USAA TAX EXEMPT FUND, INC.
California Bond Fund Virginia Bond Fund
California Money Market Fund Virginia Money Market Fund
New York Money Market Fund
SUPPLEMENT DATED MAY 18, 1995
to the PROSPECTUSES of the
USAA CALIFORNIA and VIRGINIA FUNDS dated AUGUST 1, 1994
SECOND SUPPLEMENT DATED MAY 18, 1995
to the PROSPECTUS of the
USAA NEW YORK FUNDS dated AUGUST 1, 1994
"Appendix A - Portfolio Management" of each Prospectus is
amended to reflect the following changes effective May 15, 1995.
Robert R. Pariseau, Executive Director of Fixed Income Investments
since 11/93, assumed portfolio management responsibilities of the
California Bond Fund and Virginia Bond Fund replacing David G. Miller.
Pamela K. Bledsoe, Associate Portfolio Manager, assumed portfolio
management responsibilities of the California Money Market Fund,
Virginia Money Market Fund, and New York Money Market Fund replacing
Robert R. Pariseau. Ms. Bledsoe's biographical information follows:
Name Pamela K. Bledsoe
Education BS, Louisiana Tech University
MBA, Texas Christian University
Experience (1) 6 1/2 years, investment management
4 years, IMCO
Business 05/95-present, Associate Portfolio Manager,
History Fixed Income Investments, IMCO
Past Five 03/95-05/95, Senior Securities Analyst,
Years (1) Fixed Income Research, IMCO
07/91-03/95, Securities Analyst,
Fixed Income Research, IMCO
Professional CFA, 1992
Designations (1)
Professional AIMR
Memberships (1) SAFAS
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(1) Abbreviations of designations and organizations used in the above table:
IMCO - USAA Investment Management Company
CFA - Chartered Financial Analyst
AIMR - Association for Investment Management and Research
SAFAS - San Antonio Financial Analysts Society, Inc.
USAA TAX EXEMPT FUND, INC.
New York Bond Fund
New York Money Market Fund
SUPPLEMENT DATED AUGUST 8, 1994
TO THE PROSPECTUS DATED AUGUST 1, 1994
"Appendix A - Portfolio Management" on page 25 of the Prospectus
is amended to reflect the following change:
Robert R. Pariseau assumed portfolio management responsibilities
of the New York Money Market Fund replacing Sharon S. Pichler. Mr.
Pariseau's biographical information follows:
Name Robert R. Pariseau
Portfolio New York Money Market Fund
Managed since 08/94
Education BS, U.S. Naval Academy, Annapolis, Maryland
MBA, Lindenwood College, Missouri
Experience (1) 10 years, investment management
10 years, IMCO
Business 11/93-present, Executive Director,
History Fixed Income Investments, IMCO
Past Five 04/93-11/93, Associate Portfolio Manager,
Years (1) Fixed Income Investments, IMCO
03/91-03/93, Senior Securities Analyst I,
Fixed Income Investments, IMCO
04/88-02/91, Senior Securities Analyst II,
Equity Investments, IMCO
Professional CFA, 1987
Designations (1)
Professional AIMR
Memberships (1) SAFAS
NFMA
- -------------
(1) Abbreviations of designations and organizations used in the above table:
IMCO - USAA Investment Management Company
CFA - Chartered Financial Analyst
AIMR - Association for Investment Management and Research
SAFAS - San Antonio Financial Analysts Society, Inc.
NFMA - National Federation of Municipal Analysts
25027-0894
USAA CALIFORNIA FUNDS
August 1, 1994 PROSPECTUS
USAA California Bond Fund and USAA California Money
Market Fund (collectively, the Funds or the California
Funds) are two of ten no-load mutual funds offered by
USAA Tax Exempt Fund, Inc. (the Company). The Funds are
managed by USAA Investment Management Company (the
Manager).
WHAT ARE THE INVESTMENT OBJECTIVES AND POLICIES?
The Funds have a common objective of providing
California investors with a high level of current
interest income that is exempt from federal and
California state income taxes. The California Money
Market Fund has a further objective of preserving capital
and maintaining liquidity. Each Fund has separate
investment policies to achieve its objective.
The California Bond Fund invests primarily in long-
term investment grade California tax-exempt securities.
The Fund's average portfolio maturity is not restricted
but is expected to be greater than 10 years. Page 9.
The California Money Market Fund invests in high
quality California tax- exempt securities with maturities
of 397 days or less. The Manager will maintain a dollar-
weighted average portfolio maturity of 90 days or less
and will endeavor to maintain a constant net asset value
per share of $1.00. Page 9.
Shares of the California Funds are authorized for
sale only to residents of the State of California. The
delivery of this Prospectus shall not constitute an offer
in any state in which shares of the California Funds may
not lawfully be made.
This Prospectus, which should be read and retained
for future reference, provides information regarding the
Company and the California Funds that you should know
before investing.
HOW DO YOU BUY? Fund shares are sold on a continuous
basis at the net asset value per share without a sales
charge. Make your initial investment directly with the
Manager by mail or in person. Page 13.
HOW DO YOU SELL? You may redeem shares of a Fund by
mail, telephone, fax, or telegraph on any day that the
net asset value is calculated. Page 15.
Shares of the USAA California Funds are not deposits
or other obligations of, or guaranteed by the USAA
Federal Savings Bank, are not insured by the FDIC or any
other Government Agency, and are subject to market risks.
If you would like more information, a STATEMENT OF
ADDITIONAL INFORMATION dated August 1, 1994, is available
upon request and without charge by writing to USAA TAX
EXEMPT FUND, INC., California Funds, 9800 Fredericksburg
Rd., San Antonio, TX 78288, or by calling 1-800-531-8181.
The Statement of Additional Information has been filed
with the Securities and Exchange Commission and is
incorporated by reference into this Prospectus.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
AN INVESTMENT IN THE CALIFORNIA MONEY MARKET FUND IS
NEITHER INSURED NOR GUARANTEED BY THE U.S. GOVERNMENT AND
THERE CAN BE NO ASSURANCE THAT THE FUND WILL BE ABLE TO
MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE.
TABLE OF CONTENTS
Page
----
SUMMARY DATA
Fees and Expenses 3
Financial Highlights 4
Performance Information 6
USING MUTUAL FUNDS
USAA Family of No-Load Mutual Funds 7
Using Mutual Funds in an Investment Program 8
INVESTMENT PORTFOLIO INFORMATION
Investment Objectives and Policies 9
California Bond Fund 9
California Money Market Fund 9
Other Investment Information 10
SHAREHOLDER INFORMATION
Purchase of Shares 13
Redemption of Shares 15
Conditions of Purchase and Redemption 17
Exchanges 18
Other Services 18
Share Price Calculation 19
Dividends, Distributions and Taxes 20
Management of the Company 22
Service Providers 22
Description of Shares 23
Telephone Assistance Numbers 23
Appendix A - Portfolio Management 24
FEES AND EXPENSES
The following summary is provided to assist you in
understanding the expenses you will bear directly or
indirectly.
Shareholder Transaction Expenses (applicable to each
Fund)
- ------------------------------------------------------------------
Sales Load Imposed on Purchases None
Sales Load Imposed on Reinvested Dividends None
Deferred Sales Load None
Redemption Fee* None
Exchange Fee None
Annual Fund Operating Expenses (as a percentage of
average net assets)
- ------------------------------------------------------------------
California California
Bond Money Market
Fund Fund
---- ----
Management Fee .32% .32%
12b-1 Fee None None
Other Expenses
Transfer Agent Fee** .07% .08%
Custodian Fee .02% .04%
All Other Expenses .03% .05%
---- ----
Total Other Expenses .12% .17%
---- ----
Total Operating Expenses .44% .49%
==== ====
- -------------------------------------------------------------------
* A shareholder who requests delivery of redemption proceeds by
wire transfer will be subject to a $10 fee. See Redemption of
Shares - Wire Redemption.
** The Funds pay USAA Shareholder Account Services an annual fixed
fee per account for its services. See Transfer Agent in the
Statement of Additional Information, page 23.
Example of Effect of Fund Expenses
- -------------------------------------------------------------------
An investor would pay the following expenses on a $1,000
investment, assuming (1) 5% annual return and (2)
redemption at the end of the periods shown:
1 year 3 years 5 years 10 years
------ ------- ------- --------
California Bond Fund $ 5 $ 14 $ 25 $ 55
California Money Market Fund $ 5 $ 16 $ 27 $ 62
The above example should not be considered a representation of past or
future expenses and actual expenses may be greater or less than those shown.
FINANCIAL HIGHLIGHTS
The following per share operating performance for a share
outstanding throughout each period in the five-year period
ended March 31, 1994, has been derived from financial
statements audited by KPMG Peat Marwick. This table should
be read in conjunction with the financial statements and
related notes that appear in the Funds' Annual Report.
Further performance information is contained in the Annual
Report and is available upon request without charge.
NET ASSET NET REALIZED DISTRIBUTIONS
VALUE AT NET AND FROM NET DISTRIBUTIONS
BEGINNING INVESTMENT UNREALIZED INVESTMENT OF REALIZED
FISCAL YEAR OF PERIOD INCOME GAIN (LOSS) INCOME CAPITAL GAINS
ENDED ($) ($) ($) ($) ($)
CALIFORNIA BOND FUND:
March 31,
1990* 10.00 .44 (.25) (.44) -
1991 9.75 .66 .23 (.66) -
1992 9.98 .66 .27 (.66) -
1993 10.25 .62 .62 (.62) (.12)
1994 10.75 .59 (.52) (.59) (.20)
CALIFORNIA MONEY MARKET FUND:
March 31,
1990* 1.00 .04 - (.04) -
1991 1.00 .05 - (.05) -
1992 1.00 .04 - (.04) -
1993 1.00 .03 - (.03) -
1994 1.00 .02 - (.02) -
FINANCIAL HIGHLIGHTS cont.
RATIO OF NET
NET ASSET RATIO OF INVESTMENT
VALUE AT NET ASSETS EXPENSES INCOME
END TOTAL AT END TO AVERAGE TO AVERAGE PORTFOLIO
OF PERIOD RETURN OF PERIOD NET ASSETS NET ASSETS TURNOVER
($) (%)** ($000) (%) (%) (%)
9.75 1.97 107,539 .50(a)(b) 6.81(a)(b) 135.61
9.98 9.46 192,344 .50(b) 6.73(b) 72.67
10.25 9.52 305,834 .48 6.44 50.61
10.75 12.56 386,933 .46 5.94 86.53
10.03 .31 382,766 .44 5.40 102.85
1.00 3.70 97,782 .50(a)(b) 5.51(a)(b) -
1.00 5.44 197,254 .50(b) 5.26(b) -
1.00 4.03 229,328 .50 3.94 -
1.00 2.66 219,097 .50 2.63 -
1.00 2.22 247,303 .49 2.19 -
- -------------
(a) Annualized. The ratio is not necessarily indicative of 12 months'
operations.
(b) The information contained in this table is based on actual
expenses for the period, after giving effect to reimbursements
of expenses by the Manager. Absent such reimbursements the
following information would have been:
RATIO OF RATIO OF NET
EXPENSES INVESTMENT INCOME
TO AVERAGE TO AVERAGE
FISCAL YEAR ENDED NET ASSETS NET ASSETS
(%) (%)
CALIFORNIA BOND FUND:
March 31,
1990* .74(a) 6.57(a)
1991 .54 6.69
CALIFORNIA MONEY MARKET FUND:
March 31,
1990* .76(a) 5.25(a)
1991 .55 5.21
- --------------
* From date of inception, August 1, 1989 to March 31, 1990.
** Assumes reinvestment of all dividend income and capital gain
distributions during the period.
PERFORMANCE INFORMATION
Performance information should be considered in light of
each Fund's investment objective and policies and market
conditions during the time periods for which it is
reported. Historical performance should not be
considered as representative of the future performance of
either Fund.
The Company may quote a Fund's yield or total return
in advertisements and reports to shareholders or
prospective investors. A Fund's performance may also be
compared to that of other mutual funds with similar
investment objectives and relevant indexes that are
referenced in Appendix B in the Statement of Additional
Information. Standard total return and yield results
reported by the Funds do not take into account recurring
and nonrecurring charges for optional services which only
certain shareholders elect and which involve nominal
fees, such as the $10 fee for a delivery of redemption
proceeds by wire transfer.
Further information concerning yield and total
return is included in the Statement of Additional
Information.
TOTAL RETURN - California Bond Fund. The Fund's average
annual total return is computed by determining the
average annual compounded rate of return for a specified
period which, when applied to a hypothetical $1,000
investment in the Fund at the beginning of the period,
would produce the redeemable value of that investment at
the end of the period, assuming reinvestment of all
dividends and distributions during the period.
YIELD - California Bond Fund. This Fund may advertise
performance in terms of a 30-day yield quotation. The
yield quotation is computed by dividing the net
investment income per share earned during the period by
the offering price per share on the last day of the
period. This income is then annualized. For purposes of
the yield calculation, interest income is computed based
on the yield to maturity of each debt obligation in a
Fund's portfolio and all recurring charges are
recognized.
YIELD - California Money Market Fund. The Fund may
advertise its yield and effective yield. The yield of
the Fund refers to the income generated by an investment
in the Fund over a seven-day period (which period will be
stated in the advertisement). This income is then
annualized, that is, the amount of income generated by
the investment during the week is assumed to be generated
each week over a 52-week period and is shown as a
percentage of the investment.
The effective yield is calculated similarly but,
when annualized, the income earned by an investment in
the Fund is assumed to be reinvested. The effective
yield will be slightly higher than the yield because of
the compounding effect of this assumed reinvestment.
TAX EQUIVALENT YIELD - The Funds may also utilize tax
equivalent yields with adjustments for assumed income tax
rates. See Appendix C Taxable Equivalent Yield Table
in the Statement of Additional Information for
illustrations of this yield.
USAA FAMILY OF NO-LOAD MUTUAL FUNDS
The USAA Family of No-Load Mutual Funds includes a
variety of portfolios, each with different objectives and
policies. In combination, these portfolios are designed
to provide investors with the opportunity to formulate
their own investment program. An investor in any one
portfolio may exchange into any other portfolio. For
more complete information about the portfolios in the
USAA Family of Funds, including charges and expenses,
call the Manager for a Prospectus. Be sure to read it
carefully before you invest or send money.
USAA TAX EXEMPT FUND, INC.
Long-Term Fund
Intermediate-Term Fund
Short-Term Fund
Tax Exempt Money Market Fund
California Bond Fund*
California Money Market Fund*
New York Bond Fund*
New York Money Market Fund*
Virginia Bond Fund*
Virginia Money Market Fund*
USAA MUTUAL FUND, INC.
Aggressive Growth Fund
Growth Fund
Growth & Income Fund
Income Stock Fund
Income Fund
Short-Term Bond Fund
Money Market Fund
USAA INVESTMENT TRUST
Balanced Portfolio Fund
Cornerstone Fund
Gold Fund
International Fund
World Growth Fund
GNMA Trust
Treasury Money Market Trust
USAA STATE TAX-FREE TRUST
Florida Tax-Free Income Fund*
Florida Tax-Free Money Market Fund*
Texas Tax-Free Income Fund*
Texas Tax-Free Money Market Fund*
* Available for sale only to residents
of these specific states.
USING MUTUAL FUNDS IN AN INVESTMENT PROGRAM
I. THE IDEA BEHIND MUTUAL FUNDS
Mutual funds were conceived as a vehicle that could give
small investors some of the advantages enjoyed by wealthy
investors. A relatively small investment buys part of a
widely diversified portfolio. That portfolio is managed
by investment professionals, relieving the shareholder of
the need to make individual stock or bond selections.
The investor also enjoys conveniences, such as daily
pricing, liquidity, and in the case of the USAA Family of
Funds, no sales charge. The portfolio, because of its
size, has lower transaction costs on its trades than most
individuals would have. As a result each shareholder
owns an investment that in earlier times would have been
available only to very wealthy people.
II. USING FUNDS IN AN INVESTMENT PROGRAM
In choosing a mutual fund as an investment vehicle, the
shareholder is foregoing some investment decisions, but
must still make others. The decisions foregone are those
involved with choosing individual securities. The fund
manager will perform that function. In addition, the
manager will arrange for the safekeeping of securities,
auditing the annual financial statements, and daily
valuation of the fund, as well as other functions.
The shareholder, however, retains at least part of
the responsibility for an equally important decision.
That is determining a portfolio of mutual funds that
balances the investor's investment goals with his or her
tolerance for risk. It is likely that this decision may
involve the use of more than one fund of the USAA Family
of Funds.
For example, assume a shareholder wishes to pursue
the higher yields usually available in the long-term bond
market, but is also concerned about the possible price
swings of the long-term bonds. He or she could divide
investments between the California Bond Fund and the
California Money Market Fund. This would create a
portfolio with a higher yield than that of the money
market and less volatility than that of the long-term
market. This is just one example of how an individual
could combine funds to create a portfolio tailored to his
or her own risk and reward goals.
III. USAA'S FAMILY OF FUNDS
The Manager offers investors another alternative in its
portfolio funds, the Balanced Portfolio and Cornerstone
Funds. Both of these unique mutual funds provide a
professionally managed diversified investment portfolio
within a mutual fund. These funds are designed for the
shareholder who prefers to delegate the asset allocation
process to an investment manager. The funds are
structured to achieve diversification across a number of
investment categories.
Whether you prefer to create your own mix of mutual
funds or use a portfolio fund, the USAA Family of Funds
provides a broad range of choices covering just about any
investor's investment objectives. Our sales
representatives stand ready to inform you of your choices
and to help you craft a portfolio which meets your needs.
INVESTMENT OBJECTIVES AND POLICIES
CALIFORNIA BOND FUND
CALIFORNIA MONEY MARKET FUND
INVESTMENT OBJECTIVES
The California Bond Fund and California Money Market Fund
have a common investment objective of providing
California investors with a high level of current
interest income that is exempt from federal and
California state income taxes. The California Money
Market Fund has a further objective of preserving capital
and maintaining liquidity.
INVESTMENT POLICIES
The Manager will pursue this common objective by
investing each Fund's assets in tax-exempt securities,
the interest from which, in the opinion of counsel, is
excluded from gross income for federal income tax
purposes and is exempt from California state income
taxes. It is a fundamental policy of each Fund that
during normal market conditions at least 80% of the
Fund's net assets will consist of California tax-exempt
securities and at least 80% of the Fund's annual income
will be exempt from federal and California state income
taxes and excluded from the calculation of federal
alternative minimum taxes for individual taxpayers.
California Bond Fund. Under normal market conditions,
the Manager will invest the assets of the Fund so that at
least 75% of the total market value of the tax-exempt
securities is rated within the three highest long-term
rating categories (at least A) by Moody's Investors
Service, Inc. (Moody's), Standard & Poor's Corporation
(S&P), or Fitch Investors Service, Inc. (Fitch), in the
highest short-term rating category by Moody's, S&P, or Fitch,
or, if a security is not rated by those rating agencies, it
must be of equivalent investment quality as determined by the
Manager. The Manager will not purchase a security if, as a result
of such purchase, more than 25% of the total market value of
the tax-exempt securities of the Fund would be invested
in securities which do not meet these quality standards.
In no event will a security be purchased for the Fund
unless it is rated at least investment grade; i.e., rated
by Moody's, S&P, or Fitch at least in the fourth highest
rating category for long-term securities, in the second
highest rating category for short-term securities, or, if
not rated by those rating agencies, determined by the
Manager to be of equivalent investment quality.
Securities rated in the lowest level of investment grade
have some speculative characteristics since adverse
economic conditions and changing circumstances are more
likely to have an adverse impact on such securities.
If the rating of a security is downgraded, the
Manager will determine whether it is in the best interest
of the Fund's shareholders to continue to hold such
security in the Fund's portfolio. For a more complete
description of tax-exempt securities and their ratings,
see Appendix A in the Statement of Additional
Information.
The Fund's average portfolio maturity is not
restricted but is expected to be greater than ten years.
The per share net asset value of the California Bond Fund
will fluctuate with portfolio maturity, the quality of
securities held, and inversely to interest rate levels.
California Money Market Fund. The Fund will purchase
only high quality securities that qualify as "eligible"
securities under the Securities and Exchange Commission
rules applicable to money market mutual funds. These
securities must also be determined by the Manager to
present minimal credit risk. In general, the category of
eligible securities may include a security that is:
(1) issued or guaranteed by the U.S. Government or any
agency or instrumentality thereof;
(2) rated in one of the two highest categories for
short-term securities by at least two Nationally
Recognized Statistical Rating Organizations
(NRSROs), or by one NRSRO if the security is rated
by only one NRSRO;
(3) unrated but issued by an issuer or guaranteed by a
guarantor that has other comparable short-term debt
obligations so rated; or
(4) unrated but determined to be of comparable quality
by the Manager.
If a security is downgraded after purchase, the
Manager will follow written procedures adopted by the
Fund's Board of Directors and a determination will be
made as to whether it is in the best interest of the
Fund's shareholders for the Fund to continue to hold the
security.
Current NRSROs include Moody's Investors Service,
Inc., Standard & Poor's Corporation, Fitch Investors
Service, Inc., Duff & Phelps Inc., Thompson BankWatch,
Inc., and IBCA Inc. For a description of tax-exempt
securities and their ratings, see Appendix A in the
Statement of Additional Information.
Consistent with regulatory requirements, the Manager
will purchase securities with remaining maturities of 397
days or less and will maintain a dollar-weighted average
portfolio maturity of no more than 90 days. The Fund
will endeavor to maintain a constant net asset value of
$1.00 per share, although there is no assurance that it
will be able to do so.
OTHER INVESTMENT INFORMATION
The investment objectives of the Funds may not be changed
without shareholder approval. In view of the risks
inherent in all investments in securities, there is no
assurance that these objectives will be achieved. The
investment policies and techniques used to pursue the
Funds' objectives may be changed without shareholder
approval, except as otherwise noted. Further information
regarding the Funds' investment policies and restrictions
is provided in the Statement of Additional Information.
TAX-EXEMPT SECURITIES
These securities include general obligation bonds, which
are secured by the issuer's pledge of its full faith,
credit and taxing power for the payment of principal and
interest; revenue bonds, which are payable from the
revenue derived from a particular facility or class of
facilities or, in some cases, from the proceeds of a
special excise tax or other specific revenue source, but
not from the general taxing power; lease obligations
backed by the municipality's covenant to budget for the
payments due under the lease obligation; and certain
types of industrial development bonds issued by or on
behalf of public authorities to obtain funds for
privately-operated facilities, provided that the interest
paid on such securities qualifies as exempt from federal
and California state income taxes. The value of the
securities in which the Company will invest generally
fluctuates inversely with changes in prevailing interest
rates. Changes in the creditworthiness of issuers and
changes in other market factors such as the relative
supply of and demand for tax-exempt bonds also create
value fluctuations.
Each Fund may on a temporary basis due to market or
other conditions invest up to 100% of its assets in
short-term securities whether or not exempt from federal
and California state income taxes. Such taxable
securities may consist of obligations of the United
States Government, its agencies or instrumentalities, and
repurchase agreements secured by such instruments;
certificates of deposit of domestic banks having capital,
surplus and undivided profits in excess of $100 million;
banker's acceptances of similar banks; commercial paper;
and other corporate debt obligations.
INVESTMENT TECHNIQUES
Variable Rate Securities - Each Fund may invest in tax-
exempt securities that bear interest at rates which are
adjusted periodically to market rates. These interest
rate adjustments can both raise and lower the income
generated by such securities. These changes will have
the same effect on the income earned by a Fund depending
on the proportion of such securities held.
The market value of fixed coupon securities
fluctuates with changes in prevailing interest rates,
increasing in value when interest rates decline and
decreasing in value when interest rates rise. The value
of variable rate securities, however, is less affected by
changes in prevailing interest rates because of the
periodic adjustment of their coupons to a market rate.
The shorter the period between adjustments, the smaller
the impact of interest rate fluctuations on the value of
these securities. The market value of tax-exempt
variable rate securities usually tends toward par (100%
of face value) at interest rate adjustment time.
In the case of the California Money Market Fund
only, any variable rate instrument with a demand feature
will be deemed to have a maturity equal to either the
date on which the underlying principal amount may be recovered
through demand or the next rate adjustment date consistent with
applicable regulatory requirements.
Put Bonds - Each Fund may invest in tax-exempt securities
(including securities with variable interest rates) which
may be redeemed or sold back (put) to the issuer of the
security or a third party at face value prior to stated
maturity ("Put Bonds"). Such securities will normally
trade as if maturity is the earlier put date, even though
stated maturity is longer. For the California Bond Fund,
maturity for put bonds is deemed to be the date on which
the put becomes exercisable. Generally, maturity for put
bonds for the California Money Market Fund is determined
as stated under Variable Rate Securities.
When-Issued Securities - Each Fund may invest in new
issues of tax-exempt securities offered on a when-issued
basis; that is, delivery and payment take place after the
date of the commitment to purchase, normally within 45
days. Both price and interest rate are fixed at the time
of commitment. The market value at the time the
transaction is completed may be more or less than the
fixed purchase price. Such securities can be sold before
settlement date.
Cash or high quality liquid debt securities equal to
the amount of the when-issued commitments are segregated
at the Fund's custodian bank. The segregated securities
are valued at market, and daily adjustments are made to
keep the value of the cash and segregated securities at
least equal to the amount of such commitments by the
Fund. On the settlement date, the Fund will meet its
obligations from then available cash, sale of segregated
securities, sale of other securities, or sale of the
when-issued securities themselves.
Municipal Lease Obligations - Each Fund may invest in
municipal lease obligations and certificates of
participation in such obligations (collectively, lease
obligations). A lease obligation does not constitute a
general obligation of the municipality for which the
municipality's taxing power is pledged, although the
lease obligation is ordinarily backed by the
municipality's covenant to budget for the payments due
under the lease obligation.
Certain lease obligations contain "non-
appropriation" clauses which provide that the
municipality has no obligation to make lease obligation
payments in future years unless money is appropriated for
such purpose on a yearly basis. Although "non-
appropriation" lease obligations are secured by the
leased property, disposition of the property in the event
of foreclosure might prove difficult. In evaluating a
potential investment in such a lease obligation, the
Manager will consider: (1) the credit quality of the
obligor, (2) whether the underlying property is essential
to a governmental function, and (3) whether the lease
obligation contains covenants prohibiting the obligor
from substituting similar property if the obligor fails
to make appropriations for the lease obligation.
Liquidity - Municipal Lease Obligations and certain Put
Bonds that are subject to restrictions on transfer may be
determined to be liquid in accordance with the guidelines
established by the Board of Directors for purposes of
complying with the Funds' investment restrictions
applicable to investments in illiquid securities.
In determining the liquidity of a lease obligation,
the Manager will consider: (1) the frequency of
trades and quotes for the lease obligation, (2) the
number of dealers willing to purchase or sell the lease
obligation and the number of other potential purchasers,
(3) dealer undertakings to make a market in the lease obligation,
(4) the nature of the marketplace trades, including the time
needed to dispose of the lease obligation, the method of soliciting
offers, and the mechanics of transfer, (5) whether the lease
obligation is of a size that will be attractive to
institutional investors, (6) whether the lease
obligation contains a non-appropriation clause and the
likelihood that the obligor will fail to make an
appropriation therefor, and (7) such other factors as the
Manager may determine to be relevant to such
determination.
In determining the liquidity of Put Bonds with
restrictions on transfer, the Manager will evaluate the
credit quality of the party (the "Put Provider") issuing
(or unconditionally guaranteeing performance on) the
unconditional put or demand feature of the Put Bond.
OTHER POLICIES
Each Fund is permitted (i) to lend portfolio securities
so long as collateral is obtained for the securities and
the aggregate value of all loans does not exceed 5% of
the Fund's total assets, and (ii) to invest up to 5% of
the Fund's total assets in repurchase agreements.
The California Bond Fund may enter into financial
futures contracts (and options thereon) for hedging
purposes or to attempt to reduce principal fluctuations
in the value of its portfolio. The Fund will not invest
in futures contracts or options thereon for speculation.
INVESTMENT RESTRICTIONS
The following restrictions may not be changed without
shareholder approval:
a. Neither Fund may borrow money except from banks for
temporary emergency purposes and then only in an
amount not to exceed 10% of the value of the Fund's
total assets.
b. Neither Fund may pledge or mortgage more than 10% of
its total assets.
c. Neither Fund may invest more than 10% of its total
assets in illiquid securities (including repurchase
agreements maturing in more than seven days).
d. Neither Fund may invest more than 25% of its total
assets in securities issued in connection with the
financing of projects with similar characteristics,
such as toll road revenue bonds, housing revenue
bonds or electric power project revenue bonds or in
industrial revenue bonds which are based, directly
or indirectly, on the credit of private entities of
any one industry. However, each Fund reserves the
right to invest more than 25% of its total assets in
tax-exempt industrial revenue bonds.
e. Neither Fund will invest more than 25% of its total
assets in the securities of a single issuer, and
neither Fund will, with respect to 75% of its total
assets, invest more than 5% of its total assets in
securities of a single issuer.
RISK FACTORS
Each Fund is subject to credit and market risks, which
will be intensified by concentration in California
issues. Because the Funds' portfolios concentrate their
investments in California tax-exempt securities, the
Funds are affected by political, economical, regulatory
or other developments which constrain the taxing and
spending authority of California issuers or otherwise
affect the ability of California issuers to pay interest
or repay principal. See Special Risk Considerations in
the Statement of Additional Information.
PURCHASE OF SHARES
OPENING AN ACCOUNT
You may open an account and make an investment by any of
the methods described in the following table. A
complete, signed application is required together with a
check (payable to USAA Tax Exempt Fund, Inc., [Fund
Name]) for each new account.
TAX ID NUMBER
We require that each shareholder named on the account
provide the Company with a social security number or tax
identification number to avoid possible tax withholding
requirements.
EFFECTIVE DATE
The purchase of shares will be effective on the day on
which a completed application and check are received by
the Manager at its principal office in San Antonio, TX,
if received before the time the net asset value (NAV) per
share is calculated. If an application, check, or funds
are received in San Antonio after the time at which the
NAV is calculated, the purchase will be effective on the
next business day. A check drawn on a foreign bank will
not be deemed received for the purchase of shares until
such time as the check has cleared and the Manager has
received good funds, which may take up to 4 to 6 weeks.
Furthermore, a bank charge may be assessed in the
clearing process, which will be deducted from the amount
of the purchase. To avoid a delay in the effectiveness
of your purchase, the Manager suggests that you convert
your foreign check to U.S. dollars prior to investment in
the Funds.
PURCHASE OF SHARES
INITIAL PURCHASES: Minimum $3,000
Mail
Send your application and check to:
USAA Investment Management Company
9800 Fredericksburg Rd., San Antonio, TX 78288
In Person
Bring your application and check to:
USAA Investment Management Company
USAA Federal Savings Bank
10750 Robert F. McDermott Freeway
San Antonio, TX
Exchange
Call our telephone assistance numbers. The new account must have
the same registration as the account from which you are exchanging.
ADDITIONAL PURCHASES: Minimum $50 - (Except transfers from
brokerage accounts).
Mail
Send your check and the "Invest By Mail" stub, which accompanies
your Fund's transaction confirmation, to the Transfer Agent:
USAA Shareholder Account Services
9800 Fredericksburg Rd., San Antonio, TX 78288
Bank Wire Purchase
Instruct your bank (which may charge a fee for the service)
to wire the specified amount to the Company as follows:
State Street Bank and Trust Company
Boston, MA 02101
ABA# 011000028
Attn: USAA [Fund Name]
USAA AC-69384998
Shareholder(s) Name(s)
Shareholder Account Number
Electronic Funds Transfer (EFT)
You can pay for purchases electronically via electronic
funds transfer. Systematic (regular) purchases can be
deducted from your bank account, payroll, income-
producing investment, or from a USAA money market
account. Intermittent (as-needed) purchases can be
deducted from your bank account through our Buy/Sell
Service.
Establish any of our electronic investing services
when you apply for your account, or later upon request.
REDEMPTION OF SHARES
You may redeem shares of a Fund by any of the methods
described in the following table on any day the NAV is
calculated. Redemptions will be effective on the day on
which instructions are received in accordance with the
requirements set forth below. However, if instructions
are received after the NAV calculation, redemption will
be effective on the next business day.
REDEMPTION PROCEEDS
Redemption proceeds are distributed within seven days
after the effective date of redemption. Redemption of
shares purchased by check or electronic funds transfer
will not occur until the purchase check or electronic
funds transfer has cleared, which could take up to 15
days from the purchase date. If you are considering
redeeming shares soon after purchase, the Manager suggests
you purchase by bank wire or certified check to avoid delay.
In addition, the Company may elect to suspend the
redemption of shares or postpone the date of payment
during any period that the New York Stock Exchange is
closed, or trading in the markets the Company normally
utilizes is restricted, or during any period that
redemption is otherwise permitted to be suspended by the
Securities and Exchange Commission.
Redemption of Shares
Any of the following methods may be used to authorize the
Transfer Agent to redeem shares from your account based
on instructions received.
Written, Fax, or Telegraph
Send your written instructions to:
USAA Shareholder Account Services
9800 Fredericksburg Rd., San Antonio, TX 78288
Send a signed fax to 210-498-2889, or send a telegraph to
USAA Shareholder Account Services.
Written redemption requests must include the
following: (1) a letter of instruction or stock
assignment, and stock certificate (if issued), specifying
the Fund and the number of shares or dollar amount to be
redeemed; (2) signatures of all owners of the shares
exactly as their names appear on the account; (3) other
supporting legal documents, if required, as in the case
of estates, trusts, guardianships, custodianships,
partnerships, corporations, and pension and profit-
sharing plans; and (4) method of payment.
Telephone
Call toll free 1-800-531-8448, in San Antonio, 498-7290.
The Fund will employ reasonable procedures to
confirm that instructions communicated by telephone are
genuine, and if it does not, it may be liable for any
losses due to unauthorized or fraudulent instructions.
Information is obtained prior to any discussion regarding
an account including: (1) USAA number or account number,
(2) the name(s) on the account registration, and (3)
social security number or tax identification number for
the account registration. In addition, all telephone
communications with a shareholder are recorded and
confirmations of all account transactions are sent to the
address of record.
Redemption by telephone, fax, or telegraph is not
available to shares represented by stock certificates.
(continued)
Methods of Payment
Any of the following methods of payment may be used with
your redemption request.
Bank Wire Redemption
The wire redemption privilege allows redemptions of
$1,000 or more to be sent directly to your bank account.
Establish this service when you apply for your account,
or later upon request. If your account is at a savings
bank, savings and loan association, or credit union,
please obtain precise wiring instructions from your
institution. Specifically, include the name of the
correspondent bank and your institution's account number
at that bank. USAA Shareholder Account Services deducts
a wire fee from the account for the redemption by wire.
The fee as of the date of this Prospectus is $10 and is
subject to change at any time. The fee is paid to State
Street Bank and Trust Company (State Street) and the
Transfer Agent for their services in connection with the
wire redemption. Your bank may also charge a fee for
receiving funds by wire.
Electronic Funds Transfer (EFT)
You can request electronic redemptions via electronic
funds transfer. Systematic (regular) or intermittent
(as-needed) redemptions can be credited to your bank
account.
Establish any of our electronic investing services
when you apply for your account, or later upon request.
Check Redemption
You may request a redemption to be paid by check to the
registered shareholder(s) and mailed to the address of
record. This check redemption privilege is automatically
established when your application is completed and
accepted. There is a 15 day waiting period before a
check redemption can be processed following a telephone
address change.
Checkwriting
You may request that checks be issued for your California
Money Market Fund account. To establish your
checkwriting privilege, complete the signature card which
accompanies the application form or Shareholder Services
Guide, or request and complete the signature card
separately. A one-time $5 checkwriting fee is charged to
each account by the Transfer Agent for the establishment
of the privilege. There is no charge for the use of
checks nor for subsequent reorders. This privilege is
subject to State Street's rules and regulations governing
checking accounts. Checks must be written for an amount
of at least $250. Checks written for less than $250 will
be returned. Checkwriting may not be used to close an
account because the value of the account changes daily as
dividends are accrued.
When a check is presented to the Transfer Agent for
payment, a sufficient number of full and fractional
shares in the investor's account will be redeemed to
cover the amount of the check. Checks will be returned
if there are insufficient shares to cover the amount of
the check. Presently, there is a $15 processing fee
assessed against an account for any redemption check not
honored by a clearing or paying agent. A check paid
during the month will be returned to the shareholder by
separate mail. Checkwriting fees are subject to change
at any time. The Company, the Transfer Agent and State
Street each reserve the right to change or suspend the
checkwriting privilege upon 30 days' written notice to
participating shareholders. See the Statement of
Additional Information for further information.
You may request that the Transfer Agent stop payment
on a check. The Transfer Agent will use its best efforts
to execute stop payment instructions but does not
guarantee that such efforts will be effective. A $10
charge will be made for each stop payment requested by a
shareholder.
CONDITIONS OF PURCHASE AND REDEMPTION
NONPAYMENT
If any order to purchase shares is cancelled due to
nonpayment or if the Company does not receive good funds
either by check or electronic funds transfer, the
cancellation will be treated as a redemption of shares
purchased and you will be responsible for any resulting
loss incurred by the Fund or the Manager. If you are a
shareholder, shares can be redeemed from any of your
account(s) as reimbursement for all losses. In addition,
you may be prohibited or restricted from making future
purchases in any of the USAA Family of Funds. A $15 fee
is charged for all returned items, including checks and
electronic funds transfers.
TRANSFER OF SHARES
Fund shares may be transferred to another person by
sending written instructions to the Transfer Agent. The
account must be clearly identified and the shareholder
must include the number of shares to be transferred, the
signatures of all registered owners, and all stock
certificates, if any, which are the subject of transfer.
You also need to send written instructions and supporting
documents to change an account registration due to events
such as divorce, marriage, or death. If a new account
needs to be established, an application must be completed
and returned to the Transfer Agent.
ACCOUNT BALANCE
The Board of Directors may cause the redemption of an
account with a balance of less than 50 full shares of
either Fund, subject to certain limitations described in
Additional Information Regarding Redemption of Shares in
the Statement of Additional Information.
COMPANY RIGHTS
The Company reserves the right to:
(1) reject purchase or exchange orders when in the best
interest of the Company;
(2) limit or discontinue the offering of shares of any
portfolio of the Company without notice to the
shareholders;
(3) impose a redemption charge of up to 1% of the net
asset value of shares redeemed if circumstances
indicate a charge is necessary for the protection of
remaining investors (as, for example, if excessive
market-timing share activity unfairly burdens long-
term investors); provided, however, this 1% charge
will not be imposed upon shareholders unless
authorized by the Board of Directors and adequate
notice has been given to shareholders;
(4) require a signature guarantee when deemed
appropriate by the Manager for purchases,
redemptions, or changes in account information. The
section Additional Information Regarding Redemption
of Shares in the Statement of Additional Information
contains information on acceptable guarantors.
EXCHANGES
EXCHANGE PRIVILEGE
The Exchange Privilege is automatically established when
you complete your application. You may exchange shares
among portfolios in the USAA Family of Funds, provided
you do not hold these shares in stock certificate form
and that the shares to be acquired are offered in your
state of residence. Only California residents may
exchange into a California Fund. Exchange redemptions
and purchases will be processed simultaneously at the
share prices next determined after the exchange order is
received. For federal income tax purposes, an exchange
between portfolios is a taxable event. Accordingly, a
capital gain or loss may be realized.
The Fund has undertaken certain procedures regarding
telephone transactions. See Redemption of Shares -
Telephone.
EXCHANGE LIMITATIONS,
EXCESSIVE TRADING
To minimize Fund costs and to protect the portfolios and
their shareholders from unfair expense burdens, the Funds
restrict excessive exchanges. Exchanges out of any
portfolio in the USAA Family of Funds are limited for
each account to six per calendar year except that there
is no limitation on exchanges out of the Tax Exempt
Short-Term Fund, Short-Term Bond Fund, or any of the
money market funds in the USAA Family of Funds.
OTHER SERVICES
INVESTMENT PLANS
You may establish a systematic investment plan by
completing the appropriate forms. At the time you sign
up for any of the following investment plans that utilize
the electronic funds transfer service, you will choose
the day of the month (the effective date) on which you
would like to regularly purchase shares. When this day
falls on a weekend or holiday, the electronic transfer
will take place on the last business day before the
effective date. Call the Manager to obtain instructions.
More information about these preauthorized plans is
contained in the Statement of Additional Information.
InvesTronic(registered trademark) - the periodic purchase
of shares through electronic funds transfer from a
checking or savings account.
Direct Purchase Service - the periodic purchase of shares
through electronic funds transfer from a non-governmental
employer, an income-producing investment, or an account
with a participating financial institution.
Automatic Purchase Plan - the periodic transfer of funds
from a USAA money market fund to purchase shares in
another non-money market USAA mutual fund.
Buy/Sell Service - the intermittent purchase or
redemption of shares through electronic funds transfer to
or from a checking or savings account.
Systematic Withdrawal Plan - the periodic redemption of
shares from one of your accounts permitting you to
receive a fixed amount of money monthly or quarterly.
SHAREHOLDER STATEMENTS AND REPORTS
You will receive a confirmation statement after each
transaction showing the activity in your account except
when account activity is produced solely from dividend
reinvestment in which case confirmation statements will
be mailed only on a quarterly basis. A statement which
reflects the account history during the prior tax year is
provided to each shareholder annually. There will be a
$10 fee charged for copies of historical statements for
other than the prior tax year for any one account. You
will receive a Fund's financial statements with a summary
of its investments and performance at least semiannually.
In an effort to reduce expenses and respond to
shareholders' requests to reduce mail, the Company
intends to consolidate mailings of annual and semiannual
reports to households having multiple accounts with the same
address of record. One copy of each report will be
furnished to that address. You may request additional
reports by notifying the Company.
DIRECTED DIVIDENDS
If you own shares in more than one of the Funds in the
USAA Family of Funds, you may direct that dividends
and/or capital gain distributions earned in one fund be
used to automatically purchase shares in another fund.
TELEPHONE ASSISTANCE
Call our telephone assistance numbers for specific forms,
a copy of the Statement of Additional Information, the
most recent Annual Report and/or Semiannual Report, or if
you have any questions concerning any of the services
offered.
SHARE PRICE CALCULATION
The price at which shares of the Funds are purchased and
redeemed by shareholders is equal to the net asset value
(NAV) per share determined on the effective date of the
purchase or redemption.
WHEN
The NAV per share for each Fund is calculated at the
close of the regular trading session of the New York
Stock Exchange, which is usually 4:00 p.m. Eastern time.
You buy and sell Fund shares at NAV without a sales
charge.
HOW
The NAV is calculated by adding the value of all
securities and other assets in a Fund, deducting
liabilities, and dividing by the number of shares of the
Fund outstanding. Securities of the California Bond Fund
are valued each business day at their current market value
as determined by a pricing service approved by the Board of
Directors. Securities which cannot be valued by the pricing
service are valued in good faith at fair value using methods
determined by the Manager under the general supervision of
the Board of Directors. In addition, securities purchased with
maturities of 60 days or less and all securities of the
California Money Market Fund are stated at amortized cost.
For additional information, see Valuation of
Securities in the Statement of Additional Information.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
Net investment income of each Fund is accrued daily and
distributed to shareholders on the last business day of
each month. Any net capital gain generally will be
distributed after the end of the fiscal year. The Funds
intend to make such additional distributions as may be
necessary to avoid the imposition of any federal excise tax.
All shares purchased will begin accruing dividends
on the day following the effective date of the purchase
and will receive dividends through the effective date of
redemption.
All income dividends and capital gain distributions
are automatically reinvested, unless the shareholder
specifies otherwise. The share price will be the net
asset value of the Fund shares computed on the ex-
dividend date. Any capital gain distribution paid by the
California Bond Fund will reduce the per share net asset
value by the amount of the distribution. An investor
should consider carefully the effects of purchasing
shares of the California Bond Fund shortly before any
capital gain distribution. Although in effect a return
of capital, these distributions are subject to taxes. If
a shareholder becomes a resident of a state other than
California, a check for proceeds of income dividends will
be mailed to such shareholder monthly, and a check for
any capital gain distribution will be mailed after the
distribution is paid.
Any dividend or distribution payment returned to the
Manager as not deliverable will be invested in the
shareholder's Fund account at the then-current net asset
value. If any check for the payment of dividends or
distributions is not cashed within six months from the
date on the check, it becomes void. The amount of the
check will then be invested in the shareholder's account
at the then-current net asset value.
FEDERAL TAXES
The exemption of interest income for federal income tax
purposes does not necessarily result in exemption under
the income or other tax laws of any state or local taxing
authority. The following discussion relates only to
generally applicable federal income tax provisions in
effect as of the date of this Prospectus. Therefore,
shareholders are urged to consult their own tax advisers
about the status of distributions from a Fund in their
own states and localities.
Fund - Each Fund intends to qualify as a regulated
investment company under Subchapter M of the Internal
Revenue Code of 1986, as amended (the Code). By
complying with the applicable provisions of the Code,
neither Fund will be subject to federal income tax on its
net investment income and net capital gains (capital
gains in excess of capital losses) distributed to
shareholders.
Shareholder - Dividends of net tax-exempt interest income
paid by a Fund will be excluded from a shareholder's
gross income for federal income tax purposes. Dividends
from taxable net investment income and distributions of
net short-term capital gains are taxable to shareholders
as ordinary income, whether received in cash or
reinvested in additional shares. However, it is expected
that any taxable net investment income will be
insubstantial in relation to the tax-exempt interest
generated by a Fund.
Distributions of net long-term capital gains are
taxable as long-term capital gains whether received in
cash or reinvested in additional shares, and regardless
of the length of time the investor has held the shares of
a Fund.
Tax-exempt interest from private activity bonds (for
example, industrial development revenue bonds) issued
after August 7, 1986, although otherwise exempt from
federal tax, is treated as a tax preference item for
purposes of the alternative minimum tax. For
corporations, all tax-exempt interest will be considered
in calculating the alternative minimum tax as part of the
adjusted current earnings.
Withholding - Each Fund is required by federal law to
withhold and remit to the U.S. Treasury a portion of the
income dividends and capital gain distributions and
proceeds of redemptions paid to any non-corporate
shareholder who fails to furnish the Fund with a correct
tax identification number, who underreports dividend or
interest income, or who fails to certify to the Fund that
he is not subject to withholding. To avoid this
withholding requirement, you must certify on your
application, or on a separate Form W-9 supplied by the
Transfer Agent, that your tax identification number is
correct and that you are not currently subject to backup
withholding.
Reporting - Each Fund will report annually to its
shareholders the federal tax status of dividends and
distributions paid or declared by each Fund during the
preceding calendar year, including the portion of the
dividends constituting interest on private activity
bonds, and the percentage and source, on a state-by-state
basis, of interest income earned on tax-exempt securities
held by the Fund during the preceding year.
CALIFORNIA TAXATION
California law relating to the taxation of regulated
investment companies was generally conformed to federal
law effective January 1, 1993. Any portion of the
dividends paid by the Funds and derived from interest on
obligations that pay interest (when such obligations are
held by an individual) which is excludable from California
personal income under California law will be exempt from
California personal income tax (although not from the
California franchise tax). To the extent a portion of
the dividends are derived from interest on debt
obligations other than those described directly above,
such portion will be subject to the California personal
and corporate income tax even though it may be excludable
from gross income for federal income tax purposes. In
addition, distributions of short-term capital gains
realized by the Funds will be taxable to the shareholders
as ordinary income. Distributions of long-term capital
gains will be taxable as such to the shareholders
regardless of how long they have held their shares. If
shares of the Funds that are sold at a loss have been
held six months or less, the loss will be disallowed to
the extent of any exempt-interest dividends received on
such shares.
With respect to non-corporate shareholders,
California does not treat tax- exempt interest as a tax
preference item for purposes of its alternative minimum
tax. To the extent a corporate shareholder receives
dividends which are exempt from California taxation, a
portion of such dividends may be subject to the
alternative minimum tax. Interest on indebtedness
incurred or continued to purchase or carry shares of an
investment company paying exempt-interest dividends, such
as the Fund, will not be deductible by the shareholder
for California personal income tax purposes.
The foregoing is only a summary of some of the
important California personal income tax considerations
generally affecting the Funds and their shareholders.
This discussion is not intended as a substitute for
careful planning. Potential investors in the Funds
should consult their tax advisers with specific reference
to their own tax situations.
MANAGEMENT OF THE COMPANY
The business affairs of the Company are subject to the
supervision of the Board of Directors.
The Manager, USAA Investment Management Company, was
organized in May 1970 and is an affiliate of United
Services Automobile Association (USAA), a large
diversified financial services institution. As of the
date of this Prospectus, the Manager had in excess of $24
billion in total assets under management. The Manager
has offices at 9800 Fredericksburg Rd., San Antonio, TX
78288, which is also the home office of USAA and other
affiliates.
ADVISORY AGREEMENT
The Manager serves as the manager and investment adviser
of the Company, providing services under an Advisory
Agreement. Under the Advisory Agreement, the Manager is
responsible for the management of the portfolios,
business affairs, and placement of brokerage orders,
subject to the authority of and supervision by the Board
of Directors.
For its services under the Advisory Agreement, each
Fund pays the Manager an annual fee which is computed as
a percentage of the aggregate average net assets (ANA) of
both Funds combined. The fee is accrued daily, paid
monthly, and allocated between the Funds based on the
relative net assets of each. The fee is computed at .50%
of the first $50,000,000 ANA, .40% of that portion over
$50,000,000 and not over $100,000,000 ANA, and .30% of
that portion over $100,000,000 ANA. For the fiscal year
ended March 31, 1994, the fees paid to the Manager were
.32% of ANA for the California Bond Fund and .32% of ANA
for the California Money Market Fund.
OPERATING EXPENSES
For the fiscal year ended March 31, 1994, the total
operating expenses for each Fund as a percentage of that
Fund's ANA equaled .44% for the California Bond Fund and
.49% for the California Money Market Fund.
PORTFOLIO MANAGERS
See Appendix A - Portfolio Management for a listing of
portfolio managers.
SERVICE PROVIDERS
UNDERWRITER/ USAA Investment Management Company
DISTRIBUTOR 9800 Fredericksburg Rd., San Antonio, Texas 78288.
TRANSFER USAA Shareholder Account Services
AGENT 9800 Fredericksburg Rd., San Antonio, Texas 78288.
CUSTODIAN State Street Bank and Trust Company
P.O. Box 1713, Boston, Massachusetts 02105.
LEGAL Goodwin, Procter & Hoar
COUNSEL Exchange Place, Boston, Massachusetts 02109.
INDEPENDENT KPMG Peat Marwick
AUDITORS 112 East Pecan, Suite 2400, San Antonio, Texas 78205.
DESCRIPTION OF SHARES
The Company is an open-end management investment company
incorporated under the laws of the State of Maryland on
November 16, 1981. The Company is authorized to issue
shares in separate classes, or portfolios. Ten such
portfolios have been established, two of which are
described in this Prospectus. Each of the two Funds is
classified as a diversified investment company. Under
the Company's charter, the Board of Directors is
authorized to create new portfolios in addition to those
already existing without the approval of the shareholders
of the Company.
Under the provisions of the Bylaws of the Company,
no annual meeting of shareholders is required.
Ordinarily, no shareholder meeting will be held unless
required by the Investment Company Act of 1940. The
Directors may fill vacancies on the Board or appoint new
Directors provided that immediately after such action at
least two-thirds of the Directors have been elected by
shareholders.
Shareholders are entitled to one vote per share
(with proportionate voting for fractional shares)
irrespective of the relative net asset value of the
shares. For matters affecting an individual Fund, a
separate vote of the shareholders of that Fund is required.
TELEPHONE ASSISTANCE
(Call toll free, Monday-Saturday, Central Time)
For further information on mutual funds:
Office Hours: M-F 8:00 a.m. to 8:00 p.m.
Saturday: 8:30 a.m. to 5:00 p.m.
1-800-531-8181
In San Antonio 210-498-6505
For account servicing, exchanges or redemptions:
Office Hours: M-F 8:00 a.m. to 8:00 p.m.
Saturday: 8:30 a.m. to 5:00 p.m.
1-800-531-8448
In San Antonio 210-498-7290
RECORDED MUTUAL FUND PRICE QUOTES
(Accessible 24 hours from any phone)
1-800-531-8066
In San Antonio 210-498-8066
MUTUAL FUND TOUCHLINE (registered trademark)
(Accessible 24 hours from Touchtone phones)
For account balance, last transaction or fund prices:
1-800-531-8777
In San Antonio 210-498-8777
APPENDIX A - PORTFOLIO MANAGEMENT
The following are the portfolio managers of USAA Tax Exempt Fund, Inc.,
California Funds:
NAME David G. Miller Robert R. Pariseau
PORTFOLIO California Bond Fund California Money Market Fund
MANAGED since 04/94 since 04/93
EDUCATION BS, University of Colorado BS, U.S. Naval Academy,
MBA, Trinity University, Annapolis, Maryland
Texas MBA, Lindenwood College,
Missouri
EXPERIENCE (1) 21 years, investment 10 years, investment
management management
11 years, IMCO 10 years, IMCO
BUSINESS HISTORY 11/92-present, Executive 11/93-present, Executive
PAST FIVE YEARS Director, Fixed Income Director, Fixed Income
Investments, IMCO Investments, IMCO
04/91-11/92, Associate 04/93-11/93, Associate
Portfolio Manager, Fixed Portfolio Manager, Fixed
Income Investments, IMCO Income Investments, IMCO
12/90-04/91, Senior 03/91-03/93, Senior
Securities Analyst, Securities Analyst I,
Fixed Income Fixed Income Investments,
Investments, IMCO IMCO
04/88-11/90, Director, 04/88-02/91, Senior
Discount Brokerage, IMCO Securities Analyst II,
Equity Investments, IMCO
PROFESSIONAL CFP, 1985 CFA, 1987
DESIGNATIONS (1) CFA, 1990
PROFESSIONAL AIMR AIMR
MEMBERSHIPS (1) SAFAS SAFAS
NFMA NFMA
- ----------------------
(1) Abbreviations of designations and organizations used in above table:
IMCO - USAA Investment Management Company (the Manager)
CFP - Certified Financial Planner
CFA - Chartered Financial Analyst
AIMR - Association for Investment Management and Research
SAFAS - San Antonio Financial Analysts Society, Inc.
NFMA - National Federation of Municipal Analysts
USAA VIRGINIA FUNDS
August 1, 1994 PROSPECTUS
USAA Virginia Bond Fund and USAA Virginia Money Market
Fund (collectively, the Funds or the Virginia Funds) are
two of ten no-load mutual funds offered by USAA Tax
Exempt Fund, Inc. (the Company). The Funds are managed
by USAA Investment Management Company (the Manager).
WHAT ARE THE INVESTMENT OBJECTIVES AND POLICIES?
The Funds have a common objective of providing
Virginia investors with a high level of current interest
income that is exempt from federal and Virginia state
income taxes. The Virginia Money Market Fund has a
further objective of preserving capital and maintaining
liquidity. Each Fund has separate investment policies to
achieve its objective.
The Virginia Bond Fund invests primarily in long-
term investment grade Virginia tax-exempt securities.
The Fund's average portfolio maturity is not restricted
but is expected to be greater than 10 years. Page 9.
The Virginia Money Market Fund invests in high
quality Virginia tax-exempt securities with maturities of
397 days or less. The Manager will maintain a dollar-
weighted average portfolio maturity of 90 days or less
and will endeavor to maintain a constant net asset value
per share of $1.00. Page 9.
Shares of the Virginia Funds are authorized for sale
only to residents of the Commonwealth of Virginia. The
delivery of this Prospectus shall not constitute an offer
in any state in which shares of the Virginia Funds may
not lawfully be made.
This Prospectus, which should be read and retained
for future reference, provides information regarding the
Company and the Virginia Funds that you should know
before investing.
HOW DO YOU BUY? Fund shares are sold on a continuous
basis at the net asset value per share without a sales
charge. Make your initial investment directly with the
Manager by mail or in person. Page 13.
HOW DO YOU SELL? You may redeem shares of a Fund by
mail, telephone, fax, or telegraph on any day that the
net asset value is calculated. Page 15.
Shares of the USAA Virginia Funds are not deposits
or other obligations of, or guaranteed by the USAA
Federal Savings Bank, are not insured by the FDIC or any
other Government Agency, and are subject to market risks.
If you would like more information, a STATEMENT OF
ADDITIONAL INFORMATION dated August 1, 1994, is available
upon request and without charge by writing to USAA TAX
EXEMPT FUND, INC., Virginia Funds, 9800 Fredericksburg
Rd., San Antonio, TX 78288, or by calling 1-800-531-8181.
The Statement of Additional Information has been filed
with the Securities and Exchange Commission and is
incorporated by reference into this Prospectus.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
AN INVESTMENT IN THE VIRGINIA MONEY MARKET FUND IS
NEITHER INSURED NOR GUARANTEED BY THE U.S. GOVERNMENT AND
THERE CAN BE NO ASSURANCE THAT THE FUND WILL BE ABLE TO
MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE.
TABLE OF CONTENTS
Page
----
SUMMARY DATA
Fees and Expenses 3
Financial Highlights 4
Performance Information 6
USING MUTUAL FUNDS
USAA Family of No-Load Mutual Funds 7
Using Mutual Funds in an Investment Program 8
INVESTMENT PORTFOLIO INFORMATION
Investment Objectives and Policies 9
Virginia Bond Fund 9
Virginia Money Market Fund 9
Other Investment Information 10
SHAREHOLDER INFORMATION
Purchase of Shares 13
Redemption of Shares 15
Conditions of Purchase and Redemption 17
Exchanges 18
Other Services 18
Share Price Calculation 19
Dividends, Distributions and Taxes 20
Management of the Company 22
Service Providers 22
Description of Shares 23
Telephone Assistance Numbers 23
Appendix A - Portfolio Management 24
FEES AND EXPENSES
The following summary is provided to assist you in understanding
the expenses you will bear directly or indirectly.
Shareholder Transaction Expenses (applicable to each Fund)
- -----------------------------------------------------------------------
Sales Load Imposed on Purchases None
Sales Load Imposed on Reinvested Dividends None
Deferred Sales Load None
Redemption Fee* None
Exchange Fee None
Annual Fund Operating Expenses (as a percentage of average net
assets (ANA))
- -----------------------------------------------------------------------
Virginia Virginia
Bond Money Market
Fund Fund
---- ----
Management Fee, net of reimbursements .35% .24%
12b-1 Fee None None
Other Expenses, net of reimbursements
Transfer Agent Fee** .08% .12%
Custodian Fee .03% .05%
All Other Expenses .03% .09%
---- ----
Total Other Expenses .14% .26%
---- ----
Total Operating Expenses, net of reimbursements .49% .50%
==== ====
- -----------------------------------------------------------------------
* A shareholder who requests delivery of redemption proceeds by
wire transfer will be subject to a $10 fee. See Redemption of
Shares - Wire Redemption.
** The Funds pay USAA Shareholder Account Services an annual fixed
fee per account for its services. See Transfer Agent in the
Statement of Additional Information, page 24.
During the year, the Manager voluntarily limited
each Fund's expenses to .50% of its ANA and reimbursed
the Funds for all expenses in excess of the limitation.
The Management Fee, Other Expenses, and Total Operating
Expenses information gives effect to all such expense
reimbursements by the Manager. Absent such
reimbursements, the amount of the Virginia Money Market
Fund's Management Fee, Other Expenses, and Total
Operating Expenses, as a percentage of its ANA, would
have been .35%, .26%, and .61%. Total operating expenses
for the Virginia Bond Fund were below the limitation,
therefore no reimbursements were required. The Manager
has voluntarily agreed to continue to limit each Fund's
annual expenses until August 1, 1995, to .50% of its ANA
and will reimburse the Funds for all expenses in excess
of the limitation.
Example of Effect of Fund Expenses
- -----------------------------------------------------------------------
An investor would pay the following expenses on a $1,000 investment,
assuming (1) 5% annual return and (2) redemption at the end of the
periods shown:
1 year 3 years 5 years 10 years
------ ------- ------- --------
Virginia Bond Fund $ 5 $ 16 $ 27 $ 62
Virginia Money Market Fund $ 5 $ 16 $ 28 $ 63
The above example should not be considered a representation of past
or future expenses and actual expenses may be greater or less than
those shown.
FINANCIAL HIGHLIGHTS
The following per share operating performance for a share
outstanding throughout each period in the four-year period
ended March 31, 1994, has been derived from financial
statements audited by KPMG Peat Marwick. This table should
be read in conjunction with the financial statements and
related notes that appear in the Funds' Annual Report.
Further performance information is contained in the Annual
Report and is available upon request without charge.
NET ASSET NET REALIZED DISTRIBUTIONS
VALUE AT NET AND FROM NET DISTRIBUTIONS
BEGINNING INVESTMENT UNREALIZED INVESTMENT OF REALIZED
FISCAL YEAR OF PERIOD INCOME GAIN (LOSS) INCOME CAPITAL GAINS
ENDED ($) ($) ($) ($) ($)
VIRGINIA BOND FUND:
March 31,
1991* 10.00 .32 .28 (.32) -
1992 10.28 .67 .29 (.67) -
1993 10.57 .64 .65 (.64) (.06)
1994 11.16 .62 (.30) (.62) (.15)
VIRGINIA MONEY MARKET FUND:
March 31,
1991* 1.00 .02 - (.02) -
1992 1.00 .04 - (.04) -
1993 1.00 .03 - (.03) -
1994 1.00 .02 - (.02) -
FINANCIAL HIGHLIGHTS cont.
RATIO OF NET
NET ASSET RATIO OF INVESTMENT
VALUE AT NET ASSETS EXPENSES INCOME
END TOTAL AT END TO AVERAGE TO AVERAGE PORTFOLIO
OF PERIOD RETURN OF PERIOD NET ASSETS NET ASSETS TURNOVER
($) (%)** ($000) (%) (%) (%)
10.28 6.01 58,045 .50(a)(b) 6.83(a)(b) 142.56
10.57 9.61 131,475 .50(b) 6.40(b) 86.77
11.16 12.61 207,302 .50(b) 5.90(b) 91.31
10.71 2.69 235,901 .49 5.44 92.17
1.00 2.38 42,513 .50(a)(b) 5.03(a)(b) -
1.00 4.09 73,220 .50(b) 3.96(b) -
1.00 2.65 77,263 .50(b) 2.62(b) -
1.00 2.14 92,570 .50(b) 2.12(b) -
- --------------
(a) Annualized. The ratio is not necessarily indicative of 12 months'
operations.
(b) The information contained in this table is based on actual expenses
for the period, after giving effect to reimbursements of expenses
by the Manager. Absent such reimbursements, the Funds' ratios would
have been:
RATIO OF RATIO OF NET
EXPENSES INVESTMENT INCOME
TO AVERAGE TO AVERAGE
FISCAL YEAR ENDED NET ASSETS NET ASSETS
(%) (%)
VIRGINIA BOND FUND:
March 31,
1991* .99(a) 6.34(a)
1992 .65 6.25
1993 .54 5.86
VIRGINIA MONEY MARKET FUND:
March 31,
1991* 1.08(a) 4.45(a)
1992 .74 3.72
1993 .63 2.49
1994 .61 2.01
- --------------
* From date of inception, October 15, 1990 to March 31, 1991.
** Assumes reinvestment of all dividend income and capital
gain distributions during the period.
PERFORMANCE INFORMATION
Performance information should be considered in light of
each Fund's investment objective and policies and market
conditions during the time periods for which it is
reported. Historical performance should not be
considered as representative of the future performance of
either Fund.
The Company may quote a Fund's yield or total return
in advertisements and reports to shareholders or
prospective investors. A Fund's performance may also be
compared to that of other mutual funds with similar
investment objectives and relevant indexes that are
referenced in Appendix B in the Statement of Additional
Information. Standard total return and yield results
reported by the Funds do not take into account recurring
and nonrecurring charges for optional services which only
certain shareholders elect and which involve nominal
fees, such as the $10 fee for a delivery of redemption
proceeds by wire transfer.
Further information concerning yield and total
return is included in the Statement of Additional
Information.
TOTAL RETURN - Virginia Bond Fund. The Fund's average
annual total return is computed by determining the
average annual compounded rate of return for a specified
period which, when applied to a hypothetical $1,000
investment in the Fund at the beginning of the period,
would produce the redeemable value of that investment at
the end of the period, assuming reinvestment of all
dividends and distributions during the period.
YIELD - Virginia Bond Fund. This Fund may advertise
performance in terms of a 30-day yield quotation. The
yield quotation is computed by dividing the net
investment income per share earned during the period by
the offering price per share on the last day of the
period. This income is then annualized. For purposes of
the yield calculation, interest income is computed based
on the yield to maturity of each debt obligation in a
Fund's portfolio and all recurring charges are recognized.
YIELD - Virginia Money Market Fund. The Fund may
advertise its yield and effective yield. The yield of
the Fund refers to the income generated by an investment
in the Fund over a seven-day period (which period will be
stated in the advertisement). This income is then
annualized, that is, the amount of income generated by
the investment during the week is assumed to be generated
each week over a 52-week period and is shown as a
percentage of the investment.
The effective yield is calculated similarly but,
when annualized, the income earned by an investment in
the Fund is assumed to be reinvested. The effective
yield will be slightly higher than the yield because of
the compounding effect of this assumed reinvestment.
TAX EQUIVALENT YIELD - The Funds may also utilize tax
equivalent yields with adjustments for assumed income tax
rates. See Appendix C Taxable Equivalent Yield Table
in the Statement of Additional Information for
illustrations of this yield.
USAA FAMILY OF NO-LOAD MUTUAL FUNDS
The USAA Family of No-Load Mutual Funds includes a
variety of portfolios, each with different objectives and
policies. In combination, these portfolios are designed
to provide investors with the opportunity to formulate
their own investment program. An investor in any one
portfolio may exchange into any other portfolio. For
more complete information about the portfolios in the
USAA Family of Funds, including charges and expenses,
call the Manager for a Prospectus. Be sure to read it
carefully before you invest or send money.
USAA TAX EXEMPT FUND, INC.
Long-Term Fund
Intermediate-Term Fund
Short-Term Fund
Tax Exempt Money Market Fund
California Bond Fund*
California Money Market Fund*
New York Bond Fund*
New York Money Market Fund*
Virginia Bond Fund*
Virginia Money Market Fund*
USAA MUTUAL FUND, INC.
Aggressive Growth Fund
Growth Fund
Growth & Income Fund
Income Stock Fund
Income Fund
Short-Term Bond Fund
Money Market Fund
USAA INVESTMENT TRUST
Balanced Portfolio Fund
Cornerstone Fund
Gold Fund
International Fund
World Growth Fund
GNMA Trust
Treasury Money Market Trust
USAA STATE TAX-FREE TRUST
Florida Tax-Free Income Fund*
Florida Tax-Free Money Market Fund*
Texas Tax-Free Income Fund*
Texas Tax-Free Money Market Fund*
* Available for sale only to residents of these
specific states.
USING MUTUAL FUNDS IN AN INVESTMENT PROGRAM
I. THE IDEA BEHIND MUTUAL FUNDS
Mutual funds were conceived as a vehicle that could give
small investors some of the advantages enjoyed by wealthy
investors. A relatively small investment buys part of a
widely diversified portfolio. That portfolio is managed
by investment professionals, relieving the shareholder of
the need to make individual stock or bond selections.
The investor also enjoys conveniences, such as daily
pricing, liquidity, and in the case of the USAA Family of
Funds, no sales charge. The portfolio, because of its
size, has lower transaction costs on its trades than most
individuals would have. As a result each shareholder
owns an investment that in earlier times would have been
available only to very wealthy people.
II. USING FUNDS IN AN INVESTMENT PROGRAM
In choosing a mutual fund as an investment vehicle, the
shareholder is foregoing some investment decisions, but
must still make others. The decisions foregone are those
involved with choosing individual securities. The fund
manager will perform that function. In addition, the
manager will arrange for the safekeeping of securities,
auditing the annual financial statements, and daily
valuation of the fund, as well as other functions.
The shareholder, however, retains at least part of
the responsibility for an equally important decision.
That is determining a portfolio of mutual funds that
balances the investor's investment goals with his or her
tolerance for risk. It is likely that this decision may
involve the use of more than one fund of the USAA Family
of Funds.
For example, assume a shareholder wishes to pursue
the higher yields usually available in the long-term bond
market, but is also concerned about the possible price
swings of the long-term bonds. He or she could divide
investments between the Virginia Bond Fund and the
Virginia Money Market Fund. This would create a
portfolio with a higher yield than that of the money
market and less volatility than that of the long-term
market. This is just one example of how an individual
could combine funds to create a portfolio tailored to his
or her own risk and reward goals.
III. USAA'S FAMILY OF FUNDS
The Manager offers investors another alternative in its
portfolio funds, the Balanced Portfolio and Cornerstone
Funds. Both of these unique mutual funds provide a
professionally managed diversified investment portfolio
within a mutual fund. These funds are designed for the
shareholder who prefers to delegate the asset allocation
process to an investment manager. The funds are
structured to achieve diversification across a number of
investment categories.
Whether you prefer to create your own mix of mutual
funds or use a portfolio fund, the USAA Family of Funds
provides a broad range of choices covering just about any
investor's investment objectives. Our sales
representatives stand ready to inform you of your choices
and to help you craft a portfolio which meets your needs.
INVESTMENT OBJECTIVES AND POLICIES
VIRGINIA BOND FUND
VIRGINIA MONEY MARKET FUND
INVESTMENT OBJECTIVES
The Virginia Bond Fund and Virginia Money Market Fund
have a common investment objective of providing Virginia
investors with a high level of current interest income
that is exempt from federal and Virginia state income
taxes. The Virginia Money Market Fund has a further
objective of preserving capital and maintaining liquidity.
INVESTMENT POLICIES
The Manager will pursue this common objective by
investing each Fund's assets in debt obligations issued
by the Commonwealth of Virginia, its political
subdivisions and instrumentalities, and by other
governmental entities if, in the opinion of counsel, the
interest from such obligations is excluded from gross
income for federal income tax purposes and is exempt from
Virginia state income taxes. It is a fundamental policy
of each Fund that during normal market conditions at
least 80% of the Fund's net assets will consist of
Virginia tax-exempt securities and at least 80% of the
Fund's annual income will be exempt from federal and
Virginia state income taxes and excluded from the
calculation of federal alternative minimum taxes for
individual taxpayers.
Virginia Bond Fund. Under normal market conditions, the
Manager will invest the assets of the Fund so that at
least 75% of the total market value of the tax-exempt
securities is rated within the three highest long-term
rating categories (at least A) by Moody's Investors
Service, Inc. (Moody's), Standard & Poor's Corporation
(S&P), or Fitch Investors Service, Inc. (Fitch), in the
highest short-term rating category by Moody's, S&P, or
Fitch, or, if a security is not rated by those rating
agencies, it must be of equivalent investment quality as
determined by the Manager. The Manager will not purchase
a security if, as a result of such purchase, more than 25%
of the total market value of the tax-exempt securities of
the Fund would be invested in securities which do not meet
these quality standards. In no event will a security be
purchased for the Fund unless it is rated at least
investment grade; i.e., rated by Moody's, S&P, or Fitch
at least in the fourth highest rating category for long-
term securities, in the second highest rating category
for short-term securities, or, if not rated by those
rating agencies, determined by the Manager to be of
equivalent investment quality. Securities rated in the
lowest level of investment grade have some speculative
characteristics since adverse economic conditions and
changing circumstances are more likely to have an adverse
impact on such securities.
If the rating of a security is downgraded, the
Manager will determine whether it is in the best interest
of the Fund's shareholders to continue to hold such
security in the Fund's portfolio. For a more complete
description of tax-exempt securities and their ratings,
see Appendix A in the Statement of Additional Information.
The Fund's average portfolio maturity is not
restricted but is expected to be greater than ten years.
The per share net asset value of the Virginia Bond Fund
will fluctuate with portfolio maturity, the quality of
securities held, and inversely to interest rate levels.
Virginia Money Market Fund. The Fund will purchase only
high quality securities that qualify as "eligible"
securities under the Securities and Exchange Commission
rules applicable to money market mutual funds. These
securities must also be determined by the Manager to
present minimal credit risk. In general, the category of
eligible securities may include a security that is:
(1) issued or guaranteed by the U.S. Government or any
agency or instrumentality thereof;
(2) rated in one of the two highest categories for
short-term securities by at least two Nationally
Recognized Statistical Rating Organizations
(NRSROs), or by one NRSRO if the security is rated
by only one NRSRO;
(3) unrated but issued by an issuer or guaranteed by a
guarantor that has other comparable short-term debt
obligations so rated; or
(4) unrated but determined to be of comparable quality
by the Manager.
If a security is downgraded after purchase, the
Manager will follow written procedures adopted by the
Fund's Board of Directors and a determination will be
made as to whether it is in the best interest of the
Fund's shareholders for the Fund to continue to hold
the security.
Current NRSROs include Moody's Investors Service,
Inc., Standard & Poor's Corporation, Fitch Investors
Service, Inc., Duff & Phelps Inc., Thompson BankWatch,
Inc., and IBCA Inc. For a description of tax- exempt
securities and their ratings, see Appendix A in the
Statement of Additional Information.
Consistent with regulatory requirements, the Manager
will purchase securities with remaining maturities of 397
days or less and will maintain a dollar-weighted average
portfolio maturity of no more than 90 days. The Fund
will endeavor to maintain a constant net asset value of
$1.00 per share, although there is no assurance that it
will be able to do so.
OTHER INVESTMENT INFORMATION
The investment objectives of the Funds may not be changed
without shareholder approval. In view of the risks
inherent in all investments in securities, there is no
assurance that these objectives will be achieved. The
investment policies and techniques used to pursue the
Funds' objectives may be changed without shareholder
approval, except as otherwise noted. Further information
regarding the Funds' investment policies and restrictions
is provided in the Statement of Additional Information.
TAX-EXEMPT SECURITIES
These securities include general obligation bonds, which
are secured by the issuer's pledge of its full faith,
credit and taxing power for the payment of principal and
interest; revenue bonds, which are payable from the
revenue derived from a particular facility or class of
facilities or, in some cases, from annual appropriations
made by the state legislature for the repayment of
interest and principal or other specific revenue source,
but not from the general taxing power; lease obligations
backed by the municipality's covenant to budget for the
payments due under the lease obligation; and certain
types of industrial development bonds issued by or on
behalf of public authorities to obtain funds for
privately-operated facilities, provided that the interest
paid on such securities qualifies as exempt from federal
and Virginia state income taxes. The value of the
securities in which the Company will invest generally
fluctuates inversely with changes in prevailing interest
rates. Changes in the creditworthiness of issuers and
changes in other market factors such as the relative
supply of and demand for tax-exempt bonds also create
value fluctuations.
Each Fund may on a temporary basis due to market or
other conditions invest up to 100% of its assets in
short-term securities whether or not exempt from federal
and Virginia state income taxes. Such taxable securities
may consist of obligations of the United States
Government, its agencies or instrumentalities, and
repurchase agreements secured by such instruments.
INVESTMENT TECHNIQUES
Variable Rate Securities - Each Fund may invest in tax-
exempt securities that bear interest at rates which are
adjusted periodically to market rates. These interest
rate adjustments can both raise and lower the income
generated by such securities. These changes will have
the same effect on the income earned by a Fund depending
on the proportion of such securities held.
The market value of fixed coupon securities
fluctuates with changes in prevailing interest rates,
increasing in value when interest rates decline and
decreasing in value when interest rates rise. The value
of variable rate securities, however, is less affected by
changes in prevailing interest rates because of the
periodic adjustment of their coupons to a market rate.
The shorter the period between adjustments, the smaller
the impact of interest rate fluctuations on the value of
these securities. The market value of tax-exempt
variable rate securities usually tends toward par (100%
of face value) at interest rate adjustment time.
In the case of the Virginia Money Market Fund only,
any variable rate instrument with a demand feature will
be deemed to have a maturity equal to either the date on
which the underlying principal amount may be recovered
through demand or the next rate adjustment date
consistent with applicable regulatory requirements.
Put Bonds - Each Fund may invest in tax-exempt securities
(including securities with variable interest rates) which
may be redeemed or sold back (put) to the issuer of
the security or a third party at face value prior to
stated maturity ("Put Bonds"). Such securities will
normally trade as if maturity is the earlier put date,
even though stated maturity is longer. For the Virginia
Bond Fund, maturity for put bonds is deemed to be the
date on which the put becomes exercisable. Generally,
maturity for put bonds for the Virginia Money Market Fund
is determined as stated under Variable Rate Securities.
When-Issued Securities - Each Fund may invest in new
issues of tax-exempt securities offered on a when-issued
basis; that is, delivery and payment take place after the
date of the commitment to purchase, normally within 45
days. Both price and interest rate are fixed at the time
of commitment. The market value at the time the
transaction is completed may be more or less than the
fixed purchase price. Such securities can be sold before
settlement date.
Cash or high quality liquid debt securities equal to
the amount of the when-issued commitments are segregated
at the Fund's custodian bank. The segregated securities
are valued at market, and daily adjustments are made to
keep the value of the cash and segregated securities at
least equal to the amount of such commitments by the
Fund. On the settlement date, the Fund will meet its
obligations from then available cash, sale of segregated
securities, sale of other securities, or sale of the
when-issued securities themselves.
Municipal Lease Obligations - Each Fund may invest in
municipal lease obligations and certificates of
participation in such obligations (collectively, lease
obligations). A lease obligation does not constitute a
general obligation of the municipality for which the
municipality's taxing power is pledged, although the
lease obligation is ordinarily backed by the
municipality's covenant to budget for the payments due
under the lease obligation.
Certain lease obligations contain "non-
appropriation" clauses which provide that the
municipality has no obligation to make lease obligation
payments in future years unless money is appropriated for
such purpose on a yearly basis. Although "non-
appropriation" lease obligations are secured by the
leased property, disposition of the property in the event
of foreclosure might prove difficult. In evaluating a
potential investment in such a lease obligation, the
Manager will consider: (1) the credit quality of the
obligor, (2) whether the underlying property is essential
to a governmental function, and (3) whether the lease
obligation contains covenants prohibiting the obligor
from substituting similar property if the obligor fails
to make appropriations for the lease obligation.
Liquidity - Municipal Lease Obligations and certain Put
Bonds that are subject to restrictions on transfer may be
determined to be liquid in accordance with the guidelines
established by the Board of Directors for purposes of
complying with the Funds' investment restrictions
applicable to investments in illiquid securities.
In determining the liquidity of a lease obligation,
the Manager will consider: (1) the frequency of
trades and quotes for the lease obligation, (2) the
number of dealers willing to purchase or sell the lease
obligation and the number of other potential purchasers,
(3) dealer undertakings to make a market in the lease
obligation, (4) the nature of the marketplace trades,
including the time needed to dispose of the lease
obligation, the method of soliciting offers, and the
mechanics of transfer, (5) whether the lease obligation
is of a size that will be attractive to institutional
investors, (6) whether the lease obligation
contains a non-appropriation clause and the likelihood
that the obligor will fail to make an appropriation
therefor, and (7) such other factors as the Manager may
determine to be relevant to such determination.
In determining the liquidity of Put Bonds with
restrictions on transfer, the Manager will evaluate the
credit quality of the party (the "Put Provider") issuing
(or uncondi-tionally guaranteeing performance on) the
unconditional put or demand feature of the Put Bond.
OTHER POLICIES
Each Fund is permitted (i) to lend portfolio securities
so long as collateral is obtained for the securities and
the aggregate value of all loans does not exceed 5% of
the Fund's total assets, and (ii) to invest up to 5% of
the Fund's total assets in repurchase agreements.
The Virginia Bond Fund may enter into financial
futures contracts (and options thereon) for hedging
purposes or to attempt to reduce principal fluctuations
in the value of its portfolio. The Fund will not invest
in futures contracts or options thereon for speculation.
INVESTMENT RESTRICTIONS
The following restrictions may not be changed without
shareholder approval:
a. Neither Fund may borrow money except from banks for
temporary purposes and then only in an amount not to
exceed 10% of the value of the Fund's total assets.
b. Neither Fund may pledge or mortgage more than 10% of
its total assets.
c. Neither Fund may invest more than 10% of its net
assets in illiquid securities (including repurchase
agreements maturing in more than seven days).
d. Neither Fund may invest 25% or more of its total
assets in securities issued in connection with the
financing of projects with similar characteristics,
such as toll road revenue bonds, housing revenue
bonds or electric power project revenue bonds or in
industrial revenue bonds which are based, directly
or indirectly, on the credit of private entities of
any one industry. However, each Fund reserves the right
to invest more than 25% of its total assets in tax-exempt
industrial revenue bonds.
e. Neither Fund will invest 25% or more of its total
assets in the securities of a single issuer, and
neither Fund will, with respect to 75% of its total
assets, invest more than 5% of its total assets in
securities of a single issuer.
RISK FACTORS
Each Fund is subject to credit and market risks, which
will be intensified by concentration in obligations
issued by or on behalf of Virginia public authorities.
For this reason, the Funds are affected by political,
economical, legal, regulatory or other developments which
constrain the taxing, spending and revenue collection
authority of Virginia issuers or otherwise affect the
ability of Virginia issuers to pay interest, repay
principal or any premium. See Special Risk Considerations
in the Statement of Additional Information.
PURCHASE OF SHARES
OPENING AN ACCOUNT
You may open an account and make an investment by any of
the methods described in the following table. A
complete, signed application is required together with a
check (payable to USAA Tax Exempt Fund, Inc., [Fund
Name]) for each new account.
TAX ID NUMBER
We require that each shareholder named on the account
provide the Company with a social security number or tax
identification number to avoid possible tax withholding
requirements.
EFFECTIVE DATE
The purchase of shares will be effective on the day on
which a completed application and check are received by
the Manager at its principal office in San Antonio, TX,
if received before the time the net asset value (NAV) per
share is calculated. If an application, check, or funds
are received in San Antonio after the time at which the
NAV is calculated, the purchase will be effective on the
next business day. A check drawn on a foreign bank will
not be deemed received for the purchase of shares until
such time as the check has cleared and the Manager has
received good funds, which may take up to 4 to 6 weeks.
Furthermore, a bank charge may be assessed in the
clearing process, which will be deducted from the amount
of the purchase. To avoid a delay in the effectiveness
of your purchase, the Manager suggests that you convert
your foreign check to U.S. dollars prior to investment in
the Funds.
PURCHASE OF SHARES
INITIAL PURCHASES: Minimum $3,000
Mail
Send your application and check to:
USAA Investment Management Company
9800 Fredericksburg Rd., San Antonio, TX 78288
In Person
Bring your application and check to:
USAA Investment Management Company
USAA Federal Savings Bank
10750 Robert F. McDermott Freeway
San Antonio, TX
Exchange
Call our telephone assistance numbers. The new account
must have the same registration as the account from which
you are exchanging.
ADDITIONAL PURCHASES: Minimum $50 - (Except transfers from
brokerage accounts).
Mail
Send your check and the "Invest By Mail" stub, which accompanies
your Fund's transaction confirmation, to the Transfer Agent:
USAA Shareholder Account Services
9800 Fredericksburg Rd., San Antonio, TX 78288
Bank Wire Purchase
Instruct your bank (which may charge a fee for the service)
to wire the specified amount to the Company as follows:
State Street Bank and Trust Company
Boston, MA 02101
ABA# 011000028
Attn: USAA [Fund Name]
USAA AC-69384998
Shareholder(s) Name(s)
Shareholder Account Number
Electronic Funds Transfer (EFT)
You can pay for purchases electronically via electronic
funds transfer. Systematic (regular) purchases can be
deducted from your bank account, payroll, income-
producing investment, or from a USAA money market
account. Intermittent (as-needed) purchases can be
deducted from your bank account through our Buy/Sell
Service.
Establish any of our electronic investing services
when you apply for your account, or later upon request.
REDEMPTION OF SHARES
You may redeem shares of a Fund by any of the methods
described in the following table on any day the NAV is
calculated. Redemptions will be effective on the day on
which instructions are received in accordance with the
requirements set forth below. However, if instructions
are received after the NAV calculation, redemption will
be effective on the next business day.
REDEMPTION PROCEEDS
Redemption proceeds are distributed within seven days
after the effective date of redemption. Redemption of
shares purchased by check or electronic funds transfer
will not occur until the purchase check or electronic
funds transfer has cleared, which could take up to 15
days from the purchase date. If you are considering
redeeming shares soon after purchase, the Manager suggests
you purchase by bank wire or certified check to avoid delay.
In addition, the Company may elect to suspend the
redemption of shares or postpone the date of payment
during any period that the New York Stock Exchange is
closed, or trading in the markets the Company normally
utilizes is restricted, or during any period that
redemption is otherwise permitted to be suspended by the
Securities and Exchange Commission.
Redemption of Shares
Any of the following methods may be used to authorize the
Transfer Agent to redeem shares from your account based
on instructions received.
Written, Fax, or Telegraph
Send your written instructions to:
USAA Shareholder Account Services
9800 Fredericksburg Rd., San Antonio, TX 78288
Send a signed fax to 210-498-2889, or send a telegraph to
USAA Shareholder Account Services.
Written redemption requests must include the
following: (1) a letter of instruction or stock
assignment, and stock certificate (if issued), specifying
the Fund and the number of shares or dollar amount to be
redeemed; (2) signatures of all owners of the shares
exactly as their names appear on the account; (3) other
supporting legal documents, if required, as in the case
of estates, trusts, guardianships, custodianships,
partnerships, corporations, and pension and profit-
sharing plans; and (4) method of payment.
Telephone
Call toll free 1-800-531-8448, in San Antonio, 498-7290.
The Fund will employ reasonable procedures to
confirm that instructions communicated by telephone are
genuine, and if it does not, it may be liable for any
losses due to unauthorized or fraudulent instructions.
Information is obtained prior to any discussion regarding
an account including: (1) USAA number or account number,
(2) the name(s) on the account registration, and (3)
social security number or tax identification number for
the account registration. In addition, all telephone
communications with a shareholder are recorded and
confirmations of all account transactions are sent to the
address of record.
Redemption by telephone, fax, or telegraph is not
available to shares represented by stock certificates.
(continued)
Methods of Payment
Any of the following methods of payment may be used with
your redemption request.
Bank Wire Redemption
The wire redemption privilege allows redemptions of
$1,000 or more to be sent directly to your bank account.
Establish this service when you apply for your account,
or later upon request. If your account is at a savings
bank, savings and loan association, or credit union,
please obtain precise wiring instructions from your
institution. Specifically, include the name of the
correspondent bank and your institution's account number
at that bank. USAA Shareholder Account Services deducts
a wire fee from the account for the redemption by wire.
The fee as of the date of this Prospectus is $10 and is
subject to change at any time. The fee is paid to State
Street Bank and Trust Company (State Street) and the
Transfer Agent for their services in connection with the
wire redemption. Your bank may also charge a fee for
receiving funds by wire.
Electronic Funds Transfer (EFT)
You can request electronic redemptions via electronic
funds transfer. Systematic (regular) or intermittent
(as-needed) redemptions can be credited to your bank
account.
Establish any of our electronic investing services
when you apply for your account, or later upon request.
Check Redemption
You may request a redemption to be paid by check to the
registered shareholder(s) and mailed to the address of
record. This check redemption privilege is automatically
established when your application is completed and
accepted. There is a 15 day waiting period before a
check redemption can be processed following a telephone
address change.
Checkwriting
You may request that checks be issued for your Virginia
Money Market Fund account. To establish your
checkwriting privilege, complete the signature card which
accompanies the application form or Shareholder Services
Guide, or request and complete the signature card
separately. A one-time $5 checkwriting fee is charged to
each account by the Transfer Agent for the establishment
of the privilege. There is no charge for the use of
checks nor for subsequent reorders. This privilege is
subject to State Street's rules and regulations governing
checking accounts. Checks must be written for an amount
of at least $250. Checks written for less than $250 will
be returned. Checkwriting may not be used to close an
account because the value of the account changes daily as
dividends are accrued.
When a check is presented to the Transfer Agent for
payment, a sufficient number of full and fractional
shares in the investor's account will be redeemed to
cover the amount of the check. Checks will be returned
if there are insufficient shares to cover the amount of
the check. Presently, there is a $15 processing fee
assessed against an account for any redemption check not
honored by a clearing or paying agent. A check paid
during the month will be returned to the shareholder by
separate mail. Checkwriting fees are subject to change
at any time. The Company, the Transfer Agent and State
Street each reserve the right to change or suspend the
checkwriting privilege upon 30 days' written notice to
participating shareholders. See the Statement of
Additional Information for further information.
You may request that the Transfer Agent stop payment
on a check. The Transfer Agent will use its best efforts
to execute stop payment instructions but does not
guarantee that such efforts will be effective. A $10
charge will be made for each stop payment requested by a
shareholder.
CONDITIONS OF PURCHASE AND REDEMPTION
NONPAYMENT
If any order to purchase shares is cancelled due to
nonpayment or if the Company does not receive good funds
either by check or electronic funds transfer, the
cancellation will be treated as a redemption of shares
purchased and you will be responsible for any resulting
loss incurred by the Fund or the Manager. If you are a
shareholder, shares can be redeemed from any of your
account(s) as reimbursement for all losses. In addition,
you may be prohibited or restricted from making future
purchases in any of the USAA Family of Funds. A $15 fee
is charged for all returned items, including checks and
electronic funds transfers.
TRANSFER OF SHARES
Fund shares may be transferred to another person by
sending written instructions to the Transfer Agent. The
account must be clearly identified and the shareholder
must include the number of shares to be transferred, the
signatures of all registered owners, and all stock
certificates, if any, which are the subject of transfer.
You also need to send written instructions and supporting
documents to change an account registration due to events
such as divorce, marriage, or death. If a new account
needs to be established, an application must be completed
and returned to the Transfer Agent.
ACCOUNT BALANCE
The Board of Directors may cause the redemption of an
account with a balance of less than 50 full shares of
either Fund, subject to certain limitations described in
Additional Information Regarding Redemption of Shares in
the Statement of Additional Information.
COMPANY RIGHTS
The Company reserves the right to:
(1) reject purchase or exchange orders when in the best
interest of the Company;
(2) limit or discontinue the offering of shares of any
portfolio of the Company without notice to the
shareholders;
(3) impose a redemption charge of up to 1% of the net
asset value of shares redeemed if circumstances
indicate a charge is necessary for the protection of
remaining investors (as, for example, if excessive
market-timing share activity unfairly burdens long-
term investors); provided, however, this 1% charge
will not be imposed upon shareholders unless
authorized by the Board of Directors and adequate
notice has been given to shareholders;
(4) require a signature guarantee when deemed
appropriate by the Manager for purchases,
redemptions, or changes in account information. The
section Additional Information Regarding Redemption
of Shares in the Statement of Additional Information
contains information on acceptable guarantors.
EXCHANGES
EXCHANGE PRIVILEGE
The Exchange Privilege is automatically established when
you complete your application. You may exchange shares
among portfolios in the USAA Family of Funds, provided
you do not hold these shares in stock certificate form
and that the shares to be acquired are offered in your
state of residence. Only Virginia residents may exchange
into a Virginia Fund. Exchange redemptions and purchases
will be processed simultaneously at the share prices next
determined after the exchange order is received. For
federal income tax purposes, an exchange between
portfolios is a taxable event. Accordingly, a capital
gain or loss may be realized.
The Fund has undertaken certain procedures regarding
telephone transactions. See Redemption of Shares - Telephone.
EXCHANGE LIMITATIONS,
EXCESSIVE TRADING
To minimize Fund costs and to protect the portfolios and
their shareholders from unfair expense burdens, the Funds
restrict excessive exchanges. Exchanges out of any
portfolio in the USAA Family of Funds are limited for
each account to six per calendar year except that there
is no limitation on exchanges out of the Tax Exempt
Short-Term Fund, Short-Term Bond Fund, or any of the
money market funds in the USAA Family of Funds. OTHER SERVICES
INVESTMENT PLANS
You may establish a systematic investment plan by
completing the appropriate forms. At the time you sign
up for any of the following investment plans that utilize
the electronic funds transfer service, you will choose
the day of the month (the effective date) on which you
would like to regularly purchase shares. When this day
falls on a weekend or holiday, the electronic transfer
will take place on the last business day before the
effective date. Call the Manager to obtain instructions.
More information about these preauthorized plans is
contained in the Statement of Additional Information.
InvesTronic(registered trademark) - the periodic purchase
of shares through electronic funds transfer from a
checking or savings account.
Direct Purchase Service - the periodic purchase of shares
through electronic funds transfer from a non-governmental
employer, an income-producing investment, or an account
with a participating financial institution.
Automatic Purchase Plan - the periodic transfer of funds
from a USAA money market fund to purchase shares in
another non-money market USAA mutual fund.
Buy/Sell Service - the intermittent purchase or
redemption of shares through electronic funds transfer to
or from a checking or savings account.
Systematic Withdrawal Plan - the periodic redemption of
shares from one of your accounts permitting you to
receive a fixed amount of money monthly or quarterly.
SHAREHOLDER STATEMENTS AND REPORTS
You will receive a confirmation statement after each
transaction showing the activity in your account except
when account activity is produced solely from dividend
reinvestment in which case confirmation statements will
be mailed only on a quarterly basis. A statement which
reflects the account history during the prior tax year is
provided to each shareholder annually. There will be a
$10 fee charged for copies of historical statements for
other than the prior tax year for any one account. You
will receive a Fund's financial statements with a summary
of its investments and performance at least semiannually.
In an effort to reduce expenses and respond to
shareholders' requests to reduce mail, the Company
intends to consolidate mailings of annual and semiannual
reports to households having multiple accounts with the same
address of record. One copy of each report will be
furnished to that address. You may request additional
reports by notifying the Company.
DIRECTED DIVIDENDS
If you own shares in more than one of the Funds in the
USAA Family of Funds, you may direct that dividends
and/or capital gain distributions earned in one fund be
used to automatically purchase shares in another fund.
TELEPHONE ASSISTANCE
Call our telephone assistance numbers for specific forms,
a copy of the Statement of Additional Information, the
most recent Annual Report and/or Semiannual Report, or if
you have any questions concerning any of the services
offered.
SHARE PRICE CALCULATION
The price at which shares of the Funds are purchased and
redeemed by shareholders is equal to the net asset value
(NAV) per share determined on the effective date of the
purchase or redemption.
WHEN
The NAV per share for each Fund is calculated at the
close of the regular trading session of the New York
Stock Exchange, which is usually 4:00 p.m. Eastern time.
You buy and sell Fund shares at NAV without a sales charge.
HOW
The NAV is calculated by adding the value of all securities
and other assets in a Fund, deducting liabilities, and
dividing by the number of shares of the Fund outstanding.
Securities of the Virginia Bond Fund are valued each
business day at their current market value as determined
by a pricing service approved by the Board of Directors.
Securities which cannot be valued by the pricing service
are valued in good faith at fair value using methods
determined by the Manager under the general supervision
of the Board of Directors. In addition, securities
purchased with maturities of 60 days or less and all
securities of the Virginia Money Market Fund are stated
at amortized cost.
For additional information, see Valuation of
Securities in the Statement of Additional Information.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
Net investment income of each Fund is accrued daily and
distributed to shareholders on the last business day of
each month. Any net capital gain generally will be
distributed after the end of the fiscal year. The Funds
intend to make such additional distributions as may be
necessary to avoid the imposition of any federal excise tax.
All shares purchased will begin accruing dividends
on the day following the effective date of the purchase
and will receive dividends through the effective date of
redemption.
All income dividends and capital gain distributions
are automatically reinvested, unless the shareholder
specifies otherwise. The share price will be the net
asset value of the Fund shares computed on the ex-
dividend date. Any capital gain distribution paid by the
Virginia Bond Fund will reduce the per share net asset
value by the amount of the distribution. An investor
should consider carefully the effects of purchasing
shares of the Virginia Bond Fund shortly before any
capital gain distribution. Although in effect a return
of capital, these distributions are subject to taxes. If
a shareholder becomes a resident of a state other than
Virginia, a check for proceeds of income dividends will
be mailed to such shareholder monthly, and a check for
any capital gain distribution will be mailed after the
distribution is paid.
Any dividend or distribution payment returned to the
Manager as not deliverable will be invested in the
shareholder's Fund account at the then-current net asset
value. If any check for the payment of dividends or
distributions is not cashed within six months from the
date on the check, it becomes void. The amount of the
check will then be invested in the shareholder's account
at the then-current net asset value.
FEDERAL TAXES
The exemption of interest income for federal income tax
purposes does not necessarily result in exemption under
the income or other tax laws of any state or local taxing
authority. The following discussion relates only to
generally applicable federal income tax provisions in
effect as of the date of this Prospectus. Therefore,
shareholders are urged to consult their own tax advisers
about the status of distributions from a Fund in their
own states and localities.
Fund - Each Fund intends to qualify as a regulated
investment company under Subchapter M of the Internal
Revenue Code of 1986, as amended (the Code). By
complying with the applicable provisions of the Code,
neither Fund will be subject to federal income tax on its
net investment income and net capital gains (capital
gains in excess of capital losses) distributed to shareholders.
Shareholder - Dividends of net tax-exempt interest income
paid by a Fund will be excluded from a shareholder's
gross income for federal income tax purposes. Dividends
from taxable net investment income and distributions of
net short-term capital gains are taxable to shareholders
as ordinary income, whether received in cash or
reinvested in additional shares. However, it is expected
that any taxable net investment income will be
insubstantial in relation to the tax-exempt interest
generated by a Fund.
Distributions of net long-term capital gains are
taxable as long-term capital gains whether received in
cash or reinvested in additional shares, and regardless
of the length of time the investor has held the shares of
a Fund.
Tax-exempt interest from private activity bonds (for
example, industrial development revenue bonds) issued
after August 7, 1986, although otherwise exempt from
federal tax, is treated as a tax preference item for
purposes of the alternative minimum tax. For
corporations, all tax-exempt interest will be considered
in calculating the alternative minimum tax as part of the
adjusted current earnings.
Withholding - Each Fund is required by federal law to
withhold and remit to the U.S. Treasury a portion of the
income dividends and capital gain distributions and
proceeds of redemptions paid to any non-corporate
shareholder who fails to furnish the Fund with a correct
tax identification number, who underreports dividend or
interest income, or who fails to certify to the Fund that
he is not subject to withholding. To avoid this
withholding requirement, you must certify on your
application, or on a separate Form W-9 supplied by the
Transfer Agent, that your tax identification number is
correct and that you are not currently subject to backup
withholding.
Reporting - Each Fund will report annually to its
shareholders the federal tax status of dividends and
distributions paid or declared by each Fund during the
preceding calendar year, including the portion of the
dividends constituting interest on private activity
bonds, and the percentage and source, on a state-by-state
basis, of interest income earned on tax-exempt securities
held by the Fund during the preceding year.
VIRGINIA TAXATION
The Commonwealth of Virginia generally adopts the federal
tax treatment of regulated investment companies by
adopting federal taxable income as the starting point for
determining the Virginia taxable income of regulated
investment companies. Dividends paid by the Funds and
derived from interest on obligations of the Commonwealth
of Virginia or of any political subdivision or instrumentality
of the Commonwealth or derived from the United States which
pay interest or dividends excludable from Virginia taxable
income under the laws of the United States will be exempt
from the Virginia income tax. Dividends paid by the
Funds and derived from interest on debt obligations of
certain territories and possessions of the United States
(those issued by Puerto Rico, the Virgin Islands and
Guam) will be exempt from the Virginia income tax. To
the extent a portion of the dividends are derived from
interest on debt obligations other than those described
above, such portion will be subject to the Virginia
income tax even though it may be excludable from gross
income for federal income tax purposes.
As a general rule, distribution of short-term
capital gains realized by the Funds will be taxable to
the shareholders as ordinary income. Distributions of
long-term capital gains generally will be taxable as such
to the shareholders regardless of how long they have held
their shares. However, certain capital gains distributed
to shareholders derived from certain Virginia obligations
may be exempt from Virginia income taxes.
The foregoing is only a summary of some of the
important Virginia income tax considerations generally
affecting the Funds and their shareholders, and does not
address any Virginia taxes other than income taxes. This
discussion is not intended as a substitute for careful
planning. Potential investors in the Funds should
consult their tax advisers with specific reference to
their own tax situations.
MANAGEMENT OF THE COMPANY
The business affairs of the Company are subject to the
supervision of the Board of Directors.
The Manager, USAA Investment Management Company, was
organized in May 1970 and is an affiliate of United
Services Automobile Association (USAA), a large
diversified financial services institution. As of the
date of this Prospectus, the Manager had in excess of
$24 billion in total assets under management. The
Manager has offices at 9800 Fredericksburg Rd., San
Antonio, TX 78288, which is also the home office of USAA
and other affiliates.
ADVISORY AGREEMENT
The Manager serves as the manager and investment adviser
of the Company, providing services under an Advisory
Agreement. Under the Advisory Agreement, the Manager is
responsible for the management of the portfolios,
business affairs, and placement of brokerage orders,
subject to the authority of and supervision by the Board
of Directors.
For its services under the Advisory Agreement, each
Fund pays the Manager an annual fee which is computed as
a percentage of the aggregate average net assets (ANA) of
both Funds combined. The fee is accrued daily, paid
monthly, and allocated between the Funds based on the relative
net assets of each. The fee is computed at .50% of the first
$50,000,000 ANA, .40% of that portion over $50,000,000
and not over $100,000,000 ANA, and .30% of that portion
over $100,000,000 ANA. For the fiscal year ended March
31, 1994, the fees paid to the Manager, net of
reimbursements, were .35% of ANA for the Virginia Bond
Fund and .24% of ANA for the Virginia Money Market Fund.
OPERATING EXPENSES
For the fiscal year ended March 31, 1994, the Manager
limited each Fund's total operating expenses to .50% of
its ANA. The Manager reimbursed the Virginia Money
Market Fund $83,779 for expenses in excess of the
limitation. Total operating expenses for the Virginia
Bond Fund were .49% of its ANA, therefore no
reimbursements were required. The Manager has
voluntarily agreed to continue to limit each Fund's
annual expenses until August 1, 1995, to .50% of its ANA
and will reimburse the Funds for all expenses in excess
of the limitation.
PORTFOLIO MANAGERS
See Appendix A - Portfolio Management for a listing of
portfolio managers.
SERVICE PROVIDERS
UNDERWRITER/ USAA Investment Management Company
DISTRIBUTOR 9800 Fredericksburg Rd., San Antonio, Texas 78288.
TRANSFER USAA Shareholder Account Services
AGENT 9800 Fredericksburg Rd., San Antonio, Texas 78288.
CUSTODIAN State Street Bank and Trust Company
P.O. Box 1713, Boston, Massachusetts 02105.
LEGAL Goodwin, Procter & Hoar
COUNSEL Exchange Place, Boston, Massachusetts 02109.
INDEPENDENT KPMG Peat Marwick
AUDITORS 112 East Pecan, Suite 2400, San Antonio, Texas 78205.
DESCRIPTION OF SHARES
The Company is an open-end management investment company
incorporated under the laws of the State of Maryland on
November 16, 1981. The Company is authorized to issue
shares in separate classes, or portfolios. Ten such
portfolios have been established, two of which are
described in this Prospectus. Each of the two Funds is
classified as a diversified investment company. Under
the Company's charter, the Board of Directors is
authorized to create new portfolios in addition to those
already existing without the approval of the shareholders
of the Company.
Under the provisions of the Bylaws of the Company,
no annual meeting of shareholders is required.
Ordinarily, no shareholder meeting will be held unless
required by the Investment Company Act of 1940. The
Directors may fill vacancies on the Board or appoint new
Directors provided that immediately after such action at
least two-thirds of the Directors have been elected by
shareholders.
Shareholders are entitled to one vote per share
(with proportionate voting for fractional shares)
irrespective of the relative net asset value of the
shares. For matters affecting an individual Fund, a
separate vote of the shareholders of that Fund is
required.
TELEPHONE ASSISTANCE
(Call toll free, Monday-Saturday, Central Time)
For further information on mutual funds:
Office Hours: M-F 8:00 a.m. to 8:00 p.m.
Saturday: 8:30 a.m. to 5:00 p.m.
1-800-531-8181
In San Antonio 210-498-6505
For account servicing, exchanges or redemptions:
Office Hours: M-F 8:00 a.m. to 8:00 p.m.
Saturday: 8:30 a.m. to 5:00 p.m.
1-800-531-8448
In San Antonio 210-498-7290
RECORDED MUTUAL FUND PRICE QUOTES
(Accessible 24 hours from any phone)
1-800-531-8066
In San Antonio 210-498-8066
MUTUAL FUND TOUCHLINE (registered trademark)
(Accessible 24 hours from Touchtone phones)
For account balance, last transaction or fund prices:
1-800-531-8777
In San Antonio 210-498-8777
APPENDIX A - PORTFOLIO MANAGEMENT
The following are the portfolio managers of USAA Tax
Exempt Fund, Inc., Virginia Funds:
NAME David G. Miller Robert R. Pariseau
PORTFOLIO Virginia Bond Fund Virginia Money Market Fund
MANAGED since 04/94 since 04/93
EDUCATION BS, University of BS, U.S. Naval Academy,
Colorado Annapolis, Maryland
MBA, Trinity University, MBA, Lindenwood College,
Texas Missouri
EXPERIENCE (1) 21 years, investment 10 years, investment
management management
11 years, IMCO 10 years, IMCO
BUSINESS HISTORY 11/92-present, Executive 11/93-present, Executive
PAST FIVE YEARS Director, Fixed Director, Fixed Income
Income Investments, IMCO Investments, IMCO
04/91-11/92, Associate 04/93-11/93, Associate
Portfolio Manager, Fixed Portfolio Manager,
Income Investments, IMCO Fixed Income
12/90-04/91, Senior Investments, IMCO
Securities Analyst, Fixed 03/91-03/93, Senior
Income Investments, IMCO Securities Analyst I,
04/88-11/90, Director, Fixed Income
Discount Brokerage, IMCO Investments, IMCO
04/88-02/91, Senior
Securities Analyst II,
Equity Investments, IMCO
PROFESSIONAL CFP, 1985 CFA, 1987
DESIGNATIONS (1) CFA, 1990
PROFESSIONAL AIMR AIMR
MEMBERSHIPS (1) SAFAS SAFAS
NFMA NFMA
(1) Abbreviations of designations and organizations used in above table:
IMCO - USAA Investment Management Company (the Manager)
CFP - Certified Financial Planner
CFA - Chartered Financial Analyst
AIMR - Association for Investment Management and Research
SAFAS - San Antonio Financial Analysts Society, Inc.
NFMA - National Federation of Municipal Analysts
USAA NEW YORK FUNDS
August 1, 1994 PROSPECTUS
USAA New York Bond Fund and USAA New York Money Market
Fund (collectively, the Funds or the New York Funds) are
two of ten no-load mutual funds offered by USAA Tax
Exempt Fund, Inc. (the Company). The Funds are managed
by USAA Investment Management Company (the Manager).
WHAT ARE THE INVESTMENT OBJECTIVES AND POLICIES?
The Funds have a common objective of providing New
York investors with a high level of current interest
income that is exempt from federal income taxes and New
York State and New York City personal income taxes. The
New York Money Market Fund has a further objective of
preserving capital and maintaining liquidity. Each Fund
has separate investment policies to achieve its
objective.
The New York Bond Fund invests primarily in long-
term investment grade New York tax-exempt securities.
The Fund's average portfolio maturity is not restricted
but is expected to be greater than 10 years. Page 9.
The New York Money Market Fund invests in high
quality New York tax- exempt securities with maturities
of 397 days or less. The Manager will maintain a dollar-
weighted average portfolio maturity of 90 days or less
and will endeavor to maintain a constant net asset value
per share of $1.00. Page 9.
Shares of the New York Funds are authorized for sale
only to residents of the State of New York. The delivery
of this Prospectus shall not constitute an offer in any
state in which shares of the New York Funds may not
lawfully be made.
This Prospectus, which should be read and retained
for future reference, provides information regarding the
Company and the New York Funds that you should know
before investing.
HOW DO YOU BUY? Fund shares are sold on a continuous
basis at the net asset value per share without a sales
charge. Make your initial investment directly with the
Manager by mail or in person. Page 14.
HOW DO YOU SELL? You may redeem shares of a Fund by
mail, telephone, fax, or telegraph on any day that the
net asset value is calculated. Page 16.
Shares of the USAA New York Funds are not deposits
or other obligations of, or guaranteed by the USAA
Federal Savings Bank, are not insured by the FDIC or any
other Government Agency, and are subject to market risks.
If you would like more information, a STATEMENT OF
ADDITIONAL INFORMATION dated August 1, 1994, is available
upon request and without charge by writing to USAA TAX
EXEMPT FUND, INC., New York Funds, 9800 Fredericksburg
Rd., San Antonio, TX 78288, or by calling 1-800-531-8181.
The Statement of Additional Information has been filed
with the Securities and Exchange Commission and is
incorporated by reference into this Prospectus.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
AN INVESTMENT IN THE NEW YORK MONEY MARKET FUND IS
NEITHER INSURED NOR GUARANTEED BY THE U.S. GOVERNMENT AND
THERE CAN BE NO ASSURANCE THAT THE FUND WILL BE ABLE TO
MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE.
TABLE OF CONTENTS
Page
----
SUMMARY DATA
Fees and Expenses 3
Financial Highlights 4
Performance Information 6
USING MUTUAL FUNDS
USAA Family of No-Load Mutual Funds 7
Using Mutual Funds in an Investment Program 8
INVESTMENT PORTFOLIO INFORMATION
Investment Objectives and Policies 9
New York Bond Fund 9
New York Money Market Fund 9
Other Investment Information 11
SHAREHOLDER INFORMATION
Purchase of Shares 14
Redemption of Shares 16
Conditions of Purchase and Redemption 18
Exchanges 19
Other Services 19
Share Price Calculation 20
Dividends, Distributions and Taxes 21
Management of the Company 23
Service Providers 23
Description of Shares 24
Telephone Assistance Numbers 24
Appendix A - Portfolio Management 25
FEES AND EXPENSES
The following summary is provided to assist you in
understanding the expenses you will bear directly or
indirectly.
Shareholder Transaction Expenses (applicable to each Fund)
- ----------------------------------------------------------------------
Sales Load Imposed on Purchases None
Sales Load Imposed on Reinvested Dividends None
Deferred Sales Load None
Redemption Fee* None
Exchange Fee None
Annual Fund Operating Expenses (as a percentage of average net
assets (ANA))
- ----------------------------------------------------------------------
New York New York
Bond Money Market
Fund Fund
---- ----
Management Fee, net of reimbursements .28% .00%
12b-1 Fee None None
Other Expenses, net of reimbursements
Transfer Agent Fee** .08% .13%
Custodian Fee .06% .17%
All Other Expenses .08% .20%
---- ----
Total Other Expenses .22% .50%
---- ----
Total Operating Expenses, net of reimbursements .50% .50%
==== ====
- -----------------------------------------------------------------------
* A shareholder who requests delivery of redemption proceeds by
wire transfer will be subject to a $10 fee. See Redemption of
Shares - Wire Redemption.
** The Funds pay USAA Shareholder Account Services an annual fixed
fee per account for its services. See Transfer Agent in the
Statement of Additional Information, page 27.
During the year, the Manager voluntarily limited
each Fund's expenses to .50% of its ANA and reimbursed
the Funds for all expenses in excess of the limitation.
The Management Fee, Other Expenses, and Total Operating
Expenses information gives effect to all such expense
reimbursements by the Manager. Absent such
reimbursements, the amount of the Management Fee, Other
Expenses, and Total Operating Expenses as a percentage of
ANA for each of the Funds would have been as follows: New
York Bond Fund, .47%, .22%, and .69%; and New York Money
Market Fund, .47%, .51%, and .98%. The Manager has
voluntarily agreed to continue to limit each Fund's
annual expenses until August 1, 1995, to .50% of its ANA
and will reimburse the Funds for all expenses in excess
of the limitation.
Example of Effect of Fund Expenses
- -----------------------------------------------------------------------
An investor would pay the following expenses on a $1,000
investment, assuming (1) 5% annual return and (2)
redemption at the end of the periods shown:
1 year 3 years 5 years 10 years
------ ------- ------- --------
New York Bond Fund $ 5 $ 16 $ 28 $ 63
New York Money Market Fund $ 5 $ 16 $ 28 $ 63
The above example should not be considered a representation of past or
future expenses and actual expenses may be greater or less than those shown.
FINANCIAL HIGHLIGHTS
The following per share operating performance for a share
outstanding throughout each period in the four-year period
ended March 31, 1994, has been derived from financial
statements audited by KPMG Peat Marwick. This table should
be read in conjunction with the financial statements and
related notes that appear in the Funds' Annual Report.
Further performance information is contained in the Annual
Report and is available upon request without charge.
NET ASSET NET REALIZED DISTRIBUTIONS
VALUE AT NET AND FROM NET DISTRIBUTIONS
FISCAL BEGINNING INVESTMENT UNREALIZED INVESTMENT OF REALIZED
YEAR OF PERIOD INCOME GAIN (LOSS) INCOME CAPITAL GAINS
ENDED ($) ($) ($) ($) ($)
NEW YORK BOND FUND:
March 31,
1991* 10.00 .32 .50 (.32) -
1992 10.50 .69 .44 (.69) -
1993 10.94 .65 .80 (.65) (.12)
1994 11.62 .62 (.50) (.62) (.29)
NEW YORK MONEY MARKET FUND:
March 31,
1991* 1.00 .02 - (.02) -
1992 1.00 .04 - (.04) -
1993 1.00 .03 - (.03) -
1994 1.00 .02 - (.02) -
FINANCIAL HIGHLIGHTS cont.
RATIO OF NET
NET ASSET RATIO OF INVESTMENT
VALUE AT NET ASSETS EXPENSES INCOME
END TOTAL AT END TO AVERAGE TO AVERAGE PORTFOLIO
OF PERIOD RETURN OF PERIOD NET ASSETS NET ASSETS TURNOVER
($) (%)** ($000) (%) (%) (%)
10.50 8.22 11,635 .50(a)(b) 6.73(a)(b) 128.04
10.94 11.00 28,022 .50(b) 6.32(b) 110.77
11.62 13.74 48,925 .50(b) 5.79(b) 107.12
10.83 .68 56,912 .50(b) 5.24(b) 124.40
1.00 2.23 12,684 .50(a)(b) 4.75(a)(b) -
1.00 3.72 16,788 .50(b) 3.61(b) -
1.00 2.51 19,428 .50(b) 2.46(b) -
1.00 2.00 24,513 .50(b) 1.98(b) -
- --------------
(a) Annualized. The ratio is not necessarily indicative of 12 months'
operations.
(b) The information contained in this table is based on actual expenses
for the period, after giving effect to reimbursements of expenses
by the Manager. Absent such reimbursements, the Funds' ratios
would have been:
RATIO OF RATIO OF NET
EXPENSES INVESTMENT INCOME
TO AVERAGE TO AVERAGE
FISCAL YEAR ENDED NET ASSETS NET ASSETS
(%) (%)
NEW YORK BOND FUND:
March 31,
1991* 1.73(a) 5.50(a)
1992 1.07 5.75
1993 .80 5.49
1994 .69 5.05
NEW YORK MONEY MARKET FUND:
March 31,
1991* 1.65(a) 3.60(a)
1992 1.26 2.86
1993 1.06 1.90
1994 .98 1.50
- --------------
* From date of inception, October 15, 1990 to March 31, 1991.
** Assumes reinvestment of all dividend income and capital gain
distributions during the period.
PERFORMANCE INFORMATION
Performance information should be considered in light of
each Fund's investment objective and policies and market
conditions during the time periods for which it is
reported. Historical performance should not be
considered as representative of the future performance of
either Fund.
The Company may quote a Fund's yield or total return
in advertisements and reports to shareholders or
prospective investors. A Fund's performance may also be
compared to that of other mutual funds with similar
investment objectives and relevant indexes that are
referenced in Appendix B in the Statement of Additional
Information. Standard total return and yield results
reported by the Funds do not take into account recurring
and nonrecurring charges for optional services which only
certain shareholders elect and which involve nominal
fees, such as the $10 fee for a delivery of redemption
proceeds by wire transfer.
Further information concerning yield and total
return is included in the Statement of Additional
Information.
TOTAL RETURN - New York Bond Fund. The Fund's average
annual total return is computed by determining the
average annual compounded rate of return for a specified
period which, when applied to a hypothetical $1,000
investment in the Fund at the beginning of the period,
would produce the redeemable value of that investment at
the end of the period, assuming reinvestment of all
dividends and distributions during the period.
YIELD - New York Bond Fund. This Fund may advertise
performance in terms of a 30-day yield quotation. The
yield quotation is computed by dividing the net
investment income per share earned during the period by
the offering price per share on the last day of the
period. This income is then annualized. For purposes of
the yield calculation, interest income is computed based
on the yield to maturity of each debt obligation in a
Fund's portfolio and all recurring charges are
recognized.
YIELD - New York Money Market Fund. The Fund may
advertise its yield and effective yield. The yield of
the Fund refers to the income generated by an investment
in the Fund over a seven-day period (which period will be
stated in the advertisement). This income is then
annualized, that is, the amount of income generated by
the investment during the week is assumed to be generated
each week over a 52-week period and is shown as a
percentage of the investment.
The effective yield is calculated similarly but,
when annualized, the income earned by an investment in
the Fund is assumed to be reinvested. The effective
yield will be slightly higher than the yield because of
the compounding effect of this assumed reinvestment.
TAX EQUIVALENT YIELD - The Funds may also utilize tax
equivalent yields with adjustments for assumed income tax
rates. See Appendix C Taxable Equivalent Yield Tables
in the Statement of Additional Information for
illustrations of this yield.
USAA FAMILY OF NO-LOAD MUTUAL FUNDS
The USAA Family of No-Load Mutual Funds includes a
variety of portfolios, each with different objectives and
policies. In combination, these portfolios are designed
to provide investors with the opportunity to formulate
their own investment program. An investor in any one
portfolio may exchange into any other portfolio. For
more complete information about the portfolios in the
USAA Family of Funds, including charges and expenses,
call the Manager for a Prospectus. Be sure to read it
carefully before you invest or send money.
USAA TAX EXEMPT FUND, INC.
Long-Term Fund
Intermediate-Term Fund
Short-Term Fund
Tax Exempt Money Market Fund
California Bond Fund*
California Money Market Fund*
New York Bond Fund*
New York Money Market Fund*
Virginia Bond Fund*
Virginia Money Market Fund*
USAA MUTUAL FUND, INC.
Aggressive Growth Fund
Growth Fund
Growth & Income Fund
Income Stock Fund
Income Fund
Short-Term Bond Fund
Money Market Fund
USAA INVESTMENT TRUST
Balanced Portfolio Fund
Cornerstone Fund
Gold Fund
International Fund
World Growth Fund
GNMA Trust
Treasury Money Market Trust
USAA STATE TAX-FREE TRUST
Florida Tax-Free Income Fund*
Florida Tax-Free Money Market Fund*
Texas Tax-Free Income Fund*
Texas Tax-Free Money Market Fund*
* Available for sale only to residents
of these specific states.
USING MUTUAL FUNDS IN AN INVESTMENT PROGRAM
I. THE IDEA BEHIND MUTUAL FUNDS
Mutual funds were conceived as a vehicle that could give
small investors some of the advantages enjoyed by wealthy
investors. A relatively small investment buys part of a
widely diversified portfolio. That portfolio is managed
by investment professionals, relieving the shareholder of
the need to make individual stock or bond selections.
The investor also enjoys conveniences, such as daily
pricing, liquidity, and in the case of the USAA Family of
Funds, no sales charge. The portfolio, because of its
size, has lower transaction costs on its trades than most
individuals would have. As a result each shareholder
owns an investment that in earlier times would have been
available only to very wealthy people.
II. USING FUNDS IN AN INVESTMENT PROGRAM
In choosing a mutual fund as an investment vehicle, the
shareholder is foregoing some investment decisions, but
must still make others. The decisions foregone are those
involved with choosing individual securities. The fund
manager will perform that function. In addition, the
manager will arrange for the safekeeping of securities,
auditing the annual financial statements, and daily
valuation of the fund, as well as other functions.
The shareholder, however, retains at least part of
the responsibility for an equally important decision.
That is determining a portfolio of mutual funds that
balances the investor's investment goals with his or her
tolerance for risk. It is likely that this decision may
involve the use of more than one fund of the USAA Family
of Funds.
For example, assume a shareholder wishes to pursue
the higher yields usually available in the long-term bond
market, but is also concerned about the possible price
swings of the long-term bonds. He or she could divide
investments between the New York Bond Fund and the New
York Money Market Fund. This would create a portfolio
with a higher yield than that of the money market and
less volatility than that of the long-term market. This
is just one example of how an individual could combine
funds to create a portfolio tailored to his or her own
risk and reward goals.
III. USAA'S FAMILY OF FUNDS
The Manager offers investors another alternative in its
portfolio funds, the Balanced Portfolio and Cornerstone
Funds. Both of these unique mutual funds provide a
professionally managed diversified investment portfolio
within a mutual fund. These funds are designed for the
shareholder who prefers to delegate the asset allocation
process to an investment manager. The funds are
structured to achieve diversification across a number of
investment categories.
Whether you prefer to create your own mix of mutual
funds or use a portfolio fund, the USAA Family of Funds
provides a broad range of choices covering just about any
investor's investment objectives. Our sales
representatives stand ready to inform you of your choices
and to help you craft a portfolio which meets your needs.
INVESTMENT OBJECTIVES AND POLICIES
NEW YORK BOND FUND
NEW YORK MONEY MARKET FUND
INVESTMENT OBJECTIVES
The New York Bond Fund and New York Money Market Fund
have a common investment objective of providing New York
investors with a high level of current interest income
that is exempt from federal income taxes and New York
State and New York City personal income taxes. The New
York Money Market Fund has a further objective of
preserving capital and maintaining liquidity.
INVESTMENT POLICIES
The Manager will pursue this common objective by
investing each Fund's assets in debt obligations issued
by New York State, its political subdivisions,
municipalities and public authorities and by other
governmental entities if, in the opinion of counsel, the
interest from such obligations is excluded from gross
income for federal income tax purposes and is exempt from
New York State and New York City personal income taxes.
It is a fundamental policy of each Fund that during
normal market conditions at least 80% of the Fund's net
assets will consist of New York tax-exempt securities and
at least 80% of the Fund's annual income will be exempt
from federal and New York State and New York City
personal income taxes and excluded from the calculation
of federal alternative minimum taxes for individual taxpayers.
New York Bond Fund. Under normal market conditions, the
Manager will invest the assets of the Fund so that at
least 75% of the total market value of the tax-exempt
securities is rated within the three highest long-term
rating categories (at least A) by Moody's Investors
Service, Inc. (Moody's), Standard & Poor's Corporation
(S&P), or Fitch Investors Service, Inc. (Fitch), in the
highest short-term rating category by Moody's, S&P, or
Fitch, or, if a security is not rated by those rating
agencies, it must be of equivalent investment quality as
determined by the Manager. The Manager will not purchase
a security if, as a result of such purchase, more than
25% of the total market value of the tax-exempt
securities of the Fund would be invested in securities
which do not meet these quality standards. In no event
will a security be purchased for the Fund unless it is
rated at least investment grade; i.e., rated by Moody's,
S&P, or Fitch at least in the fourth highest rating
category for long-term securities, in the second highest
rating category for short-term securities, or, if not
rated by those rating agencies, determined by the Manager
to be of equivalent investment quality. Securities rated
in the lowest level of investment grade have some
speculative characteristics since adverse economic
conditions and changing circumstances are more likely to
have an adverse impact on such securities.
If the rating of a security is downgraded, the
Manager will determine whether it is in the best interest
of the Fund's shareholders to continue to hold such
security in the Fund's portfolio. For a more complete
description of tax-exempt securities and their ratings,
see Appendix A in the Statement of Additional Information.
The Fund's average portfolio maturity is not
restricted but is expected to be greater than ten years.
The per share net asset value of the New York Bond Fund
will fluctuate with portfolio maturity, the quality of
securities held, and inversely to interest rate levels.
New York Money Market Fund. The Fund will purchase only
high quality securities that qualify as "eligible"
securities under the Securities and Exchange Commission
rules applicable to money market mutual funds. These
securities must also be determined by the Manager to
present minimal credit risk. In general, the category of
eligible securities may include a security that is:
(1) issued or guaranteed by the U.S. Government or any
agency or instrumentality thereof;
(2) rated in one of the two highest categories for
short-term securities by at least two Nationally
Recognized Statistical Rating Organizations
(NRSROs), or by one NRSRO if the security is rated
by only one NRSRO;
(3) unrated but issued by an issuer or guaranteed by a
guarantor that has other comparable short-term debt
obligations so rated; or
(4) unrated but determined to be of comparable quality
by the Manager.
If a security is downgraded after purchase, the
Manager will follow written procedures adopted by the
Fund's Board of Directors and a determination will be
made as to whether it is in the best interest of the
Fund's shareholders for the Fund to continue to hold the
security.
Current NRSROs include Moody's Investors Service,
Inc., Standard & Poor's Corporation, Fitch Investors
Service, Inc., Duff & Phelps Inc., Thompson BankWatch,
Inc., and IBCA Inc. For a description of tax- exempt
securities and their ratings, see Appendix A in the
Statement of Additional Information.
Consistent with regulatory requirements, the Manager
will purchase securities with remaining maturities of 397
days or less and will maintain a dollar-weighted average
portfolio maturity of no more than 90 days. The Fund
will endeavor to maintain a constant net asset value of
$1.00 per share, although there is no assurance that it
will be able to do so.
OTHER INVESTMENT INFORMATION
The investment objectives of the Funds may not be changed
without shareholder approval. In view of the risks
inherent in all investments in securities, there is no
assurance that these objectives will be achieved. The
investment policies and techniques used to pursue the
Funds' objectives may be changed without shareholder
approval, except as otherwise noted. Further information
regarding the Funds' investment policies and restrictions
is provided in the Statement of Additional Information.
TAX-EXEMPT SECURITIES
These securities include general obligation bonds, which
are secured by the issuer's pledge of its full faith,
credit and taxing power for the payment of principal and
interest; revenue bonds, which are payable from the
revenue derived from a particular facility or class of
facilities or, in some cases, from the proceeds of a
special excise tax or other specific revenue source, but
not from the general taxing power; lease obligations
backed by the municipality's covenant to budget for the
payments due under the lease obligation; and certain
types of industrial development bonds issued by or on
behalf of public authorities to obtain funds for
privately-operated facilities, provided that the interest
paid on such securities is excluded from gross income for
federal income tax purposes and is exempt from New York
State and New York City personal income taxes. The value
of the securities in which the Company will invest
generally fluctuates inversely with changes in prevailing
interest rates. Changes in the creditworthiness of
issuers and changes in other market factors such as the
relative supply of and demand for tax-exempt bonds also
create value fluctuations.
Each Fund may on a temporary basis due to market or
other conditions invest up to 100% of its assets in
short-term securities whether or not exempt from federal
and New York State and New York City income taxes. Such
taxable securities may consist of obligations of the
United States Government, its agencies or instrumentalities,
and repurchase agreements secured by such instruments;
certificates of deposit of domestic banks having capital,
surplus and undivided profits in excess of $100 million;
anker's acceptances of similar banks; commercial paper;
and other corporate debt obligations.
INVESTMENT TECHNIQUES
Variable Rate Securities - Each Fund may invest in tax-
exempt securities that bear interest at rates which are
adjusted periodically to market rates. These interest
rate adjustments can both raise and lower the income
generated by such securities. These changes will have
the same effect on the income earned by a Fund depending
on the proportion of such securities held.
The market value of fixed coupon securities
fluctuates with changes in prevailing interest rates,
increasing in value when interest rates decline and
decreasing in value when interest rates rise. The value
of variable rate securities, however, is less affected by
changes in prevailing interest rates because of the
periodic adjustment of their coupons to a market rate.
The shorter the period between adjustments, the smaller
the impact of interest rate fluctuations on the value of
these securities. The market value of tax-exempt
variable rate securities usually tends toward par (100%
of face value) at interest rate adjustment time.
In the case of the New York Money Market Fund only,
any variable rate instrument with a demand feature will
be deemed to have a maturity equal to either the date on
which the underlying principal amount may be recovered
through demand or the next rate adjustment date
consistent with applicable regulatory requirements.
Put Bonds - Each Fund may invest in tax-exempt securities
(including securities with variable interest rates) which
may be redeemed or sold back (put) to the issuer of the
security or a third party at face value prior to stated
maturity ("Put Bonds"). Such securities will normally
trade as if maturity is the earlier put date, even though
stated maturity is longer. For the New York Bond Fund,
maturity for put bonds is deemed to be the date on which
the put becomes exercisable. Generally, maturity for put
bonds for the New York Money Market Fund is determined as
stated under Variable Rate Securities.
When-Issued Securities - Each Fund may invest in new
issues of tax-exempt securities offered on a when-issued
basis; that is, delivery and payment take place after the
date of the commitment to purchase, normally within 45
days. Both price and interest rate are fixed at the time
of commitment. The market value at the time the
transaction is completed may be more or less than the
fixed purchase price. Such securities can be sold before
settlement date.
Cash or high quality liquid debt securities equal to
the amount of the when-issued commitments are segregated
at the Fund's custodian bank. The segregated securities
are valued at market, and daily adjustments are made to
keep the value of the cash and segregated securities at
least equal to the amount of such commitments by the
Fund. On the settlement date, the Fund will meet its
obligations from then available cash, sale of segregated
securities, sale of other securities, or sale of the
when-issued securities themselves.
Municipal Lease Obligations - Each Fund may invest in
municipal lease obligations and certificates of participation
in such obligations (collectively, lease obligations).
A lease obligation does not constitute a general
obligation of the municipality for which the
municipality's taxing power is pledged, although the
lease obligation is ordinarily backed by the
municipality's covenant to budget for the payments due
under the lease obligation.
Certain lease obligations contain "non-
appropriation" clauses which provide that the
municipality has no obligation to make lease obligation
payments in future years unless money is appropriated for
such purpose on a yearly basis. Although "non-
appropriation" lease obligations are secured by the
leased property, disposition of the property in the event
of foreclosure might prove difficult. In evaluating a
potential investment in such a lease obligation, the
Manager will consider: (1) the credit quality of the
obligor, (2) whether the underlying property is essential
to a governmental function, and (3) whether the lease
obligation contains covenants prohibiting the obligor
from substituting similar property if the obligor fails
to make appropriations for the lease obligation.
Liquidity - Municipal Lease Obligations and certain Put
Bonds that are subject to restrictions on transfer may be
determined to be liquid in accordance with the guidelines
established by the Board of Directors for purposes of
complying with the Funds' investment restrictions
applicable to investments in illiquid securities.
In determining the liquidity of a lease obligation,
the Manager will consider: (1) the frequency of
trades and quotes for the lease obligation, (2) the
number of dealers willing to purchase or sell the lease
obligation and the number of other potential purchasers,
(3) dealer undertakings to make a market in the lease
obligation, (4) the nature of the marketplace trades,
including the time needed to dispose of the lease
obligation, the method of soliciting offers, and the
mechanics of transfer, (5) whether the lease obligation
is of a size that will be attractive to institutional
investors, (6) whether the lease obligation
contains a non-appropriation clause and the likelihood
that the obligor will fail to make an appropriation
therefor, and (7) such other factors as the Manager may
determine to be relevant to such determination.
In determining the liquidity of Put Bonds with
restrictions on transfer, the Manager will evaluate the
credit quality of the party (the "Put Provider") issuing
(or uncondi-tionally guaranteeing performance on) the
unconditional put or demand feature of the Put Bond.
OTHER POLICIES
Each Fund is permitted (i) to lend portfolio securities
so long as collateral is obtained for the securities and
the aggregate value of all loans does not exceed 5% of
the Fund's total assets, and (ii) to invest up to 5% of
the Fund's total assets in repurchase agreements.
The New York Bond Fund may enter into financial
futures contracts (and options thereon) for hedging
purposes or to attempt to reduce principal fluctuations
in the value of its portfolio. The Fund will not invest
in futures contracts or options thereon for speculation.
INVESTMENT RESTRICTIONS
The following restrictions may not be changed without
shareholder approval:
a. Neither Fund may borrow money except from banks for
temporary purposes and then only in an amount not to
exceed 10% of the value of the Fund's total assets.
b. Neither Fund may pledge or mortgage more than 10% of
its total assets.
c. Neither Fund may invest more than 10% of its net
assets in illiquid securities (including repurchase
agreements maturing in more than seven days).
d. Neither Fund may invest 25% or more of its total
assets in securities issued in connection with the
financing of projects with similar characteristics,
such as toll road revenue bonds, housing revenue
bonds or electric power project revenue bonds or in
industrial revenue bonds which are based, directly
or indirectly, on the credit of private entities of
any one industry. However, each Fund reserves the
right to invest more than 25% of its total assets in
tax-exempt industrial revenue bonds.
e. Neither Fund will invest 25% or more of its total
assets in the securities of a single issuer, and
neither Fund will, with respect to 75% of its total
assets, invest more than 5% of its total assets in
securities of a single issuer.
RISK FACTORS
Each Fund's ability to achieve its investment objective
is dependent upon the ability of the issuers of New York
Municipal Obligations to meet their continuing
obligations for the payment of principal and interest.
New York State and New York City face long-term economic
problems that could seriously affect their ability and
that of other issuers of New York Municipal Obligations
to meet their financial obligations.
Certain substantial issuers of New York Municipal
Obligations (including issuers whose obligations may be
acquired by the Funds) have experienced serious financial
difficulties in recent years. These difficulties have at
times jeopardized the credit standing and impaired the
borrowing abilities of all New York issuers and have generally
contributed to higher interest costs for their borrowings
and fewer markets for their outstanding debt obligations.
In recent years, several different issues of municipal
securities of New York State and its agencies and
instrumentalities and of New York City have been
downgraded by S&P and Moody's. On the other hand, strong
demand for New York Municipal Obligations has more
recently had the effect of permitting New York Municipal
Obligations to be issued with yields relatively lower,
and after issuance, to trade in the market at prices
relatively higher, than comparably rated municipal
obligations issued by other jurisdictions. A recurrence
of the financial difficulties previously experienced by certain
issuers of New York Municipal Obligations could result in
defaults or declines in the market values of those
issuers' existing obligations and, possibly, in the
obligations of other issuers of New York Municipal
Obligations. Although no issuers of New York Municipal
Obligations are in default with respect to the payment of
their municipal obligations as of the date of this
Prospectus, the occurrence of any such default could
adversely affect the market values and marketability of
all New York Municipal Obligations and, consequently, the
net asset value of the Fund's portfolio.
Other considerations affecting the Fund's
investments in New York Municipal Obligations are
summarized in the Statement of Additional Information.
PURCHASE OF SHARES
OPENING AN ACCOUNT
You may open an account and make an investment by any of
the methods described in the following table. A
complete, signed application is required together with a
check (payable to USAA Tax Exempt Fund, Inc., [Fund
Name]) for each new account.
TAX ID NUMBER
We require that each shareholder named on the account
provide the Company with a social security number or tax
identification number to avoid possible tax withholding
requirements.
EFFECTIVE DATE
The purchase of shares will be effective on the day on
which a completed application and check are received by
the Manager at its principal office in San Antonio, TX, if
received before the time the net asset value (NAV) per
share is calculated. If an application, check, or funds
are received in San Antonio after the time at which the
NAV is calculated, the purchase will be effective on the
next business day. A check drawn on a foreign bank will
not be deemed received for the purchase of shares until
such time as the check has cleared and the Manager has
received good funds, which may take up to 4 to 6 weeks.
Furthermore, a bank charge may be assessed in the
clearing process, which will be deducted from the amount
of the purchase. To avoid a delay in the effectiveness
of your purchase, the Manager suggests that you convert
your foreign check to U.S. dollars prior to investment in
the Funds.
PURCHASE OF SHARES
INITIAL PURCHASES: Minimum $3,000
Mail
Send your application and check to:
USAA Investment Management Company
9800 Fredericksburg Rd., San Antonio, TX 78288
In Person
Bring your application and check to:
USAA Investment Management Company
USAA Federal Savings Bank
10750 Robert F. McDermott Freeway
San Antonio, TX
Exchange
Call our telephone assistance numbers. The new account
must have the same registration as the account from which
you are exchanging.
ADDITIONAL PURCHASES: Minimum $50 - (Except transfers from
brokerage accounts).
Mail
Send your check and the "Invest By Mail" stub, which
accompanies your Fund's transaction confirmation, to the
Transfer Agent:
USAA Shareholder Account Services
9800 Fredericksburg Rd., San Antonio, TX 78288
Bank Wire Purchase
Instruct your bank (which may charge a fee for the service)
to wire the specified amount to the Company as follows:
State Street Bank and Trust Company
Boston, MA 02101
ABA# 011000028
Attn: USAA [Fund Name]
USAA AC-69384998
Shareholder(s) Name(s)
Shareholder Account Number
Electronic Funds Transfer (EFT)
You can pay for purchases electronically via electronic
funds transfer. Systematic (regular) purchases can be
deducted from your bank account, payroll, income-
producing investment, or from a USAA money market
account. Intermittent (as-needed) purchases can be
deducted from your bank account through our Buy/Sell Service.
Establish any of our electronic investing services
when you apply for your account, or later upon request.
REDEMPTION OF SHARES
You may redeem shares of a Fund by any of the methods
described in the following table on any day the NAV is
calculated. Redemptions will be effective on the day on
which instructions are received in accordance with the
requirements set forth below. However, if instructions
are received after the NAV calculation, redemption will
be effective on the next business day.
REDEMPTION PROCEEDS
Redemption proceeds are distributed within seven days
after the effective date of redemption. Redemption of
shares purchased by check or electronic funds transfer
will not occur until the purchase check or electronic funds
transfer has cleared, which could take up to 15 days from
the purchase date. If you are considering redeeming shares
soon after purchase, the Manager suggests you purchase by
bank wire or certified check to avoid delay.
In addition, the Company may elect to suspend the
redemption of shares or postpone the date of payment
during any period that the New York Stock Exchange is
closed, or trading in the markets the Company normally
utilizes is restricted, or during any period that
redemption is otherwise permitted to be suspended by the
Securities and Exchange Commission.
Redemption of Shares
Any of the following methods may be used to authorize the
Transfer Agent to redeem shares from your account based
on instructions received.
Written, Fax, or Telegraph
Send your written instructions to:
USAA Shareholder Account Services
9800 Fredericksburg Rd., San Antonio, TX 78288
Send a signed fax to 210-498-2889, or send a telegraph to
USAA Shareholder Account Services.
Written redemption requests must include the
following: (1) a letter of instruction or stock
assignment, and stock certificate (if issued), specifying
the Fund and the number of shares or dollar amount to be
redeemed; (2) signatures of all owners of the shares
exactly as their names appear on the account; (3) other
supporting legal documents, if required, as in the case
of estates, trusts, guardianships, custodianships,
partnerships, corporations, and pension and profit-
sharing plans; and (4) method of payment.
Telephone
Call toll free 1-800-531-8448, in San Antonio, 498-7290.
The Fund will employ reasonable procedures to
confirm that instructions communicated by telephone are
genuine, and if it does not, it may be liable for any
losses due to unauthorized or fraudulent instructions.
Information is obtained prior to any discussion regarding
an account including: (1) USAA number or account number,
(2) the name(s) on the account registration, and (3)
social security number or tax identification number for
the account registration. In addition, all telephone
communications with a shareholder are recorded and
confirmations of all account transactions are sent to the
address of record.
Redemption by telephone, fax, or telegraph is not
available to shares represented by stock certificates.
(continued)
Methods of Payment
Any of the following methods of payment may be used with
your redemption request.
Bank Wire Redemption
The wire redemption privilege allows redemptions of
$1,000 or more to be sent directly to your bank account.
Establish this service when you apply for your account,
or later upon request. If your account is at a savings
bank, savings and loan association, or credit union,
please obtain precise wiring instructions from your
institution. Specifically, include the name of the
correspondent bank and your institution's account number
at that bank. USAA Shareholder Account Services deducts
a wire fee from the account for the redemption by wire.
The fee as of the date of this Prospectus is $10 and is
subject to change at any time. The fee is paid to State
Street Bank and Trust Company (State Street) and the
Transfer Agent for their services in connection with the
wire redemption. Your bank may also charge a fee for
receiving funds by wire.
Electronic Funds Transfer (EFT)
You can request electronic redemptions via electronic
funds transfer. Systematic (regular) or intermittent
(as-needed) redemptions can be credited to your bank account.
Establish any of our electronic investing services
when you apply for your account, or later upon request.
Check Redemption
You may request a redemption to be paid by check to the
registered shareholder(s) and mailed to the address of
record. This check redemption privilege is automatically
established when your application is completed and accepted.
There is a 15 day waiting period before a check redemption
can be processed following a telephone address change.
Checkwriting
You may request that checks be issued for your New York
Money Market Fund account. To establish your
checkwriting privilege, complete the signature card which
accompanies the application form or Shareholder Services
Guide, or request and complete the signature card
separately. A one-time $5 checkwriting fee is charged to
each account by the Transfer Agent for the establishment
of the privilege. There is no charge for the use of
checks nor for subsequent reorders. This privilege is
subject to State Street's rules and regulations governing
checking accounts. Checks must be written for an amount
of at least $250. Checks written for less than $250 will
be returned. Checkwriting may not be used to close an
account because the value of the account changes daily as
dividends are accrued.
When a check is presented to the Transfer Agent for
payment, a sufficient number of full and fractional
shares in the investor's account will be redeemed to
cover the amount of the check. Checks will be returned
if there are insufficient shares to cover the amount of
the check. Presently, there is a $15 processing fee
assessed against an account for any redemption check not
honored by a clearing or paying agent. A check paid
during the month will be returned to the shareholder by
separate mail. Checkwriting fees are subject to change
at any time. The Company, the Transfer Agent and State
Street each reserve the right to change or suspend the
checkwriting privilege upon 30 days' written notice to
participating shareholders. See the Statement of
Additional Information for further information.
You may request that the Transfer Agent stop payment
on a check. The Transfer Agent will use its best efforts
to execute stop payment instructions but does not
guarantee that such efforts will be effective. A $10
charge will be made for each stop payment requested by a
shareholder.
CONDITIONS OF PURCHASE AND REDEMPTION
NONPAYMENT
If any order to purchase shares is cancelled due to
nonpayment or if the Company does not receive good funds
either by check or electronic funds transfer, the
cancellation will be treated as a redemption of shares
purchased and you will be responsible for any resulting
loss incurred by the Fund or the Manager. If you are a
shareholder, shares can be redeemed from any of your
account(s) as reimbursement for all losses. In addition,
you may be prohibited or restricted from making future
purchases in any of the USAA Family of Funds. A $15 fee
is charged for all returned items, including checks and
electronic funds transfers.
TRANSFER OF SHARES
Fund shares may be transferred to another person by
sending written instructions to the Transfer Agent. The
account must be clearly identified and the shareholder
must include the number of shares to be transferred, the
signatures of all registered owners, and all stock
certificates, if any, which are the subject of transfer.
You also need to send written instructions and supporting
documents to change an account registration due to events
such as divorce, marriage, or death. If a new account
needs to be established, an application must be completed
and returned to the Transfer Agent.
ACCOUNT BALANCE
The Board of Directors may cause the redemption of an
account with a balance of less than 50 full shares of
either Fund, subject to certain limitations described in
Additional Information Regarding Redemption of Shares in
the Statement of Additional Information.
COMPANY RIGHTS
The Company reserves the right to:
(1) reject purchase or exchange orders when in the best
interest of the Company;
(2) limit or discontinue the offering of shares of any
portfolio of the Company without notice to the
shareholders;
(3) impose a redemption charge of up to 1% of the net
asset value of shares redeemed if circumstances
indicate a charge is necessary for the protection of
remaining investors (as, for example, if excessive
market-timing share activity unfairly burdens long-
term investors); provided, however, this 1% charge
will not be imposed upon shareholders unless
authorized by the Board of Directors and adequate
notice has been given to shareholders;
(4) require a signature guarantee when deemed
appropriate by the Manager for purchases,
redemptions, or changes in account information. The
section Additional Information Regarding Redemption
of Shares in the Statement of Additional Information
contains information on acceptable guarantors.
EXCHANGES
EXCHANGE PRIVILEGE
The Exchange Privilege is automatically established when
you complete your application. You may exchange shares
among portfolios in the USAA Family of Funds, provided
you do not hold these shares in stock certificate form
and that the shares to be acquired are offered in your
state of residence. Only New York residents may exchange
into a New York Fund. Exchange redemptions and purchases
will be processed simultaneously at the share prices next
determined after the exchange order is received. For
federal income tax purposes, an exchange between
portfolios is a taxable event. Accordingly, a capital
gain or loss may be realized.
The Fund has undertaken certain procedures regarding
telephone transactions. See Redemption of Shares -
Telephone.
EXCHANGE LIMITATIONS,
EXCESSIVE TRADING
To minimize Fund costs and to protect the portfolios and
their shareholders from unfair expense burdens, the Funds
restrict excessive exchanges. Exchanges out of any
portfolio in the USAA Family of Funds are limited for
each account to six per calendar year except that there
is no limitation on exchanges out of the Tax Exempt
Short-Term Fund, Short-Term Bond Fund, or any of the
money market funds in the USAA Family of Funds.
OTHER SERVICES
INVESTMENT PLANS
You may establish a systematic investment plan by
completing the appropriate forms. At the time you sign
up for any of the following investment plans that utilize
the electronic funds transfer service, you will choose
the day of the month (the effective date) on which you
would like to regularly purchase shares. When this day
falls on a weekend or holiday, the electronic transfer
will take place on the last business day before the
effective date. Call the Manager to obtain instructions.
More information about these preauthorized plans is
contained in the Statement of Additional Information.
InvesTronic(registered trademark) - the periodic purchase
of shares through electronic funds transfer from a
checking or savings account.
Direct Purchase Service - the periodic purchase of shares
through electronic funds transfer from a non-governmental
employer, an income-producing investment, or an account
with a participating financial institution.
Automatic Purchase Plan - the periodic transfer of funds
from a USAA money market fund to purchase shares in
another non-money market USAA mutual fund.
Buy/Sell Service - the intermittent purchase or
redemption of shares through electronic funds transfer to
or from a checking or savings account.
Systematic Withdrawal Plan - the periodic redemption of
shares from one of your accounts permitting you to
receive a fixed amount of money monthly or quarterly.
SHAREHOLDER STATEMENTS
AND REPORTS
You will receive a confirmation statement after each
transaction showing the activity in your account except
when account activity is produced solely from dividend
reinvestment in which case confirmation statements will
be mailed only on a quarterly basis. A statement which
reflects the account history during the prior tax year is
provided to each shareholder annually. There will be a
$10 fee charged for copies of historical statements for
other than the prior tax year for any one account. You
will receive a Fund's financial statements with a summary
of its investments and performance at least semiannually.
In an effort to reduce expenses and respond to
shareholders' requests to reduce mail, the Company intends
to consolidate mailings of annual and semiannual reports
to households having multiple accounts with the same
address of record. One copy of each report will be
furnished to that address. You may request additional
reports by notifying the Company.
DIRECTED DIVIDENDS
If you own shares in more than one of the Funds in the
USAA Family of Funds, you may direct that dividends
and/or capital gain distributions earned in one fund be
used to automatically purchase shares in another fund.
TELEPHONE ASSISTANCE
Call our telephone assistance numbers for specific forms,
a copy of the Statement of Additional Information, the
most recent Annual Report and/or Semiannual Report, or if
you have any questions concerning any of the services offered.
SHARE PRICE CALCULATION
The price at which shares of the Funds are purchased and
redeemed by shareholders is equal to the net asset value
(NAV) per share determined on the effective date of the
purchase or redemption.
WHEN
The NAV per share for each Fund is calculated at the
close of the regular trading session of the New York
Stock Exchange, which is usually 4:00 p.m. Eastern time.
You buy and sell Fund shares at NAV without a sales charge.
HOW
The NAV is calculated by adding the value of all securities
and other assets in a Fund, deducting liabilities, and dividing
by the number of shares of the Fund outstanding. Securities
of the New York Bond Fund are valued each business day at
their current market value as determined by a pricing
service approved by the Board of Directors. Securities
which cannot be valued by the pricing service are valued
in good faith at fair value using methods determined by
the Manager under the general supervision of the Board of
Directors. In addition, securities purchased with
maturities of 60 days or less and all securities of the
New York Money Market Fund are stated at amortized cost.
For additional information, see Valuation of
Securities in the Statement of Additional Information.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
Net investment income of each Fund is accrued daily and
distributed to shareholders on the last business day of
each month. Any net capital gain generally will be
distributed after the end of the fiscal year. The Funds
intend to make such additional distributions as may be
necessary to avoid the imposition of any federal excise tax.
All shares purchased will begin accruing dividends
on the day following the effective date of the purchase
and will receive dividends through the effective date of
redemption.
All income dividends and capital gain distributions
are automatically reinvested, unless the shareholder
specifies otherwise. The share price will be the net
asset value of the Fund shares computed on the ex-
dividend date. Any capital gain distribution paid by the
New York Bond Fund will reduce the per share net asset
value by the amount of the distribution. An investor
should consider carefully the effects of purchasing
shares of the New York Bond Fund shortly before any
capital gain distribution. Although in effect a return
of capital, these distributions are subject to taxes. If
a shareholder becomes a resident of a state other than
New York, a check for proceeds of income dividends will
be mailed to such shareholder monthly, and a check for
any capital gain distribution will be mailed after the
distribution is paid.
Any dividend or distribution payment returned to the
Manager as not deliverable will be invested in the
shareholder's Fund account at the then-current net asset
value. If any check for the payment of dividends or
distributions is not cashed within six months from the
date on the check, it becomes void. The amount of the
check will then be invested in the shareholder's account
at the then-current net asset value.
FEDERAL TAXES
The exemption of interest income for federal income tax
purposes does not necessarily result in exemption under
the income or other tax laws of any state or local taxing
authority. The following discussion relates only to
generally applicable federal income tax provisions in
effect as of the date of this Prospectus. Therefore,
shareholders are urged to consult their own tax advisers
about the status of distributions from a Fund in their
own states and localities.
Fund - Each Fund intends to qualify as a regulated
investment company under Subchapter M of the Internal
Revenue Code of 1986, as amended (the Code). By
complying with the applicable provisions of the Code,
neither Fund will be subject to federal income tax on its
net investment income and net capital gains (capital
gains in excess of capital losses) distributed to
shareholders.
Shareholder - Dividends of net tax-exempt interest income
paid by a Fund will be excluded from a shareholder's
gross income for federal income tax purposes. Dividends
from taxable net investment income and distributions of
net short-term capital gains are taxable to shareholders
as ordinary income, whether received in cash or
reinvested in additional shares. However, it is expected
that any taxable net investment income will be
insubstantial in relation to the tax-exempt interest
generated by a Fund.
Distributions of net long-term capital gains are
taxable as long-term capital gains whether received in
cash or reinvested in additional shares, and regardless
of the length of time the investor has held the shares of
a Fund.
Tax-exempt interest from private activity bonds (for
example, industrial development revenue bonds) issued
after August 7, 1986, although otherwise exempt from
federal tax, is treated as a tax preference item for
purposes of the alternative minimum tax. For
corporations, all tax-exempt interest will be considered
in calculating the alternative minimum tax as part of the
adjusted current earnings.
Withholding - Each Fund is required by federal law to
withhold and remit to the U.S. Treasury a portion of the
income dividends and capital gain distributions and
proceeds of redemptions paid to any non-corporate
shareholder who fails to furnish the Fund with a correct
tax identification number, who underreports dividend or
interest income, or who fails to certify to the Fund that
he is not subject to withholding. To avoid this
withholding requirement, you must certify on your
application, or on a separate Form W-9 supplied by the
Transfer Agent, that your tax identification number is
correct and that you are not currently subject to backup
withholding.
Reporting - Each Fund will report annually to its
shareholders the federal tax status of dividends and
distributions paid or declared by each Fund during the
preceding calendar year, including the portion of the
dividends constituting interest on private activity
bonds, and the percentage and source, on a state-by-state
basis, of interest income earned on tax-exempt securities
held by the Fund during the preceding year.
NEW YORK TAXATION
Each Fund intends to satisfy such requirements of
applicable New York law so as to pay dividends, as
described below, that are exempt from New York State and
New York City personal income taxes. Dividends derived
from interest on qualifying New York Municipal
Obligations will be exempt from New York State and New
York City personal income taxes, but not corporate
franchise taxes. Dividends and distributions derived
from income (including capital gains on all New York
Municipal Obligations) other than interest on qualifying
New York Municipal Obligations are not exempt from New
York State and New York City taxes. Interest or
indebtedness incurred or continued by a shareholder to
purchase or carry shares of the Fund is not deductible
for New York State and New York City personal income tax
purposes. Each shareholder will receive an annual
notification stating the shareholder's portion of each
Fund's tax-exempt income attributable to qualified New
York Municipal Obligations. The foregoing is only a
general summary of certain state and local tax
considerations generally affecting shareholders and is
not intended as a substitute for careful tax planning.
Shareholders should consult their own tax advisers
regarding their own tax situations.
MANAGEMENT OF THE COMPANY
The business affairs of the Company are subject to the
supervision of the Board of Directors.
The Manager, USAA Investment Management Company, was
organized in May 1970 and is an affiliate of United
Services Automobile Association (USAA), a large
diversified financial services institution. As of the
date of this Prospectus, the Manager had in excess of $24
billion in total assets under management. The Manager
has offices at 9800 Fredericksburg Rd., San Antonio, TX
78288, which is also the home office of USAA and other
affiliates.
ADVISORY AGREEMENT
The Manager serves as the manager and investment adviser
of the Company, providing services under an Advisory
Agreement. Under the Advisory Agreement, the Manager is
responsible for the management of the portfolios,
business affairs, and placement of brokerage orders,
subject to the authority of and supervision by the Board
of Directors.
For its services under the Advisory Agreement, each Fund
pays the Manager an annual fee which is computed as a percentage
of the aggregate average net assets (ANA) of both Funds combined.
The fee is accrued daily, paid monthly, and allocated between
the Funds based on the relative net assets of each. The
fee is computed at .50% of the first $50,000,000 ANA,
.40% of that portion over $50,000,000 and not over
$100,000,000 ANA, and .30% of that portion over
$100,000,000 ANA. For the fiscal year ended March 31,
1994, the Manager waived the advisory fee for the New
York Money Market Fund. For the same period, the fee
paid to the Manager, net of the reimbursement, for the
New York Bond Fund was .28% of ANA.
OPERATING EXPENSES
For the fiscal year ended March 31, 1994, the Manager
limited each Fund's total operating expenses to .50% of
its ANA. The Manager reimbursed the New York Bond Fund
$108,778 and the New York Money Market Fund $93,578 for
expenses in excess of the limitation. The Manager has
voluntarily agreed to continue to limit each Fund's
annual expenses until August 1, 1995, to .50% of its ANA
and will reimburse the Funds for all expenses in excess
of the limitation.
PORTFOLIO MANAGERS
See Appendix A - Portfolio Management for a listing of
portfolio managers.
SERVICE PROVIDERS
UNDERWRITER/ USAA Investment Management Company
DISTRIBUTOR 9800 Fredericksburg Rd., San Antonio, Texas 78288.
TRANSFER USAA Shareholder Account Services
AGENT 9800 Fredericksburg Rd., San Antonio, Texas 78288.
CUSTODIAN State Street Bank and Trust Company
P.O. Box 1713, Boston, Massachusetts 02105.
LEGAL Goodwin, Procter & Hoar
COUNSEL Exchange Place, Boston, Massachusetts 02109.
INDEPENDENT KPMG Peat Marwick
AUDITORS 112 East Pecan, Suite 2400, San Antonio, Texas 78205.
DESCRIPTION OF SHARES
The Company is an open-end management investment company
incorporated under the laws of the State of Maryland on
November 16, 1981. The Company is authorized to issue
shares in separate classes, or portfolios. Ten such
portfolios have been established, two of which are
described in this Prospectus. Each of the two Funds is
classified as a diversified investment company. Under
the Company's charter, the Board of Directors is
authorized to create new portfolios in addition to those
already existing without the approval of the shareholders
of the Company.
Under the provisions of the Bylaws of the Company,
no annual meeting of shareholders is required.
Ordinarily, no shareholder meeting will be held unless
required by the Investment Company Act of 1940. The
Directors may fill vacancies on the Board or appoint new
Directors provided that immediately after such action at
least two-thirds of the Directors have been elected by
shareholders.
Shareholders are entitled to one vote per share
(with proportionate voting for fractional shares)
irrespective of the relative net asset value of the
shares. For matters affecting an individual Fund, a
separate vote of the shareholders of that Fund is required.
TELEPHONE ASSISTANCE
(Call toll free, Monday-Saturday, Central Time)
For further information on mutual funds:
Office Hours: M-F 8:00 a.m. to 8:00 p.m.
Saturday: 8:30 a.m. to 5:00 p.m.
1-800-531-8181
In San Antonio 210-498-6505
For account servicing, exchanges or redemptions:
Office Hours: M-F 8:00 a.m. to 8:00 p.m.
Saturday: 8:30 a.m. to 5:00 p.m.
1-800-531-8448
In San Antonio 210-498-7290
RECORDED MUTUAL FUND PRICE QUOTES
(Accessible 24 hours from any phone)
1-800-531-8066
In San Antonio 210-498-8066
MUTUAL FUND TOUCHLINE (registered trademark)
(Accessible 24 hours from Touchtone phones)
For account balance, last transaction or
fund prices:
1-800-531-8777
In San Antonio 210-498-8777
APPENDIX A - PORTFOLIO MANAGEMENT
The following are the portfolio managers of USAA Tax
Exempt Fund, Inc., New York Funds:
NAME Kenneth E. Willmann Sharon S. Pichler
PORTFOLIOS New York Bond Fund New York Money Market Fund
MANAGED since 10/90 since 04/93
EDUCATION BA, University of Texas BA, Michigan State University
MBA, University of Texas MBA, University of Texas at
San Antonio
EXPERIENCE (1) 20 years, investment 8 years, investment
management management
17 years, IMCO 8 years, IMCO
BUSINESS HISTORY 12/86-present, Vice 11/92-present, Assistant Vice
PAST FIVE YEARS President, Fixed President, Fixed Income
Income Investments, Investments, IMCO
IMCO 02/91-11/92, Executive
Director, Fixed Income
Investments, IMCO
08/90-01/91, Executive
Director, Fixed Income
Research, IMCO
10/84-07/90, Instructor,
University of Texas at
San Antonio
PROFESSIONAL CFA, 1978 CFA, 1984
DESIGNATIONS (1)
PROFESSIONAL AIMR AIMR
MEMBERSHIPS (1) SAFAS SAFAS
NFMA NFMA
- -----------
(1) Abbreviations of designations and organizations used in above table:
IMCO - USAA Investment Management Company (the Manager)
CFA - Chartered Financial Analyst
AIMR - Association for Investment Management and Research
SAFAS - San Antonio Financial Analysts Society, Inc.
NFMA - National Federation of Municipal Analysts
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