees of the
Funds and IMCO with the goal of promoting full, fair, accurate, timely
and understandable disclosure in the reports and documents filed by a
Company with, or submitted to, the SEC, and in other public
communications made by the Funds.
o Each Covered Officer is responsible for promoting compliance with the
standards and restrictions imposed by applicable laws, rules and
regulations, and promoting compliance with the USAA Funds' and IMCO's
operating policies and procedures.
o A Covered Officer should not retaliate against any person who reports a
potential violation of this Code in good faith.
o A Covered Officer should notify the Chief Legal Officer promptly if he
knows of any violation of the Code. Failure to do so itself is a
violation of this Code.
IV. REPORTING AND ACCOUNTABILITY
A. INTERPRETATION OF THE CODE. The Chief Legal Officer of each
Company is responsible for applying this Code to specific
situations in which questions are presented under it and has the
authority to interpret the Code in any particular situation. The
Chief Legal Officer should consult, if appropriate, the USAA
Funds' outside counsel or counsel for the Independent
Directors/Trustees. However, any approvals or waivers sought by a
Covered Officer will be reported initially to the Chairman of the
Board of Directors/Trustees and will be considered by the Board
of Directors/Trustees.
B. REQUIRED REPORTS
o EACH COVERED OFFICER MUST:
o Upon adoption of the Code, affirm in writing to the Boards
that he has received, read and understands the Code.
o Annually thereafter affirm to the Chief Legal Officer that
he has complied with the requirements of the Code.
o THE CHIEF LEGAL OFFICER MUST:
o report to the Board about any matter or situation submitted
by a Covered Officer for interpretation under the Code, and
the advice given by the Chief Legal Officer;
o report annually to the Board and the Corporate Governance
Committee describing any issues that arose under the Code,
or informing the Board and Corporate Governance Committee
that no reportable issues occurred during the year.
C. INVESTIGATION PROCEDURES
The Funds will follow these procedures in investigating and enforcing
this Code:
o INITIAL COMPLAINT. All complaints or other inquiries concerning
potential violations of the Code must be reported to the Chief
Legal Officer. The Chief Legal Officer shall be responsible for
documenting any complaint. The Chief Legal Officer also will
report immediately to the President of the Company (if the
complaint involves the Treasurer), the Chairman of the Board (or
for the USAA Life Investment Trust (LIT) the Chairman/CEO of USAA
if the complaint involves the Chairman of the LIT Board) and the
Chairperson of the Audit Committee any material potential
violations that could have a material effect on the Funds'
financial condition or reputation. For all other complaints, the
Chief Legal Officer will report quarterly to the Board.
o INVESTIGATIONS. The Chief Legal Officer will take all appropriate
action to investigate any potential violation unless the Chairman
of the Board or the Chairperson of the Audit Committee direct
another person to undertake such investigation. The Chief Legal
Officer may utilize USAA's Office of Ethics to do a unified
investigation under this Code and USAA's Code of Conduct. The
Chairman of the Board, or the Board as a whole, may direct the
Company's outside counsel or the counsel to the Independent
Directors/Trustees (if any) to participate in any investigation
under this Code.
o STATUS REPORTS. The Chief Legal Officer will provide monthly
status reports to the Board about any alleged violation of the
Code that could have a material effect on the Funds' financial
condition or reputation, and quarterly updates regarding all
other alleged violations of the Code.
o VIOLATIONS OF THE CODE. If after investigation, the Chief Legal
Officer, or other investigating person, believes that a violation
of the Code has occurred, he will report immediately to the
Chairman of the Board (and for the USAA LIT the Chairman/CEO of
USAA if the violation involves the Chairman of the LIT Board) the
nature of the violation, and his recommendation regarding the
materiality of the violation. If, in the opinion of the
investigating person, the violation could materially affect the
Funds' financial condition or reputation, the Chief Legal Officer
also will notify the Chairperson of the Audit Committee of each
Company.
The Chief Legal Officer will inform, and make a recommendation
to, the Board, which will consider what further action is
appropriate. Appropriate action could include: (1) review of, and
modifications to, the Code or other applicable policies or
procedures; (2) notifications to appropriate personnel of IMCO or
USAA; (3) dismissal of the Covered Officer; and/or (4) other
disciplinary actions including reprimands or fines.
o The Boards of Directors/Trustees understand that Covered
Officers also are subject to USAA's Code of Business
Conduct. If a violation of this Code also violates USAA's
Code of Business Conduct, these procedures do not limit or
restrict USAA's ability to discipline such Covered Officer
under USAA's Code of Business Conduct. In that event, the
Chairman of the Board of Directors/Trustees will report to
the Boards the action taken by USAA with respect to a
Covered Officer.
V. OTHER POLICIES AND PROCEDURES
This Code shall be the sole code of ethics adopted by the Funds for
purposes of Section 406 of the Act and the implementing regulations adopted by
the SEC applicable to registered investment companies. If other policies and
procedures of a Company, IMCO, or other service providers govern or purport to
govern the behavior or activities of Covered Officers, they are superseded by
this Code to the extent that they overlap, conflict with, or are more lenient
than the provisions of this Code. The USAA Funds' and IMCO's Joint Code of
Ethics under Rule 17j-1 under the 1940 Act, and IMCO's more detailed compliance
policies and procedures (including its Insider Trading Policy) are separate
requirements applying to Covered Officers and other IMCO employees, and are not
part of this Code. Also, USAA's Code of Conduct imposes separate requirements on
Covered Officers and all employees of USAA, and also is not part of this Code.
VI. AMENDMENTS
Any amendment to this Code, other than amendments to Appendix A, must
be approved or ratified by majority vote of the Board of Directors/Trustees.
VII. CONFIDENTIALITY AND DOCUMENT RETENTION
The Chief Legal Officer shall retain material investigation documents
and reports required to be prepared under the Code for six years from the date
of the resolution of any such complaint. All reports and records prepared or
maintained pursuant to this Code will be considered confidential and shall be
maintained and protected accordingly. Except as otherwise required by law or
this Code, such matters shall not be disclosed to anyone other than the
appropriate Board of Directors/Trustees and counsel for the Independent
Directors/Trustees (if any), the appropriate Company and its counsel, IMCO, and
other personnel of USAA as determined by the affected Company's Chief Legal
Officer or the Chairman of the Board of Directors/Trustees.
Approved and adopted by IMCO's Code of Ethics Committee: June 12, 2003 Approved
and adopted by the Boards of Directors/Trustees of USAA Mutual Fund, Inc., USAA
Tax-Exempt Fund, Inc., USAA Investment Trust & USAA State Tax-Free Trust: June
25, 2003.
Approved and adopted by the Board of Trustees of USAA Life Investment Trust:
August 20, 2003.
APPENDIX A
COVERED OFFICERS
TITLE COMPANY
PRESIDENT USAA Mutual Fund, Inc.
USAA Tax-Exempt Fund, Inc.
USAA Investment Trust
USAA State Tax-Free Trust
USAA Life Investment Trust
TREASURER USAA Mutual Fund, Inc.
USAA Tax-Exempt Fund, Inc.
USAA Investment Trust
USAA State Tax-Free Trust
USAA Life Investment Trust
(a)(2). Certification pursuant to Rule 30a-2(a) under the Investment Company Act
of 1940 (17 CFR 270.30a-2(a)) is filed and attached hereto as Exhibit
99.CERT.
(a)(3). Not Applicable.
(b). Certification pursuant to Rule 30a-2(b) under the Investment Company Act
of 1940 (17 CFR 270.30a-2(b))is filed and attached hereto as Exhibit
99.906CERT.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Registrant: USAA INVESTMENT TRUST
By:* /s/ EILEEN M. SMILEY
-----------------------------------------------------------
Signature and Title: Eileen M. Smiley, Assistant Secretary
Date: OCTOBER 22, 2004
------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By:* /s/ CHRISTOPHER W. CLAUS
----------------------------------------------------
Signature and Title: Christopher W. Claus/President
Date: OCTOBER 26, 2004
------------------------------
By:* /s/ DAVID HOLMES
--------------------------------------------
Signature and Title: David Holmes/Treasurer
Date: OCTOBER 26, 2004
------------------------------
*Print the name and title of each signing officer under his or her signature.