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 - USAA GROWTH AND TAX STRATEGY FUND - ANNUAL REPORT FOR
PERIOD ENDING MAY 31, 2004
[LOGO OF USAA]
USAA(R)
USAA GROWTH and
TAX STRATEGY Fund
[GRAPHIC OF USAA GROWTH AND TAX STRATEGY FUND]
A n n u a l R e p o r t
- --------------------------------------------------------------------------------
MAY 31, 2004
Table of CONTENTS
- --------------------------------------------------------------------------------
MESSAGE FROM THE PRESIDENT 2
INVESTMENT OVERVIEW & MANAGERS' COMMENTARY 5
FINANCIAL INFORMATION
Distributions to Shareholders 13
Report of Independent Registered Public Accounting Firm 14
Portfolio of Investments 15
Notes to Portfolio of Investments 23
Financial Statements 25
Notes to Financial Statements 28
DIRECTORS' AND OFFICERS' INFORMATION 41
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
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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
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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 GROWTH AND TAX STRATEGY FUND
OBJECTIVE
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Conservative balance for the investor between income, the
majority of which is exempt from federal income tax, and the
potential for long-term growth of capital to preserve
purchasing power.
TYPES OF INVESTMENTS
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Invests principally in tax-exempt bonds and money market
instruments and the remainder in blue chip stocks.
5/31/04 5/31/03
Net Assets $186.8 Million $186.9 Million
Net Asset Value Per Share $14.61 $13.99
AVERAGE ANNUAL TOTAL RETURNS AND 30-DAY SEC YIELD* AS OF 5/31/04
1 YEAR 5 YEARS 10 YEARS 30-DAY SEC YIELD
6.96% 0.21% 6.30% 2.24%
*CALCULATED AS PRESCRIBED BY THE SECURITIES AND EXCHANGE COMMISSION.
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]
RUSSELL 1000 LIPPER LEHMAN BROTHERS USAA GROWTH
GROWTH LIPPER BALANCED BALANCED FUNDS MUNICIPAL AND TAX STRATEGY
INDEX FUNDS INDEX AVERAGE BOND INDEX FUND
5/31/1994 $10000.00 $10000.00 $10000.00 $10000.00 $10000.00
6/30/1994 9704.18 9826.40 9822.74 9938.84 9967.53
7/31/1994 10035.63 10048.33 10041.32 10121.16 10139.53
8/31/1994 10594.33 10299.75 10297.76 10156.24 10344.28
9/30/1994 10451.12 10113.99 10101.33 10007.25 10196.78
10/31/1994 10696.52 10145.45 10166.58 9829.56 10130.62
11/30/1994 10353.64 9908.91 9920.77 9651.58 9881.00
12/31/1994 10527.09 10004.15 10007.49 9864.05 9957.24
1/31/1995 10752.32 10128.50 10145.33 10146.09 10179.65
2/28/1995 11202.77 10423.69 10458.99 10441.17 10461.94
3/31/1995 11529.52 10608.03 10647.31 10561.17 10658.86
4/30/1995 11781.63 10806.98 10854.70 10573.64 10814.34
5/31/1995 12191.75 11152.85 11227.51 10911.04 11073.47
6/30/1995 12662.32 11350.50 11440.12 10815.67 11073.11
7/31/1995 13188.53 11590.46 11714.63 10918.00 11250.36
8/31/1995 13202.93 11680.90 11803.83 11056.55 11372.83
9/30/1995 13811.52 11959.87 12083.21 11126.41 11609.76
10/31/1995 13821.09 11929.56 12059.97 11288.15 11565.62
11/30/1995 14358.27 12300.31 12439.60 11475.70 11962.91
12/31/1995 14440.59 12493.91 12614.84 11585.84 12217.80
1/31/1996 14923.62 12719.44 12852.86 11673.38 12405.08
2/29/1996 15196.56 12725.57 12896.28 11594.54 12458.59
3/31/1996 15216.06 12773.57 12940.19 11446.42 12565.38
4/30/1996 15616.40 12858.12 13060.03 11413.96 12565.38
5/31/1996 16162.07 12989.89 13236.66 11409.61 12691.30
6/30/1996 16184.02 13032.73 13252.65 11533.96 12781.91
7/31/1996 15235.80 12697.33 12862.99 11638.31 12610.21
8/31/1996 15629.05 12897.83 13105.14 11635.70 12731.29
9/30/1996 16767.13 13376.24 13608.91 11798.31 13075.88
10/31/1996 16868.16 13659.25 13860.09 11931.65 13263.89
11/30/1996 18134.65 14295.83 14498.02 12150.21 13705.70
12/31/1996 17779.61 14124.61 14337.27 12098.90 13576.62
1/31/1997 19026.63 14561.40 14787.06 12121.80 13851.76
2/28/1997 18897.80 14615.44 14783.05 12233.11 13956.12
3/31/1997 17875.13 14190.65 14341.37 12069.92 13642.09
4/30/1997 19062.10 14617.25 14771.65 12171.08 13919.72
5/31/1997 20437.73 15215.83 15436.85 12354.27 14494.12
6/30/1997 21255.67 15720.21 15913.84 12485.87 14790.90
7/31/1997 23135.56 16615.63 16847.21 12831.68 15355.33
8/31/1997 21781.43 16088.94 16374.39 12711.38 15008.60
9/30/1997 22853.28 16730.24 17033.82 12862.11 15445.03
10/31/1997 22008.60 16425.60 16754.77 12945.01 15395.11
11/30/1997 22943.41 16727.32 17050.60 13021.25 15594.79
12/31/1997 23200.43 16991.58 17310.94 13211.11 15770.68
1/31/1998 23894.18 17112.33 17414.77 13347.35 15882.53
2/28/1998 25691.54 17791.73 18165.16 13351.40 16370.60
3/31/1998 26715.72 18335.76 18710.96 13363.29 16817.85
4/30/1998 27085.42 18464.19 18852.47 13303.00 16787.12
5/31/1998 26316.84 18277.51 18635.66 13513.44 16705.18
6/30/1998 27928.64 18614.55 18944.03 13566.77 16858.97
7/31/1998 27743.77 18396.49 18704.03 13600.69 16624.88
8/31/1998 23580.10 16811.61 16988.42 13810.84 15592.99
9/30/1998 25391.46 17537.22 17745.66 13983.02 16206.39
10/31/1998 27432.21 18193.32 18529.53 13982.73 16542.71
11/30/1998 29518.84 18859.25 19266.98 14031.71 17141.78
12/31/1998 32180.55 19555.01 19998.34 14067.08 17595.83
1/31/1999 34070.13 19867.71 20392.53 14234.33 18150.46
2/28/1999 32513.70 19390.16 19837.15 14172.30 17769.83
3/31/1999 34226.07 19868.78 20338.09 14191.72 18290.93
4/30/1999 34269.83 20519.58 20921.75 14227.08 18564.42
5/31/1999 33216.63 20203.18 20609.95 14144.76 18225.29
6/30/1999 35543.28 20761.76 21247.92 13941.27 18741.98
7/31/1999 34413.67 20373.46 20822.92 13992.00 18503.58
8/31/1999 34975.97 20159.70 20582.63 13879.82 18360.39
9/30/1999 34241.23 19901.40 20316.22 13885.62 18095.73
10/31/1999 36827.05 20477.64 20938.62 13735.18 18739.24
11/30/1999 38814.01 20697.97 21232.93 13881.27 18894.57
12/31/1999 42850.97 21310.41 21961.87 13777.79 19227.10
1/31/2000 40841.75 20775.04 21365.58 13717.79 18847.25
2/29/2000 42838.33 20725.00 21457.12 13877.21 19115.38
3/31/2000 45904.52 21945.27 22682.49 14180.41 20388.63
4/30/2000 43720.17 21543.10 22219.14 14096.64 19905.06
5/31/2000 41518.59 21340.40 21921.21 14023.30 19432.73
6/30/2000 44665.20 21681.01 22389.91 14394.91 19871.55
7/31/2000 42803.21 21621.93 22311.07 14595.21 19724.36
8/31/2000 46678.77 22587.05 23395.51 14820.14 20403.72
9/30/2000 42263.20 22111.71 22821.22 14743.04 19373.91
10/31/2000 40263.40 22092.14 22724.78 14903.91 19567.76
11/30/2000 34328.30 21290.21 21772.04 15016.67 18963.40
12/31/2000 33242.09 21819.37 22326.16 15387.69 19099.66
1/31/2001 35538.65 22282.45 22880.67 15540.16 19271.94
2/28/2001 29505.19 21417.51 21830.14 15589.44 18341.65
3/31/2001 26294.50 20725.86 21040.79 15729.15 17652.63
4/30/2001 29620.04 21595.67 21983.65 15558.71 18277.71
5/31/2001 29184.13 21788.02 22164.71 15726.25 18370.31
6/30/2001 28508.25 21454.18 21849.41 15831.47 18150.83
7/31/2001 27795.77 21438.65 21801.06 16065.97 18267.48
8/31/2001 25522.78 20828.53 21100.04 16330.62 17555.91
9/30/2001 22974.55 19827.60 19927.65 16275.83 16660.01
10/31/2001 24179.90 20159.44 20365.36 16469.75 17012.98
11/30/2001 26502.76 20962.05 21227.95 16330.91 17683.61
12/31/2001 26452.95 21113.23 21368.27 16176.41 17512.47
1/31/2002 25985.63 20928.05 21145.17 16457.00 17571.75
2/28/2002 24907.24 20785.85 20894.26 16655.27 17346.47
3/31/2002 25768.73 21240.33 21368.94 16328.88 17619.76
4/30/2002 23665.61 20730.61 20840.35 16648.02 17011.36
5/31/2002 23093.07 20720.94 20731.44 16749.18 16975.57
6/30/2002 20956.86 19836.96 19758.43 16926.29 16248.50
7/31/2002 19804.75 18820.25 18782.86 17143.98 15996.12
8/31/2002 19863.95 19013.34 18982.81 17350.07 16140.33
9/30/2002 17803.49 17878.17 17852.05 17730.08 15639.16
10/31/2002 19436.63 18623.40 18546.76 17436.16 16111.24
11/30/2002 20492.33 19378.93 19262.01 17363.69 16304.91
12/31/2002 19076.79 18856.56 18715.01 17730.08 16055.18
1/31/2003 18613.90 18574.09 18442.44 17685.15 15822.85
2/28/2003 18528.42 18434.80 18314.41 17932.40 15896.22
3/31/2003 18873.26 18510.03 18399.06 17943.13 16152.25
4/30/2003 20268.69 19511.71 19386.67 18061.68 16730.88
5/31/2003 21280.39 20374.69 20291.40 18484.59 17223.32
6/30/2003 21573.41 20529.19 20446.81 18406.04 17309.01
7/31/2003 22110.23 20576.76 20478.12 17761.96 17098.53
8/31/2003 22660.14 20924.14 20845.47 17894.43 17271.87
9/30/2003 22417.55 20950.69 20838.13 18420.53 17482.35
10/31/2003 23676.69 21641.90 21516.00 18327.78 17843.71
11/30/2003 23924.58 21833.51 21719.32 18518.80 17993.24
12/31/2003 24751.97 22615.83 22452.57 18672.13 18488.29
1/31/2004 25257.46 22953.53 22775.86 18779.09 18651.24
2/29/2004 25417.93 23266.37 23069.63 19061.71 18839.25
3/31/2004 24946.42 23155.38 22957.62 18995.33 18649.04
4/30/2004 24656.42 22668.76 22426.86 18545.46 18283.37
5/31/2004 25115.98 22768.84 22540.73 18478.22 18422.06
[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 Growth and Tax Strategy Fund to the
following benchmarks:
o The Russell 1000 Growth Index measures the performance of
those Russell 1000 companies with higher price-to-book
ratios and higher forecasted growth values.
o The Lipper Balanced Funds Index, which tracks the total
return performance of the 30 largest funds within the
Lipper Balanced Funds category.
o The Lipper Balanced Funds Average, an average performance
level of all balanced funds, reported by Lipper Inc., an
independent organization that monitors the performance of
mutual funds.
o The Lehman Brothers Municipal Bond Index, an unmanaged
benchmark of total return performance for the long-term,
investment-grade, tax-exempt bond market.
8
M A N A G E R S '
==================--------------------------------------------------------------
COMMENTARY on the Fund
CLIFFORD A. GLADSON, CFA SETH A. REICHER, CFA
USAA Investment Management Company RCM Capital Management LLC
(Tax-Exempt Bonds) (Blue Chip Stocks)
JOANNE L. HOWARD, CFA
RCM Capital Management LLC
(Blue Chip Stocks)
- --------------------------------------------------------------------------------
HOW DID THE FUND PERFORM?
The USAA Growth and Tax Strategy Fund had a total return of
6.96% for the year ended May 31, 2004. This compares to a
return of 10.91% for the Lipper Balanced Funds Average, 11.75%
for the Lipper Balanced Funds Index, 18.02% for the Russell
1000 Growth Index, and -0.03% for the Lehman Brothers
Municipal Bond Index for the period.
WHY DID THE FUND'S RETURN TRAIL THAT OF OTHER BALANCED FUNDS?
The structure of your Fund is unique. It was the first fund to
combine tax-exempt securities with common stocks in a balanced
format. Under IRS code, the Fund must have at least 50% of its
assets invested in tax-exempt securities at the end of each
fiscal quarter in order to pass tax-exempt income to its
shareholders. Therefore, instead of the 60% common stocks/40%
bonds investment mix normally associated with balanced funds,
we target a common stock allocation of 41% to 49%. In a period
when stocks outperform bonds, it is normal for the Fund to
underperform traditional balanced funds.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
REFER TO PAGE 7 FOR BENCHMARK DEFINITIONS.
9
. . . C O N T I N U E D
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HOW DID THE FUND'S TAX-EXEMPT MUNICIPAL BOND PORTION PERFORM?
The yield on the Bond Buyer 40-Bond Index, the industry
standard for long-term investment-grade municipal bonds, rose
from 4.83% to 5.21% over the course of the reporting year.
This rise in rates was much less than that experienced by U.S.
Treasuries with similar maturities. The Fund's municipal bonds
performed well, providing a positive total return in spite of
rising interest rates. They also benefited from an improvement
in general economic conditions, which helped raise the credit
standing of a number of bonds in the portfolio.
Looking ahead, we expect the Federal Reserve Board to increase
short-term rates as economic conditions improve. In this
environment, we continue to focus on 15- to 20-year maturity
investment-grade municipal bonds, investing when market
conditions warrant.
HOW WOULD YOU CHARACTERIZE THE STOCK MARKET ENVIRONMENT?
For most of the reporting period, lower-quality and
higher-risk stocks led the market higher. This persisted into
late-winter 2003, when investors began to face the reality of
a slower economy and higher interest rates. The realization
that the period of easy earnings growth was over cast a light
on the valuation spread between lower-quality and
higher-quality stocks, and led to a shift in market
leadership. After having lagged its benchmark Russell 1000
Growth Index during the period of lower-quality leadership,
the equity portion of the Fund rallied strongly versus the
index in the final three months of the reporting year.
THE BOND BUYER 40-BOND INDEX IS REPRESENTATIVE OF YIELDS OF 40
LARGE ONE-YEAR, TAX-EXEMPT NOTES.
10
. . . C O N T I N U E D
========================--------------------------------------------------------
COMMENTARY on the Fund
WHAT IMPACT DID SECTOR POSITIONING HAVE ON THE EQUITY PORTION'S PERFORMANCE?
We benefited from good stock selection in the Internet and
biotechnology sectors, led by our holdings in Yahoo!, Inc. and
Genentech, Inc., respectively. In software, our overweight
position detracted from performance, but our stock selection
was solid. Overall, our semiconductor allocation hurt
performance, primarily because we didn't own the lower-quality
stocks that recorded strong gains in the first half of the
year.
The fact that we were significantly overweight in the large
pharmaceutical companies detracted from performance - Wyeth*
and Merck in particular showed negative results. We have since
sold these stocks and have reduced our sector position to
modestly overweight. Pfizer, Inc., the Fund's largest
position, is delivering in terms of earnings and has low
exposure to generic competition.
WHAT'S YOUR MARKET OUTLOOK, AND HOW IS THE FUND POSITIONED MOVING FORWARD?
We believe it's now clear that we're transitioning from a
consumer-led recovery to a business-led recovery. We expect
earnings growth will slow in 2005, putting a premium on
companies that can deliver strong earnings. As such, we have
therefore adjusted the portfolio's earnings growth
characteristics. In late-2003, the stocks we owned had roughly
the same earnings growth rate as those in the benchmark
Russell 1000 Growth Index; now, our stocks' earnings have an
expected long-term growth rate of 16.3%, while those of the
index have a growth rate of 14.6%. In conjunction, we
increased the Fund's economic sensitivity over the reporting
year without getting too aggressive. This can be seen in our
move from underweight to almost-market weight in technology,
and a reduction in our exposure to consumer staples.
We thank you for your continued investment in this innovative
Fund.
* WYETH WAS SOLD OUT OF THE PORTFOLIO AFTER MAY 31, 2004.
11
P O R T F O L I O
==================--------------------------------------------------------------
HIGHLIGHTS
TAX-EXEMPT SECURITIES
TOP 5 HOLDINGS
(% OF NET ASSETS)
Wisconsin - Univ. of Wisconsin Hospitals and Clinics Auth. RB, Series 2000 3.5%
Connecticut - Mashantucket (Western) Pequot Tribe RB, Series 1997B 3.3%
Texas - Lewisville RB, Series 1998B 3.1%
Texas - Northwest ISD GO, Series 1997 2.9%
Georgia - Atlanta Airport RB, Series 2000A 2.7%
TOP 10 INDUSTRIES
(% OF NET ASSETS)
Hospital 9.5%
General Obligation Bonds 8.6%
Water/Sewer Utility 6.5%
Pharmaceuticals 6.0%
Special Assessment/Tax/Fee Bonds 6.0%
Systems Software 4.4%
Industrial Conglomerates 4.0%
Casinos & Gaming 3.8%
Education 3.8%
Electric/Gas Utility 3.2%
YOU WILL FIND A COMPLETE LIST OF SECURITIES THAT THE FUND OWNS
ON PAGES 15-22.
12
. . . C O N T I N U E D
========================--------------------------------------------------------
HIGHLIGHTS
TOP 5 EQUITY HOLDINGS
(% OF NET ASSETS)
Pfizer, Inc. 3.5%
General Electric Co. 2.0%
Microsoft Corp. 1.8%
Cisco Systems, Inc. 1.7%
Intel Corp. 1.6%
ASSET ALLOCATION
5/31/04
[PIE CHART OF ASSET ALLOCATION]
Tax-Exempt Bonds 52.2%
Blue Chip Stocks 48.4%
Tax-Exempt Money Market Instruments 0.4%
[END CHART]
PERCENTAGES ARE OF THE NET ASSETS OF THE FUND AND MAY NOT
EQUAL 100%.
YOU WILL FIND A COMPLETE LIST OF SECURITIES THAT THE FUND OWNS
ON PAGES 15-22.
13
D I S T R I B U T I O N S
==========================------------------------------------------------------
to SHAREHOLDERS (unaudited)
USAA GROWTH AND TAX STRATEGY 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.
100% of ordinary income distributions qualifies for the
dividends-received deductions eligible to corporations.
The Fund has designated a portion of the amount paid to
redeeming shareholders, in the amount of $115,000, as a
distribution for tax purposes.
14
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 GROWTH AND TAX STRATEGY FUND:
We have audited the accompanying statement of assets and
liabilities of the USAA Growth and Tax Strategy 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 Growth and Tax
Strategy 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
15
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
USAA GROWTH AND TAX STRATEGY FUND
MAY 31, 2004
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
- --------------------------------------------------------------------------------------------------
TAX-EXEMPT SECURITIES (52.6%)
TAX-EXEMPT BONDS (52.2%)
ARIZONA (1.7%)
$ 3,000 Maricopa County School District GO (INS) 5.00% 7/01/2017 $ 3,191
ARKANSAS (1.4%)
2,500 Conway Health Facilities Board Hospital RB,
Series 1999A 6.40 8/01/2029 2,594
CALIFORNIA (2.7%)
5,000 Sacramento Municipal Utility District RB,
Series 2003R (INS) 5.00 8/15/2028 4,955
CONNECTICUT (3.3%)
6,000 Mashantucket (Western) Pequot Tribe RB,
Series 1997B(b) 5.75 9/01/2027 6,074
FLORIDA (0.6%)
1,200 City of Port St. Lucie Utility System RB,
Series 2003 (INS) 4.50 9/01/2028 1,084
GEORGIA (2.7%)
4,500 Atlanta Airport RB, Series 2000A (INS) 5.60 1/01/2030 5,063
HAWAII (1.1%)
2,000 State GO, Series 2003DA (INS) 5.25 9/01/2019 2,109
ILLINOIS (1.9%)
5,500 Health Facilities Auth. RB,
Series 1996 (Mercy Hospital) 6.38 1/01/2015 3,549
LOUISIANA (1.5%)
2,500 Local Government Environmental Facilities
and Community Development Auth. RB,
Series 2000 (INS) 6.55 9/01/2025 2,806
16
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA GROWTH AND TAX STRATEGY FUND
MAY 31, 2004
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
- --------------------------------------------------------------------------------------------------
MAINE (1.7%)
$ 3,000 Health and Higher Educational Facilities
Auth. RB, Series 2000C (INS) 5.75% 7/01/2030 $ 3,206
MASSACHUSETTS (1.7%)
3,000 Massachusetts Bay Transportation Auth. RB,
Series 2004B 5.25 7/01/2023 3,197
MICHIGAN (4.6%)
4,000 Detroit Sewage Disposal RB,
Series 1999A (INS)(d) 5.75 7/01/2026 4,531
4,000 Hospital Finance Auth. RB, Series 1996 6.25 10/01/2027 4,005
MONTANA (0.5%)
1,000 Facility Finance Auth. RB, Series 2002
(Providence Services) (INS) 4.75 12/01/2021 985
NEW JERSEY (0.5%)
1,000 Middlesex County Improvement Auth. RB,
Series 2004A 5.00 8/15/2023 982
NEW YORK (6.4%)
1,000 Dormitory Auth. RB, Series 1999A
(Upstate Community Colleges) 5.00 7/01/2019 1,012
4,000 Metropolitan Transportation Auth. RB,
Series 2000A 6.00 4/01/2030 4,564
2,690 New York City GO, Series 2000A(d) 6.00 5/15/2020 2,911
2,000 Urban Development Corp. RB, Series 2002C-1 5.00 3/15/2024 2,005
1,500 Urban Development Corp. RB, Series 2002C-1 5.00 3/15/2025 1,491
OHIO (2.5%)
1,000 Municipal Electric Generation Agency RB,
Joint Venture 5 (INS) 5.00 2/15/2023 1,007
3,470 State University General Receipt Bonds,
Series 2003B 5.25 6/01/2017 3,684
17
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA GROWTH AND TAX STRATEGY FUND
MAY 31, 2004
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
- --------------------------------------------------------------------------------------------------
RHODE ISLAND (0.1%)
$ 205 Housing and Mortgage Finance Corp. SFH RB,
Series 15-A 6.85% 10/01/2024 $ 209
TEXAS (13.0%)
3,410 Fort Worth Higher Education Finance Corp. RB,
Series 1997A 6.00 10/01/2016 3,333
4,000 Houston Utility Systems RB,
Series 2004A (INS)(c) 5.13 5/15/2028 4,008
5,675 Lewisville RB, Series 1998B (INS) 5.80 9/01/2025 5,804
30,270 Northwest ISD GO, Series 1997
(NBGA - Texas Permanent School Fund) 6.38(a) 8/15/2032 5,395
2,000 Pflugerville GO, Series 2003A (INS) 5.00 8/01/2028 1,965
3,420 San Antonio Water System RB,
Series 2002A (INS) 5.50 5/15/2018 3,680
WASHINGTON (0.5%)
1,000 Vancouver Downtown Redevelopment Auth. RB,
Series 2003A (INS) 5.00 1/01/2023 940
WISCONSIN (3.8%)
500 Muskego Norway School District GO (INS) 5.00 4/01/2022 506
6,030 Univ. of Wisconsin Hospitals and Clinics
Auth. RB, Series 2000 (INS) 6.13 4/01/2021 6,597
--------
Total tax-exempt bonds (cost: $95,245) 97,442
--------
NUMBER
OF SHARES
- ---------
TAX-EXEMPT MONEY MARKET INSTRUMENT (0.4%)
MONEY MARKET FUND
774,573 SSgA Tax Free Money Market Fund (cost: $774) 0.47(e) 774
--------
Total tax-exempt securities (cost: $96,019) 98,216
--------
18
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA GROWTH AND TAX STRATEGY FUND
MAY 31, 2004
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
- --------------------------------------------------------------------------------------------------
BLUE CHIP STOCKS (48.4%)
AEROSPACE & DEFENSE (0.3%)
7,500 United Technologies Corp. $ 635
--------
AIR FREIGHT & LOGISTICS (0.8%)
19,475 United Parcel Service, Inc. "B" 1,397
--------
APPAREL, ACCESSORIES, & LUXURY GOODS (0.3%)
11,275 Coach, Inc.* 492
--------
APPLICATION SOFTWARE (0.6%)
25,450 SAP AG ADR (Germany) 1,028
--------
ASSET MANAGEMENT & CUSTODY BANKS (0.4%)
13,700 Franklin Resources, Inc. 689
--------
BIOTECHNOLOGY (2.8%)
22,650 Amgen, Inc.* 1,239
18,825 Biogen Idec, Inc.* 1,170
24,200 Genentech, Inc.* 1,447
20,025 Gilead Sciences, Inc.* 1,311
--------
5,167
--------
CASINOS & GAMING (0.5%)
24,225 International Game Technology, Inc. 952
--------
COMMUNICATIONS EQUIPMENT (1.9%)
143,000 Cisco Systems, Inc.* 3,167
36,800 Corning, Inc.* 456
--------
3,623
--------
COMPUTER HARDWARE (1.0%)
50,700 Dell, Inc.* 1,784
--------
DATA PROCESSING & OUTSOURCED SERVICES (0.4%)
16,825 Automatic Data Processing, Inc. 747
--------
19
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA GROWTH AND TAX STRATEGY FUND
MAY 31, 2004
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
- --------------------------------------------------------------------------------------------------
DIVERSIFIED COMMERCIAL SERVICES (0.7%)
8,100 Apollo Group, Inc. "A"* $ 760
9,300 Career Education Corp.* 632
--------
1,392
--------
DRUG RETAIL (0.8%)
42,500 Walgreen Co. 1,488
--------
FOOD DISTRIBUTORS (0.6%)
29,600 Sysco Corp. 1,110
--------
FOOTWEAR (0.7%)
19,175 Nike, Inc. "B" 1,364
--------
HEALTH CARE EQUIPMENT (2.6%)
22,600 Boston Scientific Corp.* 1,001
37,350 Medtronic, Inc. 1,789
17,425 St. Jude Medical, Inc.* 1,329
13,550 Stryker Corp. 689
--------
4,808
--------
HOUSEHOLD PRODUCTS (1.7%)
8,225 Colgate-Palmolive Corp. 470
24,250 Procter & Gamble Co. 2,615
--------
3,085
--------
HYPERMARKETS & SUPER CENTERS (1.4%)
48,500 Wal-Mart Stores, Inc. 2,703
--------
INDUSTRIAL CONGLOMERATES (4.0%)
31,800 3M Co. 2,689
121,600 General Electric Co. 3,784
32,200 Tyco International Ltd. 992
--------
7,465
--------
INDUSTRIAL MACHINERY (0.7%)
24,500 Danaher Corp. 1,152
3,375 Ingersoll-Rand Co. Ltd. "A" 221
--------
1,373
--------
20
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA GROWTH AND TAX STRATEGY FUND
MAY 31, 2004
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
- --------------------------------------------------------------------------------------------------
INTERNET SOFTWARE & SERVICES (1.4%)
88,000 Yahoo!, Inc.* $ 2,698
--------
INVESTMENT BANKING & BROKERAGE (1.2%)
11,675 Goldman Sachs Group, Inc. 1,096
21,225 Merrill Lynch & Co., Inc. 1,206
--------
2,302
--------
IT CONSULTING & OTHER SERVICES (0.5%)
39,400 Accenture Ltd. "A" (Bermuda)* 970
--------
LIFE & HEALTH INSURANCE (0.4%)
17,350 AFLAC, Inc. 704
--------
MOVIES & ENTERTAINMENT (1.1%)
29,300 News Corp. Ltd. ADR (Australia) (preferred) 998
29,100 Viacom, Inc. "B" 1,073
--------
2,071
--------
MULTI-LINE INSURANCE (0.3%)
7,925 American International Group, Inc. 581
--------
OIL & GAS EQUIPMENT & SERVICES (1.3%)
13,550 Baker Hughes, Inc. 461
22,500 BJ Services Co.* 943
7,400 Schlumberger Ltd. (Netherlands) 423
10,075 Smith International, Inc.* 503
--------
2,330
--------
OIL & GAS EXPLORATION & PRODUCTION (0.5%)
10,700 Apache Corp. 432
21,075 XTO Energy, Inc. 532
--------
964
--------
OTHER DIVERSIFIED FINANCIAL SERVICES (0.5%)
18,975 Citigroup, Inc. 881
--------
PERSONAL PRODUCTS (0.7%)
15,550 Avon Products, Inc. 1,379
--------
21
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA GROWTH AND TAX STRATEGY FUND
MAY 31, 2004
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
- --------------------------------------------------------------------------------------------------
PHARMACEUTICALS (6.0%)
16,400 Eli Lilly & Co. $ 1,208
24,000 Johnson & Johnson, Inc. 1,337
16,525 Novartis AG (Switzerland) 747
184,500 Pfizer, Inc. 6,520
15,350 Teva Pharmaceutical Industries Ltd. ADR (Israel) 1,016
11,950 Wyeth 430
--------
11,258
--------
PROPERTY & CASUALTY INSURANCE (0.6%)
15,850 Safeco Corp. 665
11,181 St. Paul Companies, Inc. 443
--------
1,108
--------
PUBLISHING (0.5%)
18,825 Tribune Co. 909
--------
RESTAURANTS (1.5%)
41,600 McDonald's Corp. 1,098
42,500 Starbucks Corp.* 1,727
--------
2,825
--------
SEMICONDUCTORS (2.3%)
104,500 Intel Corp. 2,983
24,800 Maxim Integrated Products, Inc. 1,261
--------
4,244
--------
SOFT DRINKS (2.1%)
35,500 Coca-Cola Co. 1,823
39,000 PepsiCo, Inc. 2,081
--------
3,904
--------
SYSTEMS SOFTWARE (4.4%)
129,300 Microsoft Corp. 3,407
48,000 Novell, Inc.* 437
150,700 Oracle Corp.* 1,706
20,375 Red Hat, Inc.* 557
21,775 Symantec Corp.* 998
42,000 VERITAS Software Corp.* 1,117
--------
8,222
--------
22
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA GROWTH AND TAX STRATEGY FUND
MAY 31, 2004
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
- --------------------------------------------------------------------------------------------------
THRIFTS & MORTGAGE FINANCE (0.9%)
16,925 Fannie Mae $ 1,146
5,425 Golden West Financial Corp. 590
--------
1,736
--------
Total blue chip stocks (cost: $69,934) 90,388
--------
TOTAL INVESTMENTS (COST: $165,953) $188,604
========
23
N O T E S
==========----------------------------------------------------------------------
to Portfolio of INVESTMENTS
USAA GROWTH AND TAX STRATEGY 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%. Investments in foreign
securities were 2.8% of net assets as of May 31, 2004.
ADR - American depositary receipts are receipts issued by a U.S. bank
evidencing ownership of foreign shares. Dividends are paid in U.S.
dollars.
PORTFOLIO DESCRIPTION ABBREVIATIONS
GO General Obligation
ISD Independent School District
RB Revenue Bond
SFH Single-Family Housing
CREDIT ENHANCEMENTS - add the financial strength of the provider of
the enhancement to support the issuer's ability to repay the
principal when due. A high-quality bank, insurance company, or other
corporation, or a collateral trust may provide the enhancement.
(NBGA) Principal and interest payments are guaranteed by a nonbank
guarantee agreement.
(INS) Scheduled principal and interest payments are insured by one
of the following companies: AMBAC Assurance Corp., ACA
Financial Guaranty Corp., Financial Guaranty Insurance Co.,
Financial Security Assurance Holdings Ltd., or MBIA
Insurance Corp. The insurance does not guarantee the market
value of the security.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
24
N O T E S
==========----------------------------------------------------------------------
to Portfolio of INVESTMENTS
(continued)
USAA GROWTH AND TAX STRATEGY FUND
MAY 31, 2004
SPECIFIC NOTES
- --------------------------------------------------------------------------------
(a) Zero-coupon security. Rate represents the effective yield at
date of purchase.
(b) Restricted security that is not registered under the
Securities Act of 1933. A resale of this security in the United
States may occur in an exempt transaction to a qualified
institutional buyer as defined by Rule 144A, and as such, has
been deemed liquid by USAA Investment Management Company (the
Manager) under guidelines approved by the Board of Trustees,
unless otherwise noted as illiquid.
(c) At May 31, 2004, the cost of securities purchased on a
when-issued basis was $3,932,000.
(d) At May 31, 2004, portions of these securities were segregated
to cover when-issued purchases.
(e) Rate represents the money market fund annualized seven-day
yield at May 31, 2004.
* Non-income-producing security for the year ended May 31, 2004.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
25
S T A T E M E N T
==================--------------------------------------------------------------
of ASSETS and LIABILITIES
(in thousands)
USAA GROWTH AND TAX STRATEGY FUND
MAY 31, 2004
ASSETS
Investments in securities, at market value (identified cost of $165,953) $188,604
Cash 87
Receivables:
Capital shares sold 37
USAA Transfer Agency Company 1
Dividends and interest 1,477
Securities sold 2,418
--------
Total assets 192,624
--------
LIABILITIES
Payables:
Securities purchased (when-issued $3,932) 5,719
Capital shares redeemed 30
Accrued management fees 59
Other accrued expenses and payables 57
--------
Total liabilities 5,865
--------
Net assets applicable to capital shares outstanding $186,759
========
NET ASSETS CONSIST OF:
Paid-in capital $158,551
Accumulated undistributed net investment income 763
Accumulated net realized gain on investments 4,794
Net unrealized appreciation of investments 22,651
--------
Net assets applicable to capital shares outstanding $186,759
========
Capital shares outstanding, unlimited number of shares
authorized, no par value 12,780
========
Net asset value, redemption price, and offering price per share $ 14.61
========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
26
S T A T E M E N T
==================--------------------------------------------------------------
of OPERATIONS
(in thousands)
USAA GROWTH AND TAX STRATEGY FUND
YEAR ENDED MAY 31, 2004
INVESTMENT INCOME
Dividends (net of foreign taxes withheld of $8) $ 981
Interest 5,092
-------
Total income 6,073
-------
EXPENSES
Management fees 832
Administrative and servicing fees 284
Transfer agent's fees 208
Custody and accounting fees 84
Postage 17
Shareholder reporting fees 17
Trustees' fees 6
Registration fees 29
Professional fees 39
Other 8
-------
Total expenses 1,524
Expenses paid indirectly (20)
-------
Net expenses 1,504
-------
NET INVESTMENT INCOME 4,569
-------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized gain on:
Investments (unaffiliated transactions) 6,956
Investments (affiliated transactions) 29
Change in net unrealized appreciation/depreciation 1,197
-------
Net realized and unrealized gain 8,182
-------
Increase in net assets resulting from operations $12,751
=======
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
27
S T A T E M E N T S
====================------------------------------------------------------------
of Changes in NET ASSETS
(in thousands)
USAA GROWTH AND TAX STRATEGY FUND
YEARS ENDED MAY 31,
2004 2003
----------------------
FROM OPERATIONS
Net investment income $ 4,569 $ 4,910
Net realized gain on investments 6,985 13,571
Change in net unrealized appreciation/depreciation of investments 1,197 (16,923)
----------------------
Increase in net assets resulting from operations 12,751 1,558
----------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (4,421) (5,163)
Net realized gains (106) (627)
----------------------
Distributions to shareholders (4,527) (5,790)
----------------------
FROM CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold 9,102 6,711
Shares issued for dividends reinvested 4,050 5,175
Cost of shares redeemed (21,546) (25,833)
----------------------
Decrease in net assets from capital share transactions (8,394) (13,947)
----------------------
Net decrease in net assets (170) (18,179)
NET ASSETS
Beginning of period 186,929 205,108
----------------------
End of period $186,759 $186,929
======================
Accumulated undistributed net investment income:
End of period $ 763 $ 628
======================
CHANGE IN SHARES OUTSTANDING
Shares sold 629 502
Shares issued for dividends reinvested 282 390
Shares redeemed (1,489) (1,946)
----------------------
Decrease in shares outstanding (578) (1,054)
======================
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
28
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
USAA GROWTH AND TAX STRATEGY 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 Growth and Tax Strategy
Fund (the Fund). The Fund's investment objective is to seek a
conservative balance between income, the majority of which is exempt
from federal income tax, and the potential for long-term growth of
capital to preserve purchasing power.
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 the 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
29
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA GROWTH AND TAX STRATEGY FUND
MAY 31, 2004
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 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. Other debt securities are valued each business day by a
pricing service (the Service) approved by the Trust's Board
of Trustees. The Service uses the mean between quoted bid
and asked prices or the last sales price to price
securities when, in the Service's judgment, these prices
are readily available and are representative of the
securities' market values. For many securities, such prices
are not readily available. The Service generally prices
these securities based on methods that include
consideration of yields or prices of securities of
comparable quality, coupon, maturity, and type; indications
as to values from dealers in securities; and general market
conditions.
30
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA GROWTH AND TAX STRATEGY FUND
MAY 31, 2004
6. 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). 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 are amortized over the life of the respective
securities, using the effective yield method for long-term
securities and the straight-line method for short-term
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
31
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA GROWTH AND TAX STRATEGY FUND
MAY 31, 2004
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.
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
32
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA GROWTH AND TAX STRATEGY FUND
MAY 31, 2004
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. SECURITIES PURCHASED ON A WHEN-ISSUED BASIS - Delivery and
payment for securities that have been purchased by the Fund on
a when-issued basis can take place a month or more after the
trade date. During the period prior to settlement, these
securities do not earn interest, are subject to market
fluctuation, and may increase or decrease in value prior to
their delivery. The Fund maintains segregated assets with a
market value equal to or greater than the amount of its
purchase commitments. The purchase of securities on a
when-issued basis may increase the volatility of the Fund's
net asset value to the extent that the Fund makes such
purchases while remaining substantially fully invested. As of
May 31, 2004, the cost of outstanding when-issued commitments
for the Fund was $3,932,000.
G. 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 $20,000.
H. 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 general
indemnifications. The Trust's maximum exposure under these
arrangements is unknown, as this would
33
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA GROWTH AND TAX STRATEGY FUND
MAY 31, 2004
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.
I. 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
34
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA GROWTH AND TAX STRATEGY 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 $1,000. 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
$127,000, decrease accumulated undistributed net investment income by
$13,000, and decrease accumulated net realized gain on investments by
$114,000. This includes 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* $ 661,000 $ 891,000
Tax-exempt income 3,760,000 4,407,000
Long-term realized capital gains 221,000 492,000
*Includes distribution of short-term realized capital gains, if any,
which are taxable as ordinary income.
35
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA GROWTH AND TAX STRATEGY FUND
MAY 31, 2004
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
distributions paid during the fiscal year, the maximum amount that may
be considered qualified dividend income is $650,000. 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 tax-exempt income $ 676,000
Undistributed ordinary income 116,000
Accumulated long-term capital gains 4,884,000
Unrealized appreciation 22,532,000
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 are made quarterly.
Distributions of 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.
(4) INVESTMENT TRANSACTIONS
- --------------------------------------------------------------------------------
Cost of purchases and proceeds from sales/maturities of securities,
excluding short-term securities, for the year ended May 31, 2004, were
$80,371,000 and $87,747,000, respectively.
36
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA GROWTH AND TAX STRATEGY FUND
MAY 31, 2004
The cost of securities at May 31, 2004, for federal income tax
purposes, was $166,072,000.
Gross unrealized appreciation and depreciation of investments as of
May 31, 2004, for federal income tax purposes, were $25,926,000 and
$3,394,000, respectively, resulting in net unrealized appreciation of
$22,532,000.
(5) 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. The Fund had no securities-lending
transactions during the year ended May 31, 2004.
(6) TRANSACTIONS WITH MANAGER
- --------------------------------------------------------------------------------
A. MANAGEMENT FEES - The Manager carries out the Fund's
investment policies, directly manages a portion of the Fund's
portfolio, and provides portfolio management oversight 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 Balanced Funds Index, which tracks
the total return performance of the 30 largest funds in the
Lipper
37
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA GROWTH AND TAX STRATEGY FUND
MAY 31, 2004
Balanced Funds category. The Fund's base fee is accrued daily
and paid monthly at an annualized rate of 0.50% 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
- ------------------------------------------------------------------------------
+/- 0.20% to 0.50% +/- 0.04%
+/- 0.51% to 1.00% +/- 0.05%
+/- 1.01% 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%.
For the year ended May 31, 2004, the Fund incurred total
management fees, paid or payable to the Manager, of $832,000,
which is net of a performance adjustment of $(115,000) that
decreased the base management fee of 0.50% by 0.06%.
38
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA GROWTH AND TAX STRATEGY FUND
MAY 31, 2004
B. SUBADVISORY ARRANGEMENTS - The Manager has entered into an
investment subadvisory agreement with RCM Capital Management
LLC (RCM), under which RCM directs the investment and
reinvestment of the portion of the Fund's assets invested in
blue chip stocks (as allocated from time to time by the
Manager). The Manager (not the Fund) pays RCM a subadvisory
fee. Effective July 1, 2004, Loomis, Sayles & Company, L.P.
replaced RCM as the subadviser of the Fund's blue chip stocks
investment category.
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 $284,000.
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 $25.50 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 $208,000. Additionally, the Fund
recorded a receivable from USAA Transfer Agency Company of
$1,000 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.
39
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA GROWTH AND TAX STRATEGY FUND
MAY 31, 2004
(7) 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.
(8) SECURITY TRANSACTIONS WITH AFFILIATED FUNDS
- --------------------------------------------------------------------------------
During the year ended May 31, 2004, in accordance with affiliated
transaction procedures approved by the Trust's Board of Trustees,
security transactions were executed between the Fund and the following
affiliated USAA funds at the then-current market price with no
brokerage commissions incurred:
NET REALIZED
COST TO GAIN
SELLER PURCHASER PURCHASER TO SELLER
-----------------------------------------------------------------------
USAA Growth and Tax
Strategy Fund USAA Long-Term Fund $1,073,000 $29,000
USAA New York Bond
Fund USAA Growth and Tax
Strategy Fund 999,000 17,000
40
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA GROWTH AND TAX STRATEGY FUND
MAY 31, 2004
(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 $ 13.99 $ 14.23 $ 15.87 $ 17.28 $ 16.66
------------------------------------------------------------------------
Income (loss) from investment operations:
Net investment income .35 .35 .41 .49 .48
Net realized and unrealized gain (loss) .62 (.17) (1.60) (1.42) .61
------------------------------------------------------------------------
Total from investment operations .97 .18 (1.19) (.93) 1.09
------------------------------------------------------------------------
Less distributions:
From net investment income (.34) (.37) (.45) (.48) (.47)
From realized capital gains (.01) (.05) - - -
------------------------------------------------------------------------
Total distributions (.35) (.42) (.45) (.48) (.47)
------------------------------------------------------------------------
Net asset value at end of period $ 14.61 $ 13.99 $ 14.23 $ 15.87 $ 17.28
========================================================================
Total return (%)* 6.96 1.46 (7.59) (5.47) 6.62
Net assets at end of period (000) $186,759 $186,929 $205,108 $238,813 $263,592
Ratio of expenses to average net assets (%)** .80(a) .91(a) .83(a) .70(a) .71
Ratio of net investment income to average
net assets (%)** 2.41 2.67 2.75 2.91 2.80
Portfolio turnover (%) 43.22 52.38 31.81 35.69 66.43
* Assumes reinvestment of all net investment income and realized capital gain distributions during the period.
** For the year ended May 31, 2004, average net assets were $189,366,000.
(a) Reflects total expenses, excluding any expenses paid indirectly, which decreased the Fund's expense ratios as follows:
(.01%) - (.02%) (.01%) N/A
41
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.
42
. . . 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.
43
. . . 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.
44
. . . 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.
45
. . . 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,
46
. . . 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.
47
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.
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[LOGO OF USAA] WE KNOW WHAT IT MEANS TO SERVE.(R)
USAA ----------------------------------
INSURANCE o MEMBER SERVICES
23403-0704 (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.