USAA TAX EXEMPT FUND, INC.
August 1, 1995 PROSPECTUS
As Supplemented December 1, 1995
USAA Long-Term Fund, USAA Intermediate-Term Fund, USAA
Short-Term Fund and USAA Tax Exempt Money Market Fund
(collectively, the Funds) are four 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
investors with interest income that is exempt from
federal income tax. The Tax Exempt Money Market Fund
has a further objective of preserving capital and
maintaining liquidity.
The Long-Term, Intermediate-Term, and Short-Term
Funds invest primarily in investment grade tax-exempt
securities differentiated by maturity limitations.
The average weighted portfolio maturity for the Long-Term
Fund is 10 years or more, the Intermediate-Term Fund is
between 3 and 10 years, and the Short-Term Fund is 3
years or less. Page 11.
The Tax Exempt Money Market Fund invests in high
quality tax-exempt securities with maturities of 397 days
or less. The Manager 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
per share of $1.00. Page 12.
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 15.
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 17.
This Prospectus, which should be read and retained
for future reference, provides information regarding the
Company and the Funds that you should know before investing.
Shares of the USAA 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 (SAI) dated August 1, 1995, is
available upon request and without charge by writing to
USAA TAX EXEMPT FUND, INC., 9800 Fredericksburg Rd., San
Antonio, TX 78288, or by calling 1-800-531-8181. The SAI
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 TAX EXEMPT 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 8
USING MUTUAL FUNDS
USAA Family of No-Load Mutual Funds 9
Using Mutual Funds in an Investment Program 10
INVESTMENT PORTFOLIO INFORMATION
Investment Objectives and Policies 11
Long-Term Fund 11
Intermediate-Term Fund 11
Short-Term Fund 11
Tax-Exempt Money Market Fund 12
Other Investment Information 13
SHAREHOLDER INFORMATION
Purchase of Shares 15
Redemption of Shares 17
Conditions of Purchase and Redemption 19
Exchanges 20
Other Services 20
Share Price Calculation 21
Dividends, Distributions and Taxes 22
Management of the Company 24
Description of Shares 25
Service Providers 26
Telephone Assistance Numbers 26
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)
- -----------------------------------------------------------------------------
Intermediate- Tax Exempt
Long-Term Term Short-Term Money Market
Fund Fund Fund Fund
Management Fees .28% .28% .28% .28%
12b-1 Fees None None None None
Other Expenses
Transfer Agent Fees** .07% .08% .09% .06%
Custodian Fees .01% .02% .02% .02%
All Other Expenses .02% .02% .03% .03%
---- ---- ---- ----
Total Other Expenses .10% .12% .14% .11%
---- ---- ---- ----
Total Fund Operating Expenses .38% .40% .42% .39%
==== ==== ==== ====
- -----------------------------------------------------------------------------
* A shareholder who requests delivery of redemption proceeds by wire
transfer will be subject to a $10 fee. See Redemption of Shares -
Bank Wire Redemption.
** The Funds pay USAA Shareholder Account Services an annual fixed fee
per account for its services. See Transfer Agent in the SAI, page 14.
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
------ ------- ------- --------
Long-Term Fund $ 4 $ 12 $ 21 $ 48
Intermediate-Term Fund $ 4 $ 13 $ 22 $ 51
Short-Term Fund $ 4 $ 13 $ 24 $ 53
Tax Exempt Money Market Fund $ 4 $ 13 $ 22 $ 51
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 ten-year period
ended March 31, 1995, has been derived from financial
statements audited by KPMG Peat Marwick LLP. 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 ($) ($) ($) ($) ($)
LONG-TERM FUND:
March 31,
1986 11.88 1.13 1.64 (1.13) -
1987 13.52 1.04 .52 (1.04) (.08)
1988 13.96 .97 (1.30) (.97) (.22)
1989 12.44 .96 .22 (.96) -
1990 12.66 .95 .35 (.95) -
1991 13.01 .94 .12 (.94) -
1992 13.13 .92 .41 (.92) -
1993 13.54 .88 .75 (.88) (.08)
1994 14.21 .81 (.44) (.82)* (.56)
1995 13.20 .79 (.16) (.78) (.09)
INTERMEDIATE-TERM FUND:
March 31,
1986 11.19 .98 1.08 (.98) -
1987 12.27 .88 .11 (.88) -
1988 12.38 .84 (.58) (.84) (.02)
1989 11.78 .83 (.14) (.83) -
1990 11.64 .83 .23 (.83) -
1991 11.87 .82 .13 (.82) -
1992 12.00 .79 .29 (.79) -
1993 12.29 .74 .61 (.74) -
1994 12.90 .69 (.29) (.69) (.13)
1995 12.48 .69 .05 (.69) (.03)
FINANCIAL HIGHLIGHTS cont.
RATIO OF NET
NET ASSET RATIO OF INVESTMENT
VALUE AT NET ASSETS EXPENSES INCOME
END TOTAL AT END TO AVERAGE TO AVERAGE PORTFOLIO
OF PERIOD RETURN OF PERIOD NET ASSETS NET ASSETS TURNOVER
($) (%)** ($000) (%) (%) (%)
Long-Term Fund
13.52 24.28 648,076 .50 8.94 122.18
13.96 12.13 1,039,057 .49 7.64 82.51
12.44 (2.01) 823,375 .51 7.75 169.38
12.66 9.72 975,285 .45 7.58 124.07
13.01 10.44 1,172,842 .43 7.23 91.52
13.13 8.46 1,355,321 .40 7.22 91.41
13.54 10.39 1,638,848 .40 6.83 76.28
14.21 12.46 1,882,882 .39 6.35 88.27
13.20 2.36 1,831,693 .38 5.69 109.28
12.96 5.07 1,774,643 .38 6.23 163.38
Intermediate-Term Fund
12.27 19.08 201,302 .57 8.36 79.61
12.38 8.32 402,842 .60 7.07 90.86
11.78 2.34 345,997 .56 7.16 138.82
11.64 6.04 401,026 .49 7.10 112.69
11.87 9.29 471,381 .46 6.95 62.28
12.00 8.30 575,770 .43 6.91 66.26
12.29 9.24 893,874 .44 6.45 66.57
12.90 11.29 1,374,159 .42 5.85 74.02
12.48 3.06 1,559,183 .40 5.30 69.45
12.50 6.16 1,529,750 .40 5.63 72.00
FINANCIAL HIGHLIGHTS cont.
NET ASSET NET REALIZED DISTRIBUTIONS
VALUE AT NET AND FROM NET DISTRIBUTIONS
FISCAL BEGINNING INVESTMENT UNREALIZED INVESTMENT OF REALIZED
YEAR OF PERIOD INCOME GAIN (LOSS) INCOME CAPITAL GAINS
ENDED ($) ($) ($) ($) ($)
SHORT-TERM FUND:
March 31,
1986 10.36 .72 .30 (.72) -
1987 10.66 .62 .04 (.62) -
1988 10.70 .61 (.24) (.61) (.04)
1989 10.42 .64 (.15) (.64) -
1990 10.27 .67 .12 (.67) -
1991 10.39 .67 (.04) (.67) -
1992 10.35 .59 .13 (.59) -
1993 10.48 .50 .15 (.50) -
1994 10.63 .45 (.15) (.45) -
1995 10.48 .47 (.01) (.47) -
TAX-EXEMPT MONEY MARKET FUND:
March 31,
1986 1.00 .05 - (.05) -
1987 1.00 .04 - (.04) -
1988 1.00 .05 - (.05) -
1989 1.00 .05 - (.05) -
1990 1.00 .06 - (.06) -
1991 1.00 .06 - (.06) -
1992 1.00 .04 - (.04) -
1993 1.00 .03 - (.03) -
1994 1.00 .02 - (.02) -
1995 1.00 .03 - (.03) -
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) (%) (%) (%)
Short-Term Fund
10.66 10.10 139,345 .65 6.85 100.61
10.70 6.33 287,271 .57 5.78 142.11
10.42 3.57 244,703 .56 5.81 147.69
10.27 4.78 254,453 .51 6.14 146.28
10.39 7.91 279,028 .52 6.47 87.23
10.35 6.27 423,914 .50 6.48 96.10
10.48 7.09 680,075 .48 5.59 107.35
10.63 6.37 862,182 .43 4.75 138.20
10.48 2.87 995,624 .43 4.25 101.67
10.47 4.51 801,157 .42 4.50 102.93
Tax-Exempt Money Market Fund
1.00 5.43 160,506 .59 5.44 -
1.00 4.49 327,092 .47 4.34 -
1.00 4.69 619,085 .43 4.63 -
1.00 5.57 802,233 .43 5.48 -
1.00 6.24 990,050 .42 6.06 -
1.00 5.94 1,508,862 .40 5.76 -
1.00 4.30 1,483,554 .39 4.21 -
1.00 2.89 1,501,098 .40 2.85 -
1.00 2.31 1,569,760 .40 2.29 -
1.00 2.98 1,456,747 .39 2.93 -
- ------------------
* Certain book-to-tax timing differences resulted in
$.01 of excess distributions that does not
constitute a return of capital.
** 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 any 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 to the SAI. 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 SAI.
TOTAL RETURN - A 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 - Long-Term, Intermediate-Term, and Short-Term
Funds. These Funds 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 - Tax Exempt 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 SAI for illustrations of this yield.
USAA FAMILY OF NO-LOAD MUTUAL FUNDS
The USAA Family of No-Load Mutual Funds includes a
variety of Funds, each with different objectives and
policies. In combination, these Funds are designed to
provide investors with the opportunity to formulate their
own investment program. You may exchange any shares you
hold in any one USAA Fund for shares in any other USAA
Fund. For more complete information about the Funds 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
Emerging Markets 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.
This decision includes 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 longer-term bonds. He or she could divide
investments between the Long-Term Fund and the Tax Exempt
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
LONG-TERM FUND
INTERMEDIATE-TERM FUND
SHORT-TERM FUND
INVESTMENT OBJECTIVE
The Funds have a common investment objective of providing investors
with interest income that is exempt from federal income tax.
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, but may be subject to state and local taxes.
It is a fundamental policy of each Fund that during
normal market conditions the Fund's assets will be
invested so that at least 80% of the Fund's annual income
will be exempt from federal personal income tax and
excluded from the calculation of federal alternative
minimum taxes for individual taxpayers.
Under normal market conditions, the Manager will
invest the assets of each Fund so that approximately 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 Ratings Group (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 a Fund
would be invested in securities which do not meet these
quality standards. In no event will a security be
purchased for a 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 to the SAI.
FUND DIFFERENCES
These Funds are differentiated by their average weighted
maturities of all the securities in the portfolios.
Generally, the longer the maturity, the higher the yield
and the greater the price volatility.
Maturity Limits
Portfolio Weighted
Fund Average
---- -------
Long-Term 10 years or more
Intermediate-Term 3-10 years
Short-Term 3 years or less
Within these limitations, a Fund may purchase
individual securities with stated maturities greater than
the Fund's weighted average maturity limits. In
determining a security's maturity for purposes of
calculating a Fund's average maturity, estimates of the
expected time for its principal to be paid may be used.
This can be substantially shorter than its stated final
maturity. For a discussion of the method of calculating
the average weighted maturities of these Funds'
portfolios, see Investment Policies in the SAI.
TAX EXEMPT MONEY MARKET FUND
INVESTMENT OBJECTIVE
The Fund's investment objective is to provide investors
with interest income that is exempt from federal income
tax while preserving capital and maintaining liquidity.
INVESTMENT POLICIES
The Manager will pursue this objective by investing the
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, but may be
subject to state and local taxes. It is a fundamental
policy of the Fund that during normal market conditions
the Fund's assets will be invested so that at least 80%
of the Fund's annual income will be exempt from federal
personal income tax and excluded from the calculation of
federal alternative minimum taxes for individual taxpayers.
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, including
"prerefunded" and "escrowed to maturity" tax-exempt securities;
(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, S&P, Fitch, Duff &
Phelps Inc., Thompson BankWatch, Inc., and IBCA Inc. For
a description of tax-exempt securities and their ratings,
see Appendix A to the SAI.
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 SAI.
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
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 income
tax. 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 Tax Exempt 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
Long-Term, Intermediate-Term, and Short-Term Funds,
maturity for put bonds is deemed to be the date on which
the put becomes exercisable. Generally, maturity for put
bonds for the Tax Exempt 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 Funds do not earn interest on the
securities until settlement, and the market value of the
securities may fluctuate between purchase and settlement.
Such securities can be sold before settlement date.
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 - Lease obligations 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.
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 33 1/3% of
the Fund's total assets, and (ii) to invest up to 5% of
the Fund's total assets in repurchase agreements.
INVESTMENT RESTRICTIONS
The following restrictions may not be changed without
shareholder approval:
a. No Fund may borrow money, except for temporary or emergency
purposes in an amount not exceeding 33 1/3% of its total assets
(including the amount borrowed) less liabilities (other than
borrowings).
b. No Fund may pledge or mortgage more than 10% of its
total assets.
c. No Fund may invest more than 25% of its total assets
in securities of issuers conducting their principal
activities in the same state or 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.
d. No Fund may, with respect to 75% of its total assets, purchase
the securities of any issuer (except Government Securities, as
such term is defined in the 1940 Act) if, as a result, the Fund
would have more than 5% of the value of its total assets invested
in the securities of such issuer.
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 [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
Generally, when you make a purchase, your purchase price
will be the net asset value (NAV) per share next
determined after the Fund receives your request in proper form.
If a Fund receives your request prior to the close of the
New York Stock Exchange on a day on which the Exchange is
open, your purchase price will be the NAV per share
determined for that day. If a Fund receives your request
after the time at which the NAV per share 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 - (Except USAA employee payroll deduction).
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
USAA Employee
Payroll Deduction
The periodic purchase of shares through payroll deduction ($25 minimum) by
any employee of USAA, its subsidiaries or affiliated companies.
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 and USAA employee payroll deduction).
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 per
share 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 per share
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. Payment for
redemption of shares purchased by check or electronic
funds transfer will not be disbursed 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, you
should 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, 210-456-7202.
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 for 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 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 ($25 for wires to a
foreign bank) and is subject to change at any time. The
fee is paid to State Street Bank and Trust Company (SSB)
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 Short-Term
Fund or Tax Exempt Money Market Fund accounts. To
establish your checkwriting privilege (CWP), 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 SSB'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 SSB
each reserve the right to change or suspend the
checkwriting privilege upon 30 days' written notice to
participating shareholders. See the SAI 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,
subject to certain limitations described in Additional
Information Regarding Redemption of Shares in the SAI.
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 SAI 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. 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 Funds have 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 SAI.
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 after each account transaction in
your Long-Term Fund, Intermediate-Term Fund and Short-Term Fund
except:
i) a reinvested dividend;
ii) a payment you make after January 31, 1996 under the
InvesTronic(registered trademark), Direct Purchase Service,
Automatic Purchase Plan, or Directed Dividends investment
plans; or
iii) a redemption you make after January 31, 1996 under the
Systematic Withdrawal Plan.
In the Tax Exempt Money Market Fund, you will receive a
confirmation for purchases or redemptions by check and exchanges.
If your Money Market Fund account had activity other than
reinvested dividends, such as wire purchases or redemptions or
purchases under the InvesTronic(registered trademark), Direct
Purchase Service, Automatic Purchase Plan or Directed Dividends
investment plans, you will receive a monthly statement that will
reflect quarter-to-date account activity.
At the end of each quarter you will receive a
consolidated statement for all of your mutual fund
accounts, regardless of account activity. The fourth
quarter consolidated statement will reflect all account
activity for the prior tax year. 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 SAI, 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 may buy and sell Fund shares at the NAV per share
without a sales charge.
HOW
The NAV per share is calculated by adding the value of
all securities and other assets in a Fund, deducting
liabilities, and dividing by the number of shares outstanding.
Securities of the Long-Term, Intermediate-Term, and Short-Term
Funds 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, and all other assets, 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
Tax Exempt Money Market Fund are stated at amortized cost.
For additional information, see Valuation of Securities in
the SAI.
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 at least annually. 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 a
Fund (other than the Tax Exempt Money Market 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 a Fund shortly before any
capital gain distribution. Although in effect a return
of capital, these distributions are subject to taxes.
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,
none of the Funds 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 are 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 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.
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
(IMCO), 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 approximately
$27 billion in total assets under management. The
Manager's mailing address is 9800 Fredericksburg Rd., San
Antonio, TX 78288.
Officers and employees of the Manager are permitted
to engage in personal securities transactions subject to
restrictions and procedures set forth in the Joint Code
of Ethics adopted by the Company and the Manager. Such
restrictions and procedures include substantially all of
the recommendations of the Advisory Group of the
Investment Company Institute and comply with Securities
and Exchange Commission rules and regulations.
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 that Fund's average net assets (ANA),
accrued daily, and paid monthly. The fee for each Fund was
computed and paid at twenty-eight one-hundredths of one
percent (.28%) of ANA for the fiscal year ended March 31, 1995.
OPERATING EXPENSES
For the fiscal year ended March 31, 1995, the total
annualized operating expenses for each Fund as a
percentage of that Fund's ANA equaled .38% for the Long-
Term Fund; .40% for the Intermediate-Term Fund; .42% for
the Short-Term Fund; and .39% for the Tax Exempt Money
Market Fund.
PORTFOLIO MANAGERS
The following individuals are primarily responsible for
managing the Funds.
Long-Term Fund
Kenneth E. Willmann, Vice President of Fixed Income
Investments since December of 1986, has managed the Fund
since its inception in March 1982. He has 21 years
investment management experience and has worked for IMCO
18 years. Mr. Willmann earned the Chartered Financial
Analyst (CFA) designation in 1978 and is a member of the
Association for Investment Management and Research
(AIMR), San Antonio Financial Analysts Society, Inc.
(SAFAS), and the National Federation of Municipal
Analysts (NFMA). He holds an MBA and a BA from the
University of Texas.
Intermediate-Term and Short-Term Funds
Clifford A. Gladson, Assistant Vice President of Fixed
Income Investments since November of 1994, has managed
the Funds since April 1993 and April 1994, respectively.
He has eight years investment management experience and
has worked for IMCO five years where he has held various
positions in Fixed Income Investments. Mr. Gladson
earned the CFA designation in 1990 and is a member of the
AIMR, SAFAS and NFMA. He holds an MS from the University
of Wisconsin, Milwaukee and a BS from Marquette
University of Wisconsin.
Tax Exempt Money Market Fund
Thomas G. Ramos, Assistant Vice President of Fixed Income
Investments since November of 1993, has managed the Fund
since August 1994. Mr. Ramos has 16 years investment
management experience and has worked for IMCO 13 years
where he has held various positions in Fixed Income
Investments. Mr. Ramos earned the CFA designation in
1983 and is a member of the AIMR, SAFAS, and NFMA. He
holds an MBA from the University of California, an MA
from St. Mary's University, Texas and a BA from Yale
University, Connecticut.
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 Funds. Ten such Funds have
been established, four of which are described in this
Prospectus. Each of the four Funds is classified as a
diversified investment company. Under the Company's
charter, the Board of Directors is authorized to create
new Funds 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.
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 LLP
AUDITORS 112 East Pecan, Suite 2400, San Antonio, Texas 78205.
TELEPHONE ASSISTANCE
(Call toll free - Central Time)
Monday-Friday 8:00 a.m. to 8:00 p.m.
Saturday: 8:30 a.m. to 5:00 p.m.
For further information on mutual funds:
1-800-531-8181
In San Antonio 210-456-7211
For account servicing, exchanges or redemptions:
1-800-531-8448
In San Antonio 210-456-7202
RECORDED 24 HOUR SERVICE
MUTUAL FUND PRICE QUOTES
(From any phone)
1-800-531-8066
In San Antonio 210-498-8066
MUTUAL FUND TOUCHLINE(registered trademark)
(From Touchtone phones only)
For account balance, last transaction or fund prices:
1-800-531-8777
In San Antonio 210-498-8777
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USAA CALIFORNIA FUNDS
August 1, 1995 PROSPECTUS
As Supplemented December 1, 1995
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 no more than 90
days. The Fund will endeavor to maintain a constant net
asset value per share of $1.00. Page 9.
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 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.
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 (SAI) dated August 1, 1995, 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 SAI 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
Description of Shares 23
Service Providers 24
Telephone Assistance Numbers 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 Fees .32% .32%
12b-1 Fees None None
Other Expenses
Transfer Agent Fees** .07% .07%
Custodian Fees .02% .04%
All Other Expenses .03% .04%
---- ----
Total Other Expenses .12% .15%
---- ----
Total Fund Operating Expenses .44% .47%
==== ====
- --------------------------------------------------------------------------
* A shareholder who requests delivery of redemption
proceeds by wire transfer will be subject to a $10
fee. See Redemption of Shares - Bank Wire Redemption.
** The Funds pay USAA Shareholder Account Services an
annual fixed fee per account for its services. See
Transfer Agent in the SAI, page 18.
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 six-year period
ended March 31, 1995, has been derived from financial
statements audited by KPMG Peat Marwick LLP. 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 ($) ($) ($) ($) ($)
CALIFORNIA BOND FUND:
March 31,
1990* 10.00 .44 (.25) (.44) -
1991 9.75 .66 .23 (.66) -
1992 9.98 .66 .27 (.66) -
1993 10.25 .62 .62 (.62) (.12)
1994 10.75 .59 (.52) (.59) (.20)
1995 10.03 .59 .07 (.59) -
CALIFORNIA MONEY MARKET FUND:
March 31,
1990* 1.00 .04 - (.04) -
1991 1.00 .05 - (.05) -
1992 1.00 .04 - (.04) -
1993 1.00 .03 - (.03) -
1994 1.00 .02 - (.02) -
1995 1.00 .03 - (.03) -
FINANCIAL HIGHLIGHTS cont.
RATIO OF NET
NET ASSET RATIO OF INVESTMENT
VALUE AT NET ASSETS EXPENSES INCOME
END TOTAL AT END TO AVERAGE TO AVERAGE PORTFOLIO
OF PERIOD RETURN OF PERIOD NET ASSETS NET ASSETS TURNOVER
($) (%)** ($000) (%) (%) (%)
California Bond Fund
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
10.10 6.89 372,877 .44 5.98 68.57
California Money Market Fund
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 -
1.00 2.94 266,764 .47 2.91 -
- --------------
(a) Annualized. The ratio is not necessarily indicative of 12 months
of 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
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
- --------------
* Funds commenced operations August 1, 1989.
** 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 to the SAI. 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 SAI.
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 SAI for illustrations of this yield.
USAA FAMILY OF NO-LOAD MUTUAL FUNDS
The USAA Family of No-Load Mutual Funds includes a
variety of Funds, each with different objectives and
policies. In combination, these Funds are designed to
provide investors with the opportunity to formulate their
own investment program. You may exchange any shares you
hold in any one USAA Fund for shares in any other USAA
Fund. For more complete information about the Funds 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
Emerging Markets 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.
This decision includes 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 Funds 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 Ratings Group
(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 to the SAI.
The Fund's average portfolio maturity is not
restricted, but is expected to be greater than ten years.
In determining a security's maturity for purposes of
calculating the Fund's average maturity, estimates of the
expected time for its principal to be paid may be used.
This can be substantially shorter than its stated final
maturity. For a discussion of the method of calculating
the average weighted maturity of the Fund's portfolio,
see Investment Policies in the SAI. 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, including
"prerefunded" and "escrowed to maturity" tax-exempt
securities;
(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, S&P, Fitch, Duff &
Phelps Inc., Thompson BankWatch, Inc., and IBCA Inc. For
a description of tax-exempt securities and their ratings,
see Appendix A to the SAI.
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 SAI.
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 Funds do not earn interest on the
securities until settlement, and the market value of the
securities may fluctuate between purchase and settlement.
Such securities can be sold before settlement date.
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 - 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 33 1/3% 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 for temporary or
emergency purposes in an amount not exceeding 33 1/3%
of its total assets (including the amount borrowed) less
liabilities (other than borrowings).
b. Neither Fund may pledge or mortgage more than 10% of
its total assets.
c. 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.
d. 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, economic, 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 SAI.
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 [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
Generally, when you make a purchase, your purchase price
will be the net asset value (NAV) per share next determined
after the Fund receives your request in proper form.
If a Fund receives your request prior to the close of the
New York Stock Exchange on a day on which the Exchange is
open, your purchase price will be the NAV per share
determined for that day. If a Fund receives your request
after the time at which the NAV per share 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 - (Except USAA
employee payroll deduction).
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
USAA Employee
Payroll Deduction
The periodic purchase of shares through payroll deduction
($25 minimum) by any employee of USAA, its subsidiaries
or affiliated companies.
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 and USAA employee payroll deduction).
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 the Fund by any of the methods
described in the following table on any day the NAV per
share 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 per share
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. Payment for
redemption of shares purchased by check or electronic
funds transfer will not be disbursed until the purchase
check or electronic funds trans-fer has cleared, which
could take up to 15 days from the purchase date. If you
are considering redeeming shares soon after purchase, you
should 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, 210-456-7202.
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 for 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 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 ($25 for wires to a
foreign bank) and is subject to change at any time. The
fee is paid to State Street Bank and Trust Company (SSB)
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 (CWP), 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 SSB'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 SSB
each reserve the right to change or suspend the
checkwriting privilege upon 30 days' written notice to
participating shareholders. See the SAI 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 SAI.
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 SAI 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 Funds have 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 SAI.
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 after each transaction in your
California Bond Fund account except:
i) a reinvested dividend;
ii) a payment you make after January 31, 1996 under the
InvesTronic(registered trademark), Direct Purchase Service,
Automatic Purchase Plan, or Directed Dividends investment
plans; or
iii) a redemption you make after January 31, 1996 under the
Systematic Withdrawal Plan.
In the California Money Market Fund, you will receive a
confirmation for purchases or redemptions by check and exchanges.
If your Money Market Fund account had activity other than
reinvested dividends, such as wire purchases or redemptions or
purchases under the InvesTronic(registered trademark), Direct
Purchase Service, Automatic Purchase Plan or Directed Dividends
investment plans, you will receive a monthly statement that will
reflect quarter-to-date account activity.
At the end of each quarter you will receive a
consolidated statement for all of your mutual fund
accounts, regardless of account activity. The fourth
quarter consolidated statement will reflect all account
activity for the prior tax year. 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 SAI, 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 may buy and sell Fund shares at the NAV per share
without a sales charge.
HOW
The NAV per share is calculated by adding the value of
all securities and other assets in a Fund, deducting
liabilities, and dividing by the number of shares 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,
and all other assets, 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 SAI.
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 at least annually. 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 are 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 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 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
(IMCO), 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 approximately
$27 billion in total assets under management. The
Manager's mailing address is 9800 Fredericksburg Rd., San
Antonio, TX 78288.
Officers and employees of the Manager are permitted
to engage in personal securities transactions subject to
restrictions and procedures set forth in the Joint Code
of Ethics adopted by the Company and the Manager. Such
restrictions and procedures include substantially all of
the recommendations of the Advisory Group of the
Investment Company Institute and comply with Securities
and Exchange Commission rules and regulations.
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, 1995, 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, 1995, the total
annualized operating expenses for each Fund as a
percentage of that Fund's ANA equaled .44% for the
California Bond Fund and .47% for the California Money
Market Fund.
PORTFOLIO MANAGERS
The following individuals are primarily responsible for
managing the Funds.
California Bond Fund
Robert R. Pariseau, Assistant Vice President of Fixed
Income Investments since June of 1995, has managed the
Fund since May 1995. He has eleven years investment
management experience working for IMCO, where he has held
various positions in Fixed Income and Equity Investments.
Mr. Pariseau earned the Chartered Financial Analyst (CFA)
designation in 1987 and is a member of the Association
for Investment Management and Research (AIMR), San
Antonio Financial Analysts Society, Inc. (SAFAS), and the
National Federation of Municipal Analysts (NFMA). He
holds an MBA from Lindenwood College, Missouri and a BS
from the U.S. Naval Academy, Annapolis, Maryland.
California Money Market Fund
Pamela K. Bledsoe, Executive Director of Fixed Income
Investments since June of 1995, has managed the Fund
since May 1995. Ms. Bledsoe has seven years investment
management experience and has worked for IMCO since July 1991
in Fixed Income Research. From October 1986 to August 1989 she
was a Financial Analyst at Schenley Industries, Inc., Dallas,
Texas. Ms. Bledsoe earned the CFA designation in 1992 and is
a member of the AIMR and SAFAS. Ms. Bledsoe holds an MBA from
Texas Christian University and a BS from Louisiana Tech University.
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 Funds. Ten such Funds
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 Funds 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.
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 LLP
AUDITORS 112 East Pecan, Suite 2400, San Antonio, Texas 78205.
TELEPHONE ASSISTANCE
(Call toll free - Central Time)
Monday-Friday 8:00 a.m. to 8:00 p.m.
Saturday: 8:30 a.m. to 5:00 p.m.
For further information on mutual funds:
1-800-531-8181
In San Antonio 210-456-7211
For account servicing, exchanges or redemptions:
1-800-531-8448
In San Antonio 210-456-7202
RECORDED 24 HOUR SERVICE
MUTUAL FUND PRICE QUOTES
(From any phone)
1-800-531-8066
In San Antonio 210-498-8066
MUTUAL FUND TOUCHLINE(registered trademark)
(From Touchtone phones only)
For account balance, last transaction or fund prices:
1-800-531-8777
In San Antonio 210-498-8777
USAA NEW YORK FUNDS
August 1, 1995 PROSPECTUS
As Supplemented December 1, 1995
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 no more than 90
days. The Fund will endeavor to maintain a constant net
asset value per share of $1.00. Page 9.
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 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.
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 (SAI) dated August 1, 1995, 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 SAI 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
Description of Shares 24
Service Providers 25
Telephone Assistance Numbers 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 Fees, net of reimbursements .25% .11%
12b-1 Fees None None
Other Expenses, net of reimbursements
Transfer Agent Fees** .10% .10%
Custodian Fees .07% .14%
All Other Expenses .08% .15%
---- ----
Total Other Expenses .25% .39%
---- ----
Total Fund 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 - Bank Wire Redemption.
** The Funds pay USAA Shareholder Account Services an
annual fixed fee per account for its services. See
Transfer Agent in the SAI, page 21.
During the year, the Manager voluntarily limited
each Fund's annual expenses to .50% of its ANA and
reimbursed the Funds for all expenses in excess of the
limitation. The Management Fees, Other Expenses, and
Total Fund Operating Expenses reflect all such expense
reimbursements by the Manager. Absent such
reimbursements, the amount of the Management Fees, Other
Expenses, and Total Fund Operating Expenses as a
percentage of ANA for each of the Funds would have been
as follows: New York Bond Fund, .46%, .25%, and .71%; and
New York Money Market Fund, .46%, .39%, and .85%. The
Manager has voluntarily agreed to continue to limit each
Fund's annual expenses until August 1, 1996, 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 five-year period
ended March 31, 1995, has been derived from financial
statements audited by KPMG Peat Marwick LLP. 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
YEAR OF PERIOD INCOME GAIN (LOSS) INCOME CAPITAL GAINS
ENDED ($) ($) ($) ($) ($)
NEW YORK BOND FUND:
March 31,
1991* 10.00 .32 .50 (.32) -
1992 10.50 .69 .44 (.69) -
1993 10.94 .65 .80 (.65) (.12)
1994 11.62 .62 (.50) (.62) (.29)
1995 10.83 .62 (.06) (.62) -
NEW YORK MONEY MARKET FUND:
March 31,
1991* 1.00 .02 - (.02) -
1992 1.00 .04 - (.04) -
1993 1.00 .03 - (.03) -
1994 1.00 .02 - (.02) -
1995 1.00 .03 - (.03) -
FINANCIAL HIGHLIGHTS cont.
RATIO OF NET
NET ASSET RATIO OF INVESTMENT
VALUE AT NET ASSETS EXPENSES INCOME
END TOTAL AT END TO AVERAGE TO AVERAGE PORTFOLIO
OF PERIOD RETURN OF PERIOD NET ASSETS NET ASSETS TURNOVER
($) (%)** ($000) (%) (%) (%)
New York Bond Fund
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
10.77 5.42 50,507 .50(b) 5.83(b) 142.19
New York Money Market Fund
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) -
1.00 2.76 27,525 .50(b) 2.74(b) -
- --------------
(a) Annualized. The ratio is not necessarily indicative of 12 months
of 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 EXPENSES RATIO OF NET INVESTMENT
TO AVERAGE INCOME TO AVERAGE
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
1995 .71 5.62
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
1995 .85 2.39
- --------------
* Funds commenced operations October 15, 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 to the SAI. 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 SAI.
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 SAI for illustrations of this yield.
USAA FAMILY OF NO-LOAD MUTUAL FUNDS
The USAA Family of No-Load Mutual Funds includes a
variety of Funds, each with different objectives and
policies. In combination, these Funds are designed to
provide investors with the opportunity to formulate their
own investment program. You may exchange any shares you
hold in any one USAA Fund for shares in any other USAA
Fund. For more complete information about the Funds 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
Emerging Markets 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.
This decision includes 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 Funds 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 Ratings Group
(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 to the SAI.
The Fund's average portfolio maturity is not
restricted, but is expected to be greater than ten years.
In determining a security's maturity for purposes of
calculating the Fund's average maturity, estimates of the
expected time for its principal to be paid may be used.
This can be substantially shorter than its stated final
maturity. For a discussion of the method of calculating
the average weighted maturity of the Fund's portfolio,
see Investment Policies in the SAI. 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, including
"prerefunded" and "escrowed to maturity" tax-exempt
securities;
(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, S&P, Fitch, Duff &
Phelps Inc., Thompson BankWatch, Inc., and IBCA Inc. For
a description of tax- exempt securities and their
ratings, see Appendix A to the SAI.
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 SAI.
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; 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 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 Funds do not earn interest on the
securities until settlement, and the market value of the
securities may fluctuate between purchase and settlement.
Such securities can be sold before settlement date.
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 - 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 33 1/3% 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 for temporary or
emergency purposes in an amount not exceeding 33 1/3% of
its total assets (including the amount borrowed) less
liabilities (other than borrowings).
b. Neither Fund may pledge or mortgage more than 10% of
its total assets.
c. 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.
d. 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 at times 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 SAI.
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 [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
Generally, when you make a purchase, your purchase price
will be the net asset value (NAV) per share next
determined after the Fund receives your request in proper form.
If a Fund receives your request prior to the close of the
New York Stock Exchange on a day on which the Exchange is
open, your purchase price will be the NAV per share
determined for that day. If a Fund receives your request
after the time at which the NAV per share 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 - (Except USAA
employee payroll deduction).
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
USAA Employee
Payroll Deduction
The periodic purchase of shares through payroll deduction
($25 minimum) by any employee of USAA, its subsidiaries
or affiliated companies.
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 and USAA employee payroll deduction).
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 per
share 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 per share 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. Payment for
redemption of shares purchased by check or electronic
funds transfer will not be disbursed until the purchase
check or electronic funds trans-fer has cleared, which
could take up to 15 days from the purchase date. If you
are considering redeeming shares soon after purchase, you
should 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, 210-456-7202.
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 for 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 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 ($25 for wires to a
foreign bank) and is subject to change at any time. The
fee is paid to State Street Bank and Trust Company (SSB)
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 (CWP), 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 SSB'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 SSB
each reserve the right to change or suspend the
checkwriting privilege upon 30 days' written notice to
participating shareholders. See the SAI 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 SAI.
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 SAI 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 Funds have 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 SAI.
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 after each transaction in your
New York Bond Fund account except:
i) a reinvested dividend;
ii) a payment you make after January 31, 1996 under the
InvesTronic(registered trademark), Direct Purchase Service,
Automatic Purchase Plan, or Directed Dividends investment
plans; or
iii) a redemption you make after January 31, 1996 under the
Systematic Withdrawal Plan.
In the New York Money Market Fund, you will receive a
confirmation for purchases or redemptions by check and exchanges.
If your Money Market Fund account had activity other than
reinvested dividends, such as wire purchases or redemptions or
purchases under the InvesTronic(registered trademark), Direct
Purchase Service, Automatic Purchase Plan or Directed Dividends
investment plans, you will receive a monthly statement that will
reflect quarter-to-date account activity.
At the end of each quarter you will receive a
consolidated statement for all of your mutual fund
accounts, regardless of account activity. The fourth
quarter consolidated statement will reflect all account
activity for the prior tax year. 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 SAI, 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 may buy and sell Fund shares at the NAV per share
without a sales charge.
HOW
The NAV per share is calculated by adding the value of
all securities and other assets in a Fund, deducting
liabilities, and dividing by the number of shares 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, and all other
assets, 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 SAI.
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 at least annually. 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 are 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 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 on
indebtedness incurred 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. Potential investors
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
(IMCO), 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 approximately
$27 billion in total assets under management. The
Manager's mailing address is 9800 Fredericksburg Rd., San
Antonio, TX 78288.
Officers and employees of the Manager
are permitted to engage in personal securities
transactions subject to restrictions and procedures set
forth in the Joint Code of Ethics adopted by the Company
and the Manager. Such restrictions and procedures
include substantially all of the recommendations of the
Advisory Group of the Investment Company Institute and
comply with Securities and Exchange Commission rules and
regulations.
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, 1995, the fees paid to the Manager, net of the
reimbursements, were .25% of ANA for the New York Bond
Fund and .11% of ANA for the New York Money Market Fund.
OPERATING EXPENSES
For the fiscal year ended March 31, 1995, the Manager
limited each Fund's total annualized operating expenses
to .50% of its ANA. The Manager reimbursed the New York
Bond Fund $110,439 and the New York Money Market Fund
$94,923 for expenses in excess of the limitation. The
Manager has voluntarily agreed to continue to limit each
Fund's annual expenses until August 1, 1996, to .50% of
its ANA and will reimburse the Funds for all expenses in
excess of the limitation.
PORTFOLIO MANAGERS
The following individuals are primarily responsible for
managing the Funds.
New York Bond Fund
Kenneth E. Willmann, Vice President of Fixed Income
Investments since December of 1986, has managed the Fund
since its inception in March 1982. He has 21 years
investment management experience and has worked for IMCO
18 years. Mr. Willmann earned the Chartered Financial
Analyst (CFA) designation in 1978 and is a member of the
Association for Investment Management and Research
(AIMR), San Antonio Financial Analysts Society, Inc.
(SAFAS), and the National Federation of Municipal
Analysts (NFMA). He holds an MBA and a BA from the
University of Texas.
New York Money Market Fund
Pamela K. Bledsoe, Executive Director of Fixed Income
Investments since June of 1995, has managed the Fund
since May 1995. Ms. Bledsoe has seven years investment
management experience and has worked for IMCO since July
1991 in Fixed Income Research. From October 1986 to August
1989 she was a Financial Analyst at Schenley Industries, Inc.,
Dallas, Texas. Ms. Bledsoe earned the CFA designation in 1992
and is a member of the AIMR and SAFAS. Ms. Bledsoe holds an
MBA from Texas Christian University and a BS from Louisiana
Tech University.
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 Funds. Ten such Funds
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 Funds 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.
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 LLP
AUDITORS 112 East Pecan, Suite 2400, San Antonio, Texas 78205.
TELEPHONE ASSISTANCE
(Call toll free - Central Time)
Monday-Friday 8:00 a.m. to 8:00 p.m.
Saturday: 8:30 a.m. to 5:00 p.m.
For further information on mutual funds:
1-800-531-8181
In San Antonio 210-456-7211
For account servicing, exchanges or redemptions:
1-800-531-8448
In San Antonio 210-456-7202
RECORDED 24 HOUR SERVICE
MUTUAL FUND PRICE QUOTES
(From any phone)
1-800-531-8066
In San Antonio 210-498-8066
MUTUAL FUND TOUCHLINE(registered trademark)
(From Touchtone phones only)
For account balance, last transaction or fund prices:
1-800-531-8777
In San Antonio 210-498-8777
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USAA VIRGINIA FUNDS
August 1, 1995 PROSPECTUS
As Supplemented December 1, 1995
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 no more than 90
days. The Fund will endeavor to maintain a constant net
asset value per share of $1.00. Page 9.
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 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.
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 (SAI) dated August 1, 1995, 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 SAI 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
Description of Shares 23
Service Providers 24
Telephone Assistance Numbers 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 Fees, net of reimbursements .35% .29%
12b-1 Fees None None
Other Expenses, net of reimbursements
Transfer Agent Fees** .09% .10%
Custodian Fees .03% .05%
All Other Expenses .03% .06%
---- ----
Total Other Expenses .15% .21%
---- ----
Total Fund 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 -
Bank Wire Redemption.
** The Funds pay USAA Shareholder Account Services an annual fixed fee
per account for its services. See Transfer Agent in the SAI, page 19.
During the year, the Manager voluntarily limited
each Fund's annual expenses to .50% of its ANA and
reimbursed the Funds for all expenses in excess of the
limitation. The Management Fees, Other Expenses, and
Total Fund Operating Expenses reflect all such expense
reimbursements by the Manager. Absent such
reimbursements, the amount of the Virginia Money Market
Fund's Management Fees, Other Expenses, and Total Fund
Operating Expenses, as a percentage of its ANA, would
have been .35%, .21%, and .56%. Total Fund Operating
Expenses for the Virginia Bond Fund did not exceed the
limitation, therefore no reimbursements were required.
The Manager has voluntarily agreed to continue to limit
each Fund's annual expenses until August 1, 1996, 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 $ 28 $ 63
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 five-year period
ended March 31, 1995, has been derived from financial
statements audited by KPMG Peat Marwick LLP. 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 ($) ($) ($) ($) ($)
VIRGINIA BOND FUND:
March 31,
1991* 10.00 .32 .28 (.32) -
1992 10.28 .67 .29 (.67) -
1993 10.57 .64 .65 (.64) (.06)
1994 11.16 .62 (.30) (.62) (.15)
1995 10.71 .62 .05 (.62) -
VIRGINIA MONEY MARKET FUND:
March 31,
1991* 1.00 .02 - (.02) -
1992 1.00 .04 - (.04) -
1993 1.00 .03 - (.03) -
1994 1.00 .02 - (.02) -
1995 1.00 .03 - (.03) -
FINANCIAL HIGHLIGHTS cont.
RATIO OF NET
NET ASSET RATIO OF INVESTMENT
VALUE AT NET ASSETS EXPENSES INCOME
END TOTAL AT END TO AVERAGE TO AVERAGE PORTFOLIO
OF PERIOD RETURN OF PERIOD NET ASSETS NET ASSETS TURNOVER
($) (%)** ($000) (%) (%) (%)
Virginia Bond Fund
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
10.76 6.61 238,920 .50 5.95 68.53
Virginia Money Market Fund
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) -
1.00 2.91 98,049 .50(b) 2.88(b) -
- --------------
(a) Annualized. The ratio is not necessarily indicative of 12 months
of 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
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
1995 .56 2.82
- --------------
* Funds commenced operations October 15, 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 to the SAI. 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 SAI.
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 SAI for illustrations of this yield.
USAA FAMILY OF NO-LOAD MUTUAL FUNDS
The USAA Family of No-Load Mutual Funds includes a
variety of Funds, each with different objectives and
policies. In combination, these Funds are designed to
provide investors with the opportunity to formulate their
own investment program. You may exchange any shares you
hold in any one USAA Fund for shares in any other USAA
Fund. For more complete information about the Funds 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
Emerging Markets 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.
This decision includes 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 Funds 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 Ratings Group
(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 to the SAI.
The Fund's average portfolio maturity is not
restricted, but is expected to be greater than ten years.
In determining a security's maturity for purposes of
calculating the Fund's average maturity, estimates of the
expected time for its principal to be paid may be used.
This can be substantially shorter than its stated final
maturity. For a discussion of the method of calculating
the average weighted maturity of the Fund's portfolio,
see Investment Policies in the SAI. 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, including
"prerefunded" and "escrowed to maturity" tax-exempt
securities;
(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, S&P, Fitch, Duff &
Phelps Inc., Thompson BankWatch, Inc., and IBCA Inc. For
a description of tax-exempt securities and their
ratings, see Appendix A to the SAI.
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 SAI.
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 Funds do not earn interest on the
securities until settlement, and the market value of the
securities may fluctuate between purchase and settlement.
Such securities can be sold before settlement date.
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 - 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 33 1/3% 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 for temporary or
emergency purposes in an amount not exceeding 33 1/3% of
its total assets (including the amount borrowed) less
liabilities (other than borrowings).
b. Neither Fund may pledge or mortgage more than 10% of
its total assets.
c. 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.
d. 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,
economic, 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 SAI.
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 [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
Generally, when you make a purchase, your purchase price
will be the net asset value (NAV) per share next
determined after the Fund receives your request in proper form.
If a Fund receives your request prior to the close of the
New York Stock Exchange on a day on which the Exchange is
open, your purchase price will be the NAV per share
determined for that day. If a Fund receives your request
after the time at which the NAV per share 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 - (Except USAA
employee payroll deduction).
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
USAA Employee
Payroll Deduction
The periodic purchase of shares through payroll deduction
($25 minimum) by any employee of USAA, its subsidiaries
or affiliated companies.
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 and USAA employee payroll deduction).
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 per
share 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 per share
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. Payment for
redemption of shares purchased by check or electronic
funds transfer will not be disbursed until the purchase
check or electronic funds trans-fer has cleared, which
could take up to 15 days from the purchase date. If you
are considering redeeming shares soon after purchase, you
should 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, 210-456-7202.
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 for 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 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 ($25 for wires to a
foreign bank) and is subject to change at any time. The
fee is paid to State Street Bank and Trust Company (SSB)
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 (CWP), 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 SSB'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 SSB
each reserve the right to change or suspend the
checkwriting privilege upon 30 days' written notice to
participating shareholders. See the SAI 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 SAI.
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 SAI 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 Funds have 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 SAI.
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 after each transaction in your
Virginia Bond Fund account except:
i) a reinvested dividend;
ii) a payment you make after January 31, 1996 under the
InvesTronic(registered trademark), Direct Purchase Service,
Automatic Purchase Plan, or Directed Dividends investment
plans; or
iii) a redemption you make after January 31, 1996 under the
Systematic Withdrawal Plan.
In the Virginia Money Market Fund, you will receive a
confirmation for purchases or redemptions by check and exchanges.
If your Money Market Fund account had activity other than
reinvested dividends, such as wire purchases or redemptions or
purchases under the InvesTronic(registered trademark), Direct
Purchase Service, Automatic Purchase Plan or Directed Dividends
investment plans, you will receive a monthly statement that will
reflect quarter-to-date account activity.
At the end of each quarter you will receive a
consolidated statement for all of your mutual fund
accounts, regardless of account activity. The fourth
quarter consolidated statement will reflect all account
activity for the prior tax year. 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 SAI, 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 may buy and sell Fund shares at the NAV per share
without a sales charge.
HOW
The NAV per share is calculated by adding the value of
all securities and other assets in a Fund, deducting
liabilities, and dividing by the number of shares 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,
and all other assets, 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 SAI.
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 at least annually. 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 are 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 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
(IMCO), 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 approximately
$27 billion in total assets under management. The
Manager's mailing address is 9800 Fredericksburg Rd., San
Antonio, TX 78288.
Officers and employees of the Manager are permitted
to engage in personal securities transactions subject to
restrictions and procedures set forth in the Joint Code
of Ethics adopted by the Company and the Manager. Such
restrictions and procedures include substantially all of
the recommendations of the Advisory Group of the
Investment Company Institute and comply with Securities
and Exchange Commission rules and regulations.
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, 1995, the fees paid to the Manager,
net of reimbursements, were .35% of ANA for the Virginia
Bond Fund and .29% of ANA for the Virginia Money Market Fund.
OPERATING EXPENSES
For the fiscal year ended March 31, 1995, the Manager
limited each Fund's total annualized operating expenses
to .50% of its ANA. The Manager reimbursed the Virginia
Money Market Fund $58,402 for expenses in excess of the
limitation. Total operating expenses for the Virginia
Bond Fund were .50% of its ANA, however no reimbursements
were required. The Manager has voluntarily agreed to
continue to limit each Fund's annual expenses until
August 1, 1996, to .50% of its ANA and will reimburse the
Funds for all expenses in excess of the limitation.
PORTFOLIO MANAGERS
The following individuals are primarily responsible for
managing the Funds.
Virginia Bond Fund
Robert R. Pariseau, Assistant Vice President of Fixed
Income Investments since June of 1995, has managed the
Fund since May 1995. He has eleven years investment
management experience working for IMCO, where he has held
various positions in Fixed Income and Equity Investments.
Mr. Pariseau earned the Chartered Financial Analyst (CFA)
designation in 1987 and is a member of the Association
for Investment Management and Research (AIMR), San
Antonio Financial Analysts Society, Inc. (SAFAS), and the
National Federation of Municipal Analysts (NFMA). He
holds an MBA from Lindenwood College, Missouri and a BS
from the U.S. Naval Academy, Annapolis, Maryland.
Virginia Money Market Fund
Pamela K. Bledsoe, Executive Director of Fixed Income
Investments since June of 1995, has managed the Fund
since May 1995. Ms. Bledsoe has seven years investment
management experience and has worked for IMCO since July 1991
in Fixed Income Research. From October 1986 to August 1989 she
was a Financial Analyst at Schenley Industries, Inc., Dallas,
Texas. Ms. Bledsoe earned the CFA designation in 1992 and is
a member of the AIMR and SAFAS. Ms. Bledsoe holds an MBA from
Texas Christian University and a BS from Louisiana Tech University.
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 Funds. Ten such Funds
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 Funds 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.
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 LLP
AUDITORS 112 East Pecan, Suite 2400, San Antonio, Texas 78205.
TELEPHONE ASSISTANCE
(Call toll free - Central Time)
Monday-Friday 8:00 a.m. to 8:00 p.m.
Saturday: 8:30 a.m. to 5:00 p.m.
For further information on mutual funds:
1-800-531-8181
In San Antonio 210-456-7211
For account servicing, exchanges or redemptions:
1-800-531-8448
In San Antonio 210-456-7202
RECORDED 24 HOUR SERVICE
MUTUAL FUND PRICE QUOTES
(From any phone)
1-800-531-8066
In San Antonio 210-498-8066
MUTUAL FUND TOUCHLINE(registered trademark)
(From Touchtone phones only)
For account balance, last transaction or fund prices:
1-800-531-8777
In San Antonio 210-498-8777
(Logo
of the USAA STATEMENT OF
USAA TAX EXEMPT ADDITIONAL INFORMATION
Eagle FUND, INC. August 1, 1995
is here) As Supplemented December 1, 1995
- ----------------------------------------------------------------------
USAA TAX EXEMPT FUND, INC.
USAA TAX EXEMPT FUND, INC. (the Company) is a registered
investment company offering shares of ten no-load mutual funds,
four of which are described in this Statement of Additional
Information (SAI): the Long-Term Fund, Intermediate-Term Fund,
Short-Term Fund, and Tax Exempt Money Market Fund (collectively,
the Funds). Each Fund is classified as a diversified investment
company and has a common investment objective of providing
investors with interest income that is exempt from federal income
tax. The Tax Exempt Money Market Fund has a further objective of
preserving capital and maintaining liquidity.
A Prospectus for the Funds dated August 1, 1995, which provides
the basic information you should know before investing in the
Funds, may be obtained without charge upon written request to
USAA Tax Exempt Fund, Inc., 9800 Fredericksburg Rd., San Antonio,
TX 78288, or by calling toll free 1-800-531-8181. This SAI is
not a Prospectus and contains information in addition to and more
detailed than that set forth in the Prospectus. It is intended
to provide you with additional information regarding the
activities and operations of the Company and the Funds, and
should be read in conjunction with the Prospectus.
- ----------------------------------------------------------------------
TABLE OF CONTENTS
Page
2 Valuation of Securities
2 Additional Information Regarding Redemption of Shares
3 Investment Plans
4 Investment Policies
5 Investment Restrictions
6 Portfolio Transactions
7 Further Description of Shares
8 Tax Considerations
10 Directors and Officers of the Company
13 The Company's Manager
14 General Information
14 Calculation of Performance Data
16 Appendix A - Tax-Exempt Securities and Their Ratings
19 Appendix B - Comparison of Portfolio Performance
22 Appendix C - Taxable Equivalent Yield Table
23 Appendix D - Dollar-Cost Averaging
VALUATION OF SECURITIES
Shares of each Fund are offered on a continuing best efforts
basis through USAA Investment Management Company (IMCO or the
Manager). The offering price for shares of each Fund is equal to
the current net asset value per share. The net asset value per
share of each Fund is calculated by adding the value of all its
portfolio securities and other assets, deducting its liabilities,
and dividing by the number of shares outstanding.
A Fund's net asset value per share is calculated each day,
Monday through Friday, except days on which the New York Stock
Exchange (NYSE) is closed. The NYSE is currently scheduled to be
closed on New Year's Day, Presidents' Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving, and Christmas,
and on the preceding Friday or subsequent Monday when one of
these holidays falls on a Saturday or Sunday, respectively.
The investments of the Long-Term, Intermediate-Term, and
Short-Term Funds are valued each business day by a pricing
service (the Service) approved by the Company's Board of
Directors. The Service uses the mean between quoted bid and
asked prices or the last sale price to price securities when, in
the Service's judgement, these prices are readily available and
are representative of the securities' market values. For many
securities, such prices are not readily available. The Service
generally prices these securities based on methods which include
consideration of yields or prices of tax-exempt securities of
comparable quality, coupon, maturity and type, indications as to
values from dealers in securities, and general market conditions.
Securities purchased with maturities of 60 days or less are
stated at amortized cost which approximates market value.
Repurchase agreements are valued at cost. Securities which
cannot be valued by the Service, and all other assets, are valued
in good faith at fair value using methods determined by the
Manager under the general supervision of the Board of Directors.
The value of the Tax Exempt Money Market Fund's securities
is stated at amortized cost which approximates market value.
This involves valuing a security at its cost and thereafter
assuming a constant amortization to maturity of any discount or
premium, regardless of the impact of fluctuating interest rates.
While this method provides certainty in valuation, it may result
in periods during which the value of an instrument, as determined
by amortized cost, is higher or lower than the price the Fund
would receive upon the sale of the instrument.
The valuation of the Tax Exempt Money Market Fund's
portfolio instruments based upon their amortized cost is subject
to the Fund's adherence to certain procedures and conditions.
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 Manager will invest only in securities
that have been determined to present minimal credit risk and that
satisfy the quality and diversification requirements of
applicable rules and regulations of the Securities and Exchange Commission.
The Board of Directors has established procedures designed
to stabilize the Tax Exempt Money Market Fund's price per share,
as computed for the purpose of sales and redemptions, at $1.00.
There can be no assurance, however, that the Fund will at all
times be able to maintain a constant $1.00 net asset value per
share. Such procedures include review of the Fund's holdings at
such intervals as is deemed appropriate to determine whether the
Fund's net asset value calculated by using available market
quotations deviates from $1.00 per share and, if so, whether such
deviation may result in material dilution or is otherwise unfair
to existing shareholders. In the event that it is determined
that such a deviation exists, the Board of Directors will take
such corrective action as it regards as necessary and
appropriate. Such action may include selling portfolio
instruments prior to maturity to realize capital gains or losses
or to shorten average portfolio maturity, withholding dividends,
or establishing a net asset value per share by using available
market quotations.
ADDITIONAL INFORMATION REGARDING REDEMPTION OF SHARES
The value of a shareholder's investment at the time of redemption
may be more or less than the cost at purchase, depending on the
value of the securities held in each Fund's portfolio. Requests
for redemption which are subject to any special conditions, or
which specify an effective date other than as provided herein,
cannot be accepted. A gain or loss for tax purposes may be
realized on the sale of shares, depending upon the price when redeemed.
The Board of Directors may cause the redemption of an
account with a balance of less than 50 shares provided (1) the
value of the account has been reduced, for reasons other than
market action, below the minimum initial investment in such Fund
at the time of the establishment of the account, (2) the account
has remained below the minimum level for six months, and (3) 60
days' prior written notice of the proposed redemption has been sent to
the shareholder. Shares will be redeemed at the net asset value on the
date fixed for redemption by the Board of Directors. Prompt payment
will be made by mail to the last known address of the shareholder.
The Company reserves the right to suspend the right of
redemption or postpone the date of payment (1) for any periods
during which the NYSE is closed, (2) when trading in the markets
the Company normally utilizes is restricted, or an emergency
exists as determined by the Securities and Exchange Commission
(SEC) so that disposal of the Company's investments or
determination of its net asset value is not reasonably
practicable, or (3) for such other periods as the SEC by order
may permit for protection of the Company's shareholders.
For the mutual protection of the investor and the Funds, a
guarantee of signature may be required by the Company. If
required, each signature on the account registration must be
guaranteed. Signature guarantees are acceptable from FDIC member
banks, brokers, dealers, municipal securities dealers, municipal
securities brokers, government securities dealers, government
securities brokers, credit unions, national securities exchanges,
registered securities associations, clearing agencies and savings
associations. A signature guarantee for active duty military
personnel stationed abroad may be provided by an officer of the
United States Embassy or Consulate, a staff officer of the Judge
Advocate General, or an individual's commanding officer.
Redemption by Check
Shareholders in the Short-Term Fund or Tax Exempt Money Market
Fund may request that checks be issued for their accounts. A
one-time $5 checkwriting fee is charged to each account by the
Transfer Agent for the use of the privilege. Checks must be
written in the amount of at least $250.
Checks issued to shareholders of either Fund will be sent
only to the person in whose name the account is registered and
only to the address of record. The checks must be manually
signed by the registered owner(s) exactly as the account is
registered. For joint accounts the signature of either or both
joint owners will be required on the check, according to the
election made on the signature card. Dividends will continue to
be earned by the shareholder until the shares are redeemed by the
presentation of a check.
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. If an investor's account is not adequate to cover the
amount of a check, the check will be returned unpaid. A check
drawn on an account in the Short-Term Fund may be returned for
insufficient funds if the net asset value per share of that Fund
declines over the time between the date the check was written and
the date it was presented for payment. Because the value of an
account in either the Short-Term Fund or Tax Exempt Money Market
Fund changes as dividends are accrued on a daily basis, checks
may not be used to close an account.
After clearance, checks paid during the month will be
returned to the shareholder by separate mail. The checkwriting
privilege will be subject to the customary rules and regulations
of State Street Bank and Trust Company (State Street Bank or the
Custodian) governing checking accounts. Other than the initial
one-time fee, there is no charge to the shareholder for the use
of the checks or for subsequent reorders of checks.
The Company reserves the right to assess a processing fee
against a shareholder's account for any redemption check not
honored by a clearing or paying agent. Currently, this fee is
$15 and is subject to change at any time. Some examples of such
dishonor are improper endorsement, checks written for an amount
less than the minimum check amount, and insufficient or
uncollectible funds.
The Company, the Transfer Agent, and State Street Bank each
reserve the right to change or suspend the checkwriting privilege
upon 30 days' written notice to participating shareholders.
INVESTMENT PLANS
The following investment plans are made available by the Company
to shareholders of all the Funds. 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. You may terminate your participation
in a plan at any time. Please call the Manager for details and
necessary forms or applications.
Systematic Purchase of Shares
InvesTronic (registered trademark) - the periodic purchase of
shares through electronic funds transfer from a checking or
savings account. By completing an application, which may be
obtained from the Manager, you invest a specific amount each
month ($50 minimum) in any of your accounts.
Investment Plans, cont.
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. There is a minimum investment required
for this program of $5,000, with a monthly transaction minimum of
$50. The minimum initial investment requirement for the other
USAA mutual fund must be satisfied before the first transfer.
Buy/Sell Service - the intermittent purchase or redemption of
shares through electronic funds transfer to or from a checking or
savings account.
Participation in these systematic purchase plans will permit
a shareholder to engage in dollar-cost averaging. For additional
information concerning the benefits of dollar-cost averaging, see
Appendix D.
Systematic Withdrawal Plan
If a shareholder in a single investment account (accounts in
different Funds cannot be aggregated for this purpose) owns
shares having a net asset value of $5,000 or more, the
shareholder may request that enough shares to produce a fixed
amount of money be liquidated from the account monthly or
quarterly. The amount of each withdrawal must be at least $50.
Using the electronic funds transfer service, shareholders may
choose to have withdrawals electronically deposited at their bank
or other financial institution. They may also elect to have
checks mailed to a designated address.
Such a plan may be initiated by depositing shares worth at
least $5,000 with the Transfer Agent and by completing a
Systematic Withdrawal Plan application, which may be requested
from the Manager. The shareholder may terminate participation in
the plan at any time. There is no charge to the shareholder for
withdrawals under the Systematic Withdrawal Plan. The Company
will not bear any expenses in administering the plan beyond the
regular transfer agent and custodian costs of issuing and
redeeming shares. Any additional expenses of administering the
plan will be borne by the Manager.
Withdrawals will be made by redeeming full and fractional
shares on the date selected by the shareholder at the time the
plan is established. Withdrawal payments made under this plan
may exceed dividends and distributions and, to this extent, will
involve the use of principal and could reduce the dollar value of
a shareholder's investment and eventually exhaust the account.
Reinvesting dividends and distributions helps replenish the
account. Because share values and net investment income can
fluctuate, shareholders should not expect withdrawals to be
offset by rising income or share value gains.
Each redemption of shares may result in a gain or loss,
which must be reported on the shareholder's income tax return.
Therefore, a shareholder should keep an accurate record of any
gain or loss on each withdrawal.
INVESTMENT POLICIES
The section captioned Investment Objectives and Policies in the
Prospectus describes the fundamental investment objectives and
the investment policies applicable to each Fund and the following
is provided as additional information.
Calculation of Portfolio Weighted Average Maturities
Weighted average maturity is derived by multiplying the value of
each investment by the number of days remaining to its maturity,
adding these calculations, and then dividing the total by the
value of a Fund's portfolio. An obligation's maturity is
typically determined on a stated final maturity basis, although
there are some exceptions to this rule.
With respect to obligations held by the Long-Term Fund, the
Intermediate-Term Fund, and the Short-Term Fund, if it is
probable that the issuer of an instrument will take advantage of
a maturity-shortening device, such as a call, refunding, or
redemption provision, the date on which the instrument will
probably be called, refunded, or redeemed may be considered to be
its maturity date. Also, the maturities of securities subject to
sinking fund arrangements are determined on a weighted average
life basis, which is the average time for principal to be repaid.
The weighted average life of these securities is likely to be
substantially shorter than their stated final maturity. In
addition, for purposes of these Funds' investment policies, an
instrument will be treated as having a maturity earlier than its
stated maturity date if the instrument has technical features
such as puts or demand features which, in the judgment of the
Manager, will result in the instrument being valued in the market
as though it has the earlier maturity.
The Tax Exempt Money Market Fund will determine the maturity
of an obligation in its portfolio in accordance with Rule 2a-7
under the Investment Company Act of 1940, as amended (1940 Act).
Lending of Securities
Each Fund may lend its securities. A lending policy may be
authorized by the Company's Directors and implemented by the
Manager, but securities may be loaned only to qualified broker-
dealers or institutional investors that agree to maintain cash
collateral with the Company equal at all times to at least 100%
of the value of the loaned securities. The Directors will
establish procedures and monitor the creditworthiness of any
institution or broker-dealer during such time as any loan is
outstanding. The Company will continue to receive interest on
the loaned securities and will invest the cash collateral in
readily marketable short-term obligations of high quality,
thereby earning additional interest. Interest on loaned tax-
exempt securities received by the borrower and paid to the
Company will not be exempt from federal income taxes in the hands
of the Company.
No loan of securities will be made if, as a result, the
aggregate of such loans would exceed 33 1/3% of the value of a Fund's
total assets. The Company may terminate such loans at any time.
Repurchase Agreements
Each Fund may invest up to 5% of its total assets in repurchase
agreements. A repurchase agreement is a transaction in which a
security is purchased with a simultaneous commitment to sell the
security back to the seller (a commercial bank or recognized
securities dealer) at an agreed upon price on an agreed upon
date, usually not more than 7 days from the date of purchase.
The resale price reflects the purchase price plus an agreed upon
market rate of interest which is unrelated to the coupon rate or
maturity of the purchased security. A repurchase agreement
involves the obligation of the seller to pay the agreed upon
price, which obligation is in effect secured by the value of the
underlying security. In these transactions, the securities
purchased by a Fund will have a total value equal to or in excess
of the amount of the repurchase obligation and will be held by
the Funds' custodian until repurchased. If the seller defaults
and the value of the underlying security declines, a Fund may
incur a loss and may incur expenses in selling the collateral.
If the seller seeks relief under the bankruptcy laws, the
disposition of the collateral may be delayed or limited. Any
investments in repurchase agreements will give rise to income
which will not qualify as tax-exempt income when distributed by a Fund.
INVESTMENT RESTRICTIONS
The following investment restrictions have been adopted by the
Company for and are applicable to each Fund. These restrictions
may not be changed for any given Fund without approval by the
lesser of (1) 67% or more of the voting securities present at a
meeting of the Fund if more than 50% of the outstanding voting
securities of the Fund are present or represented by proxy or (2)
more than 50% of the Fund's outstanding voting securities. The
investment restrictions of one Fund may be changed without
affecting those of any other Fund.
Under the restrictions, each Fund may not:
(1) With respect to 75% of its total assets, purchase the securities
of any issuer (except Government Securities, as such term is
defined in the 1940 Act) if, as a result, the Fund would have
more than 5% of the value of its total assets invested in the
securities of such issuer;
(2) Purchase more than 10% of the outstanding voting securities
of any issuer;
(3) Borrow money, except for temporary or emergency purposes in an
amount not exceeding 33 1/3% of its total assets (including the
amount borrowed) less liabilities (other than borrowings);
(4) Pledge, mortgage or hypothecate its assets to any extent
greater than 10% of the value of its total assets;
(5) Purchase or retain securities of any issuer if any officer
or Director of the Company or its Manager owns individually
more than one-half of one percent (1/2%) of the securities
of that issuer, and collectively the officers and Directors
of the Company and Manager together own more than 5% of the
securities of that issuer;
(6) Purchase any securities which would cause more than 25% of
the value of that Fund's total assets at the time of such
purchase to be invested in either (i) the securities of
issuers conducting their principal activities in the same
state, or (ii) the securities the interest upon which is
derived from revenues or projects with similar
characteristics, such as toll road revenue bonds, housing
revenue bonds, electric power project revenue bonds, etc.;
provided that the foregoing limitation does not apply with
respect to investments in United States Treasury Bills,
other obligations issued or guaranteed by the United States
Government, its agencies and instrumentalities, and, in the
case of the Tax Exempt Money Market Fund, certificates of
deposit and banker's acceptances of domestic banks;
Investment Restrictions, cont.
(7) Invest in issuers for the purpose of exercising control of management;
(8) Issue senior securities as defined in the 1940 Act, except
that it may purchase tax-exempt securities on a "when-
issued" basis as permitted by Section 18(f)(2);
(9) Underwrite securities of other issuers, except to the extent that
it may be deemed to act as a statutory underwriter in the distribution
of any restricted securities or not readily marketable securities;
(10) Purchase or sell real estate, but this shall not prevent
investments in tax-exempt securities secured by real estate
or interests therein;
(11) Lend any securities or make any loan if, as a result, more than
33 1/3% of its total assets would be lent to other parties,
except that this limitation does not apply to purchases of debt
securities or to repurchase agreements;
(12) Purchase on margin or sell short;
(13) Purchase or sell commodities or commodities contracts;
(14) Invest its assets in securities of other investment
companies except by purchases in the open market involving
only customary brokers' commissions or as part of a merger,
consolidation, reorganization or purchase of assets approved
by the shareholders; or
(15) Invest in put, call, straddle or spread options or interests in oil,
gas or other mineral exploration or development programs.
Additional Restrictions
The following restrictions are not considered to be fundamental
policies of the Funds. These additional restrictions may be changed
by the Board of Directors of the Company without notice to or
approval by the shareholders.
Each Fund may not:
(1) Invest more than 15% (10% with respect to the Tax Exempt Money
Market Fund) of the value of its net assets in illiquid securities,
including repurchase agreements maturing in more than seven days.
(2) Purchase any security while borrowings representing more than 5%
of the Fund's total assets are outstanding.
PORTFOLIO TRANSACTIONS
The Manager, pursuant to the Advisory Agreement dated July 20,
1990 and subject to the general control of the Company's Board of
Directors, places all orders for the purchase and sale of Fund
securities. Purchases of Fund securities are made either
directly from the issuer or from dealers who deal in tax-exempt
securities. The Manager may sell Fund securities prior to
maturity if circumstances warrant and if it believes such
disposition is advisable. In connection with portfolio
transactions for the Company, the Manager seeks to obtain the
best available net price and most favorable execution for its
orders. The Manager has no agreement or commitment to place
transactions with any broker-dealer and no regular formula is
used to allocate orders to any broker-dealer. However, the
Manager may place security orders with brokers or dealers who
furnish research or other services to the Manager as long as
there is no sacrifice in obtaining the best overall terms
available. Payment for such services would be generated only
through purchase of new issue fixed income securities.
Such research and other services may include, for example:
advice concerning the value of securities, the advisability of
investing in, purchasing, or selling securities, and the
availability of securities or the purchasers or sellers of
securities; analyses and reports concerning issuers, industries,
securities, economic factors and trends, portfolio strategy, and
performance of accounts; and various functions incidental to
effecting securities transactions, such as clearance and
settlement. The Manager continuously reviews the performance of
the broker-dealers with whom it places orders for transactions.
The receipt of research from broker-dealers that execute
transactions on behalf of the Company may be useful to the
Manager in rendering investment management services to other
clients (including affiliates of the Manager), and conversely,
such research provided by broker-dealers who have executed
transaction orders on behalf of other clients may be useful to
the Manager in carrying out its obligations to the Company.
While such research is available to and may be used by the
Manager in providing investment advice to all its clients
(including affiliates of the Manager), not all of such research
may be used by the Manager for the benefit of the Company. Such
research and services will be in addition to and not in lieu of
research and services provided by the Manager, and the expenses
of the Manager will not necessarily be reduced by the receipt of
such supplemental research. See The Company's Manager.
On occasions when the Manager deems the purchase or sale of
a security to be in the best interest of the Company, as well as
the Manager's other clients, the Manager, to the extent permitted
by applicable laws and regulations, may aggregate such securities
to be sold or purchased for the Company with those to be sold or
purchased for other customers in order to obtain best execution
and lower brokerage commissions, if any. In such event,
allocation of the securities so purchased or sold, as well as the
expenses incurred in the transaction, will be made by the Manager
in the manner it considers to be most equitable and consistent
with its fiduciary obligations to all such customers, including
the Company. In some instances, this procedure may impact the
price and size of the position obtainable for the Company.
The tax-exempt security market is typically a "dealer"
market in which investment dealers buy and sell bonds for their
own accounts, rather than for customers, and although the price
may reflect a dealer's mark-up or mark-down, the Company pays no
brokerage commissions as such. In addition, some securities may
be purchased directly from issuers.
Portfolio Turnover Rates
The portfolio turnover rate is computed by dividing the dollar
amount of securities purchased or sold (whichever is smaller) by
the average value of securities owned during the year.
The rate of portfolio turnover will not be a limiting factor
when the Manager deems changes in the Long-Term, Intermediate-
Term, and Short-Term Funds' portfolios appropriate in view of
each Fund's investment objective. For example, securities may be
sold in anticipation of a rise in interest rates (market decline)
or purchased in anticipation of a decline in interest rates
(market rise) and later sold. In addition, a security may be
sold and another security of comparable quality may be purchased
at approximately the same time in order to take advantage of what
the Fund believes to be a temporary disparity in the normal yield
relationship between the two securities. These yield disparities
may occur for reasons not directly related to the investment
quality of particular issues or the general movement of interest
rates, such as changes in the overall demand for or supply of
various types of tax-exempt securities. Moreover, to optimize
yields on the short-term liquidity portion of each Fund, daily
and weekly demand bonds are utilized extensively. There are
transactions in each Fund in this type of security virtually
daily. These transactions, though short-term in nature, are
included in the turnover rate. Increased use of daily and weekly
demand bonds may result in higher portfolio turnover.
For the last two fiscal years the Funds' portfolio turnover
rates were as follows:
FUND 1994 1995
------ ------ ------
Long-Term 109.28% 163.38%*
Intermediate-Term 69.45% 72.00%
Short-Term 101.67% 102.93%
- -------
* The portfolio turnover rate for the Long-Term Fund increased
because of a weak market in the first three quarters of the
fiscal year. This led to significant shareholder
redemptions, which in turn increased the level of securities
transactions. In addition, the Fund was restructured
towards higher coupon bonds during the weak market.
FURTHER DESCRIPTION OF SHARES
The Company is authorized to issue shares in separate classes or
Funds. Ten Funds have been established, four of which are
described in this SAI. Under the Articles of Incorporation, the
Board of Directors is authorized to create new Funds in addition
to those already existing without shareholder approval. The
Company began offering shares of the Long-Term, Intermediate-Term
and Short-Term Funds in March 1982 and began offering shares of
the Tax Exempt Money Market Fund in February 1984.
The assets of each Fund and all income, earnings, profits
and proceeds thereof, subject only to the rights of creditors,
are specifically allocated to such Fund. They constitute the
underlying assets of each Fund, are required to be segregated on
the books of account, and are to be charged with the expenses of
such Fund. Any general expenses of the Company not readily
identifiable as belonging to a particular Fund are allocated on
the basis of the Funds' relative net assets during the fiscal
year or in such other manner as the Board determines to be fair
and equitable. Each share of each Fund represents an equal
proportionate interest in that Fund with every other share and is
entitled to dividends and distributions out of the net income and
capital gains belonging to that Fund when declared by the Board.
On any matter submitted to the shareholders, the holder of
each Fund share is entitled to one vote per share (with
proportionate voting for fractional shares) regardless of the
relative net asset values of the Funds' shares. However, on
matters affecting an individual Fund, a separate vote of the
shareholders of that Fund
Further Description of Shares, cont.
is required. Shareholders of a Fund are not entitled to vote on
any matter which does not affect that Fund but which requires a
separate vote of another Fund. Shares do not have cumulative
voting rights, which means that holders of more than 50% of the
shares voting for the election of Directors can elect 100% of the
Company's Board of Directors, and the holders of less than 50% of
the shares voting for the election of Directors will not be able
to elect any person as a Director.
Shareholders of a particular Fund might have the power to
elect all of the Directors of the Company because that Fund has a
majority of the total outstanding shares of the Company. When
issued, each Fund's shares are fully paid and nonassessable, have
no pre-emptive or subscription rights, and are fully
transferable. There are no conversion rights.
TAX CONSIDERATIONS
Taxation of the Funds
Each Fund intends to qualify as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as
amended (the Code). Accordingly, each Fund will not be liable
for federal income taxes on its taxable net investment income and
net capital gains (capital gains in excess of capital losses)
that are distributed to shareholders, provided that each Fund
distributes at least 90% of its net investment income and net
short-term capital gain for the taxable year.
To qualify as a regulated investment company, a Fund must,
among other things, (1) derive in each taxable year at least 90%
of its gross income from dividends, interest, payments with
respect to securities loans, gains from the sale or other
disposition of stock, securities or foreign currencies, or other
income derived with respect to its business of investing in such
stock, securities or currencies (the 90% test); (2) derive in
each taxable year less than 30% of its gross income from the sale
or other disposition of stock or securities held less than three
months (the 30% test), and (3) satisfy certain diversification
requirements at the close of each quarter of the Fund's taxable
year. Furthermore, to pay tax-exempt interest income dividends,
at least 50% of the value of each Fund's total assets at the
close of each quarter of its taxable year must consist of
obligations the interest of which is exempt from federal income
tax. Each Fund intends to satisfy this requirement.
The Code imposes a nondeductible 4% excise tax on a
regulated investment company that fails to distribute during each
calendar year an amount at least equal to the sum of (1) 98% of
its taxable net investment income for the calendar year, (2) 98%
of its capital gain net income for the twelve month period ending
on October 31, and (3) any prior amounts not distributed. Each
Fund intends to make such distributions as are necessary to avoid
imposition of this excise tax.
For federal income tax purposes, debt securities purchased
by the Funds may be treated as having original issue discount.
Original issue discount represents interest income for federal
income tax purposes and can generally be defined as the excess of
the stated redemption price at maturity of a debt obligation over
the issue price. Original issue discount is treated for federal
income tax purposes as earned by the Funds, whether or not any
income is actually received, and therefore is subject to the
distribution requirements of the Code. However, original issue
discount with respect to tax-exempt obligations generally will be
excluded from the Funds' taxable income, although such discount
will be included in gross income for purposes of the 90% test and
the 30% test described previously. Original issue discount with
respect to tax-exempt securities is accrued and added to the
adjusted tax basis of such securities for purposes of determining
gain or loss upon sale or at maturity. Generally, the amount of
original issue discount is determined on the basis of a constant
yield to maturity which takes into account the compounding of
accrued interest. An investment in a stripped bond or stripped
coupon will result in original issue discount.
Debt securities may be purchased by the Funds at a market
discount. Market discount occurs when a security is purchased at
a price less than the original issue price adjusted for accrued
original issue discount, if any. The Funds intend to defer
recognition of accrued market discount until maturity or other
disposition of the bond. For securities purchased at a market
discount, the gain realized on disposition will be treated as
taxable ordinary income to the extent it does not exceed accrued
market discount on the bond.
The Funds may also purchase debt securities at a premium,
i.e., at a purchase price in excess of face amount. With respect
to tax-exempt securities, the premium must be amortized to the
maturity date but no deduction is allowed for the premium
amortization. The amortized bond premium will reduce the Funds'
adjusted tax basis in the securities. For taxable securities,
the premium may be amortized if the Funds so elect. The
amortized premium on taxable securities is first offset against
interest received on the securities and then allowed as a
deduction, and, for securities issued after September 27, 1985,
must be amortized under an economic accrual method.
Taxation of the Shareholders
Taxable distributions are generally included in a shareholder's
gross income for the taxable year in which they are received.
Dividends declared in October, November, or December and made
payable to shareholders of record in such a month will be deemed
to have been received on December 31, if a Fund pays the dividend
during the following January. It is expected that none of the
Funds' distributions will qualify for the corporate dividends-
received deduction.
To the extent that a Fund's dividends distributed to
shareholders are derived from interest income exempt from federal
income tax and are designated as "exempt-interest dividends" by a
Fund, they will be excludable from a shareholder's gross income
for federal income tax purposes. Shareholders who are recipients
of Social Security benefits should be aware that exempt-interest
dividends received from a Fund are includible in their "modified
adjusted gross income" for purposes of determining the amount of
such Social Security benefits, if any, that are required to be
included in their gross income.
All distributions of investment income during the year will
have the same percentage designated as tax-exempt. This method
is called the "average annual method." Since the Funds invest
primarily in tax-exempt securities, the percentage will be
substantially the same as the amount actually earned during any
particular distribution period.
A shareholder of the Long-Term, Intermediate-Term, or Short-
Term Funds should be aware that a redemption of shares (including
any exchange into another USAA Fund) is a taxable event and,
accordingly, a capital gain or loss may be recognized. If a
shareholder receives an exempt-interest dividend with respect to
any share and such share has been held for six months or less,
any loss on the redemption or exchange will be disallowed to the
extent of such exempt-interest dividend. Similarly, if a
shareholder of a Fund receives a distribution taxable as long-
term capital gain with respect to shares of a Fund and redeems or
exchanges shares before he has held them for more than six
months, any loss on the redemption or exchange (not otherwise
disallowed as attributable to an exempt-interest dividend) will
be treated as long-term capital loss.
The Funds may invest in private activity bonds. Interest on
certain private activity bonds issued after August 7, 1986, is an
item of tax preference for purposes of the federal Alternative
Minimum Tax (AMT), although the interest continues to be
excludable from gross income for other purposes. AMT is a
supplemental tax designed to ensure that taxpayers pay at least a
minimum amount of tax on their income, even if they make
substantial use of certain tax deductions and exclusions
(referred to as tax preference items). Interest from private
activity bonds is one of the tax preference items that is added
to income from other sources for the purposes of determining
whether a taxpayer is subject to the AMT and the amount of any
tax to be paid. For corporate investors, alternative minimum
taxable income is increased by 75% of the amount by which
adjusted current earnings (ACE) exceeds alternative minimum
taxable income before the ACE adjustment. For corporate
taxpayers, all tax-exempt interest is considered in calculating
the AMT as part of the ACE. Prospective investors should consult
their own tax advisers with respect to the possible application
of the AMT to their tax situation.
Opinions relating to the validity of tax-exempt securities
and the exemption of interest thereon from federal income tax are
rendered by recognized bond counsel to the issuers. Neither the
Manager's nor the Funds' counsel makes any review of proceedings
relating to the issuance of tax-exempt securities or the basis of
such opinions.
State and Local 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.
Shareholders of a Fund may be exempt from state and local taxes
on distributions of tax-exempt interest income derived from
obligations of the state and/or municipalities of the state in
which they are resident, but generally are subject to tax on
income derived from obligations of other jurisdictions.
Shareholders should consult their tax advisers about the status
of distributions from a Fund in their own states and localities.
DIRECTORS AND OFFICERS OF THE COMPANY
The Board of Directors of the Company consists of eight
Directors. Set forth below are the Directors and officers of the
Company, and their respective offices and principal occupations
during the last five years. Unless otherwise indicated, the
business address of each is 9800 Fredericksburg Rd., San Antonio,
TX 78288.
Hansford T. Johnson 1, 2
Director and Chairman of the Board of Directors
Age: 59
Director, Vice Chairman and Deputy Attorney-in-Fact, United
Services Automobile Association (USAA) and President, Chief
Executive Officer, Director and Vice Chairman of the Board of
Directors of USAA Capital Corporation and of its various
subsidiaries and affiliates (9/93-present); Chief of Staff, USAA
(1/93-8/93); Executive Vice President, USAA (10/92-12/92);
Commander-in-Chief, CINCTRANS, Department of Defense -Pentagon
(9/89-9/92). Mr. Johnson currently serves as a Trustee and
Chairman of the Boards of Trustees of USAA Investment Trust and
USAA State Tax-Free Trust and as Director and Chairman of the
Boards of Directors of USAA Investment Management Company (IMCO),
USAA Mutual Fund, Inc., USAA Shareholder Account Services, USAA
Federal Savings Bank and USAA Real Estate Company.
Michael J.C. Roth 1, 2
Director, President and Vice Chairman of the Board of Directors
Age: 53
Chief Executive Officer, IMCO (10/93-present); President,
Director and Vice Chairman of the Board of Directors, IMCO (1/90-
present); Director, USAA Federal Savings Bank (12/83-8/91). Mr.
Roth currently serves as President, Trustee and Vice Chairman of
the Boards of Trustees of USAA Investment Trust and USAA State
Tax-Free Trust, as President, Director and Vice Chairman of the
Boards of Directors of USAA Mutual Fund, Inc. and USAA
Shareholder Account Services, as Director of USAA Life Insurance
Company and as Trustee and Vice Chairman of USAA Life Investment Trust.
John W. Saunders, Jr. 1, 2, 4
Director and Vice President
Age: 60
Senior Vice President, Investments, IMCO (10/85-present);
Director, BHC Financial, Inc. and BHC Securities, Inc. (1/87-
present). Mr. Saunders currently serves as a Trustee and Vice
President of USAA Investment Trust and USAA State Tax-Free Trust,
as a Director of IMCO, Director and Vice President of USAA Mutual
Fund, Inc., as Senior Vice President of USAA Shareholder Account
Services, and as Vice President of USAA Life Investment Trust.
C. Dale Briscoe 4, 5
7829 Timber Top Drive
Boerne, TX 78006
Director
Age: 74
Retired. Mr. Briscoe currently serves as a Trustee of USAA
Investment Trust and USAA State Tax-Free Trust and as a Director
of USAA Mutual Fund, Inc.
George E. Brown 3, 4, 5
5829 Northgap Drive
San Antonio, TX 78239
Director
Age: 77
Retired. Mr. Brown currently serves as a Trustee of USAA
Investment Trust and USAA State Tax-Free Trust and as a Director
of USAA Mutual Fund, Inc.
Howard L. Freeman, Jr. 2, 3, 5
2710 Hopeton
San Antonio, TX 78230
Director
Age: 60
Assistant General Manager for Finance, San Antonio City Public
Service Board (1976-present). Mr. Freeman currently serves as a
Trustee of USAA Investment Trust and USAA State Tax-Free Trust
and as a Director of USAA Mutual Fund, Inc.
Richard A. Zucker 3, 4, 5
407 Arch Bluff
San Antonio, TX 78216
Director
Age: 52
Vice President, Beldon Roofing and Remodeling (1985-present).
Mr. Zucker currently serves as a Trustee of USAA Investment Trust
and USAA State Tax-Free Trust and as a Director of USAA Mutual
Fund, Inc.
Barbara B. Dreeben 3, 5
200 Patterson #1008
San Antonio, TX 78209
Director
Age: 50
President, Postal Addvantage (7/92-present); Consultant, Nancy
Harkins Stationer, (8/91-present); Merchandise Manager, Nancy
Harkins Stationer (7/82-8/91). Mrs. Dreeben currently serves as
a Trustee of USAA Investment Trust and USAA State Tax-Free Trust
and as a Director of USAA Mutual Fund, Inc.
Michael D. Wagner 1
Secretary
Age: 47
Vice President, Corporate Counsel, USAA (1982-present). Mr.
Wagner has held various positions in the legal department of USAA
since 1970 and currently serves as Vice President, Secretary and
Counsel, IMCO and USAA Shareholder Account Services; Secretary,
USAA Investment Trust, USAA Mutual Fund, Inc., and USAA State
Tax-Free Trust; and as Vice President, Corporate Counsel, for
various other USAA subsidiaries and affiliates.
Alex M. Ciccone 1
Assistant Secretary
Age: 45
Vice President, Compliance, IMCO (12/94-present); Vice President
and Chief Operating Officer, Commonwealth Shareholder Services
(6/94-11/94); Vice President, Compliance, IMCO (12/91-5/94); Vice
President, Compliance, Fund Management Co. (10/89-11/91); and
Vice President, Compliance, AIM Distributors, Inc. (4/82-11/91).
Mr. Ciccone currently serves as Assistant Secretary of USAA
Investment Trust, USAA State Tax-Free Trust and USAA Mutual Fund,
Inc.
Sherron A. Kirk 1
Treasurer
Age: 50
Vice President, Controller, IMCO (10/92-present); Vice President,
Corporate Financial Analysis, USAA (9/92-10/92); Assistant Vice
President, Financial Plans and Support, USAA (8/91-9/92);
Assistant Vice President, Real Estate Accounting, USAA Real
Estate Company (5/90-7/91). Mrs. Kirk currently serves as
Treasurer of USAA Investment Trust, USAA State Tax-Free Trust,
and USAA Mutual Fund, Inc., and as Vice President, Controller of
USAA Shareholder Account Services.
Dean R. Pantzar 1
Assistant Treasurer
Age: 36
Director, Mutual Fund Accounting, IMCO (12/94-present); Senior
Manager, KPMG Peat Marwick LLP (7/88-12/94). Mr. Pantzar
currently serves as Assistant Treasurer of USAA Mutual Fund,
Inc., USAA State Tax-Free Trust, and USAA Investment Trust.
- -------
1 Indicates those Directors and officers who are employees of
the Manager or affiliated companies and are considered
"interested persons" under the 1940 Act.
2 Member of Executive Committee
3 Member of Audit Committee
4 Member of Pricing and Investment Committee
5 Member of Corporate Governance Committee
Between the meetings of the Board of Directors and while the
Board is not in session, the Executive Committee of the Board of
Directors has all the powers and may exercise all the duties of
the Board of Directors in the management of the business of the
Company which may be delegated to it by the Board.
Directors and Officers of the company, cont.
The Pricing and Investment Committee of the Board of Directors
acts upon various investment-related issues and other matters
which have been delegated to it by the Board. The Audit
Committee of the Board of Directors reviews the financial
statements and the auditor's reports and undertakes certain
studies and analyses as directed by the Board. The Corporate
Governance Committee of the Board of Directors maintains
oversight of the organization, performance, and effectiveness of
the Board and Independent Directors.
In addition to the previously listed Directors and/or
officers of the Company who also serve as Directors and/or
officers of the Manager, the following individuals are Directors
and/or executive officers of the Manager: Josue Robles, Jr.,
Senior Vice President, Chief Financial Officer/Controller, USAA;
William McCrae, Senior Vice President, General Counsel and
Secretary, USAA; Harry W. Miller, Senior Vice President,
Investments (Equity); and John J. Dallahan, Senior Vice
President, Investment Services. There are no family
relationships among the Directors, officers and managerial level
employees of the Company or its Manager.
The following table sets forth information describing the
compensation of the current Directors of the Company for their
services as Directors for the fiscal year ended March 31, 1995.
Name Aggregate Total Compensation
of Compensation from the USAA
Director from the Company Family of Funds (c)
- -------- ---------------- -------------------
C. Dale Briscoe $4,876 $18,500
George E. Brown (a) 4,876 18,500
Barbara B. Dreeben 4,876 18,500
Howard L. Freeman, Jr. 4,876 18,500
Hansford T. Johnson None (b) None (b)
Michael J.C. Roth None (b) None (b)
John W. Saunders, Jr. None (b) None (b)
Richard A. Zucker 4,876 18,500
- ----------------
(a) The USAA Family of Funds has accrued deferred compensation
for Mr. Brown in an amount (plus earnings thereon) of
$20,118. The compensation was deferred by Mr. Brown
pursuant to a non-qualified Deferred Compensation Plan,
under which deferred amounts accumulate interest quarterly
based on the annualized U.S. Treasury Bill rate in effect on
the last day of the quarter. Amounts deferred and
accumulated earnings thereon are not funded and are general
unsecured liabilities of the USAA Funds until paid. The
Deferred Compensation Plan was terminated in 1988 and no
compensation has been deferred by any Trustee/Director of
the USAA Family of Funds since the Plan was terminated.
(b) Hansford T. Johnson, Michael J.C. Roth, and John W.
Saunders, Jr. are affiliated with the Company's investment
adviser, IMCO, and, accordingly, receive no remuneration
from the Company or any other Fund of the USAA Family of Funds.
(c) At March 31, 1995, the USAA Family of Funds consisted of 4
registered investment companies offering 29 individual
funds. Each Director presently serves as a Trustee or
Director of each investment company in the USAA Family of
Funds. In addition, Michael J.C. Roth presently serves as a
Trustee of USAA Life Investment Trust, a registered
investment company advised by IMCO, consisting of five funds
offered to investors in a fixed and variable annuity
contract with USAA Life Insurance Company. Mr. Roth
receives no compensation as Trustee of USAA Life Investment Trust.
All of the above Directors are also Trustees/Directors of
the other funds for which IMCO serves as investment adviser. No
compensation is paid by any fund to any Trustee/Director who is a
director, officer, or employee of IMCO or its affiliates. No
pension or retirement benefits are accrued as part of fund
expenses. The Company reimburses certain expenses of the
Directors who are not affiliated with the investment adviser. As
of June 30, 1995, the officers and Directors of the Company and
their families as a group owned beneficially or of record less
than 1% of the outstanding shares of the Company.
As of June 30, 1995, USAA and its affiliates (including
related employee benefit plans) owned 3,515,037 shares (2.9%) of
the Intermediate-Term Fund and 5,663,794 shares (.4%) of the Tax
Exempt Money Market Fund, for an aggregate total of 9,178,831
shares (.4%) of the Company.
The Company knows of no one person who, as of June 30, 1995,
held of record or owned beneficially 5% or more of any Fund's shares.
THE COMPANY'S MANAGER
As described in the Prospectus, USAA Investment Management
Company is the Manager and investment adviser, providing services
under the Advisory Agreement. The Manager, organized in May
1970, has served as investment adviser and underwriter for USAA
Tax Exempt Fund, Inc. from its inception.
In addition to managing the Company's assets, the Manager
advises and manages the investments for USAA and its affiliated
companies as well as those of USAA Mutual Fund, Inc., USAA
Investment Trust and USAA State Tax-Free Trust. As of the date
of this SAI, total assets under management by the Manager were
approximately $27 billion, of which approximately $15 billion
were in mutual fund investments.
Advisory Agreement
Under the Advisory Agreement, the Manager provides an investment
program, carries out the investment policy and manages the
portfolio assets for each Fund. The Manager is authorized,
subject to the control of the Board of Directors of the Company,
to determine the selection, amount and time to buy or sell
securities for each Fund. In addition to providing investment
services, the Manager pays for office space, facilities, business
equipment and accounting services (in addition to those provided
by the Custodian) for the Company. The Manager compensates all
personnel, officers and Directors of the Company if such persons
are also employees of the Manager or its affiliates. For these
services under the Advisory Agreement, the Company has agreed to
pay the Manager a fee computed as described under Management of
the Company in the Prospectus. Management fees are computed and
accrued daily and payable monthly.
Except for the services and facilities provided by the
Manager, the Funds pay all other expenses incurred in their
operations. Expenses for which the Funds are responsible include
taxes (if any), brokerage commissions on portfolio transactions
(if any), expenses of issuance and redemption of shares, charges
of transfer agents, custodians and dividend disbursing agents,
costs of preparing and distributing proxy material, costs of
printing and engraving stock certificates, auditing and legal
expenses, certain expenses of registering and qualifying shares
for sale, fees of Directors who are not interested persons (not
affiliated) of the Manager, costs of typesetting, printing and
mailing the Prospectus, SAI and periodic reports to existing
shareholders, and any other charges or fees not specifically
enumerated. The Manager pays the cost of printing and mailing
copies of the Prospectus, the SAI, and reports to prospective
shareholders.
The Advisory Agreement will remain in effect until June 30,
1996 for each Fund and will continue in effect from year to year
thereafter for each Fund as long as it is approved at least
annually by a vote of the outstanding voting securities of such
Fund (as defined by the 1940 Act) or by the Board of Directors
(on behalf of such Fund) including a majority of the Directors
who are not interested persons of the Manager or (otherwise than
as Directors) of the Company, at a meeting called for the purpose
of voting on such approval. The Advisory Agreement may be
terminated at any time by either the Company or the Manager on 60
days' written notice. It will automatically terminate in the
event of its assignment (as defined in the 1940 Act).
Under the terms of the Advisory Agreement, the Manager is
required to reimburse each Fund in the event that the total
annual expenses, inclusive of the management fee, but exclusive
of the interest, taxes and brokerage fees and extraordinary
items, incurred by that Fund exceeds any applicable state expense
limitation. At the current time, the most restrictive expense
limitation is 2.5% of the first $30,000,000 of average net assets
(ANA), 2% of the next $70,000,000 ANA, and 1.5% of the remaining ANA.
From time to time the Manager may, without prior notice to
shareholders, waive all or any portion of fees or agree to
reimburse expenses incurred by a Fund. Any such waiver or
reimbursement may be terminated by the Manager at any time
without prior notice to shareholders.
For the last three fiscal years, the Company paid the Manager the
following fees:
FUND 1993 1994 1995
---- ------ ------ ------
Long-Term $5,001,734 $5,578,013 $4,931,411
Intermediate-Term $3,150,096 $4,403,791 $4,220,542
Short-Term $2,211,410 $2,619,690 $2,489,834
Tax Exempt Money Market $4,027,415 $4,068,637 $4,299,382
Underwriter
The Company has an agreement with the Manager for exclusive
underwriting and distribution of the Funds' shares on a
continuing best efforts basis. This agreement provides that the
Manager will receive no fee or other compensation for such
distribution services.
The Company's Manager, cont.
Transfer Agent
USAA Shareholder Account Services performs transfer agent
services for the Company under a Transfer Agency Agreement.
Services include maintenance of shareholder account records,
handling of communications with shareholders, distribution of
Fund dividends and production of reports with respect to account
activity for shareholders and the Company. For its services
under the Transfer Agency Agreement, USAA Shareholder Account
Services is paid an annual fixed fee per account of $26.00 by
each of the Funds. This fee is subject to change at any time.
The fee to the Transfer Agent includes processing of all
transactions and correspondence. Fees are billed on a monthly
basis at the rate of one-twelfth of the annual fee. In addition,
the Funds pay all out-of-pocket expenses of the Transfer Agent
and other expenses which are incurred at the specific direction
of the Company.
GENERAL INFORMATION
Custodian
State Street Bank and Trust Company, P.O. Box 1713, Boston, MA
02105, is the Company's Custodian. The Custodian is responsible
for, among other things, safeguarding and controlling the
Company's cash and securities, handling the receipt and delivery
of securities and collecting interest on the company's
investments.
Counsel
Goodwin, Procter & Hoar, Exchange Place, Boston, MA 02109, will
review certain legal matters for the Company in connection with
the shares offered by the Prospectus.
Independent Auditors
KPMG Peat Marwick LLP, 112 East Pecan, Suite 2400, San Antonio,
TX 78205, is the Company's independent auditor. In this
capacity, the firm is responsible for auditing the annual
financial statements of the Funds and reporting thereon.
Financial Statements
The financial statements of the Funds and the Independent
Auditors' Report thereon for the fiscal year ended March 31,
1995, are included in the Annual Report to Shareholders of that
date and are incorporated herein by reference. A copy of the
Annual Report will be delivered free of charge with each SAI
requested from the Manager at the address set forth on page 1 of
this statement.
CALCULATION OF PERFORMANCE DATA
Information regarding total return and yield of each Fund is
provided under Performance Information in the Prospectus. See
Valuation of Securities herein for a discussion of the manner in
which each Fund's price per share is calculated.
Total Return
The Funds, other than the Tax Exempt Money Market Fund, may each
advertise performance in terms of average annual total return for
1, 5 and 10 year periods. Average annual total return is
computed by finding the average annual compounded rates of return
over the periods that would equate the initial amount invested to
the ending redeemable value, according to the following formula:
P(1 + T)^n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical
$1,000 payment made at the beginning of the
1, 5 or 10 year periods at the end of the
year or period
The calculation assumes all charges are deducted from the
initial $1,000 payment and assumes all dividends and
distributions by such Fund are reinvested at the price stated in
the Prospectus on the reinvestment dates during the period, and
includes all recurring fees that are charged to all shareholder
accounts.
Average Annual Total Returns
For Periods Ended 3/31/95
1 5 10
Fund year years years
---- ----- ----- -----
Long-Term 5.07% 7.68% 9.13%
Intermediate-Term 6.16% 7.58% 8.22%
Short-Term 4.51% 5.41% 5.96%
Yield
The Funds, other than the Tax Exempt Money Market Fund, each may
advertise performance in terms of a 30-day yield quotation. The
30-day yield quotation is computed by dividing the net investment
income per share earned during the period by the maximum offering
price per share on the last day of the period, according to the
following formula:
YIELD = 2((((a - b)/(cd) + 1)^6) - 1)
Where: a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursement)
c = the average daily number of shares
outstanding during the period that were
entitled to receive dividends
d = the maximum offering price per share on the
last day of the period
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.
The 30-day yields for the Funds for the period ended March
31, 1995 were as follows:
Long-Term Fund . . . . 5.96%
Intermediate-Term Fund . . . . 5.45%
Short-Term Fund . . . . 4.58%
Yield - Tax Exempt Money Market Fund
When the Tax Exempt Money Market Fund quotes a current annualized
yield, it is based on a specified recent seven-calendar-day
period. It is computed by (1) determining the net change,
exclusive of capital changes, in the value of a hypothetical
preexisting account having a balance of one share at the
beginning of the period, (2) dividing the net change in account
value by the value of the account at the beginning of the base
period to obtain the base return, then (3) multiplying the base
period by 52.14 (365 divided by 7). The resulting yield figure
is carried to the nearest hundredth of one percent.
The calculation includes (1) the value of additional shares
purchased with dividends on the original share, and dividends
declared on both the original share and any such additional
shares, and (2) any fees charged to all shareholder accounts, in
proportion to the length of the base period and the Fund's
average account size.
The capital changes excluded from the calculation are
realized capital gains and losses from the sale of securities and
unrealized appreciation and depreciation. The Fund's effective
(compounded) yield will be computed by dividing the seven-day
annualized yield as defined above by 365, adding 1 to the
quotient, raising the sum to the 365th power, and subtracting 1
from the result.
Current and effective yields fluctuate daily and will vary
with factors such as interest rates and the quality, length of
maturities, and type of investments in the portfolio.
Yield For 7-day Period Ended 3/31/95 . . . . 3.70%
Effective Yield For 7-day Period Ended 3/31/95 . . . . 3.77%
Tax Equivalent Yield
The Tax Exempt Money Market Fund may advertise performance in
terms of a tax equivalent yield based on the 7-day yield or
effective yield and the other Funds may advertise performance in
terms of a 30-day tax equivalent yield. The tax equivalent yield
is computed by dividing that portion of the yield of a Fund
(computed as described in the preceding paragraphs) which is tax-
exempt, by the complement of the federal income tax rate of 31%
(or other relevant rate) and adding the result to that portion,
if any, of the yield of such Fund that is not tax-exempt. The
complement, for example, of a tax rate of 31% is 69%, that is
[1.00 - .31 = .69].
Calculation of Performance Data, cont.
Based on a tax rate of 31%, the tax equivalent yields for
the Long-Term, Intermediate-Term, Short-Term, and Tax Exempt
Money Market Funds for the period ended March 31, 1995 were
8.64%, 7.90%, 6.64%, and 5.36%, respectively.
APPENDIX A - TAX-EXEMPT SECURITIES AND THEIR RATINGS
Tax-Exempt Securities
Tax-exempt securities generally include debt obligations issued
by states and their political subdivisions, and duly constituted
authorities and corporations, to obtain funds to construct,
repair or improve various public facilities such as airports,
bridges, highways, hospitals, housing, schools, streets, and
water and sewer works. Tax-exempt securities may also be issued
to refinance outstanding obligations as well as to obtain funds
for general operating expenses and for loans to other public
institutions and facilities.
The two principal classifications of tax-exempt securities
are "general obligations" and "revenue" or "special tax" bonds.
General obligation bonds are secured by the issuer's pledge of
its full faith, credit and taxing power for the payment of
principal and interest. Revenue or special tax bonds are payable
only from the revenues derived from a particular facility or
class of facilities or, in some cases, from the proceeds of a
special excise or other tax, but not from general tax revenues.
The Funds may also invest in tax-exempt private activity bonds,
which in most cases are revenue bonds and generally do not have
the pledge of the credit of the issuer. The payment of the
principal and interest on such industrial revenue bonds is
dependent solely on the ability of the user of the facilities
financed by the bonds to meet its financial obligations and the
pledge, if any, of real and personal property so financed as
security for such payment. There are, of course, many variations
in the terms of, and the security underlying tax-exempt
securities. Short-term obligations issued by states, cities,
municipalities or municipal agencies, include Tax Anticipation
Notes, Revenue Anticipation Notes, Bond Anticipation Notes,
Construction Loan Notes and Short-Term Discount Notes.
The yields of tax-exempt securities depend on, among other
things, general money market conditions, conditions of the Tax-
Exempt Bond market, the size of a particular offering, the
maturity of the obligation, and the rating of the issue. The
ratings of Moody's Investors Service, Inc. (Moody's), Standard &
Poor's Ratings Group (S&P), Fitch Investors Service, Inc.
(Fitch), Duff & Phelps Inc., Thompson BankWatch, Inc., and IBCA
Inc. represent their opinions of the quality of the securities
rated by them. It should be emphasized that such ratings are
general and are not absolute standards of quality. Consequently,
securities with the same maturity, coupon and rating may have
different yields, while securities of the same maturity and
coupon but with different ratings may have the same yield. It
will be the responsibility of the Manager to appraise
independently the fundamental quality of the tax-exempt
securities included in a Fund's portfolio.
Ratings
Excerpts from Moody's Bond (Tax-Exempt Securities) Ratings:
Aaa Bonds which are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment risk
and are generally referred to as "gilt edge." Interest
payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various
protective elements are likely to change, such changes as
can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa Bonds which are rated Aa are judged to be of high quality by
all standards. Together with the Aaa group they comprise
what are generally known as high grade bonds. They are
rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater
amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than in Aaa
securities.
A Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade
obligations. Factors giving security to principal and
interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the
future.
Baa Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor
poorly secured. Interest payments and principal security
appear adequate for the present but certain protective
elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and in fact have
speculative characteristics as well.
Note: Those bonds in the Aa, A, and Baa groups which Moody's
believes possess the strongest investment attributes are
designated by the symbols Aa1, A1, and Baa1.
Excerpts of Moody's Ratings of Short-Term Loans (State and Tax-
Exempt Notes):
Moody's ratings for state and tax-exempt notes and other short-
term obligations are designated Moody's Investment Grade (MIG).
Symbols used will be as follows:
MIG-1 This designation denotes best quality. There is
present strong protection by established cash flows,
superior liquidity support or demonstrated broadbased
access to the market for refinancing.
MIG-2 This designation denotes high quality. Margins of
protection are ample although not so large as in the
preceding group.
Excerpts of Moody's Rating of Commercial Paper:
Prime-1 Issuers have a superior ability for repayment of senior
short-term debt obligations. Prime-1 repayment ability
will often be evidenced by many of the following
characteristics:
Leading market positions in well-established industries.
High rates of return on funds employed.
Conservative capitalization structure with moderate
reliance on debt and ample asset protection.
Broad margins in earnings coverage of fixed financial
charges and high internal cash generation.
Well-established access to a range of financial markets
and assured sources of alternate liquidity.
Prime-2 Issuers have a strong ability for repayment of senior
short-term debt obligations. This will normally be
evidenced by many of the characteristics cited above
but to a lesser degree. Earnings trends and coverage
ratios, while sound, will be more subject to variation.
Capitalization characteristics, while still
appropriate, may be more affected by external
conditions. Ample alternate liquidity is maintained.
Excerpts from S&P's Bond Ratings:
AAA Debt rated AAA has the highest rating assigned by S&P.
Capacity to pay interest and repay principal is extremely
strong.
AA Debt rated AA has a very strong capacity to pay interest and
repay principal and differs from the highest rated issues
only in small degree.
A Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the
adverse effects of changes in circumstances and economic
conditions than debt in higher rated categories.
BBB Debt rated BBB is regarded as having an adequate capacity to
pay interest and repay principal. Whereas it normally
exhibits adequate protection parameters, adverse economic
conditions or changing circumstances are more likely to lead
to a weakened capacity to pay interest and repay principal
for debt in this category than in higher rated categories.
Plus (+) or Minus (-): The ratings from AA to BBB may be
modified by the addition of a plus or minus sign to show relative
standing within the major rating categories.
Excerpts of S&P's Ratings of Tax-Exempt Notes:
SP-1 Strong capacity to pay principal and interest. Issues
determined to possess very strong characteristics are given
a plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest, with
some vulnerability to adverse financial and economic changes
over the term of the notes.
Appendix A, cont.
Excerpts of S&P's Rating of Commercial Paper:
A-1 This highest category indicates that the degree of safety
regarding timely payment is strong. Those issues determined
to possess extremely strong safety characteristics are
denoted with a plus (+) sign designation.
A-2 Capacity for timely payment on issues with this designation
is satisfactory. However, the relative degree of safety is
not as high as for issues designated A-1.
Excerpts of Fitch's Ratings of Bonds:
AAA Bonds considered to be investment grade and of the highest
credit quality. The obligor has an exceptionally strong
ability to pay interest and repay principal, which is
unlikely to be affected by reasonably foreseeable events.
AA Bonds considered to be investment grade and of very high
credit quality. The obligor's ability to pay interest and
repay principal is very strong, although not quite as strong
as bonds rated AAA. Because bonds rated in the AAA and AA
categories are not significantly vulnerable to foreseeable
future developments, short-term debt of these issuers is
generally rated F-1+.
A Bonds considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay
principal is considered to be strong, but may be more
vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB Bonds considered to be investment grade and of satisfactory
credit quality. The obligor's ability to pay interest and
repay principal is considered to be adequate. Adverse
changes in economic conditions and circumstances, however,
are more likely to have adverse impact on these bonds, and
therefore, impair timely payment.
Plus (+) and Minus (-): Plus and minus signs are used with a
rating symbol to indicate the relative position of a credit
within the rating category. Plus and minus signs, however, are
not used in the AAA category.
Excerpts of Fitch's Ratings to Commercial Paper, Certificates of
Deposit and Tax-Exempt Notes:
F-1+ Exceptionally strong credit quality. Issues assigned this
rating are regarded as having the strongest degree of
assurance for timely payment.
F-1 Very strong credit quality. Issues assigned this rating
reflect an assurance of timely payment only slightly less in
degree than issues rated F-1+.
F-2 Good credit quality. Issues assigned this rating have a
satisfactory degree of assurance for timely payments, but
the margin of safety is not as great as the F-1+ and F-1
ratings.
Excerpts from Duff & Phelps Long-Term Rating Scale:
AAA Highest credit quality. The risk factors are negligible,
being only slightly more than for risk-free U.S. Treasury
debt.
AA High credit quality. Protection factors are strong. Risk
is modest but may vary slightly from time to time because of
economic conditions.
A Protection factors are average but adequate. However, risk
factors are more variable and greater in periods of economic
stress.
BBB Below average protection factors but still considered
sufficient for prudent investment. Considerable variability
in risk during economic cycles.
Excerpts from Duff & Phelps Commercial Paper Rating Scale:
Duff 1+ Highest certainty of timely payment. Short-term
liquidity, including internal operating factors and/or
ready access to alternative sources of funds, is
outstanding, and safety is just below risk-free U.S.
Treasury short-term obligations.
Duff 1 Very high certainty of timely payment. Liquidity
factors are excellent and supported by good fundamental
protection factors. Risk factors are minor.
Duff 1- High certainty of timely payment. Liquidity factors
are strong and supported by good fundamental protection
factors. Risk factors are very small.
Duff 2 Good certainty of timely payment. Liquidity factors
and company fundamentals are sound. Although ongoing
funding needs may enlarge total financing requirements,
access to capital markets is good. Risk factors are
small.
Thompson BankWatch, Inc.
TBW-1 The highest category; indicates a very high likelihood
that principal and interest will be paid on a timely
basis.
TBW-2 The second highest category; while the degree of safety
regarding timely repayment of principal and interest is
strong, the relative degree of safety is not as high as
for issues rated TBW-1.
TBW-3 The lowest investment grade category; indicates that
while the obligation is more susceptible to adverse
developments (both internal and external) than
obligations with higher ratings, the capacity to
service principal and interest in a timely fashion is
considered adequate.
IBCA Inc.
A1 Obligations supported by the highest capacity for timely
repayment. Where issues possess a particularly strong
credit feature, a rating of A1+ is assigned.
A2 Obligations supported by a good capacity for timely
repayment.
A3 Obligations supported by a satisfactory capacity for timely
repayment.
B Obligations for which there is an uncertainty as to the
capacity to ensure timely repayment.
C Obligations for which there is a high risk of default or
which are currently in default.
APPENDIX B - COMPARISON OF PORTFOLIO PERFORMANCE
Occasionally, we may make comparisons in advertising and sales
literature between the Funds contained in this SAI and other
Funds in the USAA Family of Funds. These comparisons may include
such topics as risk and reward, investment objectives, investment
strategies, and performance.
Fund performance also may be compared to the performance of
broad groups of mutual funds with similar investment goals or
unmanaged indexes of comparable securities. Evaluations of Fund
performance made by independent sources may be used in
advertisements concerning the Fund, including reprints of, or
selections from, editorials or articles about the Fund. The Fund
or its performance may also be compared to products and services
not constituting securities subject to registration under the
Securities Act of 1933 such as, but not limited to, certificates
of deposit and money market accounts. Sources for performance
information and articles about the Fund may include the
following:
AAII Journal, a monthly association magazine for members of the
American Association of Individual Investors.
Arizona Republic, a newspaper which may cover financial and
investment news.
Austin American-Statesman, a newspaper which may cover financial news.
Barron's, a Dow Jones and Company, Inc. business and financial
weekly that periodically reviews mutual fund performance data.
The Bond Buyer, a daily newspaper which covers bond market news.
Business Week, a national business weekly that periodically reports
the performance rankings and ratings of a variety of mutual funds.
Chicago Tribune, a newspaper which may cover financial news.
Consumer Reports, a monthly magazine which from time to time
reports on companies in the mutual fund industry.
Dallas Morning News, a newspaper which may cover financial news.
Denver Post, a newspaper which may quote financial news.
Appendix B, cont.
Financial Planning, a monthly magazine that periodically features
companies in the mutual fund industry.
Financial Services Week, a weekly newspaper which covers financial news.
Financial World, a monthly magazine which may periodically review
mutual fund companies.
Forbes, a national business publication that periodically reports
the performance of companies in the mutual fund industry.
Fortune, a national business publication that periodically rates
the performance of a variety of mutual funds.
Fund Action, a mutual fund news report.
Houston Chronicle, a newspaper which may cover financial news.
Houston Post, a newspaper which may cover financial news.
IBC/Donoghue's Moneyletter, a biweekly newsletter which covers
financial news and from time to time rates specific mutual funds.
IBC's Money Market Insight, a monthly money market industry
analysis prepared by IBC USA, Inc.
Income and Safety, a monthly newsletter that rates mutual funds.
InvesTech, a bimonthly investment newsletter.
Investment Advisor, a monthly publication directed primarily to
the advisor community; includes ranking of mutual funds using a
proprietary methodology.
Investment Company Institute, a national association of the
American investment company industry.
Investor's Business Daily, a newspaper which covers financial news.
Kiplinger's Personal Finance Magazine, a monthly investment
advisory publication that periodically features the performance
of a variety of securities.
Lipper Analytical Services, Inc.'s Fixed Income Fund Performance
Analysis, a monthly publication of industry-wide mutual fund
performance averages by type of fund.
Lipper Analytical Services, Inc.'s Mutual Fund Performance
Analysis, a weekly and quarterly publication of industry-wide
mutual fund performance averages by type of fund.
Los Angeles Times, a newspaper which may cover financial news.
Louis Rukeyser's Wall Street, a publication for investors.
Medical Economics, a monthly magazine providing information to
the medical profession.
Money, a monthly magazine that features the performance of both
specific funds and the mutual fund industry as a whole.
Money Fund Report, a weekly publication of the Donoghue
Organization, Inc., reporting on the performance of the nation's
money market funds, summarizing money market fund activity, and
including certain averages as performance benchmarks,
specifically: (1) Taxable Money Fund Averages: "100% U.S.
Treasury" and "First Tier" and (2) Tax-Free Money Fund Averages:
"Stockbroker and General Purpose" and "State Specific Stockbroker
and General Purpose".
MorningStar 5 Star Investor, a monthly newsletter by Morningstar,
Inc. which covers financial news and rates mutual funds.
Muni Bond Fund Report, a monthly newsletter which covers news on
the municipal bond market and features performance data for
municipal bond mutual funds.
MuniWeek, a weekly newspaper which covers news on the municipal
bond market.
Mutual Fund Forecaster, a monthly newsletter that ranks mutual funds.
Mutual Fund Investing, a newsletter covering mutual funds.
Mutual Fund Performance Report, a monthly publication of
industry-wide mutual fund averages produced by Morningstar, Inc.
Mutual Funds Magazine, a monthly publication reporting on mutual
fund investing.
Mutual Fund Source Book, an annual publication produced by
Morningstar, Inc. which describes and rates mutual funds.
Mutual Fund Values, a biweekly guidebook to mutual funds produced
by Morningstar, Inc. (a data service which tracks open-end mutual funds).
Newsweek, a national business weekly.
New York Times, a newspaper which may cover financial news.
No Load Fund Investor, a newsletter covering companies in the
mutual fund industry.
Personal Investor, a monthly magazine which from time to time
features mutual fund companies and the mutual fund industry.
San Antonio Business Journal, a weekly newspaper that
periodically covers mutual fund companies as well as financial news.
San Antonio Express-News, a newspaper which may cover financial news.
San Francisco Chronicle, a newspaper which may cover financial news.
Smart Money, a monthly magazine featuring news and articles on
investing and mutual funds.
USA Today, a newspaper which may cover financial news.
U.S. News and World Report, a national business weekly that
periodically reports mutual fund performance data.
Wall Street Journal, a Dow Jones and Company, Inc. newspaper
which covers financial news.
Washington Post, a newspaper which may cover financial news.
Weisenberger Mutual Funds Investment Report, a monthly newsletter
that reports on both specific mutual fund companies and the
mutual fund industry as a whole.
Worth, a magazine which covers financial and investment subjects
including mutual funds.
Your Money, a monthly magazine directed towards the novice investor.
Among the organizations cited above, Lipper Analytical
Services, Inc.'s tracking results may be used. The Fund will be
compared to Lipper's appropriate fund category according to
objective and portfolio holdings. The Long-Term Fund will be
compared to funds in Lipper's general tax-exempt bond fund
category, Intermediate-Term Fund to funds in Lipper's
intermediate (5-10 yr.) tax-exempt bond fund category, Short-Term
Fund to Lipper's short (1-5 yr.) tax-exempt bond fund category,
and Tax Exempt Money Market Fund to Lipper's general short-term
tax-exempt bond fund category. Footnotes in advertisements and
other sales literature will include the time period applicable
for any rankings used.
For comparative purposes, unmanaged indices of comparable
securities or economic data may be cited. Examples include the
following:
- Shearson Lehman Hutton Bond Indices, indices of fixed-rate
debt issues rated investment grade or higher which can be found
in the Bond Market Report.
- Bond Buyer Indices, indices of debt of varying maturities
including revenue bonds, general obligation bonds, and U.S.
Treasury bonds which can be found in MuniWeek and The Bond Buyer.
Other sources for total return and other performance data
which may be used by the Fund or by those publications listed
previously are Morningstar, Inc., Schabaker Investment
Management, and Investment Company Data, Inc. These are services
that collect and compile data on mutual fund companies.
APPENDIX C - TAXABLE EQUIVALENT YIELD TABLE
FEDERAL INCOME TAX RATES
TO MATCH A A FULLY TAXABLE INVESTMENT
TAX-FREE WOULD HAVE TO PAY YOU:
YIELD OF: ASSUMING A MARGINAL ASSUMING A MARGINAL ASSUMING A MARGINAL
TAX RATE OF 28% (a) TAX RATE OF 31% (b) TAX RATE OF 36% (c)
2.00% 2.78% 2.90% 3.13%
3.00% 4.17% 4.35% 4.69%
4.00% 5.56% 5.80% 6.25%
5.00% 6.94% 7.25% 7.81%
6.00% 8.33% 8.70% 9.38%
(a) FEDERAL RATE OF 28%
(b) FEDERAL RATE OF 31%
(c) FEDERAL RATE OF 36%
THIS TABLE IS A HYPOTHETICAL ILLUSTRATION AND SHOULD NOT BE
CONSIDERED AN INDICATION OF FUND PERFORMANCE OF ANY OF THE USAA
FAMILY OF FUNDS.
THE ASSUMED MARGINAL TAX RATES ARE NOT NECESSARILY THE HIGHEST
POSSIBLE MARGINAL TAX RATES, NOR ARE THEY THE LOWEST RATES.
THESE RATES WERE PICKED AS EXEMPLARY RATES THAT MANY TAXPAYERS
WOULD BE SUBJECT TO.
APPENDIX D - DOLLAR-COST AVERAGING
Dollar-cost averaging is a systematic investing method which can
be used by investors as a disciplined technique for investing. A
fixed amount of money is invested in a security (such as a stock
or mutual fund) on a regular basis over a period of time,
regardless of whether securities markets are moving up or down.
This practice reduces average share costs to the investor
who acquires more shares in periods of lower securities prices
and fewer shares in periods of higher prices.
While dollar-cost averaging does not assure a profit or
protect against loss in declining markets, this investment
strategy is an effective way to help calm the effect of
fluctuations in the financial markets. Systematic investing
involves continuous investment in securities regardless of
fluctuating price levels of such securities. Investors should
consider their financial ability to continue purchases through
periods of low and high price levels.
As the following chart illustrates, dollar-cost averaging
tends to keep the overall cost of shares lower. This example is
for illustration only, and different trends would result in
different average costs.
HOW DOLLAR-COST AVERAGING WORKS
$100 Invested Regularly for 5 Periods
Market Trend
---------------------------------------------------------------
Down Up Mixed
------------------ ------------------ -------------------
Share Shares Share Shares Share Shares
Investment Price Purchased Price Purchased Price Purchased
------------------ ------------------ -------------------
$100 10 10 6 16.67 10 10
100 9 11.1 7 14.29 9 11.1
100 8 12.5 7 14.29 8 12.5
100 8 12.5 9 11.1 9 11.1
100 6 16.67 10 10 10 10
--- -- ----- -- ----- -- -----
$500 ***41 62.77 ***39 66.35 ***46 54.7
*Avg. Cost: $7.97 *Avg. Cost: $7.54 *Avg. Cost: $9.14
----- ----- -----
**Avg. Price: $8.20 **Avg. Price: $7.80 **Avg. Price: $9.20
----- ----- -----
* Average Cost is the total amount invested divided by shares purchased.
** Average Price is the sum of the prices paid divided by number of purchases.
*** Cumulative total of share prices used to compute average prices.
06052-1295
(Logo
of the USAA STATEMENT OF
USAA TAX EXEMPT ADDITIONAL INFORMATION
Eagle FUND, INC. August 1, 1995
is here) As Supplemented December 1, 1995
- ------------------------------------------------------------------------
USAA TAX EXEMPT FUND, INC.
CALIFORNIA FUNDS
USAA TAX EXEMPT FUND, INC. (the Company) is a registered
investment company offering shares of ten no-load mutual funds,
two of which are described in this Statement of Additional
Information (SAI): the California Bond Fund and California Money
Market Fund (collectively, the Funds or the California Funds).
Each Fund is classified as a diversified investment company and
has 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.
A Prospectus for the California Funds dated August 1, 1995, which
provides the basic information you should know before investing
in the Funds, may be obtained without charge upon written request
to USAA Tax Exempt Fund, Inc., 9800 Fredericksburg Rd., San
Antonio, TX 78288, or by calling toll free 1-800-531-8181. This
SAI is not a Prospectus and contains information in addition to
and more detailed than that set forth in the Prospectus. It is
intended to provide you with additional information regarding the
activities and operations of the Company and the Funds, and
should be read in conjunction with the Prospectus.
- ----------------------------------------------------------------------
TABLE OF CONTENTS
Page
2 Valuation of Securities
2 Additional Information Regarding Redemption of Shares
3 Investment Plans
4 Investment Policies
5 Investment Restrictions
6 Special Risk Considerations
10 Portfolio Transactions
11 Further Description of Shares
12 Certain Federal Income Tax Considerations
13 California Taxation
14 Directors and Officers of the Company
17 The Company's Manager
18 General Information
19 Calculation of Performance Data
20 Appendix A - Tax-Exempt Securities and Their Ratings
23 Appendix B - Comparison of Portfolio Performance
26 Appendix C - Taxable Equivalent Yield Table
27 Appendix D - Dollar-Cost Averaging
VALUATION OF SECURITIES
Shares of each Fund are offered on a continuing best efforts
basis through USAA Investment Management Company (IMCO or the
Manager). The offering price for shares of each Fund is equal to
the current net asset value per share. The net asset value per
share of each Fund is calculated by adding the value of all its
portfolio securities and other assets, deducting its liabilities,
and dividing by the number of shares outstanding.
A Fund's net asset value per share is calculated each day,
Monday through Friday, except days on which the New York Stock
Exchange (NYSE) is closed. The NYSE is currently scheduled to be
closed on New Year's Day, Presidents' Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving, and Christmas,
and on the preceding Friday or subsequent Monday when one of
these holidays falls on a Saturday or Sunday, respectively.
The investments of the California Bond Fund are valued each
business day by a pricing service (the Service) approved by the
Company's Board of Directors. The Service uses the mean between
quoted bid and asked prices or the last sale price to price
securities when, in the Service's judgement, these prices are
readily available and are representative of the securities'
market values. For many securities, such prices are not readily
available. The Service generally prices these securities based
on methods which include consideration of yields or prices of
tax-exempt securities of comparable quality, coupon, maturity and
type, indications as to values from dealers in securities, and
general market conditions. Securities purchased with maturities
of 60 days or less are stated at amortized cost which
approximates market value. Repurchase agreements are valued at
cost. Securities which cannot be valued by the Service, and all
other assets, are valued in good faith at fair value using
methods determined by the Manager under the general supervision
of the Board of Directors.
The value of the California Money Market Fund's securities
is stated at amortized cost which approximates market value.
This involves valuing a security at its cost and thereafter
assuming a constant amortization to maturity of any discount or
premium, regardless of the impact of fluctuating interest rates.
While this method provides certainty in valuation, it may result
in periods during which the value of an instrument, as determined
by amortized cost, is higher or lower than the price the Fund
would receive upon the sale of the instrument.
The valuation of the California Money Market Fund's
portfolio instruments based upon their amortized cost is subject
to the Fund's adherence to certain procedures and conditions.
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 Manager will invest only in securities
that have been determined to present minimal credit risk and that
satisfy the quality and diversification requirements of
applicable rules and regulations of the Securities and Exchange Commission.
The Board of Directors has established procedures designed
to stabilize the California Money Market Fund's price per share,
as computed for the purpose of sales and redemptions, at $1.00.
There can be no assurance, however, that the Fund will at all
times be able to maintain a constant $1.00 net asset value per
share. Such procedures include review of the Fund's holdings at
such intervals as is deemed appropriate to determine whether the
Fund's net asset value calculated by using available market
quotations deviates from $1.00 per share and, if so, whether such
deviation may result in material dilution or is otherwise unfair
to existing shareholders. In the event that it is determined
that such a deviation exists, the Board of Directors will take
such corrective action as it regards as necessary and
appropriate. Such action may include selling portfolio
instruments prior to maturity to realize capital gains or losses
or to shorten average portfolio maturity, withholding dividends,
or establishing a net asset value per share by using available
market quotations.
ADDITIONAL INFORMATION REGARDING REDEMPTION OF SHARES
The value of a shareholder's investment at the time of redemption
may be more or less than the cost at purchase, depending on the
value of the securities held in each Fund's portfolio. Requests
for redemption which are subject to any special conditions, or
which specify an effective date other than as provided herein,
cannot be accepted. A gain or loss for tax purposes may be
realized on the sale of shares, depending upon the price when redeemed.
The Board of Directors may cause the redemption of an
account with a balance of less than 50 shares provided (1) the
value of the account has been reduced, for reasons other than
market action, below the minimum initial investment in such Fund
at the time of the establishment of the account, (2) the account
has remained below the minimum level for six months, and (3) 60
days' prior written notice of the proposed redemption has been sent
to the shareholder. Shares will be redeemed at the net asset value
on the date fixed for redemption by the Board of Directors. Prompt
payment will be made by mail to the last known address of the shareholder.
The Company reserves the right to suspend the right of
redemption or postpone the date of payment (1) for any periods
during which the NYSE is closed, (2) when trading in the markets
the Company normally utilizes is restricted, or an emergency
exists as determined by the Securities and Exchange Commission
(SEC) so that disposal of the Company's investments or
determination of its net asset value is not reasonably
practicable, or (3) for such other periods as the SEC by order
may permit for protection of the Company's shareholders.
For the mutual protection of the investor and the Funds, a
guarantee of signature may be required by the Company. If
required, each signature on the account registration must be
guaranteed. Signature guarantees are acceptable from FDIC member
banks, brokers, dealers, municipal securities dealers, municipal
securities brokers, government securities dealers, government
securities brokers, credit unions, national securities exchanges,
registered securities associations, clearing agencies and savings
associations. A signature guarantee for active duty military
personnel stationed abroad may be provided by an officer of the
United States Embassy or Consulate, a staff officer of the Judge
Advocate General, or an individual's commanding officer.
Redemption by Check
Shareholders in the California Money Market Fund may request that
checks be issued for their account. A one-time $5 checkwriting
fee is charged to each account by the Transfer Agent for the use
of the privilege. Checks must be written in the amount of at
least $250.
Checks issued to shareholders of the Fund will be sent only
to the person in whose name the account is registered and only to
the address of record. The checks must be manually signed by the
registered owner(s) exactly as the account is registered. For
joint accounts the signature of either or both joint owners will
be required on the check, according to the election made on the
signature card. Dividends will continue to be earned by the
shareholder until the shares are redeemed by the presentation of
a check.
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. If an investor's account is not adequate to cover the
amount of a check, the check will be returned unpaid. Because
the value of each account changes as dividends are accrued on a
daily basis, checks may not be used to close an account.
After clearance, checks paid during the month will be
returned to the shareholder by separate mail. The checkwriting
privilege will be subject to the customary rules and regulations
of State Street Bank and Trust Company (State Street Bank or the
Custodian) governing checking accounts. Other than the initial
one-time fee, there is no charge to the shareholder for the use
of the checks or for subsequent reorders of checks.
The Company reserves the right to assess a processing fee
against a shareholder's account for any redemption check not
honored by a clearing or paying agent. Currently, this fee is
$15 and is subject to change at any time. Some examples of such
dishonor are improper endorsement, checks written for an amount
less than the minimum check amount, and insufficient or
uncollectible funds.
The Company, the Transfer Agent, and State Street Bank each
reserve the right to change or suspend the checkwriting privilege
upon 30 days' written notice to participating shareholders.
INVESTMENT PLANS
The following investment plans are made available by the Company
to shareholders of the Funds. 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. You may terminate your participation
in a plan at any time. Please call the Manager for details and
necessary forms or applications.
Systematic Purchase of Shares
InvesTronic(registered trademark) - the periodic purchase of
shares through electronic funds transfer from a checking or
savings account. By completing an application, which may be
obtained from the Manager, you invest a specific amount each
month ($50 minimum) in any of your accounts.
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.
Investment Plans, cont.
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. There is a minimum investment required
for this program of $5,000, with a monthly transaction minimum of
$50. The minimum initial investment requirement for the other
USAA mutual fund must be satisfied before the first transfer.
Buy/Sell Service - the intermittent purchase or redemption of
shares through electronic funds transfer to or from a checking or
savings account.
Participation in these systematic purchase plans will permit
a shareholder to engage in dollar-cost averaging. For additional
information concerning the benefits of dollar-cost averaging, see
Appendix D.
Systematic Withdrawal Plan
If a shareholder in a single investment account (accounts in
different Funds cannot be aggregated for this purpose) owns
shares having a net asset value of $5,000 or more, the
shareholder may request that enough shares to produce a fixed
amount of money be liquidated from the account monthly or
quarterly. The amount of each withdrawal must be at least $50.
Using the electronic funds transfer service, shareholders may
choose to have withdrawals electronically deposited at their bank
or other financial institution. They may also elect to have
checks mailed to a designated address.
Such a plan may be initiated by depositing shares worth at
least $5,000 with the Transfer Agent and by completing a
Systematic Withdrawal Plan application, which may be requested
from the Manager. The shareholder may terminate participation in
the plan at any time. There is no charge to the shareholder for
withdrawals under the Systematic Withdrawal Plan. The Company
will not bear any expenses in administering the plan beyond the
regular transfer agent and custodian costs of issuing and
redeeming shares. Any additional expenses of administering the
plan will be borne by the Manager.
Withdrawals will be made by redeeming full and fractional
shares on the date selected by the shareholder at the time the
plan is established. Withdrawal payments made under this plan
may exceed dividends and distributions and, to this extent, will
involve the use of principal and could reduce the dollar value of
a shareholder's investment and eventually exhaust the account.
Reinvesting dividends and distributions helps replenish the
account. Because share values and net investment income can
fluctuate, shareholders should not expect withdrawals to be
offset by rising income or share value gains.
Each redemption of shares may result in a gain or loss,
which must be reported on the shareholder's income tax return.
Therefore, a shareholder should keep an accurate record of any
gain or loss on each withdrawal.
INVESTMENT POLICIES
The section captioned Investment Objectives and Policies in the
Prospectus describes the fundamental investment objectives and
the investment policies applicable to each Fund and the following
is provided as additional information.
Calculation of Portfolio Weighted Average Maturities
Weighted average maturity is derived by multiplying the value of
each investment by the number of days remaining to its maturity,
adding these calculations, and then dividing the total by the
value of the Fund's portfolio. An obligation's maturity is
typically determined on a stated final maturity basis, although
there are some exceptions to this rule.
With respect to obligations held by the California Bond
Fund, if it is probable that the issuer of an instrument will
take advantage of a maturity-shortening device, such as a call,
refunding, or redemption provision, the date on which the
instrument will probably be called, refunded, or redeemed may be
considered to be its maturity date. Also, the maturities of
securities subject to sinking fund arrangements are determined on
a weighted average life basis, which is the average time for
principal to be repaid. The weighted average life of these
securities is likely to be substantially shorter than their
stated final maturity. In addition, for purposes of the Fund's
investment policies, an instrument will be treated as having a
maturity earlier than its stated maturity date if the instrument
has technical features such as puts or demand features which, in
the judgment of the Manager, will result in the instrument being
valued in the market as though it has the earlier maturity.
The California Money Market Fund will determine the maturity
of an obligation in its portfolio in accordance with Rule 2a-7
under the Investment Company Act of 1940, as amended (1940 Act).
Lending of Securities
Each Fund may lend its securities. A lending policy may be
authorized by the Company's Directors and implemented by the
Manager, but securities may be loaned only to qualified broker-
dealers or institutional investors that agree to maintain cash
collateral with the Company equal at all times to at least 100%
of the value of the loaned securities. The Directors will
establish procedures and monitor the creditworthiness of any
institution or broker-dealer during such time as any loan is
outstanding. The Company will continue to receive interest on
the loaned securities and will invest the cash collateral in
readily marketable short-term obligations of high quality,
thereby earning additional interest. Interest on loaned tax-
exempt securities received by the borrower and paid to the
Company will not be exempt from federal income taxes in the hands
of the Company.
No loan of securities will be made if, as a result, the
aggregate of such loans would exceed 33 1/3% of the value of a Fund's
total assets. The Company may terminate such loans at any time.
Repurchase Agreements
Each Fund may invest up to 5% of its total assets in repurchase
agreements. A repurchase agreement is a transaction in which a
security is purchased with a simultaneous commitment to sell the
security back to the seller (a commercial bank or recognized
securities dealer) at an agreed upon price on an agreed upon
date, usually not more than 7 days from the date of purchase.
The resale price reflects the purchase price plus an agreed upon
market rate of interest which is unrelated to the coupon rate or
maturity of the purchased security. A repurchase agreement
involves the obligation of the seller to pay the agreed upon
price, which obligation is in effect secured by the value of the
underlying security. In these transactions, the securities
purchased by a Fund will have a total value equal to or in excess
of the amount of the repurchase obligation and will be held by
the Funds' custodian until repurchased. If the seller defaults
and the value of the underlying security declines, a Fund may
incur a loss and may incur expenses in selling the collateral.
If the seller seeks relief under the bankruptcy laws, the
disposition of the collateral may be delayed or limited. Any
investments in repurchase agreements will give rise to income which
will not qualify as tax-exempt income when distributed by a Fund.
Other Policies
Although the California Bond Fund is permitted to invest in
options, financial futures contracts and options on financial
futures contracts, the Fund has no current intention of doing so
and will not invest in such securities without first notifying
shareholders and supplying further information in the Prospectus.
INVESTMENT RESTRICTIONS
The following investment restrictions have been adopted by the
Company for and are applicable to each Fund. These restrictions
may not be changed for any given Fund without approval by the
lesser of (1) 67% or more of the voting securities present at a
meeting of the Fund if more than 50% of the outstanding voting
securities of the Fund are present or represented by proxy or (2)
more than 50% of the Fund's outstanding voting securities. The
investment restrictions of one Fund may be changed without
affecting those of the other Fund.
Under the restrictions, neither Fund will:
(1) With respect to 75% of its total assets, purchase securities
of any issuer (except the United States Government, its
agencies and instrumentalities and any tax-exempt security
guaranteed by the United States Government) if as a result
more than 5% of the total assets of that Fund would be
invested in securities of such issuer; for purposes of this
limitation, identification of the "issuer" will be based on
a determination of the source of assets and revenues
committed to meeting interest and principal payments of each
security; for purposes of this limitation the State of
California or other jurisdictions and each of its separate
political subdivisions, agencies, authorities and
instrumentalities shall be treated as a separate issuer;
(2) Purchase more than 10% of the outstanding voting securities
of any issuer;
(3) Borrow money, except for temporary or emergency purposes in an
amount not exceeding 33 1/3% of its total assets (including the
amount borrowed) less liabilities (other than borrowings);
(4) Pledge, mortgage or hypothecate its assets to any extent
greater than 10% of the value of its total assets;
(5) Purchase or retain securities of any issuer if any officer
or Director of the Company or its Manager owns individually
more than one-half of one percent ( 1/2%) of the securities
of that issuer, and collectively the officers and Directors
of the Company and Manager together own more than 5% of the
securities of that issuer;
(6) Purchase any securities which would cause more than 25% of the value
of that Fund's total assets at the time of such purchase to be
invested in securities the interest upon which is derived from revenues
or projects with similar characteristics, such as toll road revenue
bonds, housing revenue bonds, electric
Investment Restrictions, cont.
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; provided that the foregoing limitation does not apply with
respect to investments in United States Treasury Bills, other obligations
issued or guaranteed by the United States Government, its agencies and
instrumentalities, and, in the case of the California Money Market Fund,
certificates of deposit and banker's acceptances of domestic banks;
(7) Invest in issuers for the purpose of exercising control or
management;
(8) Issue senior securities as defined in the 1940 Act, except
that it may purchase tax-exempt securities on a "when-
issued" basis or in financial futures contracts as permitted
by Section 18(f)(2);
(9) Underwrite securities of other issuers, except to the extent that
it may be deemed to act as a statutory underwriter in the
distribution of any restricted securities or not readily
marketable securities;
(10) Purchase or sell real estate, but this shall not prevent
investments in tax-exempt securities secured by real estate
or interests therein;
(11) Lend any securities or make any loan if, as a result, more than
33 1/3% of its total assets would be lent to other parties,
except that this limitation does not apply to purchases of debt
securities or to repurchase agreements;
(12) Purchase on margin or sell short; for purposes of this
restriction the deposit or payment of initial or variation
margin in connection with financial futures contracts or
related options will not be deemed to be a purchase of
securities on margin by a Fund;
(13) Purchase or sell commodities or commodities contracts,
except that the Fund may invest in financial futures
contracts and options thereon;
(14) Invest its assets in securities of other investment
companies except by purchases in the open market involving
only customary brokers' commissions or as part of a merger,
consolidation, reorganization or purchase of assets approved
by the shareholders; or
(15) Invest in put, call, straddle or spread options or interests
in oil, gas or other mineral exploration or development
programs, except that a Fund may write covered call options
and purchase put options.
Additional Restrictions
The following restrictions are not considered to be fundamental
policies of the Funds. These additional restrictions may be
changed by the Board of Directors of the Company without notice
to or approval by the shareholders.
Neither Fund will:
(1) Invest more than 15% (10% with respect to the California Money
Market Fund) of the value of its net assets in illiquid securities,
including repurchase agreements maturing in more than seven days.
(2) Purchase any security while borrowings representing more than
5% of the Fund's total assets are outstanding.
SPECIAL RISK CONSIDERATIONS
Certain California constitutional amendments, legislative
measures, executive orders, administrative regulations and voter
initiatives could result in the adverse effects described below.
The following information constitutes only a brief summary, does
not purport to be a complete description, and is based on
information drawn from official statements and prospectuses
relating to securities offerings of the State of California (the
"State") and various local agencies in California and from other
relevant sources. While the Funds have not independently
verified such information, they have no reason to believe that
such information is not correct in all material respects.
Certain of the tax-exempt securities in which the Funds may
invest may be obligations of issuers which rely in whole or in
part on California State revenues for payment of these
obligations. Property tax revenues and a portion of the State's
General Fund surplus are distributed to counties, cities and
their various taxing entities, and the State assumes certain
obligations theretofore paid out of local funds. Whether and to
what extent a portion of the State's General Fund will be
distributed in the future to counties, cities and their various
entities, is unclear.
Certain of the tax-exempt securities may be obligations of
issuers who rely in whole or in part on ad valorem real property
taxes as a source of revenue. On June 6, 1978, California voters
approved an amendment to the California Constitution known as
Proposition 13, which added Article XIIIA to the California
Constitution. The effect of Article XIIIA is to limit ad valorem
taxes on real property, and to restrict the ability of taxing
entities to increase real property tax revenues. On November 7,
1978, California voters approved Proposition 8, and on June 3,
1986 California voters approved Proposition 46, both of which
amended Article XIIIA.
Section 1 of Article XIIIA limits the maximum ad valorem
property tax on real property to 1% of full cash value (as
defined in Section 2), to be collected by the counties and
apportioned according to law; provided that the 1% limitation
does not apply to ad valorem taxes or special assessments to pay
the interest and redemption charges or (i) any indebtedness
approved by the voters prior to July 1, 1978, or (ii) any bonded
indebtedness for the acquisition or improvement of real property
approved on or after July 1, 1978 by two-thirds of the votes cast
by the voters voting on the proposition. Section 2 of Article
XIIIA defines "full cash value" to mean "the County Assessor's
valuation of real property as shown on the 1975-76 tax bill under
full cash value or, thereafter, the appraised value of real
property when purchased, newly constructed, or a change in
ownership has occurred after the 1975 assessment." The "full
cash value" may be adjusted annually to reflect inflation at a
rate not to exceed 2% per year, or a reduction in the Consumer
Price Index or comparable local data, or reduced in the event of
declining property value caused by damage, destruction or other
factors. The California State Board of Equalization has adopted
regulations, binding on county assessors, interpreting the
meaning of "change in ownership" and "new construction" for
purposes of determining full cash value of property under Article XIIIA.
Legislation enacted by the California Legislature to
implement Article XIIIA (statutes of 1978, Chapter 292, as
amended) provides, that notwithstanding any other law, local
agencies may not levy any ad valorem property tax except to pay
debt service on indebtedness approved by the voters prior to July
1, 1978, and that each county will levy the maximum tax permitted
by Article XIIIA of $4.00 per $100 assessed valuation (based on
the former practice of using 25%, instead of 100%, of full cash
value as the assessed value for tax purposes). The legislation
further provided that, for the 1978-79 fiscal year only, the tax
levied by each county was to be apportioned among all taxing
agencies within the county in proportion to their average share
of taxes levied in certain pervious years. The apportionment of
property taxes for fiscal years after 1978-79 has been revised
pursuant to Statutes of 1979, Chapter 282, which provides relief
funds from state attorneys beginning in fiscal year 1979-80 and
is designed to provide a permanent system for sharing state taxes
and budget funds with local agencies. Under Chapter 282, cities
and counties receive more of the remaining property tax revenues
collected under Proposition 13 instead of direct State aid.
School districts receive a correspondingly reduced amount of
property taxes, but receive compensation directly from the State
and are given additional relief. Chapter 282 does not affect the
derivation of the base levy ($4.00 per $100 of assessed
valuation) and the bonded debt tax rate. However, there can be
no assurance that any particular level of State aid to local
governments will be maintained in future years.
On November 6, 1979, another initiative known as
"Proposition 4" or the "Gann Initiative" was approved by the
California voters, which added Article XIIIB to the California
Constitution. Under Article XIIIB, state and local governmental
entities have an annual "appropriations limit" and are not able
to spend certain moneys called "appropriations subject to
limitation" in an amount higher than the "appropriations limit."
Article XIIIB does not affect the appropriation of moneys which
are excluded from the definition of "appropriations subject to
limitation," including debt service on indebtedness existing or
authorized as of January 1, 1979, or bonded indebtedness
subsequently approved by the voters. In general terms, the
"appropriations limit" is to be based on certain 1978-79
expenditures, and is to be adjusted annually to reflect changes
in consumer prices, population and certain services provided by
these entities. Article XIIIB also provides that if these
entities' revenues in any year exceed the amount permitted to be
spent, the excess would have to be returned by revising tax rates
or fee schedules over the subsequent two years. The
"appropriations limit" was $35.010 billion for the 1992-93 fiscal
year, and is estimated to be $36.599 billion for the 1993-94
fiscal year and $36.606 billion for the 1994-95 fiscal year.
In June 1982, the voters of California passed two initiative
measures to repeal the California gift and inheritance tax laws
and to enact, in lieu thereof, a California death tax.
California voters also passed an initiative measure to increase,
for taxable years commencing on or after January 1, 1982, the
amount by which personal income tax brackets will be adjusted
annually in an effort to index such tax brackets to account for
the effects of inflation. Decreases in State and local revenues
in future fiscal years as a consequence of these initiatives may
result in reductions in allocations of state revenues to
California issuers or in the ability of California issuers to pay
their obligations.
At the November 8, 1988 general election, California voters
approved an initiative known as Proposition 98. This initiative
amends Article XIIIB to require that (i) the California
Legislature establish a prudent state reserve fund in an amount
as shall be reasonable and necessary and (ii) revenues in excess
of amounts permitted to be spent and which would otherwise be
returned pursuant to Article XIIIB by revision of tax rates or
fees schedules, be transferred and allocated (up to a maximum of
40%) to the State School Fund and be expended solely for purposes
of instructional improvement and accountability. No such
transfer or allocation of funds will be required if certain
designated state officials determine that annual student
expenditures and class size meet certain criteria as set forth in
Proposition 98. Any funds allocated to the State School Fund
shall cause the appropriation limits established in Article XIIIB
to be annually increased for any such allocation made in the prior year.
Special Risk Considerations, cont.
Proposition 98 also amends Article XVI to require that the
State of California provide a minimum level of funding for public
schools and community colleges. Commencing with the 1988-89
fiscal year, moneys to be applied by the State for the support of
school districts and community college districts shall not be
less than the greater of: (i) the amount which, as a percentage
of the State General Fund revenues which may be appropriated
pursuant to Article XIIIB, equals the percentage of such State
General Fund revenues appropriated for school districts and
community college districts, respectively, in fiscal year 1986-87
or (ii) the amount required to ensure that the total allocations
to school districts and community college districts from the
State general fund proceeds of taxes appropriated pursuant to
Article XIIIB and allocated local proceeds of taxes shall not be
less than the total amount from the sources in the prior year,
adjusted for increases in enrollment and adjusted for changes in
the cost of living pursuant to the provisions of Article XIIIB.
The initiative permits the enactment of legislation, by a two-
thirds vote, to suspend the minimum funding requirements for one year.
In June 1989, the California Legislature enacted Senate
Constitutional amendment number one ("SCA 1"), a proposed
modification of the California Constitution to alter the spending
limit in the educational funding provisions of Proposition 98.
SCA 1 was approved by the voters on the June 1990 ballot and took
effect on July 1, 1990. SCA 1 permits annual adjustments to the
spending limit to be more closely linked to the rate of economic
growth in the State. Instead of being tied to the consumer price
index, the change in "cost of living" is measured by the change
in California per capita personal income. In addition, if
certain kinds of emergencies are declared by the Governor, an
appropriation enacted by a two-thirds vote of the Legislature
will be excluded from the State's appropriations limit.
SCA 1 also provides two new exceptions to the calculation of
appropriations which are subject to the spending limit. First,
there will be excluded all appropriations for "qualified capital
outlay projects" as defined by the Legislature. Second, there
will be excluded any increase in gasoline taxes above their
current 9% per gallon level. In addition, SCA 1 recalculates the
appropriation limits for each unit in government, beginning in
the 1990-91 fiscal year, based upon a two-year cycle. The
Proposition 98 provision regarding excess taxes will also be
modified. After a two-year period if there are any excess state
tax revenues, 50% (instead of 100%) of the excess will be
transferred to schools with the balance returned to taxpayers.
SCA 1 also modifies in certain respects the complex adjustment in
the Proposition 98 formula which guarantees schools a certain
amount of the General Fund revenues.
In 1992-93 and 1993-94, the State budget met part of its
Proposition 98 commitment to education through $1.8 billion in
off-book loans. The legality of these loans was challenged in a
lawsuit by the California Teachers Association. A lower court in
California has ruled against the State, and under this decision
the schools will not be required to repay these loans. If upheld
on appeal, the ruling would increase the State's officially
recognized 1993-94 year-end deficit by $1.8 billion.
In September 1980, the legislature enacted a measure
(Chapter 1342, Statutes of 1980) declaring that tax increment
revenues are not "proceeds of taxes" within the meaning of
Article XIIIB and that the allocation and expenditure of such
moneys are not appropriations subject to the limitations under
Article XIIIB, if used for repayment of indebtedness incurred for
redevelopment activity. While the California Supreme Court
expressly declined to rule on the validity of Chapter 1342 and
the applicability of Article XIIIB to redevelopment agencies in
Huntington Park Redevelopment Agency v. Martin, two subsequent
decisions of the California Court of Appeal have upheld the
validity of Chapter 1342 and have concluded that redevelopment
agencies are not subject to the appropriations limit of Article
XIIIB. Proposition 87 was approved by the California voters on
November 8, 1988. Proposition 87 amends Article XVI, Section 16,
of the California Constitution by authorizing the California
Legislature to prohibit redevelopment agencies from receiving any
of the property tax revenue raised by increased property tax
rates levied to repay bonded indebtedness of local governments
which is approved by voters on or after January 1, 1989. It is
not possible to predict whether the California Legislature will
enact such a prohibition, nor is it possible to predict the
impact of Proposition 87 on redevelopment agencies and their
ability to make payments on outstanding debt obligations.
On November 4, 1986, California voters approved an
initiative statute known as Proposition 62. This initiative (i)
requires that any tax for general governmental purposes imposed
by local governments be approved by resolution or ordinance
adopted by a two-thirds vote of the governmental entity's
legislative body and by a majority vote of the electorate of the
governmental entity, (ii) requires that any special tax (defined
as taxes levied for other than general governmental purposes)
imposed by a local governmental entity be approved by a two-
thirds vote of the voters within the jurisdiction, (iii)
restricts the use of revenues from a special tax to the purposes
or for the service for which the special tax was imposed, (iv)
prohibits the imposition of ad valorem taxes on real property by
local governmental entities except as permitted by Article XIIIA,
(v) prohibits the imposition of transaction taxes and sales taxes
on the sale of real property by local governments, (vi) requires
that any tax imposed by a local government on or after August 1, 1985
be ratified by a majority vote of the electorate within two years
of the adoption of the initiative or be terminated by November 15, 1988,
(vii) requires that, in the event a local government fails to comply with
the provisions of this measure, a reduction in the amount of property
tax revenue allocated to such local government occurs in an
amount equal to the revenues received by such entity attributable
to the tax levied in violation of the initiative, and (viii)
permits these provisions to be amended exclusively by the voters
of the State of California.
In September 1988, the California Court of Appeal in City of
Westminster v. County of Orange held that Proposition 62 is
unconstitutional to the extent that it requires a general tax by
a general law city, enacted on or after August 1, 1985 and prior
to the effective date of Proposition 62, to be subject to
approval by a majority of voters. The Court held that the
California Constitution prohibits the imposition of a requirement
that local tax measures be submitted to the electorate by either
referendum or initiative. It is not possible to predict the
impact of this decision on charter cities, on special taxes, or
on new taxes imposed after the effective date of Proposition 62.
In July, 1991, California increased taxes by adding two new
marginal personal income tax rates, at 10% and 11%, effective for
tax years 1991 through 1995. The rate increase is scheduled to
return to 9.3%. The alternative minimum tax rate was increased
to 8.5% and is scheduled to return to 7% after 1995. In
addition, the sales tax was increased by 1.25%. Of this
increase, 0.5% was a permanent addition to counties, but with the
money earmarked to trust funds to pay for health and welfare
programs whose administration was transferred to counties. This
tax increase will be cancelled if a court rules that such
transfer and tax increase violate any constitutional requirement.
An additional 0.5% of the sales tax rate was scheduled for
termination on June 30, 1993, but was extended by legislation
through December 31, 1993. The approval of Proposition 172 on the
November 1993 ballot by the voters extended this increase permanently.
California is the most populous state in the nation with a
total population at the 1990 Census of 29,976,000. Growth has
been incessant since World War II, with population gains in each
decade since 1950 of between 18% and 49%. During the last
decade, population rose 20%. The State now comprises 12.3% of
the nation's population and 12.9% of its total personal income.
Its economy is broad and diversified with major concentrations in
high technology research and manufacturing, aerospace and
defense-related manufacturing, trade, real estate, and financial
services. After experiencing strong growth throughout much of
the 1980's, the State was adversely affected by both the national
recession and the cutbacks in aerospace and defense spending,
which have a severe impact on the economy in Southern California.
In 1990, unemployment moved above the national average for the
first time in many years and remained significantly above the
United States average in 1993. Although the national economic
recovery is continuing at a strong pace, California is still
experiencing the effects of a recession. Unemployment has
remained above the national average since 1990. Substantial
contraction in California's defense related industries,
overbuilding in commercial real estate, and consolidation and
decline in the State's financial services industry will likely
produce slower overall growth for several years. Economists
predict that the State's economy will experience modest growth in
1995 and 1996. The earthquake which struck Northridge,
California on January 17, 1994, is not expected to derail the
State's economic recovery, although it may carry long-term
implications for the City of Los Angeles.
These economic difficulties have exacerbated the structural
budget imbalance, which has been evident since fiscal year 1985-
86. Since that time, budget shortfalls have become increasingly
more difficult to solve and the State has recorded General Fund
operating deficits in five of the past six fiscal years. The
accumulated budget deficits over the past several years had
exhausted the State's available cash reserves and resources. In
July and August, 1994, the State was required to issue a total of
$7 billion of short-term revenue anticipation warrants and notes
to fund, in part, the State's cash flow management needs for the
1994-95 fiscal year. The current budget recognizes that the
accumulated deficit cannot be repaid in one year. In order to
balance the budget and generate sufficient cash to retire the $7
billion warrants and notes, the State's fiscal plan relies upon
assumptions of federal assistance to compensate the State for its
cost of providing services to illegal immigrants. These
assumptions, combined with the fiscal year 1996 constitutionally
mandated increases in spending for K-12 education, and continued
growth in social services and corrections expenditures are
speculative. To offset any risk, the State has enacted a Budget
Adjustment Law, known as the "trigger" legislation, which
established a set of backup budget adjustment mechanisms to
address potential shortfalls in cash. The trigger mechanism will
be in effect for both fiscal years 1995 and 1996.
Although an improving economy and healthier tax revenues are
anticipated, the political environment and voter initiatives may
constrain the State's financial flexibility. For example,
according to the Legislative Analyst's Office, the passage of
Proposition 187 in the November 1994 election, which in part
denies certain social services to illegal immigrants, could
jeopardize $15 billion in federal funding. In addition, the passage
Special Risk Considerations, cont.
of Proposition 184 in the November 1994 election, which imposes
mandatory, lengthy prison sentences on individuals convicted of
three felonies, is expected to increase prison operating costs by
$3 billion annually and increase prison construction costs by $20 billion.
With the apparent onset of recovery in California's economy,
revenue growth over the next few years could recommence at levels
that would enable California to restore fiscal stability. The
political environment, however, combined with pressures on the
State's financial flexibility, may frustrate its ability to reach
this goal. Strong interests in long-established state programs
ranging from low-cost public higher education access to welfare
and health benefits join with the more recently emerging
pressures for expanded prison construction and heightened
awareness and concern over the State's business climate.
Because of the State of California's continuing budget
problems, the State's General Obligation bonds were downgraded in
July 1994 to A1 from Aa by Moody's, to A from A+ by Standard &
Poor's, and to A from AA by Fitch. All three rating agencies expressed
uncertainty in the State's ability to balance the budget by 1996.
On December 6, 1994, Orange County became the largest
municipality in the United States to file for protection under
the Federal bankruptcy laws. The filing stemmed from
approximately $1.7 billion in losses suffered by the County's
investment pool due to investments in high risk "derivative"
securities. Over 185 public agencies had funds invested in the
pool, and these funds may be accessed only with permission of the
bankruptcy court. On June 27, 1995, Orange County voters
rejected a proposal to increase the County's sales tax by $.005.
While there is speculation of the State taking control of Orange
County, it is unclear whether the State will lend financial or
other assistance to Orange County to prevent the County from
defaulting on its other obligations. In any case, significant
County budget cutbacks are expected.
Certain tax-exempt securities in which the Funds may invest
may be obligations payable solely from the revenues of specific
institutions, or may be secured by specific properties, which are
subject to provisions of California law that could adversely
affect the holders of such obligations. For example, the
revenues of California health care institutions may be subject to
state laws, and California laws limit the remedies of a creditor
secured by a mortgage or deed of trust on real property.
PORTFOLIO TRANSACTIONS
The Manager, pursuant to the Advisory Agreement dated July 20,
1990 and subject to the general control of the Company's Board of
Directors, places all orders for the purchase and sale of Fund
securities. Purchases of Fund securities are made either
directly from the issuer or from dealers who deal in tax-exempt
securities. The Manager may sell Fund securities prior to
maturity if circumstances warrant and if it believes such
disposition is advisable. In connection with portfolio
transactions for the Company, the Manager seeks to obtain the
best available net price and most favorable execution for its
orders. The Manager has no agreement or commitment to place
transactions with any broker-dealer and no regular formula is
used to allocate orders to any broker-dealer. However, the
Manager may place security orders with brokers or dealers who
furnish research or other services to the Manager as long as
there is no sacrifice in obtaining the best overall terms
available. Payment for such services would be generated only
through purchase of new issue fixed income securities.
Such research and other services may include, for example:
advice concerning the value of securities, the advisability of
investing in, purchasing, or selling securities, and the
availability of securities or the purchasers or sellers of
securities; analyses and reports concerning issuers, industries,
securities, economic factors and trends, portfolio strategy, and
performance of accounts; and various functions incidental to
effecting securities transactions, such as clearance and
settlement. The Manager continuously reviews the performance of
the broker-dealers with whom it places orders for transactions.
The receipt of research from broker-dealers that execute
transactions on behalf of the Company may be useful to the
Manager in rendering investment management services to other
clients (including affiliates of the Manager), and conversely,
such research provided by broker-dealers who have executed
transaction orders on behalf of other clients may be useful to
the Manager in carrying out its obligations to the Company.
While such research is available to and may be used by the
Manager in providing investment advice to all its clients
(including affiliates of the Manager), not all of such research
may be used by the Manager for the benefit of the Company. Such
research and services will be in addition to and not in lieu of
research and services provided by the Manager, and the expenses
of the Manager will not necessarily be reduced by the receipt of
such supplemental research. See The Company's Manager.
On occasions when the Manager deems the purchase or sale of
a security to be in the best interest of the Company, as well as
the Manager's other clients, the Manager, to the extent permitted
by applicable laws and regulations, may aggregate such securities
to be sold or purchased for the Company with those to be sold or
purchased for other customers in order to obtain best execution
and lower brokerage commissions, if any. In such event,
allocation of the securities so purchased or sold, as well as the
expenses incurred in the transaction, will be made by the Manager
in the manner it considers to be most equitable and consistent
with its fiduciary obligations to all such customers, including
the Company. In some instances, this procedure may impact the
price and size of the position obtainable for the Company.
The tax-exempt security market is typically a "dealer"
market in which investment dealers buy and sell bonds for their
own accounts, rather than for customers, and although the price
may reflect a dealer's mark-up or mark-down, the Company pays no
brokerage commissions as such. In addition, some securities may
be purchased directly from issuers.
Portfolio Turnover Rates
The portfolio turnover rate is computed by dividing the dollar
amount of securities purchased or sold (whichever is smaller) by
the average value of securities owned during the year.
The rate of portfolio turnover will not be a limiting factor
when the Manager deems changes in the California Bond Fund's
portfolio appropriate in view of its investment objective. For
example, securities may be sold in anticipation of a rise in
interest rates (market decline) or purchased in anticipation of a
decline in interest rates (market rise) and later sold. In
addition, a security may be sold and another security of
comparable quality may be purchased at approximately the same
time in order to take advantage of what the Fund believes to be a
temporary disparity in the normal yield relationship between the
two securities. These yield disparities may occur for reasons
not directly related to the investment quality of particular
issues or the general movement of interest rates, such as changes
in the overall demand for or supply of various types of tax-
exempt securities. Moreover, to optimize yields on the short-
term liquidity portion of the Fund, daily and weekly demand bonds
are utilized extensively. There are transactions in the Fund in
this type of security virtually daily. These transactions,
though short-term in nature, are included in the turnover rate.
Increased use of daily and weekly demand bonds may result in
higher portfolio turnover.
For the last two fiscal years the California Bond Fund's
portfolio turnover rates were as follows:
1994.....102.85% 1995......68.57%
FURTHER DESCRIPTION OF SHARES
The Company is authorized to issue shares in separate classes or
Funds. Ten Funds have been established, two of which are
described in this SAI. Under the Articles of Incorporation, the
Board of Directors is authorized to create new Funds in addition
to those already existing without shareholder approval. The
Company began offering shares of the California Bond and the
California Money Market Funds in August 1989.
The assets of each Fund and all income, earnings, profits
and proceeds thereof, subject only to the rights of creditors,
are specifically allocated to such Fund. They constitute the
underlying assets of each Fund, are required to be segregated on
the books of account, and are to be charged with the expenses of
such Fund. Any general expenses of the Company not readily
identifiable as belonging to a particular Fund are allocated on
the basis of the Funds' relative net assets during the fiscal
year or in such other manner as the Board determines to be fair
and equitable. Each share of each Fund represents an equal
proportionate interest in that Fund with every other share and is
entitled to dividends and distributions out of the net income and
capital gains belonging to that Fund when declared by the Board.
On any matter submitted to the shareholders, the holder of
each Fund share is entitled to one vote per share (with
proportionate voting for fractional shares) regardless of the
relative net asset values of the Funds' shares. However, on
matters affecting an individual Fund, a separate vote of the
shareholders of that Fund is required. Shareholders of a Fund
are not entitled to vote on any matter which does not affect that
Fund but which requires a separate vote of another Fund. Shares
do not have cumulative voting rights, which means that holders of
more than 50% of the shares voting for the election of Directors
can elect 100% of the Company's Board of Directors, and the
holders of less than 50% of the shares voting for the election of
Directors will not be able to elect any person as a Director.
Shareholders of a particular Fund might have the power to
elect all of the Directors of the Company because that Fund has a
majority of the total outstanding shares of the Company. When
issued, each Fund's shares are fully paid and nonassessable, have
no pre-emptive or subscription rights, and are fully
transferable. There are no conversion rights.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
Each Fund intends to qualify as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as
amended (the Code). Accordingly, each Fund will not be liable
for federal income taxes on its taxable net investment income and
net capital gains (capital gains in excess of capital losses)
that are distributed to shareholders, provided that each Fund
distributes at least 90% of its net investment income and net
short-term capital gain for the taxable year.
To qualify as a regulated investment company, a Fund must,
among other things, (1) derive in each taxable year at least 90%
of its gross income from dividends, interest, payments with
respect to securities loans, gains from the sale or other
disposition of stock, securities or foreign currencies, or other
income derived with respect to its business of investing in such
stock, securities or currencies (the 90% test); (2) derive in
each taxable year less than 30% of its gross income from the sale
or other disposition of stock or securities held less than three
months (the 30% test), and (3) satisfy certain diversification
requirements at the close of each quarter of the Fund's taxable
year. Furthermore, to pay tax-exempt interest income dividends,
at least 50% of the value of each Fund's total assets at the
close of each quarter of its taxable year must consist of
obligations the interest of which is exempt from federal income
tax. Each Fund intends to satisfy this requirement.
The Code imposes a nondeductible 4% excise tax on a
regulated investment company that fails to distribute during each
calendar year an amount at least equal to the sum of (1) 98% of
its taxable net investment income for the calendar year, (2) 98%
of its capital gain net income for the twelve month period ending
on October 31, and (3) any prior amounts not distributed. Each
Fund intends to make such distributions as are necessary to avoid
imposition of this excise tax.
For federal income tax purposes, debt securities purchased
by the Funds may be treated as having original issue discount.
Original issue discount represents interest income for federal
income tax purposes and can generally be defined as the excess of
the stated redemption price at maturity of a debt obligation over
the issue price. Original issue discount is treated for federal
income tax purposes as earned by the Funds, whether or not any
income is actually received, and therefore is subject to the
distribution requirements of the Code. However, original issue
discount with respect to tax-exempt obligations generally will be
excluded from the Funds' taxable income, although such discount
will be included in gross income for purposes of the 90% test and
the 30% test described previously. Original issue discount with
respect to tax-exempt securities is accrued and added to the
adjusted tax basis of such securities for purposes of determining
gain or loss upon sale or at maturity. Generally, the amount of
original issue discount is determined on the basis of a constant
yield to maturity which takes into account the compounding of
accrued interest. An investment in a stripped bond or stripped
coupon will result in original issue discount.
Debt securities may be purchased by the Funds at a market
discount. Market discount occurs when a security is purchased at
a price less than the original issue price adjusted for accrued
original issue discount, if any. The Funds intend to defer
recognition of accrued market discount until maturity or other
disposition of the bond. For securities purchased at a market
discount, the gain realized on disposition will be treated as
taxable ordinary income to the extent it does not exceed accrued
market discount on the bond.
The Funds may also purchase debt securities at a premium,
i.e., at a purchase price in excess of face amount. With respect
to tax-exempt securities, the premium must be amortized to the
maturity date but no deduction is allowed for the premium
amortization. The amortized bond premium will reduce the Funds'
adjusted tax basis in the securities. For taxable securities,
the premium may be amortized if the Funds so elect. The
amortized premium on taxable securities is first offset against
interest received on the securities and then allowed as a
deduction, and, for securities issued after September 27, 1985,
must be amortized under an economic accrual method.
Taxation of the Shareholders
Taxable distributions are generally included in a shareholder's
gross income for the taxable year in which they are received.
Dividends declared in October, November, or December and made
payable to shareholders of record in such a month will be deemed
to have been received on December 31, if a Fund pays the dividend
during the following January. It is expected that none of the
Funds' distributions will qualify for the corporate dividends-
received deduction.
To the extent that a Fund's dividends distributed to
shareholders are derived from interest income exempt from federal
income tax and are designated as "exempt-interest dividends" by a
Fund, they will be excludable from a shareholder's gross income
for federal income tax purposes. Shareholders who are recipients
of Social Security benefits should be aware that exempt-interest
dividends received from a Fund are includible in their "modified
adjusted gross income" for purposes of determining the amount of
such Social Security benefits, if any, that are required to be
included in their gross income.
All distributions of investment income during the year will
have the same percentage designated as tax-exempt. This method
is called the "average annual method." Since the Funds invest
primarily in tax-exempt securities, the percentage will be
substantially the same as the amount actually earned during any
particular distribution period.
A shareholder of the California Bond Fund should be aware
that a redemption of shares (including any exchange into another
USAA Fund) is a taxable event and, accordingly, a capital gain or
loss may be recognized. If a shareholder receives an exempt-
interest dividend with respect to any share and such share has
been held for six months or less, any loss on the redemption or
exchange will be disallowed to the extent of such exempt-interest
dividend. Similarly, if a shareholder of the Fund receives a
distribution taxable as long-term capital gain with respect to
shares of the Fund and redeems or exchanges shares before he has
held them for more than six months, any loss on the redemption or
exchange (not otherwise disallowed as attributable to an exempt-
interest dividend) will be treated as long-term capital loss.
The Funds may invest in private activity bonds. Interest on
certain private activity bonds issued after August 7, 1986, is an
item of tax preference for purposes of the Federal Alternative
Minimum Tax (AMT), although the interest continues to be
excludable from gross income for other purposes. AMT is a
supplemental tax designed to ensure that taxpayers pay at least a
minimum amount of tax on their income, even if they make
substantial use of certain tax deductions and exclusions
(referred to as tax preference items). Interest from private
activity bonds is one of the tax preference items that is added
to income from other sources for the purposes of determining
whether a taxpayer is subject to the AMT and the amount of any
tax to be paid. For corporate investors, alternative minimum
taxable income is increased by 75% of the amount by which
adjusted current earnings (ACE) exceeds alternative minimum
taxable income before the ACE adjustment. For corporate
taxpayers, all tax-exempt interest is considered in calculating
the AMT as part of the ACE. Prospective investors should consult
their own tax advisers with respect to the possible application
of the AMT to their tax situation.
Opinions relating to the validity of tax-exempt securities
and the exemption of interest thereon from federal income tax are
rendered by recognized bond counsel to the issuers. Neither the
Manager's nor the Funds' counsel makes any review of proceedings
relating to the issuance of tax-exempt securities or the basis of
such opinions.
CALIFORNIA TAXATION
The State of California has adopted legislation incorporating the
federal provisions relating to regulated investment companies.
Thus, to the extent the Funds distribute their income, they will
be exempt from the California franchise and corporate income
taxes as regulated investment companies under Section 24870 of
the California Revenue and Taxation Code.
In the year in which a Fund qualifies as a regulated
investment company under the Code and is exempt from federal
income tax, (i) the Fund will also be exempt from the California
corporate income and franchise taxes to the extent it distributes
its income and (ii), provided 50% or more of the value of the
total assets of the Fund at the close of each quarter of its
taxable year consists of obligations, the interest on which (when
held by an individual) is exempt from personal income taxation
under California law, the Fund will be qualified under California
law to distribute dividends ("California exempt-interest
dividends") which will be exempt from the California personal
income tax. The Funds intend to qualify under the above
requirement so that they can distribute California exempt-
interest dividends. If the Funds fail to so qualify, no part of
their dividends will be exempt from the California personal
income tax.
The portion of dividends constituting California exempt-
interest dividends is that portion derived from interest on
obligations issued by California and its municipalities and
localities, the interest on which (when held by an individual) is
excludable from California personal income under California law.
Distributions from the Funds that are attributable to sources
other than those described in the preceding sentence generally
will be taxable to such shareholders as ordinary income. In
addition, distributions other than exempt-interest dividends to
such shareholders are includable in income that may be subject to
the California alternative minimum tax. The total amount of
California exempt-interest dividends paid by each Fund to all of
its shareholders with respect to any taxable year cannot exceed
the amount of interest received by each Fund during such year on
California municipal obligations less any expenses and
expenditures. California exempt-interest dividends are
excludable from income for California personal income tax
purposes only. Any dividends paid to shareholders subject to the
California franchise tax will be taxed as ordinary dividends to
such shareholders notwithstanding that all or a portion of such
dividends are exempt from the California personal income tax.
To the extent any portion of the dividends distributed to
the shareholders by the Funds are derived from taxable interest
for California purposes or net short-term capital gains, such
portion will be taxable to the shareholders as ordinary income.
The character of long-term capital gains realized and distributed by the
California Taxation, cont.
Bond Fund will flow through to its shareholders regardless of how
long the shareholders have held their shares. If a shareholder
of the Funds received any California exempt-interest dividends on
shares thereafter sold within six months of acquisition, then any
realized loss, to the extent of the amount of exempt-interest
dividends received prior to such sale, will be disallowed.
Interest on indebtedness incurred by shareholders to purchase or
carry shares of the Funds' will not be deductible for California
personal income tax purposes. Any loss realized upon the
redemption of shares within 30 days before or after the
acquisition of other shares of the same series may be disallowed
under the "wash sale" rules.
The foregoing is only a summary of some of the important
California personal income tax considerations generally affecting
the Funds and their shareholders. No attempt is made to present
a detailed explanation of the California personal income tax
treatment of the Funds or their shareholders, and this discussion
is not intended as a substitute for careful planning.
Accordingly, potential investors in the Funds should consult
their tax advisers with respect to the application of California
taxes to the receipt of the Funds' dividends and as to their own
California tax situation.
DIRECTORS AND OFFICERS OF THE COMPANY
The Board of Directors of the Company consists of eight
Directors. Set forth below are the Directors and officers of the
Company, and their respective offices and principal occupations
during the last five years. Unless otherwise indicated, the business
address of each is 9800 Fredericksburg Rd., San Antonio, TX 78288.
Hansford T. Johnson 1, 2
Director and Chairman of the Board of Directors
Age: 59
Director, Vice Chairman and Deputy Attorney-in-Fact, United
Services Automobile Association (USAA) and President, Chief
Executive Officer, Director and Vice Chairman of the Board of
Directors of USAA Capital Corporation and of its various
subsidiaries and affiliates (9/93-present); Chief of Staff, USAA
(1/93-8/93); Executive Vice President, USAA (10/92-12/92);
Commander-in-Chief, CINCTRANS, Department of Defense -Pentagon
(9/89-9/92). Mr. Johnson currently serves as a Trustee and
Chairman of the Boards of Trustees of USAA Investment Trust and
USAA State Tax-Free Trust and as Director and Chairman of the
Boards of Directors of USAA Investment Management Company (IMCO),
USAA Mutual Fund, Inc., USAA Shareholder Account Services, USAA
Federal Savings Bank and USAA Real Estate Company.
Michael J.C. Roth 1, 2
Director, President and Vice Chairman of the Board of Directors
Age: 53
Chief Executive Officer, IMCO (10/93-present); President,
Director and Vice Chairman of the Board of Directors, IMCO (1/90-
present); Director, USAA Federal Savings Bank (12/83-8/91). Mr.
Roth currently serves as President, Trustee and Vice Chairman of
the Boards of Trustees of USAA Investment Trust and USAA State
Tax-Free Trust, as President, Director and Vice Chairman of the
Boards of Directors of USAA Mutual Fund, Inc. and USAA
Shareholder Account Services, as Director of USAA Life Insurance
Company and as Trustee and Vice Chairman of USAA Life Investment Trust.
John W. Saunders, Jr. 1, 2, 4
Director and Vice President
Age: 60
Senior Vice President, Investments, IMCO (10/85-present);
Director, BHC Financial, Inc. and BHC Securities, Inc. (1/87-
present). Mr. Saunders currently serves as a Trustee and Vice
President of USAA Investment Trust and USAA State Tax-Free Trust,
as a Director of IMCO, Director and Vice President of USAA Mutual
Fund, Inc., as Senior Vice President of USAA Shareholder Account
Services, and as Vice President of USAA Life Investment Trust.
C. Dale Briscoe 4, 5
7829 Timber Top Drive
Boerne, TX 78006
Director
Age: 74
Retired. Mr. Briscoe currently serves as a Trustee of USAA
Investment Trust and USAA State Tax-Free Trust and as a Director
of USAA Mutual Fund, Inc.
George E. Brown 3, 4, 5
5829 Northgap Drive
San Antonio, TX 78239
Director
Age: 77
Retired. Mr. Brown currently serves as a Trustee of USAA
Investment Trust and USAA State Tax-Free Trust and as a Director
of USAA Mutual Fund, Inc.
Howard L. Freeman, Jr. 2, 3, 5
2710 Hopeton
San Antonio, TX 78230
Director
Age: 60
Assistant General Manager for Finance, San Antonio City Public
Service Board (1976-present). Mr. Freeman currently serves as a
Trustee of USAA Investment Trust and USAA State Tax-Free Trust
and as a Director of USAA Mutual Fund, Inc.
Richard A. Zucker 3, 4, 5
407 Arch Bluff
San Antonio, TX 78216
Director
Age: 52
Vice President, Beldon Roofing and Remodeling (1985-present).
Mr. Zucker currently serves as a Trustee of USAA Investment Trust
and USAA State Tax-Free Trust and as a Director of USAA Mutual Fund, Inc.
Barbara B. Dreeben 3, 5
200 Patterson #1008
San Antonio, TX 78209
Director
Age: 50
President, Postal Addvantage (7/92-present); Consultant, Nancy
Harkins Stationer, (8/91-present); Merchandise Manager, Nancy
Harkins Stationer (7/82-8/91). Mrs. Dreeben currently serves as
a Trustee of USAA Investment Trust and USAA State Tax-Free Trust
and as a Director of USAA Mutual Fund, Inc.
Michael D. Wagner 1
Secretary
Age: 47
Vice President, Corporate Counsel, USAA (1982-present). Mr.
Wagner has held various positions in the legal department of USAA
since 1970 and currently serves as Vice President, Secretary and
Counsel, IMCO and USAA Shareholder Account Services; Secretary,
USAA Investment Trust, USAA Mutual Fund, Inc., and USAA State
Tax-Free Trust; and as Vice President, Corporate Counsel, for
various other USAA subsidiaries and affiliates.
Alex M. Ciccone 1
Assistant Secretary
Age: 45
Vice President, Compliance, IMCO (12/94-present); Vice President
and Chief Operating Officer, Commonwealth Shareholder Services
(6/94-11/94); Vice President, Compliance, IMCO (12/91-5/94); Vice
President, Compliance, Fund Management Co. (10/89-11/91); and
Vice President, Compliance, AIM Distributors, Inc. (4/82-11/91).
Mr. Ciccone currently serves as Assistant Secretary of USAA
Investment Trust, USAA State Tax-Free Trust and USAA Mutual Fund, Inc.
Sherron A. Kirk 1
Treasurer
Age: 50
Vice President, Controller, IMCO (10/92-present); Vice President,
Corporate Financial Analysis, USAA (9/92-10/92); Assistant Vice
President, Financial Plans and Support, USAA (8/91-9/92);
Assistant Vice President, Real Estate Accounting, USAA Real
Estate Company (5/90-7/91). Mrs. Kirk currently serves as
Treasurer of USAA Investment Trust, USAA State Tax-Free Trust,
and USAA Mutual Fund, Inc., and as Vice President, Controller of
USAA Shareholder Account Services.
Directors and Officers of the Company, cont.
Dean R. Pantzar 1
Assistant Treasurer
Age: 36
Director, Mutual Fund Accounting, IMCO (12/94-present); Senior
Manager, KPMG Peat Marwick LLP (7/88-12/94). Mr. Pantzar
currently serves as Assistant Treasurer of USAA Mutual Fund,
Inc., USAA State Tax-Free Trust, and USAA Investment Trust.
- -------
1 Indicates those Directors and officers who are employees of
the Manager or affiliated companies and are considered
"interested persons" under the 1940 Act.
2 Member of Executive Committee
3 Member of Audit Committee
4 Member of Pricing and Investment Committee
5 Member of Corporate Governance Committee
Between the meetings of the Board of Directors and while the
Board is not in session, the Executive Committee of the Board of
Directors has all the powers and may exercise all the duties of
the Board of Directors in the management of the business of the
Company which may be delegated to it by the Board. The Pricing
and Investment Committee of the Board of Directors acts upon
various investment-related issues and other matters which have been
delegated to it by the Board. The Audit Committee of the Board of
Directors reviews the financial statements and the auditor's reports and
undertakes certain studies and analyses as directed by the Board. The
Corporate Governance Committee of the Board of Directors
maintains oversight of the organization, performance, and
effectiveness of the Board and Independent Directors.
In addition to the previously listed Directors and/or
officers of the Company who also serve as Directors and/or
officers of the Manager, the following individuals are Directors
and/or executive officers of the Manager: Josue Robles, Jr.,
Senior Vice President, Chief Financial Officer/Controller, USAA;
William McCrae, Senior Vice President, General Counsel and
Secretary, USAA; Harry W. Miller, Senior Vice President,
Investments (Equity); and John J. Dallahan, Senior Vice
President, Investment Services. There are no family
relationships among the Directors, officers and managerial level
employees of the Company or its Manager.
The following table sets forth information describing the
compensation of the current Directors of the Company for their
services as Directors for the fiscal year ended March 31, 1995.
Name Aggregate Total Compensation
of Compensation from the USAA
Director from the Company Family of Funds (c)
- ----- ---------------- -------------------
C. Dale Briscoe $4,876 $18,500
George E. Brown (a) 4,876 18,500
Barbara B. Dreeben 4,876 18,500
Howard L. Freeman, Jr. 4,876 18,500
Hansford T. Johnson None (b) None (b)
Michael J.C. Roth None (b) None (b)
John W. Saunders, Jr. None (b) None (b)
Richard A. Zucker 4,876 18,500
- ----------------
(a) The USAA Family of Funds has accrued deferred compensation
for Mr. Brown in an amount (plus earnings thereon) of
$20,118. The compensation was deferred by Mr. Brown
pursuant to a non-qualified Deferred Compensation Plan,
under which deferred amounts accumulate interest quarterly
based on the annualized U.S. Treasury Bill rate in effect on
the last day of the quarter. Amounts deferred and
accumulated earnings thereon are not funded and are general
unsecured liabilities of the USAA Funds until paid. The
Deferred Compensation Plan was terminated in 1988 and no
compensation has been deferred by any Trustee/Director of
the USAA Family of Funds since the Plan was terminated.
(b) Hansford T. Johnson, Michael J.C. Roth, and John W.
Saunders, Jr. are affiliated with the Company's investment
adviser, IMCO, and, accordingly, receive no remuneration
from the Company or any other Fund of the USAA Family of Funds.
(c) At March 31, 1995, the USAA Family of Funds consisted of 4
registered investment companies offering 29 individual
funds. Each Director presently serves as a Trustee or
Director of each investment company in the USAA Family of
Funds. In addition, Michael J.C. Roth presently serves as a
Trustee of USAA Life Investment Trust, a registered investment
company advised by IMCO, consisting of five funds offered to
investors in a fixed and variable annuity contract with USAA
Life Insurance Company. Mr Roth receives no compensation as
Trustee of USAA Life Investment Trust.
All of the above Directors are also Trustees/Directors of
the other funds for which IMCO serves as investment adviser. No
compensation is paid by any fund to any Trustee/Director who is a
director, officer, or employee of IMCO or its affiliates. No
pension or retirement benefits are accrued as part of fund
expenses. The Company reimburses certain expenses of the
Directors who are not affiliated with the investment adviser. As
of June 30, 1995, the officers and Directors of the Company and
their families as a group owned beneficially or of record less
than 1% of the outstanding shares of the Company.
The following table identifies all persons, who as of June
30, 1995, held of record or owned beneficially 5% or more of
either Fund's shares.
Name and address
Title of Class of beneficial owner Percent of class
-------------- ------------------- ----------------
California Money Robert M. Kommerstad 8.2%
Market Fund Lila M. Kommerstad
218 Deodar Ln
Bradbury, CA 91010-1011
THE COMPANY'S MANAGER
As described in the Prospectus, USAA Investment Management
Company is the Manager and investment adviser, providing services
under the Advisory Agreement. The Manager, organized in May
1970, has served as investment adviser and underwriter for USAA
Tax Exempt Fund, Inc. from its inception.
In addition to managing the Company's assets, the Manager
advises and manages the investments for USAA and its affiliated
companies as well as those of USAA Mutual Fund, Inc., USAA
Investment Trust and USAA State Tax-Free Trust. As of the date
of this SAI, total assets under management by the Manager were
approximately $27 billion, of which approximately $15 billion
were in mutual fund investments.
Advisory Agreement
Under the Advisory Agreement, the Manager provides an investment
program, carries out the investment policy and manages the
portfolio assets for each Fund. The Manager is authorized,
subject to the control of the Board of Directors of the Company,
to determine the selection, amount and time to buy or sell
securities for each Fund. In addition to providing investment
services, the Manager pays for office space, facilities, business
equipment and accounting services (in addition to those provided
by the Custodian) for the Company. The Manager compensates all
personnel, officers and Directors of the Company if such persons
are also employees of the Manager or its affiliates. For these
services under the Advisory Agreement, the Company has agreed to
pay the Manager a fee computed as described under Management of
the Company in the Prospectus. Management fees are computed and
accrued daily and payable monthly.
Except for the services and facilities provided by the
Manager, the Funds pay all other expenses incurred in their
operations. Expenses for which the Funds are responsible include
taxes (if any), brokerage commissions on portfolio transactions
(if any), expenses of issuance and redemption of shares, charges
of transfer agents, custodians and dividend disbursing agents,
costs of preparing and distributing proxy material, costs of
printing and engraving stock certificates, auditing and legal
expenses, certain expenses of registering and qualifying shares
for sale, fees of Directors who are not interested persons (not
affiliated) of the Manager, costs of typesetting, printing and
mailing the Prospectus, SAI and periodic reports to existing
shareholders, and any other charges or fees not specifically enumerated.
The Manager pays the cost of printing and mailing copies of the Prospectus,
the SAI, and reports to prospective shareholders.
The Advisory Agreement will remain in effect until June 30,
1996 for each Fund and will continue in effect from year to year
thereafter for each Fund as long as it is approved at least
annually by a vote of the outstanding voting securities of such
Fund (as defined by the 1940 Act) or by the Board of Directors
(on behalf of such Fund) including a majority of the Directors
who are not interested persons of the Manager or (otherwise than
as Directors) of the Company, at a meeting called for the purpose
of voting on such approval. The Advisory Agreement may be
terminated at any time by either the Company or the Manager on 60
days' written notice. It will automatically terminate in the
event of its assignment (as defined in the 1940 Act).
The Company's Manager, cont.
Under the terms of the Advisory Agreement, the Manager is
required to reimburse each Fund in the event that the total
annual expenses, inclusive of the management fee, but exclusive
of the interest, taxes and brokerage fees and extraordinary
items, incurred by that Fund exceeds any applicable state expense
limitation. At the current time, the most restrictive expense
limitation is 2.5% of the first $30,000,000 of average net assets
(ANA), 2% of the next $70,000,000 ANA, and 1.5% of the remaining ANA.
From time to time the Manager may, without prior notice to
shareholders, waive all or any portion of fees or agree to
reimburse expenses incurred by a Fund. Any such waiver or
reimbursement may be terminated by the Manager at any time
without prior notice to shareholders.
For the last three fiscal years, the Company paid the
Manager the following fees:
1993 1994 1995
------ ------ ------
California Bond Fund $1,122,858 $1,346,140 $1,192,329
California Money Market Fund $ 711,841 $ 727,498 $ 823,095
Underwriter
The Company has an agreement with the Manager for exclusive
underwriting and distribution of the Funds' shares on a
continuing best efforts basis. This agreement provides that the
Manager will receive no fee or other compensation for such
distribution services.
Transfer Agent
USAA Shareholder Account Services performs transfer agent
services for the Company under a Transfer Agency Agreement.
Services include maintenance of shareholder account records,
handling of communications with shareholders, distribution of
Fund dividends and production of reports with respect to account
activity for shareholders and the Company. For its services
under the Transfer Agency Agreement, USAA Shareholder Account
Services is paid an annual fixed fee per account of $26.00 by
each Fund. This fee is subject to change at any time.
The fee to the Transfer Agent includes processing of all
transactions and correspondence. Fees are billed on a monthly
basis at the rate of one-twelfth of the annual fee. In addition,
the Funds pay all out-of-pocket expenses of the Transfer Agent
and other expenses which are incurred at the specific direction
of the Company.
GENERAL INFORMATION
Custodian
State Street Bank and Trust Company, P.O. Box 1713, Boston, MA
02105, is the Company's Custodian. The Custodian is responsible
for, among other things, safeguarding and controlling the
Company's cash and securities, handling the receipt and delivery
of securities and collecting interest on the Company's investments.
Counsel
Goodwin, Procter & Hoar, Exchange Place, Boston, MA 02109, will
review certain legal matters for the Company in connection with
the shares offered by the Prospectus.
Independent Auditors
KPMG Peat Marwick LLP, 112 East Pecan, Suite 2400, San Antonio,
TX 78205, is the Company's independent auditor. In this
capacity, the firm is responsible for auditing the annual
financial statements of the Funds and reporting thereon.
Financial Statements
The financial statements of the Funds and the Independent
Auditors' Report thereon for the fiscal year ended March 31,
1995, are included in the Annual Report to Shareholders of that
date and are incorporated herein by reference. A copy of the
Annual Report will be delivered free of charge with each SAI
requested from the Manager at the address set forth on page 1 of
this statement.
CALCULATION OF PERFORMANCE DATA
Information regarding total return and yield of each Fund is
provided under Performance Information in the Prospectus. See
Valuation of Securities herein for a discussion of the manner in
which each Fund's price per share is calculated.
Total Return
The California Bond Fund may advertise performance in terms of
average annual total return for 1, 5 and 10 year periods, or for
such lesser period as the Fund has been in existence. Average
annual total return is computed by finding the average annual
compounded rates of return over the periods that would equate the
initial amount invested to the ending redeemable value, according
to the following formula:
P(1 + T)^n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical
$1,000 payment made at the beginning of the
1, 5 or 10 year periods at the end of the
year or period
The calculation assumes all charges are deducted from the
initial $1,000 payment and assumes all dividends and
distributions by such Fund are reinvested at the price stated in
the Prospectus on the reinvestment dates during the period, and
includes all recurring fees that are charged to all shareholder accounts.
The date of commencement of operations for the California
Bond Fund was August 1, 1989. The Fund's average annual total
returns for the periods ended March 31, 1995 were:
1 year . . . . 6.89%
5 years . . . . 7.66%
Since inception . . . . 7.09%
Yield
The California Bond Fund may advertise performance in terms of a
30-day yield quotation. The 30-day yield quotation is computed
by dividing the net investment income per share earned during the
period by the maximum offering price per share on the last day of
the period, according to the following formula:
YIELD = 2((((a-b)/(cd)+1^6)-1)
Where: a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursement)
c = the average daily number of shares outstanding during
the period that were entitled to receive dividends
d = the maximum offering price per share on the last day
of the period
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.
The Fund's 30-day yield for the period ended March 31, 1995 was 5.94%.
Yield - California Money Market Fund
When the California Money Market Fund quotes a current annualized
yield, it is based on a specified recent seven-calendar-day
period. It is computed by (1) determining the net change,
exclusive of capital changes, in the value of a hypothetical
preexisting account having a balance of one share at the
beginning of the period, (2) dividing the net change in account
value by the value of the account at the beginning of the base
period to obtain the base return, then (3) multiplying the base
period by 52.14 (365 divided by 7). The resulting yield figure
is carried to the nearest hundredth of one percent.
The calculation includes (1) the value of additional shares
purchased with dividends on the original share, and dividends
declared on both the original share and any such additional
shares, and (2) any fees charged to all shareholder accounts, in
proportion to the length of the base period and the Fund's
average account size.
Calculation of Performance Data, cont.
The capital changes excluded from the calculation are
realized capital gains and losses from the sale of securities and
unrealized appreciation and depreciation. The Fund's effective
(compounded) yield will be computed by dividing the seven-day
annualized yield as defined above by 365, adding 1 to the
quotient, raising the sum to the 365th power, and subtracting 1
from the result.
Current and effective yields fluctuate daily and will vary
with factors such as interest rates and the quality, length of
maturities, and type of investments in the portfolio.
Yield for 7-day Period Ended 3/31/95 . . 3.69%
Effective Yield for 7-day Period Ended 3/31/95 . . 3.76%
Tax Equivalent Yield
The California Money Market Fund may advertise performance in
terms of a tax equivalent yield based on the 7-day yield or
effective yield and the California Bond Fund may advertise
performance in terms of a 30-day tax equivalent yield. The tax
equivalent yield is computed by dividing that portion of the
yield of a Fund (computed as described in the preceding
paragraphs) which is tax-exempt, by the complement of a tax rate
of 41% (31% federal plus 10% state, or other relevant rates) and
adding the result to that portion, if any, of the yield of such
Fund that is not tax-exempt. The complement, for example, of a
tax rate of 41% is 59%, that is [1.00 - .41 = .59].
Based on a tax rate of 41%, the tax equivalent yields for
the California Bond and California Money Market Funds for the
period ended March 31, 1995 were 10.07% and 6.25%, respectively.
APPENDIX A - TAX-EXEMPT SECURITIES AND THEIR RATINGS
Tax-Exempt Securities
Tax-exempt securities generally include debt obligations issued
by states and their political subdivisions, and duly constituted
authorities and corporations, to obtain funds to construct,
repair or improve various public facilities such as airports,
bridges, highways, hospitals, housing, schools, streets, and
water and sewer works. Tax-exempt securities may also be issued
to refinance outstanding obligations as well as to obtain funds
for general operating expenses and for loans to other public
institutions and facilities.
The two principal classifications of tax-exempt securities
are "general obligations" and "revenue" or "special tax" bonds.
General obligation bonds are secured by the issuer's pledge of
its full faith, credit and taxing power for the payment of
principal and interest. Revenue or special tax bonds are payable
only from the revenues derived from a particular facility or
class of facilities or, in some cases, from the proceeds of a
special excise or other tax, but not from general tax revenues.
The Funds may also invest in tax-exempt private activity bonds,
which in most cases are revenue bonds and generally do not have
the pledge of the credit of the issuer. The payment of the
principal and interest on such industrial revenue bonds is
dependent solely on the ability of the user of the facilities
financed by the bonds to meet its financial obligations and the
pledge, if any, of real and personal property so financed as
security for such payment. There are, of course, many variations
in the terms of, and the security underlying tax-exempt
securities. Short-term obligations issued by states, cities,
municipalities or municipal agencies, include Tax Anticipation
Notes, Revenue Anticipation Notes, Bond Anticipation Notes,
Construction Loan Notes and Short-Term Discount Notes.
The yields of tax-exempt securities depend on, among other
things, general money market conditions, conditions of the Tax-
Exempt Bond market, the size of a particular offering, the
maturity of the obligation, and the rating of the issue. The
ratings of Moody's Investors Service, Inc. (Moody's), Standard &
Poor's Ratings Group (S&P), Fitch Investors Service, Inc.
(Fitch), Duff & Phelps Inc., Thompson BankWatch, Inc., and IBCA
Inc. represent their opinions of the quality of the securities
rated by them. It should be emphasized that such ratings are
general and are not absolute standards of quality. Consequently,
securities with the same maturity, coupon and rating may have
different yields, while securities of the same maturity and
coupon but with different ratings may have the same yield. It
will be the responsibility of the Manager to appraise
independently the fundamental quality of the tax-exempt
securities included in a Fund's portfolio.
Ratings
Excerpts from Moody's Bond (Tax-Exempt Securities) Ratings:
Aaa Bonds which are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment risk
and are generally referred to as "gilt edge." Interest
payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various
protective elements are likely to change, such changes as
can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa Bonds which are rated Aa are judged to be of high quality by
all standards. Together with the Aaa group they comprise
what are generally known as high grade bonds. They are
rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater
amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than in Aaa
securities.
A Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade
obligations. Factors giving security to principal and
interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the
future.
Baa Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor
poorly secured. Interest payments and principal security
appear adequate for the present but certain protective
elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and in fact have
speculative characteristics as well.
Note: Those bonds in the Aa, A, and Baa groups which Moody's
believes possess the strongest investment attributes are
designated by the symbols Aa1, A1, and Baa1.
Excerpts of Moody's Ratings of Short-Term Loans (State and Tax-
Exempt Notes):
Moody's ratings for state and tax-exempt notes and other short-
term obligations are designated Moody's Investment Grade (MIG).
Symbols used will be as follows:
MIG-1 This designation denotes best quality. There is
present strong protection by established cash flows,
superior liquidity support or demonstrated broadbased
access to the market for refinancing.
MIG-2 This designation denotes high quality. Margins of
protection are ample although not so large as in the
preceding group.
Excerpts of Moody's Rating of Commercial Paper:
Prime-1 Issuers have a superior ability for repayment of senior
short-term debt obligations. Prime-1 repayment ability
will often be evidenced by many of the following
characteristics:
Leading market positions in well-established
industries.
High rates of return on funds employed.
Conservative capitalization structure with moderate
reliance on debt and ample asset protection.
Broad margins in earnings coverage of fixed financial
charges and high internal cash generation.
Well-established access to a range of financial markets
and assured sources of alternate liquidity.
Prime-2 Issuers have a strong ability for repayment of senior
short-term debt obligations. This will normally be
evidenced by many of the characteristics cited above
but to a lesser degree. Earnings trends and coverage
ratios, while sound, will be more subject to variation.
Capitalization characteristics, while still
appropriate, may be more affected by external
conditions. Ample alternate liquidity is maintained.
Excerpts from S&P's Bond Ratings:
AAA Debt rated AAA has the highest rating assigned by S&P.
Capacity to pay interest and repay principal is extremely
strong.
AA Debt rated AA has a very strong capacity to pay interest and
repay principal and differs from the highest rated issues
only in small degree.
A Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the
adverse effects of changes in circumstances and economic
conditions than debt in higher rated categories.
BBB Debt rated BBB is regarded as having an adequate capacity to
pay interest and repay principal. Whereas it normally
exhibits adequate protection parameters, adverse economic
conditions or changing circumstances are more likely to lead
to a weakened capacity to pay interest and repay principal
for debt in this category than in higher rated categories.
Plus (+) or Minus (-): The ratings from AA to BBB may be
modified by the addition of a plus or minus sign to show relative
standing within the major rating categories.
Appendix A, cont.
Excerpts of S&P's Ratings of Tax-Exempt Notes:
SP-1 Strong capacity to pay principal and interest. Issues
determined to possess very strong characteristics are given
a plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest, with
some vulnerability to adverse financial and economic changes
over the term of the notes.
Excerpts of S&P's Rating of Commercial Paper:
A-1 This highest category indicates that the degree of safety
regarding timely payment is strong. Those issues determined
to possess extremely strong safety characteristics are
denoted with a plus (+) sign designation.
A-2 Capacity for timely payment on issues with this designation
is satisfactory. However, the relative degree of safety is
not as high as for issues designated A-1.
Excerpts of Fitch's Ratings of Bonds:
AAA Bonds considered to be investment grade and of the highest
credit quality. The obligor has an exceptionally strong
ability to pay interest and repay principal, which is
unlikely to be affected by reasonably foreseeable events.
AA Bonds considered to be investment grade and of very high
credit quality. The obligor's ability to pay interest and
repay principal is very strong, although not quite as strong
as bonds rated AAA. Because bonds rated in the AAA and AA
categories are not significantly vulnerable to foreseeable
future developments, short-term debt of these issuers is
generally rated F-1+.
A Bonds considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay
principal is considered to be strong, but may be more
vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB Bonds considered to be investment grade and of satisfactory
credit quality. The obligor's ability to pay interest and
repay principal is considered to be adequate. Adverse
changes in economic conditions and circumstances, however,
are more likely to have adverse impact on these bonds, and
therefore, impair timely payment.
Plus (+) and Minus (-): Plus and minus signs are used with a
rating symbol to indicate the relative position of a credit
within the rating category. Plus and minus signs, however, are
not used in the AAA category.
Excerpts of Fitch's Ratings to Commercial Paper, Certificates of
Deposit and Tax-Exempt Notes:
F-1+ Exceptionally strong credit quality. Issues assigned this
rating are regarded as having the strongest degree of
assurance for timely payment.
F-1 Very strong credit quality. Issues assigned this rating
reflect an assurance of timely payment only slightly less in
degree than issues rated F-1+.
F-2 Good credit quality. Issues assigned this rating have a
satisfactory degree of assurance for timely payments, but
the margin of safety is not as great as the F-1+ and F-1 ratings.
Excerpts from Duff & Phelps Long-Term Rating Scale:
AAA Highest credit quality. The risk factors are negligible,
being only slightly more than for risk-free U.S. Treasury
debt.
AA High credit quality. Protection factors are strong. Risk
is modest but may vary slightly from time to time because of
economic conditions.
A Protection factors are average but adequate. However, risk
factors are more variable and greater in periods of economic
stress.
BBB Below average protection factors but still considered
sufficient for prudent investment. Considerable variability
in risk during economic cycles.
Excerpts from Duff & Phelps Commercial Paper Rating Scale:
Duff 1+ Highest certainty of timely payment. Short-term
liquidity, including internal operating factors and/or
ready access to alternative sources of funds, is
outstanding, and safety is just below risk-free U.S.
Treasury short-term obligations.
Duff 1 Very high certainty of timely payment. Liquidity
factors are excellent and supported by good fundamental
protection factors. Risk factors are minor.
Duff 1- High certainty of timely payment. Liquidity factors
are strong and supported by good fundamental protection
factors. Risk factors are very small.
Duff 2 Good certainty of timely payment. Liquidity factors
and company fundamentals are sound. Although ongoing
funding needs may enlarge total financing requirements,
access to capital markets is good. Risk factors are
small.
Thompson BankWatch, Inc.
TBW-1 The highest category; indicates a very high likelihood
that principal and interest will be paid on a timely
basis.
TBW-2 The second highest category; while the degree of safety
regarding timely repayment of principal and interest is
strong, the relative degree of safety is not as high as
for issues rated TBW-1.
TBW-3 The lowest investment grade category; indicates that
while the obligation is more susceptible to adverse
developments (both internal and external) than
obligations with higher ratings, the capacity to
service principal and interest in a timely fashion is
considered adequate.
IBCA Inc.
A1 Obligations supported by the highest capacity for timely
repayment. Where issues possess a particularly strong
credit feature, a rating of A1+ is assigned.
A2 Obligations supported by a good capacity for timely
repayment.
A3 Obligations supported by a satisfactory capacity for timely
repayment.
B Obligations for which there is an uncertainty as to the
capacity to ensure timely repayment.
C Obligations for which there is a high risk of default or
which are currently in default.
APPENDIX B - COMPARISON OF PORTFOLIO PERFORMANCE
Occasionally, we may make comparisons in advertising and sales
literature between the Funds contained in this SAI and other
Funds in the USAA Family of Funds. These comparisons may include
such topics as risk and reward, investment objectives, investment
strategies, and performance.
Fund performance also may be compared to the performance of
broad groups of mutual funds with similar investment goals or
unmanaged indexes of comparable securities. Evaluations of Fund
performance made by independent sources may be used in
advertisements concerning the Fund, including reprints of, or
selections from, editorials or articles about the Fund. The Fund
or its performance may also be compared to products and services
not constituting securities subject to registration under the
Securities Act of 1933 such as, but not limited to, certificates
of deposit and money market accounts. Sources for performance
information and articles about the Fund may include the following:
AAII Journal, a monthly association magazine for members of the
American Association of Individual Investors.
Arizona Republic, a newspaper which may cover financial and
investment news.
Austin American-Statesman, a newspaper which may cover financial news.
Barron's, a Dow Jones and Company, Inc. business and financial
weekly that periodically reviews mutual fund performance data.
The Bond Buyer, a daily newspaper which covers bond market news.
Appendix B, cont.
Business Week, a national business weekly that periodically reports
the performance rankings and ratings of a variety of mutual funds.
Chicago Tribune, a newspaper which may cover financial news.
Consumer Reports, a monthly magazine which from time to time
reports on companies in the mutual fund industry.
Dallas Morning News, a newspaper which may cover financial news.
Denver Post, a newspaper which may quote financial news.
Financial Planning, a monthly magazine that periodically features
companies in the mutual fund industry.
Financial Services Week, a weekly newspaper which covers financial news.
Financial World, a monthly magazine which may periodically review
mutual fund companies.
Forbes, a national business publication that periodically reports
the performance of companies in the mutual fund industry.
Fortune, a national business publication that periodically rates
the performance of a variety of mutual funds.
Fund Action, a mutual fund news report.
Houston Chronicle, a newspaper which may cover financial news.
Houston Post, a newspaper which may cover financial news.
IBC/Donoghue's Moneyletter, a biweekly newsletter which covers
financial news and from time to time rates specific mutual funds.
IBC's Money Market Insight, a monthly money market industry
analysis prepared by IBC USA, Inc.
Income and Safety, a monthly newsletter that rates mutual funds.
InvesTech, a bimonthly investment newsletter.
Investment Advisor, a monthly publication directed primarily to
the advisor community; includes ranking of mutual funds using a
proprietary methodology.
Investment Company Institute, a national association of the
American investment company industry.
Investor's Business Daily, a newspaper which covers financial news.
Kiplinger's Personal Finance Magazine, a monthly investment
advisory publication that periodically features the performance
of a variety of securities.
Lipper Analytical Services, Inc.'s Fixed Income Fund Performance
Analysis, a monthly publication of industry-wide mutual fund
performance averages by type of fund.
Lipper Analytical Services, Inc.'s Mutual Fund Performance
Analysis, a weekly and quarterly publication of industry-wide
mutual fund performance averages by type of fund.
Los Angeles Times, a newspaper which may cover financial news.
Louis Rukeyser's Wall Street, a publication for investors.
Medical Economics, a monthly magazine providing information to
the medical profession.
Money, a monthly magazine that features the performance of both
specific funds and the mutual fund industry as a whole.
Money Fund Report, a weekly publication of the Donoghue
Organization, Inc., reporting on the performance of the nation's
money market funds, summarizing money market fund activity, and
including certain averages as performance benchmarks,
specifically: (1) Taxable Money Fund Averages: "100% U.S.
Treasury" and "First Tier" and (2) Tax-Free Money Fund Averages:
"Stockbroker and General Purpose" and "State Specific Stockbroker
and General Purpose".
Morningstar 5 Star Investor, a monthly newsletter by Morningstar,
Inc. which covers financial news and rates mutual funds.
Muni Bond Fund Report, a monthly newsletter which covers news on
the municipal bond market and features performance data for
municipal bond mutual funds.
MuniWeek, a weekly newspaper which covers news on the municipal
bond market.
Mutual Fund Forecaster, a monthly newsletter that ranks mutual funds.
Mutual Fund Investing, a newsletter covering mutual funds.
Mutual Fund Performance Report, a monthly publication of
industry-wide mutual fund averages produced by Morningstar, Inc.
Mutual Funds Magazine, a monthly publication reporting on mutual
fund investing.
Mutual Fund Source Book, an annual publication produced by
Morningstar, Inc. which describes and rates mutual funds.
Mutual Fund Values, a biweekly guidebook to mutual funds produced
by Morningstar, Inc. (a data service which tracks open-end mutual funds).
Newsweek, a national business weekly.
New York Times, a newspaper which may cover financial news.
No Load Fund Investor, a newsletter covering companies in the
mutual fund industry.
Personal Investor, a monthly magazine which from time to time
features mutual fund companies and the mutual fund industry.
San Antonio Business Journal, a weekly newspaper that
periodically covers mutual fund companies as well as financial news.
San Antonio Express-News, a newspaper which may cover financial news.
San Francisco Chronicle, a newspaper which may cover financial news.
Smart Money, a monthly magazine featuring news and articles on
investing and mutual funds.
USA Today, a newspaper which may cover financial news.
U.S. News and World Report, a national business weekly that
periodically reports mutual fund performance data.
Wall Street Journal, a Dow Jones and Company, Inc. newspaper
which covers financial news.
Washington Post, a newspaper which may cover financial news.
Weisenberger Mutual Funds Investment Report, a monthly newsletter
that reports on both specific mutual fund companies and the
mutual fund industry as a whole.
Worth, a magazine which covers financial and investment subjects
including mutual funds.
Your Money, a monthly magazine directed towards the novice investor.
Among the organizations cited above, Lipper Analytical
Services, Inc.'s tracking results may be used. The Fund will be
compared to Lipper's appropriate fund category according to
objective and portfolio holdings. The California Bond Fund will
be compared to funds in Lipper's California tax-exempt bond funds
category, and the California Money Market Fund to funds in
Lipper's California short-term tax-exempt bond funds category.
Footnotes in advertisements and other sales literature will
include the time period applicable for any rankings used.
For comparative purposes, unmanaged indices of comparable
securities or economic data may be cited. Examples include the
following:
- Shearson Lehman Hutton Bond Indices, indices of fixed-rate
debt issues rated investment grade or higher which can be found
in the Bond Market Report.
- Bond Buyer Indices, indices of debt of varying maturities
including revenue bonds, general obligation bonds, and U.S.
Treasury bonds which can be found in MuniWeek and The Bond Buyer.
Other sources for total return and other performance data
which may be used by the Fund or by those publications listed
previously are Morningstar, Inc., Schabaker Investment
Management, and Investment Company Data, Inc. These are services
that collect and compile data on mutual fund companies.
APPENDIX C - TAXABLE EQUIVALENT YIELD TABLE
COMBINED FEDERAL AND CALIFORNIA STATE INCOME TAX RATES
TO MATCH A A FULLY TAXABLE INVESTMENT
DOUBLE WOULD HAVE TO PAY YOU:
TAX-FREE ASSUMING A MARGINAL ASSUMING A MARGINAL ASSUMING A MARGINAL
YIELD OF: TAX RATE OF 37.30% (a) TAX RATE OF 41.00% (b) TAX RATE OF 46.00% (c)
2.00% 3.19% 3.39% 3.70%
3.00% 4.78% 5.08% 5.56%
4.00% 6.38% 6.78% 7.41%
5.00% 7.97% 8.47% 9.26%
6.00% 9.57% 10.17% 11.11%
(a) FEDERAL RATE OF 28% + CALIFORNIA STATE RATE OF 9.3%
(b) FEDERAL RATE OF 31% + CALIFORNIA STATE RATE OF 10%
(c) FEDERAL RATE OF 36% + CALIFORNIA STATE RATE OF 10%
THIS TABLE IS A HYPOTHETICAL ILLUSTRATION AND SHOULD NOT BE CONSIDERED AN
INDICATION OF FUND PERFORMANCE OF ANY OF THE USAA FAMILY OF FUNDS.
THE ASSUMED MARGINAL TAX RATES ARE NOT NECESSARILY THE HIGHEST
POSSIBLE MARGINAL TAX RATES, NOR ARE THEY THE LOWEST RATES.
THESE RATES WERE PICKED AS EXEMPLARY RATES THAT MANY TAXPAYERS
WOULD BE SUBJECT TO. THE TABLE DOES NOT TAKE INTO ACCOUNT THE
FACT THAT SOME TAXPAYERS MAY GET A DEDUCTION ON THEIR FEDERAL
RETURN FOR STATE TAXES PAID. THIS EFFECT WOULD NOT SIGNIFICANTLY
CHANGE THE TAX EQUIVALENT YIELDS DISPLAYED IN THE TABLE.
APPENDIX D - DOLLAR-COST AVERAGING
Dollar-cost averaging is a systematic investing method which can
be used by investors as a disciplined technique for investing. A
fixed amount of money is invested in a security (such as a stock
or mutual fund) on a regular basis over a period of time,
regardless of whether securities markets are moving up or down.
This practice reduces average share costs to the investor
who acquires more shares in periods of lower securities prices
and fewer shares in periods of higher prices.
While dollar-cost averaging does not assure a profit or
protect against loss in declining markets, this investment
strategy is an effective way to help calm the effect of
fluctuations in the financial markets. Systematic investing
involves continuous investment in securities regardless of
fluctuating price levels of such securities. Investors should
consider their financial ability to continue purchases through
periods of low and high price levels.
As the following chart illustrates, dollar-cost averaging
tends to keep the overall cost of shares lower. This example is
for illustration only, and different trends would result in
different average costs.
HOW DOLLAR-COST AVERAGING WORKS
$100 Invested Regularly for 5 Periods
Market Trend
---------------------------------------------------------------
Down Up Mixed
------------------ ------------------ -------------------
Share Shares Share Shares Share Shares
Investment Price Purchased Price Purchased Price Purchased
------------------ ------------------ -------------------
$100 10 10 6 16.67 10 10
100 9 11.1 7 14.29 9 11.1
100 8 12.5 7 14.29 8 12.5
100 8 12.5 9 11.1 9 11.1
100 6 16.67 10 10 10 10
--- -- ----- -- ----- -- -----
$500 ***41 62.77 ***39 66.35 ***46 54.7
*Avg. Cost: $7.97 *Avg. Cost: $7.54 *Avg. Cost: $9.14
----- ----- -----
**Avg. Price: $8.20 **Avg. Price: $7.80 **Avg. Price: $9.20
----- ----- -----
* Average Cost is the total amount invested divided by shares purchased.
** Average Price is the sum of the prices paid divided by number of purchases.
*** Cumulative total of share prices used to compute average prices.
14356-1295
(Logo
of the
USAA USAA STATEMENT OF
Eagle TAX EXEMPT ADDITIONAL INFORMATION
is here) FUND, INC. August 1, 1995
As Supplemented December 1, 1995
- ------------------------------------------------------------------------
USAA TAX EXEMPT FUND, INC.
NEW YORK FUNDS
USAA TAX EXEMPT FUND, INC. (the Company) is a registered
investment company offering shares of ten no-load mutual funds,
two of which are described in this Statement of Additional
Information (SAI): the New York Bond Fund and New York Money
Market Fund (collectively, the Funds or the New York Funds).
Each Fund is classified as a diversified investment company and
has 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.
A Prospectus for the New York Funds dated August 1, 1995, which
provides the basic information you should know before investing
in the Funds, may be obtained without charge upon written request
to USAA Tax Exempt Fund, Inc., 9800 Fredericksburg Rd., San
Antonio, TX 78288, or by calling toll free 1-800-531-8181. This
SAI is not a Prospectus and contains information in addition to
and more detailed than that set forth in the Prospectus. It is
intended to provide you with additional information regarding the
activities and operations of the Company and the Funds, and
should be read in conjunction with the Prospectus.
- ----------------------------------------------------------------------
TABLE OF CONTENTS
Page
2 Valuation of Securities
2 Additional Information Regarding Redemption of Shares
3 Investment Plans
4 Investment Policies
5 Investment Restrictions
6 Special Risk Considerations
13 Portfolio Transactions
14 Further Description of Shares
15 Certain Federal Income Tax Considerations
17 Directors and Officers of the Company
20 The Company's Manager
21 General Information
22 Calculation of Performance Data
23 Appendix A - Tax-Exempt Securities and Their Ratings
26 Appendix B - Comparison of Portfolio Performance
29 Appendix C - Taxable Equivalent Yield Tables
31 Appendix D - Dollar-Cost Averaging
VALUATION OF SECURITIES
Shares of each Fund are offered on a continuing best efforts
basis through USAA Investment Management Company (IMCO or the
Manager). The offering price for shares of each Fund is equal to
the current net asset value per share. The net asset value per
share of each Fund is calculated by adding the value of all its
portfolio securities and other assets, deducting its liabilities,
and dividing by the number of shares outstanding.
A Fund's net asset value per share is calculated each day,
Monday through Friday, except days on which the New York Stock
Exchange (NYSE) is closed. The NYSE is currently scheduled to be
closed on New Year's Day, Presidents' Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving, and Christmas,
and on the preceding Friday or subsequent Monday when one of
these holidays falls on a Saturday or Sunday, respectively.
The investments of the New York Bond Fund are valued each
business day by a pricing service (the Service) approved by the
Company's Board of Directors. The Service uses the mean between
quoted bid and asked prices or the last sale price to price
securities when, in the Service's judgement, these prices are
readily available and are representative of the securities'
market values. For many securities, such prices are not readily
available. The Service generally prices these securities based
on methods which include consideration of yields or prices of
tax-exempt securities of comparable quality, coupon, maturity and
type, indications as to values from dealers in securities, and
general market conditions. Securities purchased with maturities
of 60 days or less are stated at amortized cost which
approximates market value. Repurchase agreements are valued at
cost. Securities which cannot be valued by the Service, and all
other assets, are valued in good faith at fair value using
methods determined by the Manager under the general supervision
of the Board of Directors.
The value of the New York Money Market Fund's securities is
stated at amortized cost which approximates market value. This
involves valuing a security at its cost and thereafter assuming a
constant amortization to maturity of any discount or premium,
regardless of the impact of fluctuating interest rates. While
this method provides certainty in valuation, it may result in
periods during which the value of an instrument, as determined by
amortized cost, is higher or lower than the price the Fund would
receive upon the sale of the instrument.
The valuation of the New York Money Market Fund's portfolio
instruments based upon their amortized cost is subject to the
Fund's adherence to certain procedures and conditions.
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 Manager will invest only in securities
that have been determined to present minimal credit risk and that
satisfy the quality and diversification requirements of
applicable rules and regulations of the Securities and Exchange Commission.
The Board of Directors has established procedures designed
to stabilize the New York Money Market Fund's price per share, as
computed for the purpose of sales and redemptions, at $1.00.
There can be no assurance, however, that the Fund will at all
times be able to maintain a constant $1.00 net asset value per
share. Such procedures include review of the Fund's holdings at
such intervals as is deemed appropriate to determine whether the
Fund's net asset value calculated by using available market
quotations deviates from $1.00 per share and, if so, whether such
deviation may result in material dilution or is otherwise unfair
to existing shareholders. In the event that it is determined
that such a deviation exists, the Board of Directors will take
such corrective action as it regards as necessary and
appropriate. Such action may include selling portfolio
instruments prior to maturity to realize capital gains or losses
or to shorten average portfolio maturity, withholding dividends,
or establishing a net asset value per share by using available
market quotations.
ADDITIONAL INFORMATION REGARDING REDEMPTION OF SHARES
The value of a shareholder's investment at the time of redemption
may be more or less than the cost at purchase, depending on the
value of the securities held in each Fund's portfolio. Requests
for redemption which are subject to any special conditions, or
which specify an effective date other than as provided herein,
cannot be accepted. A gain or loss for tax purposes may be
realized on the sale of shares, depending upon the price when redeemed.
The Board of Directors may cause the redemption of an
account with a balance of less than 50 shares provided (1) the
value of the account has been reduced, for reasons other than
market action, below the minimum initial investment in such Fund
at the time of the establishment of the account, (2) the total
value of such shares has been reduced, for reasons other than
market action, below $50 in the case of an account in the New
York Money Market Fund or $500 in the case of an account in the
New York Bond Fund, (3) the account has remained below the
minimum level for six months, and (4) 60 days' prior written
notice of the proposed redemption has been sent to the shareholder.
Shares will be redeemed at the net asset value on the date fixed for
redemption by the Board of Directors. Prompt payment will be
made by mail to the last known address of the shareholder.
The Company reserves the right to suspend the right of
redemption or postpone the date of payment (1) for any periods
during which the NYSE is closed, (2) when trading in the markets
the Company normally utilizes is restricted, or an emergency
exists as determined by the Securities and Exchange Commission
(SEC) so that disposal of the Company's investments or
determination of its net asset value is not reasonably
practicable, or (3) for such other periods as the SEC by order
may permit for protection of the Company's shareholders.
For the mutual protection of the investor and the Funds, a
guarantee of signature may be required by the Company. If
required, each signature on the account registration must be
guaranteed. Signature guarantees are acceptable from FDIC member
banks, brokers, dealers, municipal securities dealers, municipal
securities brokers, government securities dealers, government
securities brokers, credit unions, national securities exchanges,
registered securities associations, clearing agencies and savings
associations. A signature guarantee for active duty military
personnel stationed abroad may be provided by an officer of the
United States Embassy or Consulate, a staff officer of the Judge
Advocate General, or an individual's commanding officer.
Redemption by Check
Shareholders in the New York Money Market Fund may request that
checks be issued for their account. A one-time $5 checkwriting
fee is charged to each account by the Transfer Agent for the use
of the privilege. Checks must be written in the amount of at
least $250.
Checks issued to shareholders of the Fund will be sent only
to the person in whose name the account is registered and only to
the address of record. The checks must be manually signed by the
registered owner(s) exactly as the account is registered. For
joint accounts the signature of either or both joint owners will
be required on the check, according to the election made on the
signature card. Dividends will continue to be earned by the
shareholder until the shares are redeemed by the presentation of a check.
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. If an investor's account is not adequate to cover the
amount of a check, the check will be returned unpaid. Because
the value of each account changes as dividends are accrued on a
daily basis, checks may not be used to close an account.
After clearance, checks paid during the month will be
returned to the shareholder by separate mail. The checkwriting
privilege will be subject to the customary rules and regulations
of State Street Bank and Trust Company (State Street Bank or the
Custodian) governing checking accounts. Other than the initial
one-time fee, there is no charge to the shareholder for the use
of the checks or for subsequent reorders of checks.
The Company reserves the right to assess a processing fee
against a shareholder's account for any redemption check not
honored by a clearing or paying agent. Currently, this fee is
$15 and is subject to change at any time. Some examples of such
dishonor are improper endorsement, checks written for an amount
less than the minimum check amount, and insufficient or
uncollectible funds.
The Company, the Transfer Agent, and State Street Bank each
reserve the right to change or suspend the checkwriting privilege
upon 30 days' written notice to participating shareholders.
INVESTMENT PLANS
The following investment plans are made available by the Company
to shareholders of the Funds. 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. You may terminate your participation
in a plan at any time. Please call the Manager for details and
necessary forms or applications.
Systematic Purchase of Shares
InvesTronic (registered trademark) - the periodic purchase of
shares through electronic funds transfer from a checking or
savings account. By completing an application, which may be
obtained from the Manager, you invest a specific amount each
month ($50 minimum) in any of your accounts.
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.
Investment Plans, cont.
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. There is a minimum investment required
for this program of $5,000, with a monthly transaction minimum of
$50. The minimum initial investment requirement for the other
USAA mutual fund must be satisfied before the first transfer.
Buy/Sell Service - the intermittent purchase or redemption of
shares through electronic funds transfer to or from a checking or
savings account.
Participation in these systematic purchase plans will permit
a shareholder to engage in dollar-cost averaging. For additional
information concerning the benefits of dollar-cost averaging, see
Appendix D.
Systematic Withdrawal Plan
If a shareholder in a single investment account (accounts in
different Funds cannot be aggregated for this purpose) owns
shares having a net asset value of $5,000 or more, the
shareholder may request that enough shares to produce a fixed
amount of money be liquidated from the account monthly or
quarterly. The amount of each withdrawal must be at least $50.
Using the electronic funds transfer service, shareholders may
choose to have withdrawals electronically deposited at their bank
or other financial institution. They may also elect to have
checks mailed to a designated address.
Such a plan may be initiated by depositing shares worth at
least $5,000 with the Transfer Agent and by completing the
Systematic Withdrawal Plan application, which may be requested
from the Manager. The shareholder may terminate participation in
the plan at any time. There is no charge to the shareholder for
withdrawals under the Systematic Withdrawal Plan. The Company
will not bear any expenses in administering the plan beyond the
regular transfer agent and custodian costs of issuing and
redeeming shares. Any additional expenses of administering the
plan will be borne by the Manager.
Withdrawals will be made by redeeming full and fractional
shares on the date selected by the shareholder at the time the
plan is established. Withdrawal payments made under this plan
may exceed dividends and distributions and, to this extent, will
involve the use of principal and could reduce the dollar value of
a shareholder's investment and eventually exhaust the account.
Reinvesting dividends and distributions helps replenish the
account. Because share values and net investment income can
fluctuate, shareholders should not expect withdrawals to be
offset by rising income or share value gains.
Each redemption of shares may result in a gain or loss,
which must be reported on the shareholder's income tax return.
Therefore, a shareholder should keep an accurate record of any
gain or loss on each withdrawal.
INVESTMENT POLICIES
The section captioned Investment Objectives and Policies in the
Prospectus describes the fundamental investment objectives and
the investment policies applicable to each Fund and the following
is provided as additional information.
Calculation of Portfolio Weighted Average Maturities
Weighted average maturity is derived by multiplying the value of
each investment by the number of days remaining to its maturity,
adding these calculations, and then dividing the total by the
value of the Fund's portfolio. An obligation's maturity is
typically determined on a stated final maturity basis, although
there are some exceptions to this rule.
With respect to obligations held by the New York Bond Fund,
if it is probable that the issuer of an instrument will take
advantage of a maturity-shortening device, such as a call,
refunding, or redemption provision, the date on which the
instrument will probably be called, refunded, or redeemed may be
considered to be its maturity date. Also, the maturities of
securities subject to sinking fund arrangements are determined on
a weighted average life basis, which is the average time for
principal to be repaid. The weighted average life of these
securities is likely to be substantially shorter than their
stated final maturity. In addition, for purposes of the Fund's
investment policies, an instrument will be treated as having a
maturity earlier than its stated maturity date if the instrument
has technical features such as puts or demand features which, in
the judgment of the Manager, will result in the instrument being
valued in the market as though it has the earlier maturity.
The New York Money Market Fund will determine the maturity
of an obligation in its portfolio in accordance with Rule 2a-7
under the Investment Company Act of 1940, as amended (1940 Act).
Lending of Securities
Each Fund may lend its securities. A lending policy may be
authorized by the Company's Directors and implemented by the
Manager, but securities may be loaned only to qualified broker-
dealers or institutional investors that agree to maintain cash
collateral with the Company equal at all times to at least 100%
of the value of the loaned securities. The Directors will
establish procedures and monitor the credit worthiness of any
institution or broker-dealer during such time as any loan is
outstanding. The Company will continue to receive interest on
the loaned securities and will invest the cash collateral in
readily marketable short-term obligations of high quality,
thereby earning additional interest. Interest on loaned tax-
exempt securities received by the borrower and paid to the
Company will not be exempt from federal income taxes in the hands
of the Company.
No loan of securities will be made if, as a result, the
aggregate of such loans would exceed 33 1/3% of the value of a Fund's
total assets. The Company may terminate such loans at any time.
Repurchase Agreements
Each Fund may invest up to 5% of its total assets in repurchase
agreements. A repurchase agreement is a transaction in which a
security is purchased with a simultaneous commitment to sell the
security back to the seller (a commercial bank or recognized
securities dealer) at an agreed upon price on an agreed upon
date, usually not more than 7 days from the date of purchase.
The resale price reflects the purchase price plus an agreed upon
market rate of interest which is unrelated to the coupon rate or
maturity of the purchased security. A repurchase agreement
involves the obligation of the seller to pay the agreed upon
price, which obligation is in effect secured by the value of the
underlying security. In these transactions, the securities
purchased by a Fund will have a total value equal to or in excess
of the amount of the repurchase obligation and will be held by
the Funds' custodian until repurchased. If the seller defaults
and the value of the underlying security declines, a Fund may
incur a loss and may incur expenses in selling the collateral.
If the seller seeks relief under the bankruptcy laws, the
disposition of the collateral may be delayed or limited. Any
investments in repurchase agreements will give rise to income which
will not qualify as tax-exempt income when distributed by a Fund.
Other Policies
Although the New York Bond Fund is permitted to invest in
options, financial futures contracts and options on financial
futures contracts, the Fund has no current intention of doing so
and will not invest in such securities without first notifying
shareholders and supplying further information in the Prospectus.
INVESTMENT RESTRICTIONS
The following investment restrictions have been adopted by the
Company for and are applicable to each Fund. These restrictions
may not be changed for any given Fund without approval by the
lesser of (1) 67% or more of the voting securities present at a
meeting of the Fund if more than 50% of the outstanding voting
securities of the Fund are present or represented by proxy or (2)
more than 50% of the Fund's outstanding voting securities. The
investment restrictions of one Fund may be changed without
affecting those of the other Fund.
Under the restrictions, neither Fund will:
(1) With respect to 75% of its total assets, purchase securities
of any issuer (other than a security issued or guaranteed as
to principal or interest by the United States, or by a
person controlled or supervised by and acting as an
instrumentality of the Government of the United States; or
any certificate of deposit for any of the foregoing) if as a
result more than 5% of the total assets of that Fund would
be invested in securities of such issuer; for purposes of
this limitation, identification of the "issuer" will be
based on a determination of the source of assets and
revenues committed to meeting interest and principal
payments of each security; for purposes of this limitation
the State of New York or other jurisdictions and each of its
separate political subdivisions, agencies, authorities and
instrumentalities shall be treated as a separate issuer;
(2) Purchase more than 10% of the outstanding voting securities
of any issuer;
(3) Borrow money, except for temporary or emergency purposes in an
amount not exceeding 33 1/3% of its total assets (including the
amount borrowed) less liabilities (other than borrowings);
(4) Pledge, mortgage or hypothecate its assets to any extent
greater than 10% of the value of its total assets;
(5) Purchase or retain securities of any issuer if any officer
or Director of the Company or its Manager owns individually
more than one-half of one percent ( 1/2%) of the securities
of that issuer, and collectively the officers and Directors
of the Company and Manager together own more than 5% of the
securities of that issuer;
(6) Purchase any securities which would cause 25% or more of the value of
that Fund's total assets at the time of such purchase to be invested
in securities the interest upon which is derived from revenues or
projects with similar characteristics, such as toll road revenue bonds,
housing revenue bonds, electric
Investment Restrictions, cont.
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; provided that the foregoing limitation does not apply with
respect to investments in United States Treasury Bills, other obligations
issued or guaranteed by the United States Government, its agencies and
instrumentalities, and, in the case of the New York Money Market Fund,
certificates of deposit and banker's acceptances of domestic banks;
(7) Invest in issuers for the purpose of exercising control or
management;
(8) Issue senior securities as defined in the 1940 Act, except
that it may purchase tax-exempt securities on a "when-
issued" basis and may purchase and sell financial futures
contracts and options as permitted by Section 18(f)(2);
(9) Underwrite securities of other issuers, except to the extent that
it may be deemed to act as a statutory underwriter in the
distribution of any restricted securities or not readily
marketable securities;
(10) Purchase or sell real estate, but this shall not prevent
investments in tax-exempt securities secured by real estate
or interests therein;
(11) Lend any securities or make any loan if, as a result, more than
33 1/3% of its total assets would be lent to other parties,
except that this limitation does not apply to purchases of debt
securities or to repurchase agreements;
(12) Purchase on margin or sell short; for purposes of this
restriction the deposit or payment of initial or variation
margin in connection with financial futures contracts or
related options will not be deemed to be a purchase of
securities on margin by a Fund;
(13) Purchase or sell commodities or commodities contracts,
except that the Fund may invest in financial futures and
contracts and options thereon;
(14) Invest its assets in securities of other investment
companies except by purchases in the open market involving
only customary brokers' commissions or as part of a merger,
consolidation, reorganization or purchase of assets approved
by the shareholders; or
(15) Invest in put, call, straddle or spread options or interests
in oil, gas, or other mineral exploration or development
programs, except that a Fund may write covered call options
and purchase put options.
Additional Restrictions
The following restrictions are not considered to be fundamental
policies of the Funds. These additional restrictions may be
changed by the Board of Directors of the Company without notice
to or approval by the shareholders.
Neither Fund will:
(1) Invest more than 15% (10% with respect to the New York Money
Market Fund) of the value of its net assets in illiquid securities,
including repurchase agreements maturing in more than
seven days.
(2) Purchase any security while borrowings representing more than 5%
of the Fund's total assets are outstanding.
SPECIAL RISK CONSIDERATIONS
Special Considerations Relating To New York Municipal Obligations
Some of the significant financial considerations relating to the
Fund's investment in New York Municipal Obligations are
summarized below. This summary information is not intended to be
a complete description and is principally derived from official
statements relating to issues of New York Municipal Obligations
that were available prior to the date of this SAI. The accuracy
and completeness of the information contained in those official
statements have not been independently verified.
State Economy. New York is the third most populous state in the
nation and has a relatively high level of personal wealth. The
State's economy is diverse with a comparatively large share of
the nation's finance, insurance, transportation, communications
and services employment, and a very small share of the nation's
farming and mining activity. The State has a declining
proportion of its workforce engaged in manufacturing, and an
increasing proportion engaged in service industries. New York
City (the "City"), which is the most populous city in the State
and nation and is the center of the nation's largest metropolitan
area, accounts for a large portion of the State's population and
personal income.
The State has historically been one of the wealthiest states
in the nation. For decades, however, the State has grown more
slowly than the nation as a whole, gradually eroding its relative
economic position. The recession has been more severe in the
State, owing to a significant retrenchment in the financial
services industry, cutbacks in defense spending, and an overbuilt
real estate market. There can be no assurance that the State
economy will not experience worse-than-predicted results in the
1995-96 fiscal year, with corresponding material and adverse
effects on the State's projections of receipts and disbursements.
The unemployment rate in the State dipped below the national
rate in the second half of 1981 and remained lower until 1991.
It stood at 6.9% in 1994. The total employment growth rate in
the State has been below the national average since 1984 and is
expected to slow to less than 0.5% in 1995. State per capita
personal income remains above the national average. State per
capita income for 1994 was estimated at $25,999, which is 19.2%
above the 1994 estimated national average of $21,809. During the
past ten years, total personal income in the State rose slightly
faster than the national average only in 1986 through 1989.
State Budget. The State Constitution requires the Governor to
submit to the State legislature (the Legislature) a balanced
executive budget which contains a complete plan of expenditures
for the ensuing fiscal year and all moneys and revenues estimated
to be available therefor, accompanied by bills containing all
proposed appropriations or reappropriations and any new or
modified revenue measures to be enacted in connection with the
executive budget. The entire plan constitutes the proposed State
financial plan for that fiscal year. The Governor is required to
submit to the Legislature quarterly budget updates which include
a revised cash-basis state financial plan, and an explanation of
any changes from the previous state financial plan.
The State's budget for the 1995-96 fiscal year was enacted
by the Legislature on June 7, 1995, more than two months after
the start of the fiscal year. Prior to adoption of the budget,
the Legislature enacted appropriations for disbursements
considered to be necessary for State operations and other
purposes, including all necessary appropriations for debt
service. The State financial plan for the 1995-96 fiscal year
was formulated on June 20, 1995 and is based upon the State's
budget as enacted by the Legislature and signed into law by the
Governor (the "1995-96 State Financial Plan").
The 1995-96 State Financial Plan is the first to be enacted
in the administration of the Governor, who assumed office on
January 1. It is the first budget in over half a century which
proposed and, as enacted, projects an absolute year-over-year
decline in disbursements in the General Fund, the State's
principal operating fund. Spending for State operations is
projected to drop even more sharply, by 4.6%. Nominal spending
from all State spending sources (i.e., excluding Federal aid) is
proposed to increase by only 2.5% from the prior fiscal year, in
contrast to the prior decade when such spending growth averaged
more than 6.0% annually.
In his executive budget, the Governor indicated that in the
1995-96 fiscal year, the State Financial Plan, based on
then-current law governing spending and revenues, would be out of
balance by almost $4.7 billion, as a result of the projected
structural deficit resulting from the ongoing disparity between
sluggish growth in receipts, the effect of prior-year tax
changes, and the rapid acceleration of spending growth; the
impact of unfunded 1994-95 initiatives, primarily for local aid
programs; and the use of one-time solutions, primarily surplus
funds from the prior year, to fund recurring spending in the
1994-95 budget. The Governor proposed additional tax cuts to
spur economic growth and provide relief for low and middle-income
tax payers, which were larger than those ultimately adopted, and
which added $240 million to the then projected imbalance or
budget gap, bringing the total to approximately $5 billion.
This gap is projected to be closed in the 1995-96 State
Financial Plan through a series of actions, mainly spending
reductions and cost containment measures and certain reestimates
that are expected to be recurring, but also through the use of
one-time solutions. The 1995-96 State Financial Plan projects
(i) nearly $1.6 billion in savings from cost containment,
disbursement reestimates, and other savings in social welfare
programs, including Medicaid, income maintenance and various
child and family care programs; (ii) $2.2 billion in savings from
State agency actions to reduce spending on the State workforce,
SUNY and CUNY, mental hygiene programs, capital projects, the
prison system and fringe benefits; (iii) $300 million in savings
from local assistance reforms, including actions affecting school
aid and revenue sharing, while proposing program legislation to
provide relief from certain mandates that increase local
spending; (iv) over $400 million in revenue measures, primarily
through a new Quick Draw Lottery game, changes to tax payments
schedules, and the sale of assets; and (v) $300 million from
reestimates in receipts.
The 1995-96 State Financial Plan includes actions that will
have an effect on the budget outlook for State fiscal year
1996-97 and beyond. The Division of the Budget estimates that
the 1995-96 State Financial Plan contains actions that provide
nonrecurring resources or savings totalling approximately $900
million, while the State comptroller (the Comptroller) believes
that such amount exceeds $1 billion. In addition to this use of
nonrecurring resources, the 1995-96 State Financial Plan reflects
actions that will directly affect the State's 1996-97 fiscal year
baseline receipts and disbursements. The three-year plan to
reduce State personal income taxes will decrease State tax
receipts by an estimated $1.7 billion in State fiscal year
1996-97 in addition to the amount of reduction in State fiscal
year 1995-96. Further significant reductions in the personal
income tax are scheduled for the 1997-98 State fiscal year.
Other tax reductions enacted in 1994 and 1995 are estimated to
cause an additional reduction in receipts of over $500 million in
1996-97, as compared to the level of receipts in 1995-96.
Similarly, many actions taken to reduce disbursements in
Special Risk Considerations, cont.
the State's 1995-96 fiscal year are expected to provide greater
reductions in the State's fiscal year 1996-97. These include
actions to reduce the State workforce, reduce Medicaid and
welfare expenditures, and slow community mental hygiene program development.
The Division of the Budget and the Comptroller expect that
the net impact of these and other factors will produce a
potential imbalance in receipts and disbursements in fiscal year
1996-97. The Governor has indicated that in the 1996-97
executive budget he will propose to close this potential
imbalance primarily through General Fund expenditure reductions
and without increases in taxes or deferrals of scheduled tax reductions.
The 1995-96 State Financial Plan is based on a number of
assumptions and projections. Because it is not possible to
predict accurately the occurrence of all factors that may affect
the 1995-96 State Financial Plan, actual results could differ
materially and adversely from projections made at the outset of a
fiscal year. There can be no assurance that the State will not
face substantial potential budget gaps in future years resulting
from a significant disparity between tax revenues projected from
a lower recurring receipts base and the spending required to
maintain State programs at current levels. To address any
potential budgetary imbalance, the State may need to take
significant actions to align recurring receipts and disbursements
in future fiscal years.
Recent Financial Results. The General Fund is the principal
operating fund of the State and is used to account for all
financial transactions, except those required to be accounted for
in another fund. It is the State's largest fund and receives
almost all State taxes and other resources not dedicated to
particular purposes.
The General Fund is projected to be balanced on a cash basis
for the 1995-96 fiscal year. Total receipts and transfers from
other funds are projected to be $33.110 billion, a decrease of
$48 million from total receipts in the prior fiscal year. Total
General Fund disbursements and transfers to other funds are
projected to be $33.055 billion, a decrease of $344 million from
the total amount disbursed in the prior fiscal year.
The State's financial position on a GAAP (generally accepted
accounting principles) basis as of March 31, 1993 included a
1991-92 accumulated deficit in its combined governmental funds of
$681 million. Liabilities totalled $12.864 billion and assets of
$12.183 billion were available to liquidate these liabilities.
The State's financial operations have improved during recent
fiscal years. During the period 1989-90 through 1991-92, the
State incurred General Fund operating deficits that were closed
with receipts from the issuance of tax and revenue anticipation
notes. The national recession and then the lingering economic
slowdown in the New York and regional economy, resulted in
repeated shortfall in receipts and three budget deficits. For
its 1992-93, 1993-94 and 1994-95 fiscal years, however, the State
recorded balanced budgets on a cash basis, with substantial fund
balances in 1992-93 and 1993-94, and a smaller fund balance in
1994-95.
Debt Limits and Outstanding Debt. There are a number of methods
by which the State of New York may incur debt. Under the State
Constitution, the State may not, with limited exceptions for
emergencies, undertake long-term general obligation borrowing
(i.e., borrowing for more than one year) unless the borrowing is
authorized in a specific amount for a single work or purpose by
the Legislature and approved by the voters. There is no
limitation on the amount of long-term general obligation debt
that may be so authorized and subsequently incurred by the State.
The State may undertake short-term borrowings without voter
approval (i) in anticipation of the receipt of taxes and
revenues, by issuing tax and revenue anticipation notes, and (ii)
in anticipation of the receipt of proceeds from the sale of duly
authorized, but unissued general obligation bonds, by issuing
bond anticipation notes. The State may also, pursuant to
specific constitutional authorization, directly guarantee certain
obligations of the State of New York's authorities and public
benefit corporations (Authorities). Payments of debt service on
New York State general obligation and New York State-guaranteed
bonds and notes are legally enforceable obligations of the State
of New York.
The State employs additional long-term financing mechanisms,
lease-purchase and contractual-obligation financings, which
involve obligations of public authorities or municipalities that
are State-supported, but are not general obligations of the
State. Under these financing arrangements, certain public
authorities and municipalities have issued obligations to finance
the construction and rehabilitation of facilities or the
acquisition and rehabilitation of equipment, and expect to meet
their debt service requirements through the receipt of rental or
other contractual payments made by the State. Although these
financing arrangements involve a contractual agreement by the
State to make payments to a public authority, municipality or
other entity, the State's obligation to make such payments is
generally expressly made subject to appropriation by the
Legislature and the actual availability of money to the State for
making the payments. The State has also entered into a
contractual-obligation financing arrangement with the Local
Government Assistance Corporation (LGAC) in an effort to
restructure the way the State makes certain local aid payments.
In 1990, as part of a State fiscal reform program,
legislation was enacted creating LGAC, a public benefit
corporation empowered to issue long-term obligations to fund
certain payments to local governments traditionally funded
through New York State's annual seasonal borrowing. The
legislation empowered LGAC to issue its bonds and notes in an
amount not in excess of $4.7 billion (exclusive of certain
refunding bonds) plus certain other amounts. Over a period of
years, the issuance of these long-term obligations, which are to
be amortized over no more than 30 years, was expected to
eliminate the need for continued short-term seasonal borrowing.
The legislation also dedicated revenues equal to one-quarter of
the four cent State sales and use tax to pay debt service on
these bonds. The legislation also imposed a cap on the annual
seasonal borrowing of the State at $4.7 billion, less net
proceeds of bonds issued by LGAC and bonds issued to provide for
capitalized interest, except in cases where the Governor and the
legislative leaders have certified the need for additional
borrowing and provided a schedule for reducing it to the cap. If
borrowing above the cap is thus permitted in any fiscal year, it
is required by law to be reduced to the cap by the fourth fiscal
year after the limit was first exceeded. As of June 1995, LGAC
had issued bonds to provide net proceeds of $4.7 billion,
completing the program. The impact of LGAC's borrowing is that
the State is able to meet its cash flow needs in the first
quarter of the fiscal year without relying on short-term seasonal
borrowings. The 1995-96 State Financial Plan includes no spring
borrowing nor did the 1994-95 State Financial Plan, which was the
first time in 35 years there was no short-term seasonal borrowing.
In June 1994, the Legislature passed a proposed
constitutional amendment that would significantly change the
long-term financing practices of the State and its public
authorities. The proposed amendment would permit the State,
within a formula-based cap, to issue revenue bonds, which would
be debt of the State secured solely by a pledge of certain State
tax receipts (including those allocated to State funds dedicated
for transportation purposes), and not by the full faith and
credit of the State. In addition, the proposed amendment would
(i) permit multiple purpose general obligation bond proposals to
be proposed on the same ballot, (ii) require that State debt be
incurred only for capital projects included in a multi-year
capital financing plan, and (iii) prohibit, after its effective
date, lease-purchase and contractual-obligation financing
mechanisms for State facilities. Before the approved
constitutional amendment can be presented to the voters for their
consideration, it must be passed by a separately elected
legislature. The amendment must therefore be passed by the newly
elected Legislature in 1995 prior to presentation to the voters
in November 1995. The amendment was passed by the Senate in June
1995, and the Assembly is expected to pass the amendment shortly.
On January 13, 1992, Standard & Poor's Ratings Group (S&P)
reduced its ratings on the State's general obligation bonds from
A to A- and, in addition, reduced its ratings on the State's
moral obligation, lease purchase, guaranteed and contractual
obligation debt. S&P also continued its negative rating outlook
assessment on State general obligation debt. On April 26, 1993,
S&P revised the rating outlook assessment to stable. On February
14, 1994, S&P raised its outlook to positive and, on February 28,
1994, confirmed its A- rating. On January 6, 1992, Moody's
Investors Service, Inc. (Moody's) reduced its ratings on
outstanding limited-liability State lease purchase and
contractual obligations from A to Baa1. On February 28, 1994,
Moody's reconfirmed its A rating on the State's general
obligation long-term indebtedness.
The State anticipates that its capital programs will be
financed, in part, by State and public authorities borrowings in
1995-96. The State expects to issue $248 million in general
obligation bonds (including $170 million for purposes of
redeeming outstanding bond anticipation notes) and $186 million
in general obligation commercial paper. The Legislature has also
authorized the issuance of up to $33 million in certificates of
participation during the State's 1995-96 fiscal year for
equipment purchases and $14 million for capital purposes. These
projections are subject to change if circumstances require.
Principal and interest payments on general obligation bonds
and interest payments on bond anticipation notes and on tax and
revenue anticipation notes were $793.3 million for the 1994-95
fiscal year, and are estimated to be $774.4 million for the
1995-96 fiscal year. These figures do not include interest
payable on State General Obligation Refunding Bonds issued in
July 1992 (Refunding Bonds) to the extent that such interest was
paid from an escrow fund established with the proceeds of such
Refunding Bonds. Principal and interest payments on fixed rate
and variable rate bonds issued by LGAC were $239.4 million for
the 1994-95 fiscal year, and are estimated to be $328.2 million
for 1995-96. State lease-purchase rental and contractual
obligation payments for 1994-95, including State installment
payments relating to certificates of participation, were $1.607
billion and are estimated to be $1.641 billion in 1995-96.
New York State has never defaulted on any of its general
obligation indebtedness or its obligations under lease-purchase
or contractual-obligation financing arrangements and has never
been called upon to make any direct payments pursuant to its
guarantees.
Litigation. Certain litigation pending against New York State or
its officers or employees could have a substantial or long-term
adverse effect on New York State finances. Among the more
significant of these cases are those that involve (1) the
validity of agreements and treaties by which various Indian
tribes transferred
Special Risk Considerations, cont.
title to New York State of certain land in central and upstate
New York; (2) certain aspects of New York State's Medicaid
policies, including its rates, regulations and procedures; (3)
action against New York State and New York City officials
alleging inadequate shelter allowances to maintain proper
housing; (4) challenges to the practice of reimbursing certain
Office of Mental Health patient care expenses from the client's
Social Security benefits; (5) alleged responsibility of New York
State officials to assist in remedying racial segregation in the
City of Yonkers; (6) challenges by commercial insurers, employee
welfare benefit plans, and health maintenance organizations to
the imposition of 13%, 11% and 9% surcharges on inpatient
hospital bills and a bad debt and charity care allowance on all
hospital bills and hospital bills paid by such entities; (7)
challenges to certain aspects of petroleum business taxes, and
(8) action alleging damages resulting from the failure by the
State's Department of Environmental Conservation to timely
provide certain data.
A number of cases have also been instituted against the
State challenging the constitutionality of various public
authority financing programs.
In a proceeding commenced on August 6, 1991 (Schulz, et al.
v. State of New York, et al., Supreme Court, Albany County),
petitioners challenge the constitutionality of two bonding
programs of the New York State Thruway Authority authorized by
Chapters 166 and 410 of the Laws of 1991. In addition,
petitioners challenge the fiscal year 1991-92 judiciary budget as
having been enacted in violation of Sections 1 and 2 of Article
VII of the State Constitution. The defendants' motion to dismiss
the action on procedural grounds was denied by order of the
Supreme Court dated January 2, 1992. By order dated November 5,
1992, the Appellate Division, Third Department, reversed the
order of the Supreme Court and granted defendants' motion to
dismiss on grounds of standing and mootness. By order dated
September 16, 1993, on motion to reconsider, the Appellate
Division, Third Department, ruled that plaintiffs have standing
to challenge the bonding program authorized by Chapter 166 of the
laws of 1991. The proceeding is presently pending in Supreme
Court, Albany County.
In Schulz, et al. v. State of New York, et al., commenced
May 24, 1993, Supreme Court, Albany County, petitioners
challenge, among other things, the constitutionality of, and seek
to enjoin, certain highway, bridge and mass transportation
bonding programs of the New York State Thruway Authority and the
Metropolitan Transportation Authority authorized by Chapter 56 of
the Laws of 1993. Petitioners contend that the application of
State tax receipts held in dedicated transportation funds to pay
debt service on bonds of the Thruway Authority and of the
Metropolitan Transportation Authority violates Sections 8 and 11
of Article VII and Section 5 of Article X of the State
Constitution and due process provisions of the State and Federal
Constitutions. By order dated July 27, 1993, the Supreme Court
granted defendants' motions for summary judgment, dismissed the
complaint, and vacated the temporary restraining order previously
issued. By decision dated October 21, 1993, the Appellate
Division, Third Department, affirmed the judgment of the Supreme
Court. On June 30, 1994, the Court of Appeals unanimously
affirmed the rulings of the trial court and the Appellate
Division in favor of the State.
Several actions challenging the constitutionality of
legislation enacted during the 1990 legislative session, which
changed actuarial funding methods for determining state and local
contributions to state employee retirement systems have been
decided against the State. As a result, the Comptroller has
developed a plan to restore the State's retirement systems to
prior funding levels. Such funding is expected to exceed prior
levels by $30 million in fiscal 1994-95, $63 million in fiscal
1995-96, $116 million in fiscal 1996-97, $193 million in fiscal
1997-98, peaking at $241 million in fiscal 1998-99. Beginning in
fiscal 2001-02, State contributions required under the
Comptroller's plan are projected to be less than that required
under the prior funding method. As a result of the United States
Supreme Court decision in the case of State of Delaware v. State
of New York, on January 21, 1994, the State entered into a
settlement agreement with various parties. Pursuant to all
agreements executed in connection with the action, the State is
required to make aggregate payments of $351.4 million, of which
$90.3 million have been made. Annual payments to the various
parties will continue through the State's 2002-03 fiscal year in
amounts which will not exceed $48.4 million in any fiscal year
subsequent to the State's 1994-95 fiscal year.
The legal proceedings noted above involve State finances,
State programs and miscellaneous tort, real property and contract
claims in which the State is a defendant and the monetary damages
sought are substantial. These proceedings could affect adversely
the financial condition of the State. Adverse developments in
these proceedings or the initiation of new proceedings could
affect the ability of the State to maintain a balanced 1995-96
State Financial Plan. An adverse decision in any of these
proceedings could exceed the amount of the 1995-96 State
Financial Plan reserve for the payment of judgments and,
therefore, could affect the ability of the State to maintain a
balanced 1995-96 State Financial Plan. In its audited financial
statements for the fiscal year ended March 31, 1994, the State
reported its estimated liability for awarded and anticipated
unfavorable judgments to be $675 million.
Although other litigation is pending against New York State,
except as described above, no current litigation involves New
York State's authority, as a matter of law, to contract
indebtedness, issue its obligations, or pay such indebtedness
when it matures, or affects New York State's power or ability, as
a matter of law, to impose or collect significant amounts of
taxes and revenues.
Authorities. The fiscal stability of New York State is related,
in part, to the fiscal stability of its Authorities, which
generally have responsibility for financing, constructing and
operating revenue-producing public benefit facilities.
Authorities are not subject to the constitutional restrictions on
the incurrence of debt which apply to the State itself, and may
issue bonds and notes within the amounts of, and as otherwise
restricted by, their legislative authorization. The State's
access to the public credit markets could be impaired, and the
market price of its outstanding debt may be materially and
adversely affected, if any of the Authorities were to default on
their respective obligations, particularly with respect to debt
that are State-supported or State-related. As of September 30,
1994, date of the latest data available, there were 18
Authorities that had outstanding debt of $100 million or more.
The aggregate outstanding debt, including refunding bonds, of
these 18 Authorities was $70.3 billion. As of March 31, 1995,
aggregate public authority debt outstanding as State-supported
debt was $27.9 billion and as State-related debt was $36.1 billion.
Authorities are generally supported by revenues generated by
the projects financed or operated, such as fares, user fees on
bridges, highway tolls and rentals for dormitory rooms and
housing. In recent years, however, New York State has provided
financial assistance through appropriations, in some cases of a
recurring nature, to certain of the 18 Authorities for operating
and other expenses and, in fulfillment of its commitments on
moral obligation indebtedness or otherwise, for debt service.
This operating assistance is expected to continue to be required
in future years. In addition, certain statutory arrangements
provide for State local assistance payments otherwise payable to
localities to be made under certain circumstances to certain
Authorities. The State has no obligation to provide additional
assistance to localities whose local assistance payments have
been paid to Authorities under these arrangements. However, in
the event that such local assistance payments are so diverted,
the affected localities could seek additional State funds.
New York City and Other Localities. The fiscal health of the
State of New York may also be impacted by the fiscal health of
its localities, particularly the City of New York, which has
required and continues to require significant financial
assistance from New York State. The City depends on State aid
both to enable the City to balance its budget and to meet its
cash requirements. The City has achieved balanced operating
results for each of its fiscal years since 1981 as reported in
accordance with the then-applicable GAAP.
In 1975, New York City suffered a fiscal crisis that
impaired the borrowing ability of both the City and New York
State. In that year, the City lost access to public credit
markets. The City was not able to sell short-term notes to the
public again until 1979.
In 1975, S&P suspended its A rating of City bonds. This
suspension remained in effect until March 1981, at which time the
City received an investment grade rating of BBB from S&P. On
July 2, 1985, S&P revised its rating of City bonds upward to BBB+
and on November 19, 1987, to A-. On July 2, 1993, S&P
reconfirmed its A- rating of City bonds, continued its negative
rating outlook assessment and stated that maintenance of such
rating depended upon the City's making further progress towards
reducing budget gaps in the outlying years. Moody's ratings of
City bonds were revised in November 1981 from B (in effect since
1977) to Ba1, in November 1983 to Baa, in December 1985 to Baa1,
in May 1988 to A and again in February 1991 to Baa1. On July 10,
1995, S&P downgraded its rating on New York City's $23 billion of
outstanding general obligation bonds to "BBB+" from "A-", citing
the City's chronic structural budget problems and weak economic
outlook. S&P stated that New York City's reliance on one-time
revenue measures to close annual budget gaps, a dependence on
unrealized labor savings, overly optimistic estimates of revenues
and state and federal aid and the City's continued high debt
levels also contributed to its decision to lower the rating.
New York City is heavily dependent on New York State and
federal assistance to cover insufficiencies in its revenues.
There can be no assurance that in the future federal and State
assistance will enable the City to make up its budget deficits.
To help alleviate the City's financial difficulties, the
Legislature created the Municipal Assistance Corporation (MAC) in
1975. MAC is authorized to issue bonds and notes payable from
certain stock transfer tax revenues, from the City's portion of
the State sales tax derived in the City and from State per capita
aid otherwise payable by the State to the City. Failure by the
State to continue the imposition of such taxes, the reduction of
the rate of such taxes to rates less than those in effect on July
2, 1975, failure by the State to pay such aid revenues and the
reduction of such aid revenues below a specified level are
included among the events of default in the resolutions
authorizing MAC's long-term debt. The occurrence of an event of
default may result in the acceleration of the maturity of all or
a portion of MAC's debt. MAC bonds and notes constitute general
obligations of MAC and do not constitute an enforceable
obligation or debt of either the State or the City. Under its
enabling legislation, MAC's authority
Special Risk Considerations, cont.
to issue bonds and notes (other than refunding bonds and notes)
expired on December 31, 1984. Legislation has been passed by the
legislature which would, under certain conditions, permit MAC to
issue up to $1.465 billion of additional bonds, which are not
subject to a moral obligation provision.
Since 1975, the City's financial condition has been subject
to oversight and review by the New York State Financial Control
Board (the Control Board) and since 1978 the City's financial
statements have been audited by independent accounting firms. To
be eligible for guarantees and assistance, the City is required
during a "control period" to submit annually for Control Board
approval, and when a control period is not in effect for Control
Board review, a financial plan for the next four fiscal years
covering the City and certain agencies showing balanced budgets
determined in accordance with GAAP. New York State also
established the Office of the State Deputy Comptroller for New
York City (OSDC) to assist the Control Board in exercising its
powers and responsibilities. On June 30, 1986, the City
satisfied the statutory requirements for termination of the
control period. This means that the Control Board's powers of
approval are suspended, but the Board continues to have oversight
responsibilities.
The staffs of OSDC, the Control Board and the City's
comptroller issue periodic reports on the City's financial plans,
as modified, analyzing forecasts of revenues and expenditures,
cash flow, and debt service requirements, as well as compliance
with the financial plan, as modified, by the City and its Covered
Organizations (i.e., those which receive or may receive monies
from the City directly, indirectly or contingently). OSDC staff
reports issued during the mid-1980's noted that the City's
budgets benefited from a rapid rise in the City's economy, which
boosted the City's collection of property, business and income
taxes. These resources were used to increase the City's
workforce and the scope of discretionary and mandated City
services. Subsequent OSDC staff reports examined the 1987 stock
market crash and the 1989-92 recession, which affected the City's
region more severely than the nation, and attributed an erosion
of City revenues and increasing strain on City expenditures to that
recession. According to a recent OSDC staff report, the City's economy
was slow to recover from the recession and is expected to experience
a weak employment situation, and moderate wage and income growth,
during the 1995-96 period. Also, reports of OSDC, the Control
Board and the City comptroller have variously indicated that many
of the City's balanced budgets have been accomplished, in part,
through the use of non-recurring resources, tax and fee increases,
personnel reduction and additional State assistance; that the City
has not yet brought its long-term expenditures in line with recurring
revenues; that the City's proposed gap-closing programs, if implemented,
would narrow future budget gaps; that these programs tend to rely
heavily on actions outside the direct control of the City; and
that the City is therefore likely to continue to face future
projected budget gaps requiring the City to increase revenues
and/or reduce expenditures. According to the most recent staff
reports of OSDC, the Control Board and the comptroller, during
the four-year period covered by the current financial plan, the
City is relying on obtaining substantial resources from
initiatives needing approval and cooperation of its municipal
labor unions, Covered Organizations and city council, as well as
the State and federal governments, among others, and there can be
no assurance that such approval can be obtained.
On February 14, 1995, the Mayor released the preliminary
budget for the City's 1996 fiscal year, which addressed a
projected $2.7 billion budget gap. Most of the gap-closing
initiatives may be implemented only with the cooperation of the
City's municipal unions, or the State or federal governments.
New York City officials estimated that the final State
budget, enacted by the Legislature on June 7, 1995, would result
in a $670 million shortfall from the $1.1 billion in additional
State aid the Mayor had sought in order to close the City's
projected deficit. The City may have to take drastic actions to
balance its budget in the wake of such shortfall.
Although the City has balanced its budget since 1981,
estimates of the City's revenues and expenditures, which are
based on numerous assumptions, are subject to various
uncertainties. If expected federal or State aid is not
forthcoming, if unforeseen developments in the economy
significantly reduce revenues derived from economically sensitive
taxes or necessitate increased expenditures for public
assistance, if the City should negotiate wage increases for its
employees greater than the amounts provided for in the City's
financial plan, or if other uncertainties materialize that reduce
expected revenues or increase projected expenditures, then, to
avoid operating deficits, the City may be required to implement
additional actions, including increases in taxes and reductions
in essential City services. The City might also seek additional
assistance from New York State.
The City requires certain amounts of financing for seasonal
and capital spending purposes. The City has issued $1.75 billion
of notes for seasonal financing purposes during fiscal year 1994.
The City's capital financing program projected long-term
financing requirements of approximately $17 billion for the
City's fiscal years 1995 through 1998. The major capital
requirements include expenditures for the City's water
supply and sewage disposal systems, roads, bridges, mass transit,
schools, hospitals and housing. In addition to financing for new
purposes, the City and the New York City Municipal Water Finance
Authority have issued refunding bonds totalling $1.8 billion in
fiscal year 1994.
Certain localities, in addition to the City, could have
financial problems leading to requests for additional New York
State assistance. The potential impact on the State of such
requests by localities was not included in the projections of the
State's receipts and disbursements in the State's 1995-96 fiscal year.
Fiscal difficulties experienced by the City of Yonkers
(Yonkers) resulted in the creation of the Financial Control Board
for the City of Yonkers (the Yonkers Board) by New York State in
1984. The Yonkers Board is charged with oversight of the fiscal
affairs of Yonkers. Future actions taken by the Governor or the
Legislature to assist Yonkers could result in allocation of New
York State resources in amounts that cannot yet be determined.
Municipalities and school districts have engaged in
substantial short-term and long-term borrowings. In 1993, the
total indebtedness of all localities in New York State other than
New York City was approximately $17.7 billion. A small portion
(approximately $105 million) of that indebtedness represented
borrowing to finance budgetary deficits and was issued pursuant
to enabling New York State legislation. State law requires the
comptroller to review and make recommendations concerning the
budgets of those local government units other than New York City
authorized by State law to issue debt to finance deficits during
the period that such deficit financing is outstanding. Fifteen
localities had outstanding indebtedness for deficit financing at
the close of their fiscal year ending in 1993.
From time to time, federal expenditure reductions could
reduce, or in some cases eliminate, federal funding of some local
programs and accordingly might impose substantial increased
expenditure requirements on affected localities. If New York
State, New York City or any of the Authorities were to suffer
serious financial difficulties jeopardizing their respective
access to the public credit markets, the marketability of notes
and bonds issued by localities within New York State could be
adversely affected. Localities also face anticipated and
potential problems resulting from certain pending litigation,
judicial decisions and long-range economic trends. Long-range
potential problems of declining urban population, increasing
expenditures and other economic trends could adversely affect
localities and require increasing New York State assistance in
the future.
PORTFOLIO TRANSACTIONS
The Manager, pursuant to the Advisory Agreement dated July 20,
1990, supplemented by letter agreement dated July 26, 1990, and
subject to the general control of the Company's Board of
Directors, places all orders for the purchase and sale of Fund
securities. Purchases of Fund securities are made either
directly from the issuer or from dealers who deal in tax-exempt
securities. The Manager may sell Fund securities prior to
maturity if circumstances warrant and if it believes such
disposition is advisable. In connection with portfolio
transactions for the Company, the Manager seeks to obtain the
best available net price and most favorable execution for its
orders. The Manager has no agreement or commitment to place
transactions with any broker-dealer and no regular formula is
used to allocate orders to any broker-dealer. However, the
Manager may place security orders with brokers or dealers who
furnish research or other services to the Manager as long as
there is no sacrifice in obtaining the best overall terms
available. Payment for such services would be generated only
through purchase of new issue fixed income securities.
Such research and other services may include, for example:
advice concerning the value of securities, the advisability of
investing in, purchasing, or selling securities, and the
availability of securities or the purchasers or sellers of
securities; analyses and reports concerning issuers, industries,
securities, economic factors and trends, portfolio strategy, and
performance of accounts; and various functions incidental to
effecting securities transactions, such as clearance and
settlement. The Manager continuously reviews the performance of
the broker-dealers with whom it places orders for transactions.
The receipt of research from broker-dealers that execute
transactions on behalf of the Company may be useful to the
Manager in rendering investment management services to other
clients (including affiliates of the Manager), and conversely,
such research provided by broker-dealers who have executed
transaction orders on behalf of other clients may be useful to
the Manager in carrying out its obligations to the Company.
While such research is available to and may be used by the
Manager in providing investment advice to all its clients
(including affiliates of the Manager), not all of such research
may be used by the Manager for the benefit of the Company. Such
research and services will be in addition to and not in lieu of
research and services provided by the Manager, and the expenses
of the Manager will not necessarily be reduced by the receipt of
such supplemental research. See The Company's Manager.
On occasions when the Manager deems the purchase or sale of
a security to be in the best interest of the Company, as well as
the Manager's other clients, the Manager, to the extent permitted
by applicable laws and regulations, may aggregate such securities
to be sold or purchased for the Company with those to
Portfolio Transactions, cont.
be sold or purchased for other customers in order to obtain best
execution and lower brokerage commissions, if any. In such
event, allocation of the securities so purchased or sold, as well
as the expenses incurred in the transaction, will be made by the
Manager in the manner it considers to be most equitable and
consistent with its fiduciary obligations to all such customers,
including the Company. In some instances, this procedure may
impact the price and size of the position obtainable for the
Company.
The tax-exempt security market is typically a "dealer"
market in which investment dealers buy and sell bonds for their
own accounts, rather than for customers, and although the price
may reflect a dealer's mark-up or mark-down, the Company pays no
brokerage commissions as such. In addition, some securities may
be purchased directly from issuers.
Portfolio Turnover Rates
The portfolio turnover rate is computed by dividing the dollar
amount of securities purchased or sold (whichever is smaller) by
the average value of securities owned during the year.
The rate of portfolio turnover will not be a limiting factor
when the Manager deems changes in the New York Bond Fund's
portfolio appropriate in view of its investment objective. For
example, securities may be sold in anticipation of a rise in
interest rates (market decline) or purchased in anticipation of a
decline in interest rates (market rise) and later sold. In
addition, a security may be sold and another security of
comparable quality may be purchased at approximately the same
time in order to take advantage of what the Fund believes to be a
temporary disparity in the normal yield relationship between the
two securities. These yield disparities may occur for reasons
not directly related to the investment quality of particular
issues or the general movement of interest rates, such as changes
in the overall demand for or supply of various types of tax-
exempt securities. Moreover, to optimize yields on the short-
term liquidity portion of the Fund, daily and weekly demand bonds
are utilized extensively. There are transactions in the Fund in
this type of security virtually daily. These transactions,
though short-term in nature, are included in the turnover rate.
Increased use of daily and weekly demand bonds may result in
higher portfolio turnover.
For the last two fiscal years the New York Bond Fund's
portfolio turnover rates were as follows:
1994.....124.40% 1995.....142.19%
FURTHER DESCRIPTION OF SHARES
The Company is authorized to issue shares in separate classes or
Funds. Ten Funds have been established, two of which are
described in this SAI. Under the Articles of Incorporation, the
Board of Directors is authorized to create new Funds in addition
to those already existing without shareholder approval. The
Company began offering shares of the New York Bond and New York
Money Market Funds in October 1990.
The assets of each Fund and all income, earnings, profits
and proceeds thereof, subject only to the rights of creditors,
are specifically allocated to such Fund. They constitute the
underlying assets of each Fund, are required to be segregated on
the books of account, and are to be charged with the expenses of
such Fund. Any general expenses of the Company not readily
identifiable as belonging to a particular Fund are allocated on
the basis of the Funds' relative net assets during the fiscal
year or in such other manner as the Board determines to be fair
and equitable. Each share or each Fund represents an equal
proportionate interest in that Fund with every other share and is
entitled to dividends and distributions out of the net income and
capital gains belonging to that Fund when declared by the Board.
On any matter submitted to the shareholders, the holder of
each Fund share is entitled to one vote per share (with
proportionate voting for fractional shares) regardless of the
relative net asset values of the Funds' shares. However, on
matters affecting an individual Fund, a separate vote of the
shareholders of that Fund is required. Shareholders of a Fund
are not entitled to vote on any matter which does not affect that
Fund but which requires a separate vote of another Fund. Shares
do not have cumulative voting rights, which means that holders of
more than 50% of the shares voting for the election of Directors
can elect 100% of the Company's Board of Directors, and the
holders of less than 50% of the shares voting for the election of
Directors will not be able to elect any person as a Director.
Shareholders of a particular Fund might have the power to
elect all of the Directors of the Company because that Fund has a
majority of the total outstanding shares of the Company. When
issued, each Fund's shares are fully paid and nonassessable, have
no pre-emptive or subscription rights, and are fully
transferable. There are no conversion rights.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
Each Fund intends to qualify as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as
amended (the Code). Accordingly, each Fund will not be liable
for federal income taxes on its taxable net investment income and
net capital gains (capital gains in excess of capital losses)
that are distributed to shareholders, provided that each Fund
distributes at least 90% of its net investment income and net
short-term capital gain for the taxable year.
To qualify as a regulated investment company, a Fund must,
among other things, (1) derive in each taxable year at least 90%
of its gross income from dividends, interest, payments with
respect to securities loans, gains from the sale or other
disposition of stock, securities or foreign currencies, or other
income derived with respect to its business of investing in such
stock, securities or currencies (the 90% test); (2) derive in
each taxable year less than 30% of its gross income from the sale
or other disposition of stock or securities held less than three
months (the 30% test), and (3) satisfy certain diversification
requirements at the close of each quarter of the Fund's taxable
year. Furthermore, to pay tax-exempt interest income dividends,
at least 50% of the value of each Fund's total assets at the
close of each quarter of its taxable year must consist of
obligations the interest of which is exempt from federal income
tax. Each Fund intends to satisfy this requirement.
The Code imposes a nondeductible 4% excise tax on a
regulated investment company that fails to distribute during each
calendar year an amount at least equal to the sum of (1) 98% of
its taxable net investment income for the calendar year, (2) 98%
of its capital gain net income for the twelve month period ending
on October 31, and (3) any prior amounts not distributed. Each
Fund intends to make such distributions as are necessary to avoid
imposition of this excise tax.
For federal income tax purposes, debt securities purchased
by the Funds may be treated as having original issue discount.
Original issue discount represents interest income for federal
income tax purposes and can generally be defined as the excess of
the stated redemption price at maturity of a debt obligation over
the issue price. Original issue discount is treated for federal
income tax purposes as earned by the Funds, whether or not any
income is actually received, and therefore is subject to the
distribution requirements of the Code. However, original issue
discount with respect to tax-exempt obligations generally will be
excluded from the Funds' taxable income, although such discount
will be included in gross income for purposes of the 90% test and
the 30% test described previously. Original issue discount with
respect to tax-exempt securities is accrued and added to the
adjusted tax basis of such securities for purposes of determining
gain or loss upon sale or at maturity. Generally, the amount of
original issue discount is determined on the basis of a constant
yield to maturity which takes into account the compounding of
accrued interest. An investment in a stripped bond or stripped
coupon will result in original issue discount.
Debt securities may be purchased by the Funds at a market
discount. Market discount occurs when a security is purchased at
a price less than the original issue price adjusted for accrued
original issue discount, if any. The Funds intend to defer
recognition of accrued market discount until maturity or other
disposition of the bond. For securities purchased at a market
discount, the gain realized on disposition will be treated as
taxable ordinary income to the extent it does not exceed accrued
market discount on the bond.
The Funds may also purchase debt securities at a premium,
i.e., at a purchase price in excess of face amount. With respect
to tax-exempt securities, the premium must be amortized to the
maturity date but no deduction is allowed for the premium
amortization. The amortized bond premium will reduce the Funds'
adjusted tax basis in the securities. For taxable securities,
the premium may be amortized if the Funds so elect. The
amortized premium on taxable securities is first offset against
interest received on the securities and then allowed as a
deduction, and, for securities issued after September 27, 1985,
must be amortized under an economic accrual method.
Taxation of the Shareholders
Taxable distributions are generally included in a shareholder's
gross income for the taxable year in which they are received.
Dividends declared in October, November, or December and made
payable to shareholders of record in such a month will be deemed
to have been received on December 31, if a Fund pays the dividend
during the following January. It is expected that none of the
Funds' distributions will qualify for the corporate dividends-
received deduction.
Certain Federal Income Tax Considerations, cont.
To the extent that a Fund's dividends distributed to
shareholders are derived from interest income exempt from federal
income tax and are designated as "exempt-interest dividends" by a
Fund, they will be excludable from a shareholder's gross income
for federal income tax purposes. Shareholders who are recipients
of Social Security benefits should be aware that exempt-interest
dividends received from a Fund are includible in their "modified
adjusted gross income" for purposes of determining the amount of
such Social Security benefits, if any, that are required to be
included in their gross income.
All distributions of investment income during the year will
have the same percentage designated as tax-exempt. This method
is called the "average annual method". Since the Funds invest
primarily in tax-exempt securities, the percentage will be
substantially the same as the amount actually earned during any
particular distribution period.
A shareholder of the New York Bond Fund should be aware that
a redemption of shares (including any exchange into another USAA
Fund) is a taxable event and, accordingly, a capital gain or loss
may be recognized. If a shareholder receives an exempt-interest
dividend with respect to any share and such share has been held
for six months or less, any loss on the redemption or exchange
will be disallowed to the extent of such exempt-interest
dividend. Similarly, if a shareholder of the Fund receives a
distribution taxable as long-term capital gain with respect to
shares of the Fund and redeems or exchanges shares before he has
held them for more than six months, any loss on the redemption or
exchange (not otherwise disallowed as attributable to an exempt-
interest dividend) will be treated as long-term capital loss.
The Funds may invest in private activity bonds. Interest on
certain private activity bonds issued after August 7, 1986, is an
item of tax preference for purposes of the federal Alternative
Minimum Tax (AMT), although the interest continues to be
excludable from gross income for other purposes. AMT is a
supplemental tax designed to ensure that taxpayers pay at least a
minimum amount of tax on their income, even if they make
substantial use of certain tax deductions and exclusions
(referred to as tax preference items). Interest from private
activity bonds is one of the tax preference items that is added
to income from other sources for the purposes of determining
whether a taxpayer is subject to the AMT and the amount of any
tax to be paid. For corporate investors, alternative minimum
taxable income is increased by 75% of the amount by which
adjusted current earnings (ACE) exceeds alternative minimum
taxable income before the ACE adjustment. For corporate
taxpayers, all tax-exempt interest is considered in calculating
the AMT as part of the ACE. Prospective investors should consult
their own tax advisers with respect to the possible application
of the AMT to their tax situation.
Opinions relating to the validity of tax-exempt securities
and the exemption of interest thereon from federal income tax are
rendered by recognized bond counsel to the issuers. Neither the
Manager's nor the Funds' counsel makes any review of proceedings
relating to the issuance of tax-exempt securities or the basis of
such opinions.
DIRECTORS AND OFFICERS OF THE COMPANY
The Board of Directors of the Company consists of eight
Directors. Set forth below are the Directors and officers of the
Company, and their respective offices and principal occupations
during the last five years. Unless otherwise indicated, the
business address of each is 9800 Fredericksburg Rd., San Antonio, TX 78288.
Hansford T. Johnson 1, 2
Director and Chairman of the Board of Directors
Age: 59
Director, Vice Chairman and Deputy Attorney-in-Fact, United
Services Automobile Association (USAA) and President, Chief
Executive Officer, Director and Vice Chairman of the Board of
Directors of USAA Capital Corporation and of its various
subsidiaries and affiliates (9/93-present); Chief of Staff, USAA
(1/93-8/93); Executive Vice President, USAA (10/92-12/92);
Commander-in-Chief, CINCTRANS, Department of Defense -Pentagon
(9/89-9/92). Mr. Johnson currently serves as a Trustee and
Chairman of the Boards of Trustees of USAA Investment Trust and
USAA State Tax-Free Trust and as Director and Chairman of the
Boards of Directors of USAA Investment Management Company (IMCO),
USAA Mutual Fund, Inc., USAA Shareholder Account Services, USAA
Federal Savings Bank and USAA Real Estate Company.
Michael J.C. Roth 1, 2
Director, President and Vice Chairman of the Board of Directors
Age: 53
Chief Executive Officer, IMCO (10/93-present); President,
Director and Vice Chairman of the Board of Directors, IMCO (1/90-
present); Director, USAA Federal Savings Bank (12/83-8/91). Mr.
Roth currently serves as President, Trustee and Vice Chairman of
the Boards of Trustees of USAA Investment Trust and USAA State
Tax-Free Trust, as President, Director and Vice Chairman of the
Boards of Directors of USAA Mutual Fund, Inc. and USAA
Shareholder Account Services, as Director of USAA Life Insurance
Company and as Trustee and Vice Chairman of USAA Life Investment Trust.
John W. Saunders, Jr. 1, 2, 4
Director and Vice President
Age: 60
Senior Vice President, Investments, IMCO (10/85-present);
Director, BHC Financial, Inc. and BHC Securities, Inc. (1/87-
present). Mr. Saunders currently serves as a Trustee and Vice
President of USAA Investment Trust and USAA State Tax-Free Trust,
as a Director of IMCO, Director and Vice President of USAA Mutual
Fund, Inc., as Senior Vice President of USAA Shareholder Account
Services, and as Vice President of USAA Life Investment Trust.
C. Dale Briscoe 4, 5
7829 Timber Top Drive
Boerne, TX 78006
Director
Age: 74
Retired. Mr. Briscoe currently serves as a Trustee of USAA
Investment Trust and USAA State Tax-Free Trust and as a Director
of USAA Mutual Fund, Inc.
George E. Brown 3, 4, 5
5829 Northgap Drive
San Antonio, TX 78239
Director
Age: 77
Retired. Mr. Brown currently serves as a Trustee of USAA
Investment Trust and USAA State Tax-Free Trust and as a Director
of USAA Mutual Fund, Inc.
Howard L. Freeman, Jr. 2, 3, 5
2710 Hopeton
San Antonio, TX 78230
Director
Age: 60
Assistant General Manager for Finance, San Antonio City Public
Service Board (1976-present). Mr. Freeman currently serves as a
Trustee of USAA Investment Trust and USAA State Tax-Free Trust
and as a Director of USAA Mutual Fund, Inc.
Directors and Officers of the Company, cont.
Richard A. Zucker 3, 4, 5
407 Arch Bluff
San Antonio, TX 78216
Director
Age: 52
Vice President, Beldon Roofing and Remodeling (1985-present).
Mr. Zucker currently serves as a Trustee of USAA Investment Trust
and USAA State Tax-Free Trust and as a Director of USAA Mutual Fund, Inc.
Barbara B. Dreeben 3, 5
200 Patterson #1008
San Antonio, TX 78209
Director
Age: 50
President, Postal Addvantage (7/92-present); Consultant, Nancy
Harkins Stationer, (8/91-present); Merchandise Manager, Nancy
Harkins Stationer (7/82-8/91). Mrs. Dreeben currently serves as
a Trustee of USAA Investment Trust and USAA State Tax-Free Trust
and as a Director of USAA Mutual Fund, Inc.
Michael D. Wagner 1
Secretary
Age: 47
Vice President, Corporate Counsel, USAA (1982-present). Mr.
Wagner has held various positions in the legal department of USAA
since 1970 and currently serves as Vice President, Secretary and
Counsel, IMCO and USAA Shareholder Account Services; Secretary,
USAA Investment Trust, USAA Mutual Fund, Inc., and USAA State
Tax-Free Trust; and as Vice President, Corporate Counsel, for
various other USAA subsidiaries and affiliates.
Alex M. Ciccone 1
Assistant Secretary
Age: 45
Vice President, Compliance, IMCO (12/94-present); Vice President
and Chief Operating Officer, Commonwealth Shareholder Services
(6/94-11/94); Vice President, Compliance, IMCO (12/91-5/94); Vice
President, Compliance, Fund Management Co. (10/89-11/91); and
Vice President, Compliance, AIM Distributors, Inc. (4/82-11/91).
Mr. Ciccone currently serves as Assistant Secretary of USAA
Investment Trust, USAA State Tax-Free Trust and USAA Mutual Fund, Inc.
Sherron A. Kirk 1
Treasurer
Age: 50
Vice President, Controller, IMCO (10/92-present); Vice President,
Corporate Financial Analysis, USAA (9/92-10/92); Assistant Vice
President, Financial Plans and Support, USAA (8/91-9/92);
Assistant Vice President, Real Estate Accounting, USAA Real
Estate Company (5/90-7/91). Mrs. Kirk currently serves as
Treasurer of USAA Investment Trust, USAA State Tax-Free Trust,
and USAA Mutual Fund, Inc., and as Vice President, Controller of
USAA Shareholder Account Services.
Dean R. Pantzar 1
Assistant Treasurer
Age: 36
Director, Mutual Fund Accounting, IMCO (12/94-present); Senior
Manager, KPMG Peat Marwick LLP (7/88-12/94). Mr. Pantzar
currently serves as Assistant Treasurer of USAA Mutual Fund,
Inc., USAA State Tax-Free Trust, and USAA Investment Trust.
- -------
1 Indicates those Directors and officers who are employees of
the Manager or affiliated companies and are considered
"interested persons" under the 1940 Act.
2 Member of Executive Committee
3 Member of Audit Committee
4 Member of Pricing and Investment Committee
5 Member of Corporate Governance Committee
Between the meetings of the Board of Directors and while the
Board is not in session, the Executive Committee of the Board of
Directors has all the powers and may exercise all the duties of
the Board of Directors in the management of the business of the
Company which may be delegated to it by the Board. The Pricing
and Investment Committee of the Board of Directors acts upon
various investment-related issues and other matters which have
been delegated to it by the Board. The Audit Committee of the
Board of Directors reviews the financial statements and the
auditor's reports and undertakes certain studies and analyses as
directed by the Board. The Corporate Governance Committee of the
Board of Directors maintains oversight of the organization,
performance, and effectiveness of the Board and Independent Directors.
In addition to the previously listed Directors and/or
officers of the Company who also serve as Directors and/or
officers of the Manager, the following individuals are Directors
and/or executive officers of the Manager: Josue Robles, Jr.,
Senior Vice President, Chief Financial Officer/Controller, USAA;
William McCrae, Senior Vice President, General Counsel and
Secretary, USAA; Harry W. Miller, Senior Vice President,
Investments (Equity); and John J. Dallahan, Senior Vice
President, Investment Services. There are no family
relationships among the Directors, officers and managerial level
employees of the Company or its Manager.
The following table sets forth information describing the
compensation of the current Directors of the Company for their
services as Directors for the fiscal year ended March 31, 1995.
Name Aggregate Total Compensation
of Compensation from the USAA
Director from the Company Family of Funds (c)
- ----- ---------------- -------------------
C. Dale Briscoe $4,876 $18,500
George E. Brown (a) 4,876 18,500
Barbara B. Dreeben 4,876 18,500
Howard L. Freeman, Jr. 4,876 18,500
Hansford T. Johnson None (b) None (b)
Michael J.C. Roth None (b) None (b)
John W. Saunders, Jr. None (b) None (b)
Richard A. Zucker 4,876 18,500
- ----------------
(a) The USAA Family of Funds has accrued deferred compensation
for Mr. Brown in an amount (plus earnings thereon) of
$20,118. The compensation was deferred by Mr. Brown
pursuant to a non-qualified Deferred Compensation Plan,
under which deferred amounts accumulate interest quarterly
based on the annualized U.S. Treasury Bill rate in effect on
the last day of the quarter. Amounts deferred and
accumulated earnings thereon are not funded and are general
unsecured liabilities of the USAA Funds until paid. The
Deferred Compensation Plan was terminated in 1988 and no
compensation has been deferred by any Trustee/Director of
the USAA Family of Funds since the Plan was terminated.
(b) Hansford T. Johnson, Michael J.C. Roth, and John W.
Saunders, Jr. are affiliated with the Company's investment
adviser, IMCO, and, accordingly, receive no remuneration
from the Company or any other Fund of the USAA Family of Funds.
(c) At March 31, 1995, the USAA Family of Funds consisted of 4
registered investment companies offering 29 individual
funds. Each Director presently serves as a Trustee or
Director of each investment company in the USAA Family of
Funds. In addition, Michael J.C. Roth presently serves as a
Trustee of USAA Life Investment Trust, a registered
investment company advised by IMCO, consisting of five funds
offered to investors in a fixed and variable annuity
contract with USAA Life Insurance Company. Mr. Roth
receives no compensation as Trustee of USAA Life Investment Trust.
All of the above Directors are also Trustees/Directors of
the other funds for which IMCO serves as investment adviser. No
compensation is paid by any fund to any Trustee/Director who is a
director, officer, or employee of IMCO or its affiliates. No
pension or retirement benefits are accrued as part of fund
expenses. The Company also reimburses certain expenses of the
Directors who are not affiliated with the investment adviser. As
of June 30, 1995, the officers and Directors of the Company and
their families as a group owned beneficially or of record less
than 1% of the outstanding shares of the Company.
The Company knows of no one person who, as of June 30, 1995,
held of record or owned beneficially 5% or more of either Fund's shares.
THE COMPANY'S MANAGER
As described in the Prospectus, USAA Investment Management
Company is the Manager and investment adviser, providing services
under the Advisory Agreement. The Manager, organized in May
1970, has served as investment adviser and underwriter for USAA
Tax Exempt Fund, Inc. from its inception.
In addition to managing the Company's assets, the Manager
advises and manages the investments for USAA and its affiliated
companies as well as those of USAA Mutual Fund, Inc., USAA
Investment Trust and USAA State Tax-Free Trust. As of the date
of this SAI, total assets under management by the Manager were
approximately $27 billion, of which approximately $15 billion
were in mutual fund investments.
Advisory Agreement
Under the Advisory Agreement, the Manager provides an investment
program, carries out the investment policy and manages the
portfolio assets for each Fund. The Manager is authorized,
subject to the control of the Board of Directors of the Company,
to determine the selection, amount and time to buy or sell
securities for each Fund. In addition to providing investment
services, the Manager pays for office space, facilities, business
equipment and accounting services (in addition to those provided
by the Custodian) for the Company. The Manager compensates all
personnel, officers and Directors of the Company if such persons
are also employees of the Manager or its affiliates. For these
services under the Advisory Agreement, the Company has agreed to
pay the Manager a fee computed as described under Management of
the Company in the Prospectus. Management fees are computed and
accrued daily and payable monthly.
Except for the services and facilities provided by the
Manager, the Funds pay all other expenses incurred in their
operations. Expenses for which the Funds are responsible include
taxes (if any), brokerage commissions on portfolio transactions
(if any), expenses of issuance and redemption of shares, charges
of transfer agents, custodians and dividend disbursing agents,
cost of preparing and distributing proxy material, costs of
printing and engraving stock certificates, auditing and legal
expenses, certain expenses of registering and qualifying shares
for sale, fees of Directors who are not interested persons (not
affiliated) of the Manager, costs of typesetting, printing and
mailing the Prospectus, SAI and periodic reports to existing
shareholders, and any other charges or fees not specifically
enumerated. The Manager pays the cost of printing and mailing copies
of the Prospectus, the SAI, and reports to prospective shareholders.
The Advisory Agreement will remain in effect until June 30,
1996 for each Fund and will continue in effect from year to year
thereafter for each Fund as long as it is approved at least
annually by a vote of the outstanding voting securities of such
Fund (as defined by the 1940 Act) or by the Board of Directors
(on behalf of such Fund) including a majority of the Directors
who are not interested persons of the Manager or (otherwise than
as Directors) of the Company, at a meeting called for the purpose
of voting on such approval. The Advisory Agreement may be
terminated at any time by either the Company or the Manager on 60
days' written notice. It will automatically terminate in the
event of its assignment (as defined in the 1940 Act).
Under the terms of the Advisory Agreement, the Manager is
required to reimburse each Fund in the event that the total
annual expenses, inclusive of the management fee, but exclusive
of the interest, taxes and brokerage fees and extraordinary
items, incurred by that Fund exceeds any applicable state expense
limitation. At the current time, the most restrictive expense
limitation is 2.5% of the first $30,000,000 of average net assets
(ANA), 2% of the next $70,000,000 ANA, and 1.5% of the remaining ANA.
From time to time the Manager may, without prior notice to
shareholders, waive all or any portion of fees or agree to
reimburse expenses incurred by a Fund. Any such waiver or
reimbursement may be terminated by the Manager at any time
without prior notice to shareholders. The Manager has
voluntarily agreed to limit each Fund's annual expenses to .50%
of its ANA until August 1, 1996 and will reimburse the Funds for
all expenses in excess of the limitations.
For the last three fiscal years, management fees were as follows:
1993 1994 1995
------ ------ ------
New York Bond Fund $ 186,448 $ 268,218 $ 239,018
New York Money Market Fund $ 87,249 $ 90,987 $ 124,264
For 1993 and 1994, the Manager did not receive $114,224 and
$108,778, respectively, in management fees for the New York Bond
Fund and did not receive any management fees from the New York
Money Market Fund. In addition for the same periods, the Manager
did not receive fees from the New York Money Market Fund for other
operating expenses to which it would have been entitled in the
amounts of $12,202 and $2,591, respectively. For 1995, the Manager
did not receive management fees from the New York Bond and New York
Money Market Funds in the amounts of $110,439 and $94,923,
respectively, to which it would have been entitled.
Underwriter
The Company has an agreement with the Manager for exclusive
underwriting and distribution of the Funds' shares on a
continuing best efforts basis. This agreement provides that the
Manager will receive no fee or other compensation for such
distribution services.
Transfer Agent
USAA Shareholder Account Services performs transfer agent
services for the Company under a Transfer Agency Agreement.
Services include maintenance of shareholder account records,
handling of communications with shareholders, distribution of
Fund dividends and production of reports with respect to account
activity for shareholders and the Company. For its services
under the Transfer Agency Agreement, USAA Shareholder Account
Services is paid an annual fixed fee per account of $26.00 by
each Fund. This fee is subject to change at any time.
The fee to the Transfer Agent includes processing of all
transactions and correspondence. Fees are billed on a monthly
basis at the rate of one-twelfth of the annual fee. In addition,
the Funds pay all out-of-pocket expenses of the Transfer Agent
and other expenses which are incurred at the specific direction
of the Company.
GENERAL INFORMATION
Custodian
State Street Bank and Trust Company, P.O. Box 1713, Boston, MA
02105, is the Company's Custodian. The Custodian is responsible
for, among other things, safeguarding and controlling the
Company's cash and securities, handling the receipt and delivery
of securities and collecting interest on the Company's investments.
Counsel
Goodwin, Procter & Hoar, Exchange Place, Boston, MA 02109, will
review certain legal matters for the Company in connection with
the shares offered by the Prospectus.
Independent Auditors
KPMG Peat Marwick LLP, 112 East Pecan Suite 2400, San Antonio, TX
78205, is the Company's independent auditor. In this capacity,
the firm is responsible for auditing the annual financial
statements of the Funds and reporting thereon.
Financial Statements
The financial statements of the Funds and the Independent
Auditors' Report thereon for the fiscal year ended March 31,
1995, are included in the Annual Report to Shareholders of that
date and are incorporated herein by reference. A copy of the
Annual Report will be delivered free of charge with each SAI
requested from the Manager at the address set forth on page 1 of
this statement.
CALCULATION OF PERFORMANCE DATA
Information regarding total return and yield of each Fund is
provided under Performance Information in the Prospectus. See
Valuation of Securities herein for a discussion of the manner in
which each Fund's price per share is calculated.
Total Return
The New York Bond Fund may advertise performance in terms of
average annual total return for 1, 5 and 10 year periods, or for
such lesser period as the Fund has been in existence. Average
annual total return is computed by finding the average annual
compounded rates of return over the periods that would equate the
initial amount invested to the ending redeemable value, according
to the following formula:
P(1+T)^n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000
payment made at the beginning of the 1, 5 or 10
year periods at the end of the year or period
The calculation assumes all charges are deducted from the
initial $1,000 payment and assumes all dividends and
distributions by such Fund are reinvested at the price stated in
the Prospectus on the reinvestment dates during the period, and
includes all recurring fees that are charged to all shareholder accounts.
The date of commencement of operations for the New York Bond
Fund was October 15, 1990. The Fund's average annual total
returns for the periods ended March 31, 1995 were:
1 year . . . . 5.42%
Since inception . . . . 8.59%
Yield
The New York Bond Fund may advertise performance in terms of a
30-day yield quotation. The 30-day yield quotation is computed
by dividing the net investment income per share earned during the
period by the maximum offering price per share on the last day of
the period, according to the following formula:
YIELD = 2((((a-b)/(cd)+1^6)-1)
Where: a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursement)
c = the average daily number of shares
outstanding during the period that were
entitled to receive dividends
d = the maximum offering price per share on the
last day of the period
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.
The Fund's 30-day yield for the period ended March 31, 1995 was 5.73%.
Yield - New York Money Market Fund
When the New York Money Market Fund quotes a current annualized
yield, it is based on a specified recent seven-calendar-day
period. It is computed by (1) determining the net change,
exclusive of capital changes, in the value of a hypothetical
preexisting account having a balance of one share at the
beginning of the period, (2) dividing the net change in account
value by the value of the account at the beginning of the base
period to obtain the base return, then (3) multiplying the base
period by 52.14 (365 divided by 7). The resulting yield figure
is carried to the nearest hundredth of one percent.
The calculation includes (1) the value of additional shares
purchased with dividends on the original share, and dividends
declared on both the original share and any such additional
shares, and (2) any fees charged to all shareholder accounts, in
proportion to the length of the base period and the Fund's
average account size.
The capital changes excluded from the calculation are
realized capital gains and losses from the sale of securities and
unrealized appreciation and depreciation. The Fund's effective
(compounded) yield will be computed by dividing the seven-day
annualized yield as defined above by 365, adding 1 to the
quotient, raising the sum to the 365th power, and subtracting 1
from the result.
Current and effective yields fluctuate daily and will vary
with factors such as interest rates and the quality, length of
maturities, and type of investments in the portfolio.
Yield For 7-day Period Ended 3/31/95 . . . . 3.48%
Effective Yield For 7-day Period Ended 3/31/95 . . . . 3.54%
Tax Equivalent Yield
The New York Money Market Fund may advertise performance in terms
of a tax equivalent yield based on the 7-day yield or effective
yield and the New York Bond Fund may advertise performance in
terms of a 30-day tax equivalent yield. The tax equivalent yield
is computed by dividing that portion of the yield of a Fund
(computed as described in the preceding paragraphs) which is tax-
exempt, by the complement of a tax rate of 38.59% (31% federal
plus 7.59% state, or other relevant rates) and adding the result
to that portion, if any, of the yield of such Fund that is not
tax-exempt. The complement, for example, of a tax rate of 38.59%
is 61.41%, that is [1.00 - .3859 = .6141].
Based on a tax rate of 38.59%, the tax equivalent yields for
the New York Bond and the New York Money Market Funds for the
period ended March 31, 1995 were 9.33% and 5.67%, respectively.
APPENDIX A - TAX-EXEMPT SECURITIES AND THEIR RATINGS
Tax-Exempt Securities
Tax-exempt securities generally include debt obligations issued
by states and their political subdivisions, and duly constituted
authorities and corporations, to obtain funds to construct,
repair or improve various public facilities such as airports,
bridges, highways, hospitals, housing, schools, streets, and
water and sewer works. Tax-exempt securities may also be issued
to refinance outstanding obligations as well as to obtain funds
for general operating expenses and for loans to other public
institutions and facilities.
The two principal classifications of tax-exempt securities
are "general obligations" and "revenue" or "special tax" bonds.
General obligation bonds are secured by the issuer's pledge of
its full faith, credit and taxing power for the payment of
principal and interest. Revenue or special tax bonds are payable
only from the revenues derived from a particular facility or
class of facilities or, in some cases, from the proceeds of a
special excise or other tax, but not from general tax revenues.
The Funds may also invest in tax-exempt private activity bonds,
which in most cases are revenue bonds and generally do not have
the pledge of the credit of the issuer. The payment of the
principal and interest on such industrial revenue bonds is
dependent solely on the ability of the user of the facilities
financed by the bonds to meet its financial obligations and the
pledge, if any, of real and personal property so financed as
security for such payment. There are, of course, many variations
in the terms of, and the security underlying tax-exempt
securities. Short-term obligations issued by states, cities,
municipalities or municipal agencies, include Tax Anticipation
Notes, Revenue Anticipation Notes, Bond Anticipation Notes,
Construction Loan Notes and Short-Term Discount Notes.
The yields of tax-exempt securities depend on, among other
things, general money market conditions, conditions of the Tax-
Exempt Bond market, the size of a particular offering, the
maturity of the obligation, and the rating of the issue. The
ratings of Moody's Investors Service, Inc. (Moody's), Standard &
Poor's Ratings Group (S&P), Fitch Investors Service, Inc.
(Fitch), Duff & Phelps Inc., Thompson BankWatch, Inc., and IBCA
Inc. represent their opinions of the quality of the securities
rated by them. It should be emphasized that such ratings are
general and are not absolute standards of quality. Consequently,
securities with the same maturity, coupon and rating may have
different yields, while securities of the same maturity and
coupon but with different ratings may have the same yield. It
will be the responsibility of the Manager to appraise
independently the fundamental quality of the tax-exempt
securities included in a Fund's portfolio.
Appendix A, cont.
Ratings
Excerpts from Moody's Bond (Tax-Exempt Securities) Ratings:
Aaa Bonds which are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment risk
and are generally referred to as "gilt edge." Interest
payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various
protective elements are likely to change, such changes as
can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa Bonds which are rated Aa are judged to be of high quality by
all standards. Together with the Aaa group they comprise
what are generally known as high grade bonds. They are
rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater
amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than in Aaa securities.
A Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade
obligations. Factors giving security to principal and
interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor
poorly secured. Interest payments and principal security
appear adequate for the present but certain protective
elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and in fact have
speculative characteristics as well.
Note: Those bonds in the Aa, A, and Baa groups which Moody's
believes possess the strongest investment attributes are
designated by the symbols Aa1, A1, and Baa1.
Excerpts of Moody's Ratings of Short-Term Loans (State and Tax-
Exempt Notes):
Moody's ratings for state and tax-exempt notes and other short-
term obligations are designated Moody's Investment Grade (MIG).
Symbols used will be as follows:
MIG-1 This designation denotes best quality. There is
present strong protection by established cash flows,
superior liquidity support or demonstrated broadbased
access to the market for refinancing.
MIG-2 This designation denotes high quality. Margins of
protection are ample although not so large as in the
preceding group.
Excerpts of Moody's Rating of Commercial Paper:
Prime-1 Issuers have a superior ability for repayment of senior
short-term debt obligations. Prime-1 repayment ability
will often be evidenced by many of the following characteristics:
Leading market positions in well-established industries.
High rates of return on funds employed.
Conservative capitalization structure with moderate
reliance on debt and ample asset protection.
Broad margins in earnings coverage of fixed financial
charges and high internal cash generation.
Well-established access to a range of financial markets
and assured sources of alternate liquidity.
Prime-2 Issuers have a strong ability for repayment of senior
short-term debt obligations. This will normally be
evidenced by many of the characteristics cited above
but to a lesser degree. Earnings trends and coverage
ratios, while sound, will be more subject to variation.
Capitalization characteristics, while still
appropriate, may be more affected by external
conditions. Ample alternate liquidity is maintained.
Excerpts from S&P's Bond Ratings:
AAA Debt rated AAA has the highest rating assigned by S&P.
Capacity to pay interest and repay principal is extremely strong.
AA Debt rated AA has a very strong capacity to pay interest and
repay principal and differs from the highest rated issues
only in small degree.
A Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the
adverse effects of changes in circumstances and economic
conditions than debt in higher rated categories.
BBB Debt rated BBB is regarded as having an adequate capacity to
pay interest and repay principal. Whereas it normally
exhibits adequate protection parameters, adverse economic
conditions or changing circumstances are more likely to lead
to a weakened capacity to pay interest and repay principal
for debt in this category than in higher rated categories.
Plus (+) or Minus (-): The ratings from AA to BBB may be
modified by the addition of a plus or minus sign to show relative
standing within the major rating categories.
Excerpts of S&P's Ratings of Tax-Exempt Notes:
SP-1 Strong capacity to pay principal and interest. Issues
determined to possess very strong characteristics are given
a plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest, with
some vulnerability to adverse financial and economic changes
over the term of the notes.
Excerpts of S&P's Rating of Commercial Paper:
A-1 This highest category indicates that the degree of safety
regarding timely payment is strong. Those issues determined
to possess extremely strong safety characteristics are
denoted with a plus (+) sign designation.
A-2 Capacity for timely payment on issues with this designation
is satisfactory. However, the relative degree of safety is
not as high as for issues designated A-1.
Excerpts of Fitch's Ratings of Bonds:
AAA Bonds considered to be investment grade and of the highest
credit quality. The obligor has an exceptionally strong
ability to pay interest and repay principal, which is
unlikely to be affected by reasonably foreseeable events.
AA Bonds considered to be investment grade and of very high
credit quality. The obligor's ability to pay interest and
repay principal is very strong, although not quite as strong
as bonds rated AAA. Because bonds rated in the AAA and AA
categories are not significantly vulnerable to foreseeable
future developments, short-term debt of these issuers is
generally rated F-1+.
A Bonds considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay
principal is considered to be strong, but may be more
vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB Bonds considered to be investment grade and of satisfactory
credit quality. The obligor's ability to pay interest and
repay principal is considered to be adequate. Adverse
changes in economic conditions and circumstances, however,
are more likely to have adverse impact on these bonds, and
therefore, impair timely payment.
Plus (+) and Minus (-): Plus and minus signs are used with a
rating symbol to indicate the relative position of a credit
within the rating category. Plus and minus signs, however, are
not used in the AAA category.
Excerpts of Fitch's Ratings to Commercial Paper, Certificates of
Deposit and Tax-Exempt Notes:
F-1+ Exceptionally strong credit quality. Issues assigned this
rating are regarded as having the strongest degree of
assurance for timely payment.
F-1 Very strong credit quality. Issues assigned this rating
reflect an assurance of timely payment only slightly less in
degree than issues rated F-1+.
F-2 Good credit quality. Issues assigned this rating have a
satisfactory degree of assurance for timely payments, but
the margin of safety is not as great as the F-1+ and F-1
ratings.
Excerpts from Duff & Phelps Long-Term Rating Scale:
AAA Highest credit quality. The risk factors are negligible,
being only slightly more than for risk-free U.S. Treasury
debt.
AA High credit quality. Protection factors are strong. Risk
is modest but may vary slightly from time to time because of
economic conditions.
A Protection factors are average but adequate. However, risk
factors are more variable and greater in periods of economic stress.
Appendix A, cont.
BBB Below average protection factors but still considered
sufficient for prudent investment. Considerable variability
in risk during economic cycles.
Excerpts from Duff & Phelps Commercial Paper Rating Scale:
Duff 1+ Highest certainty of timely payment. Short-term
liquidity, including internal operating factors and/or
ready access to alternative sources of funds, is
outstanding, and safety is just below risk-free U.S.
Treasury short-term obligations.
Duff 1 Very high certainty of timely payment. Liquidity
factors are excellent and supported by good fundamental
protection factors. Risk factors are minor.
Duff 1- High certainty of timely payment. Liquidity factors
are strong and supported by good fundamental protection
factors. Risk factors are very small.
Duff 2 Good certainty of timely payment. Liquidity factors
and company fundamentals are sound. Although ongoing
funding needs may enlarge total financing requirements,
access to capital markets is good. Risk factors are small.
Thompson BankWatch, Inc.
TBW-1 The highest category; indicates a very high likelihood
that principal and interest will be paid on a timely basis.
TBW-2 The second highest category; while the degree of safety
regarding timely repayment of principal and interest is
strong, the relative degree of safety is not as high as
for issues rated TBW-1.
TBW-3 The lowest investment grade category; indicates that
while the obligation is more susceptible to adverse
developments (both internal and external) than
obligations with higher ratings, the capacity to
service principal and interest in a timely fashion is
considered adequate.
IBCA Inc.
A1 Obligations supported by the highest capacity for timely
repayment. Where issues possess a particularly strong
credit feature, a rating of A1+ is assigned.
A2 Obligations supported by a good capacity for timely repayment.
A3 Obligations supported by a satisfactory capacity for timely repayment.
B Obligations for which there is an uncertainty as to the
capacity to ensure timely repayment.
C Obligations for which there is a high risk of default or
which are currently in default.
APPENDIX B - COMPARISON OF PORTFOLIO PERFORMANCE
Occasionally, we may make comparisons in advertising and sales
literature between the Funds contained in this SAI and other
Funds in the USAA Family of Funds. These comparisons may include
such topics as risk and reward, investment objectives, investment
strategies, and performance.
Fund performance also may be compared to the performance of
broad groups of mutual funds with similar investment goals or
unmanaged indexes of comparable securities. Evaluations of Fund
performance made by independent sources may be used in
advertisements concerning the Fund, including reprints of, or
selections from, editorials or articles about the Fund. The Fund
or its performance may also be compared to products and services
not constituting securities subject to registration under the
Securities Act of 1933 such as, but not limited to, certificates
of deposit and money market accounts. Sources for performance
information and articles about the Fund may include the following:
AAII Journal, a monthly association magazine for members of the
American Association of Individual Investors.
Arizona Republic, a newspaper which may cover financial and
investment news.
Austin American-Statesman, a newspaper which may cover financial news.
Barron's, a Dow Jones and Company, Inc. business and financial
weekly that periodically reviews mutual fund performance data.
The Bond Buyer, a daily newspaper which covers bond market news.
Business Week, a national business weekly that periodically reports the
performance rankings and ratings of a variety of mutual funds.
Chicago Tribune, a newspaper which may cover financial news.
Consumer Reports, a monthly magazine which from time to time
reports on companies in the mutual fund industry.
Dallas Morning News, a newspaper which may cover financial news.
Denver Post, a newspaper which may quote financial news.
Financial Planning, a monthly magazine that periodically features
companies in the mutual fund industry.
Financial Services Week, a weekly newspaper which covers financial news.
Financial World, a monthly magazine which may periodically review
mutual fund companies.
Forbes, a national business publication that periodically reports
the performance of companies in the mutual fund industry.
Fortune, a national business publication that periodically rates
the performance of a variety of mutual funds.
Fund Action, a mutual fund news report.
Houston Chronicle, a newspaper which may cover financial news.
Houston Post, a newspaper which may cover financial news.
IBC/Donoghue's Moneyletter, a biweekly newsletter which covers
financial news and from time to time rates specific mutual funds.
IBC's Money Market Insight, a monthly money market industry
analysis prepared by IBC USA, Inc.
Income and Safety, a monthly newsletter that rates mutual funds.
InvesTech, a bimonthly investment newsletter.
Investment Advisor, a monthly publication directed primarily to
the advisor community; includes ranking of mutual funds using a
proprietary methodology.
Investment Company Institute, a national association of the
American Investment Company industry.
Investor's Business Daily, a newspaper which covers financial news.
Kiplinger's Personal Finance Magazine, a monthly investment
advisory publication that periodically features the performance
of a variety of securities.
Lipper Analytical Services, Inc.'s Fixed Income Fund Performance
Analysis, a monthly publication of industry-wide mutual fund
performance averages by type of fund.
Lipper Analytical Services, Inc.'s Mutual Fund Performance
Analysis, a weekly and quarterly publication of industry-wide
mutual fund performance averages by type of fund.
Los Angeles Times, a newspaper which may cover financial news.
Louis Rukeyser's Wall Street, a publication for investors.
Medical Economics, a monthly magazine providing information to
the medical profession.
Money, a monthly magazine that features the performance of both
specific funds and the mutual fund industry as a whole.
Money Fund Report, a weekly publication of the Donoghue
Organization, Inc., reporting on the performance of the nation's
money market funds, summarizing money market fund activity, and
including certain averages as performance benchmarks,
specifically: (1) Taxable Money Fund Averages: "100% U.S.
Treasury" and "First Tier" and (2) Tax-Free Money Fund Averages:
"Stockbroker and General Purpose" and "State Specific Stockbroker
and General Purpose".
Morningstar 5 Star Investor, a monthly newsletter by Morningstar,
Inc. which covers financial news and rates mutual funds.
Muni Bond Fund Report, a monthly newsletter which covers news on
the municipal bond market and features performance data for
municipal bond mutual funds.
MuniWeek, a weekly newspaper which covers news on the municipal
bond market.
Mutual Fund Forecaster, a monthly newsletter that ranks mutual funds.
Appendix B, cont.
Mutual Fund Investing, a newsletter covering mutual funds.
Mutual Fund Performance Report, a monthly publication of
industry-wide mutual fund averages produced by Morningstar, Inc.
Mutual Funds Magazine, a monthly publication reporting on mutual
fund investing.
Mutual Fund Source Book, an annual publication produced by
Morningstar, Inc. which describes and rates mutual funds.
Mutual Fund Values, a biweekly guidebook to mutual funds produced
by Morningstar, Inc. (a data service which tracks open-end mutual funds).
Newsweek, a national business weekly.
New York Times, a newspaper which may cover financial news.
No Load Fund Investor, a newsletter covering companies in the
mutual fund industry.
Personal Investor, a monthly magazine which from time to time
features mutual fund companies and the mutual fund industry.
San Antonio Business Journal, a weekly newspaper that
periodically covers mutual fund companies as well as financial news.
San Antonio Express-News, a newspaper which may cover financial news.
San Francisco Chronicle, a newspaper which may cover financial news.
Smart Money, a monthly magazine featuring news and articles on
investing and mutual funds.
USA Today, a newspaper which may cover financial news.
U.S. News and World Report, a national business weekly that
periodically reports mutual fund performance data.
Wall Street Journal, a Dow Jones and Company, Inc. newspaper
which covers financial news.
Washington Post, a newspaper which may cover financial news.
Weisenberger Mutual Funds Investment Report, a monthly newsletter
that reports on both specific mutual fund companies and the
mutual fund industry as a whole.
Worth, a magazine which covers financial and investment subjects
including mutual funds.
Your Money, a monthly magazine directed towards the novice investor.
Among the organizations cited above, Lipper Analytical
Services, Inc.'s tracking results may be used. The Fund will be
compared to Lipper's appropriate fund category according to
objective and portfolio holdings. The New York Bond Fund will be
compared to funds in Lipper's New York tax-exempt bond funds
category, and the New York Money Market Fund to funds in Lipper's
New York short-term tax-exempt bond funds category. Footnotes in
advertisements and other sales literature will include the time
period applicable for any rankings used.
For comparative purposes, unmanaged indices of comparable
securities or economic data may be cited. Examples include the
following:
- Shearson Lehman Hutton Bond Indices, indices of fixed-rate
debt issues rated investment grade or higher which can be found
in the Bond Market Report.
- Bond Buyer Indices, indices of debt of varying maturities
including revenue bonds, general obligation bonds, and U.S.
Treasury bonds which can be found in MuniWeek and The Bond Buyer.
Other sources for total return and other performance data
which may be used by the Fund or by those publications listed
previously are Morningstar, Inc., Schabaker Investment
Management, and Investment Company Data, Inc. These are services
that collect and compile data on mutual fund companies.
APPENDIX C - TAXABLE EQUIVALENT YIELD TABLES
I. COMBINED FEDERAL AND NEW YORK STATE INCOME TAX RATES
TO MATCH A A FULLY TAXABLE INVESTMENT
DOUBLE WOULD HAVE TO PAY YOU:
TAX-FREE ASSUMING A MARGINAL ASSUMING A MARGINAL ASSUMING A MARGINAL
YIELD OF: TAX RATE OF 35.59% (a) TAX RATE OF 38.59% (b) TAX RATE OF 43.59% (c)
2.00% 3.11% 3.26% 3.55%
3.00% 4.66% 4.89% 5.32%
4.00% 6.21% 6.51% 7.09%
5.00% 7.76% 8.14% 8.86%
6.00% 9.32% 9.77% 10.64%
(a) FEDERAL RATE OF 28% + NEW YORK STATE RATE OF 7.59%
(b) FEDERAL RATE OF 31% + NEW YORK STATE RATE OF 7.59%
(c) FEDERAL RATE OF 36% + NEW YORK STATE RATE OF 7.59%
THIS TABLE IS A HYPOTHETICAL ILLUSTRATION AND SHOULD NOT BE
CONSIDERED AN INDICATION OF FUND PERFORMANCE OF ANY OF THE USAA
FAMILY OF FUNDS.
THE ASSUMED MARGINAL TAX RATES ARE NOT NECESSARILY THE HIGHEST
POSSIBLE MARGINAL TAX RATES, NOR ARE THEY THE LOWEST RATES.
THESE RATES WERE PICKED AS EXEMPLARY RATES THAT MANY TAXPAYERS
WOULD BE SUBJECT TO. THE TABLE DOES NOT TAKE INTO ACCOUNT THE
FACT THAT SOME TAXPAYERS MAY GET A DEDUCTION ON THEIR FEDERAL
RETURN FOR STATE TAXES PAID. THIS EFFECT WOULD NOT SIGNIFICANTLY
CHANGE THE TAX EQUIVALENT YIELDS DISPLAYED IN THE TABLE.
II. COMBINED FEDERAL, NEW YORK STATE,
AND NEW YORK CITY INCOME TAX RATES
TO MATCH A A FULLY TAXABLE INVESTMENT
TRIPLE WOULD HAVE TO PAY YOU:
TAX-FREE ASSUMING A MARGINAL ASSUMING A MARGINAL ASSUMING A MARGINAL
YIELD OF: TAX RATE OF 39.99% (d) TAX RATE OF 42.99% (e) TAX RATE OF 47.99% (f)
2.00% 3.33% 3.51% 3.85%
3.00% 5.00% 5.26% 5.77%
4.00% 6.67% 7.02% 7.69%
5.00% 8.33% 8.77% 9.61%
6.00% 10.00% 10.52% 11.54%
(d) FEDERAL RATE OF 28% + NEW YORK STATE RATE OF 7.59% + CITY RATE OF 4.4%
(e) FEDERAL RATE OF 31% + NEW YORK STATE RATE OF 7.59% + CITY RATE OF 4.4%
(f) FEDERAL RATE OF 36% + NEW YORK STATE RATE OF 7.59% + CITY RATE OF 4.4%
THIS TABLE IS A HYPOTHETICAL ILLUSTRATION AND SHOULD NOT BE CONSIDERED AN
INDICATION OF FUND PERFORMANCE OF ANY OF THE USAA FAMILY OF FUNDS.
THE ASSUMED MARGINAL TAX RATES ARE NOT NECESSARILY THE HIGHEST
POSSIBLE MARGINAL TAX RATES, NOR ARE THEY THE LOWEST RATES.
THESE RATES WERE PICKED AS EXEMPLARY RATES THAT MANY TAXPAYERS
WOULD BE SUBJECT TO. THE TABLE DOES NOT TAKE INTO ACCOUNT THE
FACT THAT SOME TAXPAYERS MAY GET A DEDUCTION ON THEIR FEDERAL
RETURN FOR STATE TAXES PAID. THIS EFFECT WOULD NOT SIGNIFICANTLY
CHANGE THE TAX EQUIVALENT YIELDS DISPLAYED IN THE TABLE.
APPENDIX D - DOLLAR-COST AVERAGING
Dollar-cost averaging is a systematic investing method which can
be used by investors as a disciplined technique for investing. A
fixed amount of money is invested in a security (such as a stock
or mutual fund) on a regular basis over a period of time,
regardless of whether securities markets are moving up or down.
This practice reduces average share costs to the investor
who acquires more shares in periods of lower securities prices
and fewer shares in periods of higher prices.
While dollar-cost averaging does not assure a profit or
protect against loss in declining markets, this investment
strategy is an effective way to help calm the effect of
fluctuations in the financial markets. Systematic investing
involves continuous investment in securities regardless of
fluctuating price levels of such securities. Investors should
consider their financial ability to continue purchases through
periods of low and high price levels.
As the following chart illustrates, dollar-cost averaging
tends to keep the overall cost of shares lower. This example is
for illustration only, and different trends would result in
different average costs.
HOW DOLLAR-COST AVERAGING WORKS
$100 Invested Regularly for 5 Periods
Market Trend
---------------------------------------------------------------
Down Up Mixed
------------------ ------------------ -------------------
Share Shares Share Shares Share Shares
Investment Price Purchased Price Purchased Price Purchased
------------------ ------------------ -------------------
$100 10 10 6 16.67 10 10
100 9 11.1 7 14.29 9 11.1
100 8 12.5 7 14.29 8 12.5
100 8 12.5 9 11.1 9 11.1
100 6 16.67 10 10 10 10
--- -- ----- -- ----- -- -----
$500 ***41 62.77 ***39 66.35 ***46 54.7
*Avg. Cost: $7.97 *Avg. Cost: $7.54 *Avg. Cost: $9.14
----- ----- -----
**Avg. Price: $8.20 **Avg. Price: $7.80 **Avg. Price: $9.20
----- ----- -----
* Average Cost is the total amount invested divided by shares purchased.
** Average Price is the sum of the prices paid divided by number of purchases.
*** Cumulative total of share prices used to compute average prices.
17005-1295
(Logo
of the
USAA USAA STATEMENT OF
Eagle TAX EXEMPT ADDITIONAL INFORMATION
is here) FUND, INC. August 1, 1995
As Supplemented December 1, 1995
- -----------------------------------------------------------------------
USAA TAX EXEMPT FUND, INC.
VIRGINIA FUNDS
USAA TAX EXEMPT FUND, INC. (the Company) is a registered
investment company offering shares of ten no-load mutual funds,
two of which are described in this Statement of Additional
Information (SAI): the Virginia Bond Fund and Virginia Money
Market Fund (collectively, the Funds or the Virginia Funds).
Each Fund is classified as a diversified investment company and
has 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.
A Prospectus for the Virginia Funds dated August 1, 1995, which
provides the basic information you should know before investing
in the Funds, may be obtained without charge upon written request
to USAA Tax Exempt Fund, Inc., 9800 Fredericksburg Rd., San
Antonio, TX 78288, or by calling toll free 1-800-531-8181. This
SAI is not a Prospectus and contains information in addition to
and more detailed than that set forth in the Prospectus. It is
intended to provide you with additional information regarding the
activities and operations of the Company and the Funds, and
should be read in conjunction with the Prospectus.
- ---------------------------------------------------------------------
TABLE OF CONTENTS
Page
2 Valuation of Securities
2 Additional Information Regarding Redemption of Shares
3 Investment Plans
4 Investment Policies
5 Investment Restrictions
6 Special Risk Considerations
11 Portfolio Transactions
12 Further Description of Shares
12 Certain Federal Income Tax Considerations
14 Virginia Taxation
15 Directors and Officers of the Company
18 The Company's Manager
19 General Information
19 Calculation of Performance Data
21 Appendix A - Tax-Exempt Securities and Their Ratings
24 Appendix B - Comparison of Portfolio Performance
27 Appendix C - Taxable Equivalent Yield Table
28 Appendix D - Dollar-Cost Averaging
VALUATION OF SECURITIES
Shares of each Fund are offered on a continuing best efforts
basis through USAA Investment Management Company (IMCO or the
Manager). The offering price for shares of each Fund is equal to
the current net asset value per share. The net asset value per
share of each Fund is calculated by adding the value of all its
portfolio securities and other assets, deducting its liabilities,
and dividing by the number of shares outstanding.
A Fund's net asset value per share is calculated each day,
Monday through Friday, except days on which the New York Stock
Exchange (NYSE) is closed. The NYSE is currently scheduled to be
closed on New Year's Day, Presidents' Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving, and Christmas,
and on the preceding Friday or subsequent Monday when one of
these holidays falls on a Saturday or Sunday, respectively.
The investments of the Virginia Bond Fund are valued each
business day by a pricing service (the Service) approved by the
Company's Board of Directors. The Service uses the mean between
quoted bid and asked prices or the last sale price to price
securities when, in the Service's judgement, these prices are
readily available and are representative of the securities'
market values. For many securities, such prices are not readily
available. The Service generally prices these securities based
on methods which include consideration of yields or prices of
tax-exempt securities of comparable quality, coupon, maturity and
type, indications as to values from dealers in securities, and
general market conditions. Securities purchased with maturities
of 60 days or less are stated at amortized cost which
approximates market value. Repurchase agreements are valued at
cost. Securities which cannot be valued by the Service, and all
other assets, are valued in good faith at fair value using
methods determined by the Manager under the general supervision
of the Board of Directors.
The value of the Virginia Money Market Fund's securities is
stated at amortized cost which approximates market value. This
involves valuing a security at its cost and thereafter assuming a
constant amortization to maturity of any discount or premium,
regardless of the impact of fluctuating interest rates. While
this method provides certainty in valuation, it may result in
periods during which the value of an instrument, as determined by
amortized cost, is higher or lower than the price the Fund would
receive upon the sale of the instrument.
The valuation of the Virginia Money Market Fund's portfolio
instruments based upon their amortized cost is subject to the
Fund's adherence to certain procedures and conditions.
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 Manager will invest only in securities
that have been determined to present minimal credit risk and that
satisfy the quality and diversification requirements of
applicable rules and regulations of the Securities and Exchange Commission.
The Board of Directors has established procedures designed
to stabilize the Virginia Money Market Fund's price per share, as
computed for the purpose of sales and redemptions, at $1.00.
There can be no assurance, however, that the Fund will at all
times be able to maintain a constant $1.00 net asset value per
share. Such procedures include review of the Fund's holdings at
such intervals as is deemed appropriate to determine whether the
Fund's net asset value calculated by using available market
quotations deviates from $1.00 per share and, if so, whether such
deviation may result in material dilution or is otherwise unfair
to existing shareholders. In the event that it is determined
that such a deviation exists, the Board of Directors will take
such corrective action as it regards necessary and appropriate.
Such action may include selling portfolio instruments prior to
maturity to realize capital gains or losses or to shorten average
portfolio maturity, withholding dividends, or establishing a net
asset value per share by using available market quotations.
ADDITIONAL INFORMATION REGARDING REDEMPTION OF SHARES
The value of a shareholder's investment at the time of redemption
may be more or less than the cost at purchase, depending on the
value of the securities held in each Fund's portfolio. Requests
for redemption which are subject to any special conditions, or
which specify an effective date other than as provided herein,
cannot be accepted. A gain or loss for tax purposes may be
realized on the sale of shares, depending upon the price when redeemed.
The Board of Directors may cause the redemption of an
account with a balance of less than 50 shares provided (1) the
value of the account has been reduced, for reasons other than
market action, below the minimum initial investment in such Fund
at the time of the establishment of the account, (2) the total
value of such shares has been reduced, for reasons other than
market action, below $50 in the case of an account in the
Virginia Money Market Fund or $500 in the case of an account in
the Virginia Bond Fund, (3) the account has remained below the
minimum level for six months, and (4) 60 days' prior written notice of
the proposed redemption has been sent to the shareholder. Shares
will be redeemed at the net asset value on the date fixed for
redemption by the Board of Directors. Prompt payment will be
made by mail to the last known address of the shareholder.
The Company reserves the right to suspend the right of
redemption or postpone the date of payment (1) for any periods
during which the NYSE is closed, (2) when trading in the markets
the Company normally utilizes is restricted, or an emergency
exists as determined by the Securities and Exchange Commission
(SEC) so that disposal of the Company's investments or
determination of its net asset value is not reasonably
practicable, or (3) for such other periods as the SEC by order
may permit for protection of the Company's shareholders.
For the mutual protection of the investor and the Funds, a
guarantee of signature may be required by the Company. If
required, each signature on the account registration must be
guaranteed. Signature guarantees are acceptable from FDIC member
banks, brokers, dealers, municipal securities dealers, municipal
securities brokers, government securities dealers, government
securities brokers, credit unions, national securities exchanges,
registered securities associations, clearing agencies and savings
associations. A signature guarantee for active duty military
personnel stationed abroad may be provided by an officer of the
United States Embassy or Consulate, a staff officer of the Judge
Advocate General, or an individual's commanding officer.
Redemption by Check
Shareholders in the Virginia Money Market Fund may request that
checks be issued for their account. A one-time $5 checkwriting
fee is charged to each account by the Transfer Agent for the use
of the privilege. Checks must be written in the amount of at least $250.
Checks issued to shareholders of the Fund will be sent only
to the person in whose name the account is registered and only to
the address of record. The checks must be manually signed by the
registered owner(s) exactly as the account is registered. For
joint accounts the signature of either or both joint owners will
be required on the check, according to the election made on the
signature card. Dividends will continue to be earned by the
shareholder until the shares are redeemed by the presentation of a check.
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. If an investor's account is not adequate to cover the
amount of a check, the check will be returned unpaid. Because
the value of each account changes as dividends are accrued on a
daily basis, checks may not be used to close an account.
After clearance, checks paid during the month will be
returned to the shareholder by separate mail. The checkwriting
privilege will be subject to the customary rules and regulations
of State Street Bank and Trust Company (State Street Bank or the
Custodian) governing checking accounts. Other than the initial
one-time fee, there is no charge to the shareholder for the use
of the checks or for subsequent reorders of checks.
The Company reserves the right to assess a processing fee
against a shareholder's account for any redemption check not
honored by a clearing or paying agent. Currently, this fee is
$15 and is subject to change at any time. Some examples of such
dishonor are improper endorsement, checks written for an amount
less than the minimum check amount, and insufficient or
uncollectible funds.
The Company, the Transfer Agent and State Street Bank each
reserve the right to change or suspend the checkwriting privilege
upon 30 days' written notice to participating shareholders.
INVESTMENT PLANS
The following investment plans are made available by the Company
to shareholders of the Funds. 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. You may terminate your participation
in a plan at any time. Please call the Manager for details and
necessary forms or applications.
Systematic Purchase of Shares
InvesTronic (registered trademark) - the periodic purchase of
shares through electronic funds transfer from a checking or
savings account. By completing an application, which may be
obtained from the Manager, you invest a specific amount each
month ($50 minimum) in any of your accounts.
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.
Investment Plans, cont.
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. There is a minimum investment required
for this program of $5,000, with a monthly transaction minimum of
$50. The minimum initial investment requirement for the other
USAA mutual fund must be satisfied before the first transfer.
Buy/Sell Service - the intermittent purchase or redemption of
shares through electronic funds transfer to or from a checking or
savings account.
Participation in these systematic purchase plans will permit
a shareholder to engage in dollar-cost averaging. For additional
information concerning the benefits of dollar-cost averaging, see
Appendix D.
Systematic Withdrawal Plan
If a shareholder in a single investment account (accounts in
different Funds cannot be aggregated for this purpose) owns
shares having a net asset value of $5,000 or more, the
shareholder may request that enough shares to produce a fixed
amount of money be liquidated from the account monthly or
quarterly. The amount of each withdrawal must be at least $50.
Using the electronic funds transfer service, shareholders may
choose to have withdrawals electronically deposited at their bank
or other financial institution. They may also elect to have
checks mailed to a designated address.
Such a plan may be initiated by depositing shares worth at
least $5,000 with the Transfer Agent and by completing the
Systematic Withdrawal Plan application, which may be requested
from the Manager. The shareholder may terminate participation in
the plan at any time. There is no charge to the shareholder for
withdrawals under the Systematic Withdrawal Plan. The Company
will not bear any expenses in administering the plan beyond the
regular transfer agent and custodian costs of issuing and
redeeming shares. Any additional expenses of administering the
plan will be borne by the Manager.
Withdrawals will be made by redeeming full and fractional
shares on the date selected by the shareholder at the time the
plan is established. Withdrawal payments made under this plan
may exceed dividends and distributions and, to this extent, will
involve the use of principal and could reduce the dollar value of
a shareholder's investment and eventually exhaust the account.
Reinvesting dividends and distributions helps replenish the
account. Because share values and net investment income can
fluctuate, shareholders should not expect withdrawals to be
offset by rising income or share value gains.
Each redemption of shares may result in a gain or loss,
which must be reported on the shareholder's income tax return.
Therefore, a shareholder should keep an accurate record of any
gain or loss on each withdrawal.
INVESTMENT POLICIES
The section captioned Investment Objectives and Policies in the
Prospectus describes the fundamental investment objectives and
the investment policies applicable to each Fund and the following
is provided as additional information.
Calculation of Portfolio Weighted Average Maturities
Weighted average maturity is derived by multiplying the value of
each investment by the number of days remaining to its maturity,
adding these calculations, and then dividing the total by the
value of the Fund's portfolio. An obligation's maturity is
typically determined on a stated final maturity basis, although
there are some exceptions to this rule.
With respect to obligations held by the Virginia Bond Fund,
if it is probable that the issuer of an instrument will take
advantage of a maturity-shortening device, such as a call,
refunding, or redemption provision, the date on which the
instrument will probably be called, refunded, or redeemed may be
considered to be its maturity date. Also, the maturities of
securities subject to sinking fund arrangements are determined on
a weighted average life basis, which is the average time for
principal to be repaid. The weighted average life of these
securities is likely to be substantially shorter than their
stated final maturity. In addition, for purposes of the Fund's
investment policies, an instrument will be treated as having a
maturity earlier than its stated maturity date if the instrument
has technical features such as puts or demand features which, in
the judgment of the Manager, will result in the instrument being
valued in the market as though it has the earlier maturity.
The Virginia Money Market Fund will determine the maturity
of an obligation in its portfolio in accordance with Rule 2a-7
under the Investment Company Act of 1940, as amended (1940 Act).
Lending of Securities
Each Fund may lend its securities. A lending policy may be
authorized by the Company's Directors and implemented by the
Manager, but securities may be loaned only to qualified broker-
dealers or institutional investors that agree to maintain cash
collateral with the Company equal at all time to at least 100% of
the value of the loaned securities. The Directors will establish
procedures and monitor the creditworthiness of any institution or
broker-dealer during such time as any loan is outstanding. The
Company will continue to receive interest on the loaned
securities and will invest the cash collateral in readily
marketable short-term obligations of high quality, thereby
earning additional interest. Interest on loaned tax-exempt
securities received by the borrower and paid to the Company will
not be exempt from federal income taxes in the hands of the Company.
No loan of securities will be made if, as a result, the
aggregate of such loans would exceed 33 1/3% of the value of a Fund's
total assets. The Company may terminate such loans at any time.
Repurchase Agreements
Each Fund may invest up to 5% of its total assets in repurchase
agreements. A repurchase agreement is a transaction in which a
security is purchased with a simultaneous commitment to sell the
security back to the seller (a commercial bank or recognized
securities dealer) at an agreed upon price on an agreed upon
date, usually not more than 7 days from the date of purchase.
The resale price reflects the purchase price plus an agreed upon
market rate of interest which is unrelated to the coupon rate or
maturity of the purchased security. A repurchase agreement
involves the obligation of the seller to pay the agreed upon
price, which obligation is in effect secured by the value of the
underlying security. In these transactions, the securities
purchased by a Fund will have a total value equal to or in excess
of the amount of the repurchase obligation and will be held by
the Funds' custodian until repurchased. If the seller defaults
and the value of the underlying security declines, a Fund may
incur a loss and may incur expenses in selling the collateral.
If the seller seeks relief under the bankruptcy laws, the
disposition of the collateral may be delayed or limited. Any
investments in repurchase agreements will give rise to income
which will not qualify as tax-exempt income when distributed by a Fund.
Other Policies
Although the Virginia Bond Fund is permitted to invest in
options, financial futures contracts and options on financial
futures contracts, the Fund has no current intention of doing so
and will not invest in such securities without first notifying
shareholders and supplying further information in the Prospectus.
INVESTMENT RESTRICTIONS
The following investment restrictions have been adopted by the
Company for and are applicable to each Fund. These restrictions
may not be changed for any given Fund without approval by the
lesser of (1) 67% or more of the voting securities present at a
meeting of the Fund if more than 50% of the outstanding voting
securities of the Fund are present or represented by proxy or (2)
more than 50% of the Fund's outstanding voting securities. The
investment restrictions of one Fund may be changed without
affecting those of the other Fund.
Under the restrictions, neither Fund will:
(1) With respect to 75% of its total assets, purchase securities
of any issuer (other than a security issued or guaranteed as
to principal or interest by the United States, or by a
person controlled or supervised by and acting as an
instrumentality of the Government of the United States; or
any certificate of deposit for any of the foregoing) if as a
result more than 5% of the total assets of that Fund would
be invested in securities of such issuer; for purposes of
this limitation, identification of the "issuer" will be
based on a determination of the source of assets and
revenues committed to meeting interest and principal
payments of each security; for purposes of this limitation
the Commonwealth of Virginia or other jurisdictions and each
of its separate political subdivisions, agencies,
authorities and instrumentalities shall be treated as a
separate issuer;
(2) Purchase more than 10% of the outstanding voting securities
of any issuer;
(3) Borrow money, except for temporary or emergency purposes in an
amount not exceeding 33 1/3% of its total assets (including the
amount borrowed) less liabilities (other than borrowings);
(4) Pledge, mortgage or hypothecate its assets to any extent
greater than 10% of the value of its total assets;
(5) Purchase or retain securities of any issuer if any officer
or Director of the Company or its Manager owns individually
more than one-half of one percent ( 1/2%) of the securities
of that issuer, and collectively the officers and Directors
of the Company and Manager together own more than 5% of the
securities of that issuer;
(6) Purchase any securities which would cause 25% or more of the value of
that Fund's total assets at the time of such purchase to be invested
in securities the interest upon which is derived from revenues or
projects with similar characteristics, such as toll road revenue bonds,
housing revenue bonds, electric
Investment Restrictions, cont.
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; provided that the foregoing limitation does not apply with
respect to investments in United States Treasury Bills, other obligations
issued or guaranteed by the United States Government, its agencies and
instrumentalities, and, in the case of the Virginia Money Market Fund,
certificates of deposit and banker's acceptances of domestic banks;
(7) Invest in issuers for the purpose of exercising control or management;
(8) Issue senior securities as defined in the 1940 Act, except
that it may purchase tax-exempt securities on a "when-
issued" basis and may purchase and sell financial futures
contracts and options as permitted by Section 18(f)(2);
(9) Underwrite securities of other issuers, except to the extent that
it may be deemed to act as a statutory underwriter in the
distribution of any restricted securities or not readily
marketable securities;
(10) Purchase or sell real estate, but this shall not prevent
investments in tax-exempt securities secured by real estate
or interest therein;
(11) Lend any securities or make any loan if, as a result, more than
33 1/3% of its total assets would be lent to other parties,
except that this limitation does not apply to purchases of debt
securities or to repurchase agreements;
(12) Purchase on margin or sell short; for purposes of the
restriction the deposit or payment of initial or variation
margin in connection with financial futures contracts or
related options will not be deemed to be a purchase of
securities on margin by a Fund;
(13) Purchase or sell commodities or commodities contracts,
except that the Fund may invest in financial futures
contracts and options thereon;
(14) Invest its assets in securities of other investment
companies except by purchases in the open market involving
only customary brokers' commissions or as part of a merger,
consolidation, reorganization or purchase of assets approved
by the shareholders; or
(15) Invest in put, call, straddle or spread options or interests
in oil, gas, or other mineral exploration or development
programs, except that a Fund may write covered call options
and purchase put options.
Additional Restrictions
The following restrictions are not considered to be fundamental
policies of the Funds. These additional restrictions may be
changed by the Board of Directors of the Company without notice
to or approval by the shareholders.
Neither Fund will:
(1) Invest more than 15% (10% with respect to the Virginia Money
Market Fund) of the value of its net assets in illiquid securities,
including repurchase agreements maturing in more than
seven days.
(2) Purchase any security while borrowings representing more than 5%
of the Fund's total assets are outstanding.
SPECIAL RISK CONSIDERATIONS
A substantial portion of the Funds' investments will consist of
debt obligations issued to obtain funds for bonds issued by or on
behalf of Virginia state and local governments and other public
authorities (Virginia Issues). For this reason, the Funds are
affected by political, economic, regulatory or other developments
which constrain the taxing, revenue collecting and spending
authority of Virginia issuers or otherwise affect the ability of
Virginia issuers to pay interest, repay principal, or any
premium. The following information constitutes only a brief
summary of some of such developments and does not purport to be a
complete description.
One such Virginia issuer having special considerations is
the Metropolitan Washington Airports Authority (the Authority).
The Authority is a regional airport authority created by
legislation adopted by the Commonwealth of Virginia and the
District of Columbia. The acts empowered the Authority to
acquire Washington National and Washington Dulles International
airports by lease or otherwise, to issue bonds, to carry out
capital improvements plans and other acts necessary to administer
the airports. In 1987 the federal government enacted legislation
(the Airports Act) which authorized a long-term lease of each
airport to the Authority. The Airports Act required that the
Authority establish a Board of Review which is comprised of
members of Congress. The Board of Review was granted the power
to disapprove, among other things, the authorization by the
Authority of the issuance of bonds. In 1991, the United States
Supreme Court ruled that the legislation establishing the Board
of Review was unconstitutional in that it authorized the carrying
out of executive functions by Congress, thus violating the
doctrine of separation of powers. As part of the Intermodal
Surface Transportation Efficiency Act of 1991 (ISTEA), Congress
substantially amended the Airports Act in an effort to comply
with the Supreme Court's decision concerning the Review Board.
Under these amendments, a new Board of Review was established in
January 1992. The new Board has nine members. The 1991
legislation does not require that members of the Board be members
of Congress and, unlike the prior Board, does not have an
independent "veto" power over decisions of the Authority's Board,
but can only recommend to the Congress that Board decisions be
overturned.
On January 31, 1994, as modified on February 15, 1994, the
United States District Court for the District of Columbia, in an
action styled Hechinger, et al. v. Metropolitan Washington
Airports Authority, et. al., found the 1991 amendments to be
unconstitutional and invalidated the new Board of Review, holding
that the Authority was without authority thereafter to carry out
actions that the Board of Review was required to oversee. In its
decision, the District Court also validated all prior actions of
the Board of Review, including actions with respect to the
Authority's previously authorized bonds. On appeal, the United
States Court of Appeals for the District of Columbia Circuit
affirmed the District Court's decision in late 1994. A petition
for further review by the United States Supreme Court was denied.
In the opinion of the Authority, its litigation counsel, and
the Authority's co-bond counsel, delivered at the time of the
issuance of the Authority's Series 1994A Bonds, this litigation
will not impair the ability of the Authority to sell any
securities or to service the resulting debt.
Legislation is presently pending in the Congress to revise
the Authority's powers in compliance with the Court of Appeals
decision. Since this legislation has not been enacted, its
impact cannot be determined.
On June 18, 1993, in the case of Harper, et al. v. Virginia
Department of Taxation, the United States Supreme Court
determined that the State of Virginia must consider claims for
refunds of certain income taxes paid in prior years to the State
by federal military and civil service retirees. This decision
was a sequel to an earlier (1989) decision of the Court, Davis v.
Michigan, wherein the Court has determined that the practice of a
number of states, including Virginia, of imposing income taxes on
the retirement income of federal employees, while exempting
similar payments to state employees, was invalid under federal
law. At issue in the Harper case was whether the rule announced
in Davis would be applied retroactively. In holding that the
Davis rule was to be retroactively applied, the Supreme Court did
not order refunds for taxes or otherwise mandate a specific
remedy. Rather, it remanded the matter back to the Virginia
Courts for further proceedings to determine whether such refunds
are required. On remand, a lower court has held that no refunds
for taxes previously paid were owed. Certain federal retirees
have appealed this decision to the Virginia Supreme Court where
it is now pending.
At the present time, it is estimated that some $720.0
million in potential refund claims and accrued interest are
outstanding with potential interest accruing at the rate of
around $3.0 million monthly. In an effort to reduce the
uncertainty of further litigation at a reasonable cost to the
State, the Virginia state legislature, on July 8, 1994, enacted
legislation appropriating $340.0 million to establish a
settlement "pool" to provide for the settlement of federal
retiree's claims over a five-year period. This legislation
provides that, within the limits of the pool, a federal retiree
may seek a refund for the amount of previously paid taxes for the
tax years 1985-1988. No accrued interest was paid. This
legislation further provides that the Virginia State Department
of Taxation must provide to each eligible person a notice
indicating that such person may be entitled to a refund and the
amount of such refund. Each person receiving such notice must
advise the Taxation Department by a stated time that he wishes to
participate in this settlement or, in the alternative, that he
wishes to opt out and recover refunds through litigation, in the
Harper case or other litigation. If requests for refunds exceed
the $340.0 million available in the "pool", each refund request
will be reduced proportionally. The 1994 legislation further
provided that if more than $20.0 million in the aggregate opted
out (choose to continue the litigation), this settlement would be
void unless re-authorized by the legislature in 1995. Such re-
authorization was enacted by the 1995 session of the legislature.
Because of the several uncertainties, including the effect
of the "opt out" provision, it is difficult to measure the full
impact of this law on Virginia issuers or the ability of such
issuers to meet their obligations.
Virginia issues may be obligations which rely in whole or in
part on state revenues or appropriations from the state
legislature for the payment of such obligations. For example,
obligations of the Virginia Public Building Authority may be
repaid by an amortization and/or debt service from an agency
appropriation. There can be no assurance that such
appropriations will be forthcoming or maintained at any given
level over the life of the obligation. Similarly, certain local
government obligations may be supported by financial assistance
provided by the State. Here again, there can be no assurance
that any particular level of state aid will be maintained in
future years.
All appropriations made by the Virginia General Assembly are
conditional appropriations. In the event that Virginia's
estimated general fund revenues are exceeded by the total of
general fund appropriations, including the currently estimated
expenditures, the Governor shall, subject to certain
qualifications, reduce the general fund expenditures and withhold
allotments of the appropriations to the extent necessary to
Special Risk Considerations, cont.
prevent any expenditure in excess of the estimated general fund
revenues. Reductions shall be made in the expenditures from the
general fund to local officers and employees and to all others on
the basis of the same considerations as are applied to state
agencies receiving appropriations from the general fund. The
Governor shall act similarly with respect to any non-general fund
expenditures if the supporting revenues for such appropriations
are estimated to be insufficient to pay the appropriation;
provided, however, the Governor shall take no action to reduce
general fund expenditures or withhold allotments of
appropriations on account of reduced revenues, until such time as
a formal re-estimate of general fund revenues for current
biennium has been reported to the Chairmen of the Senate Finance,
House Finance, and House Appropriations Committees. However, the
Governor shall not reduce the appropriation for the payment of
interest or sinking fund installments on the bonded debt or other
bonded obligations of the State, its agencies, and its
authorities, or for the payment of a legally authorized deficit.
Although, in common with many other states, Virginia has
experienced considerable fiscal stress in recent years as a
result of changes in its economy. It has regularly balanced its
budget without raising general income or sales taxes, the major
sources of state revenue. A general recovery in the State's
economy in recent years is complicated by the potential for
economic losses due to continued reduction in the defense and
defense-related expenditures by both the private and public
sector. Because of these uncertainties in the State's economy
and its budget and expenditure levels, there is no assurance that
the current pattern of no increases in sales or income taxes will
continue. In particular, the financial exposure of claims by
federal retirees, discussed above, and the impact of this
exposure on the State's budget and tax policies cannot be
determined at this time.
You should be aware that certain Virginia constitutional
amendments, legislative measures, executive orders,
administrative regulations and/or voter initiatives could result
in certain adverse consequences affecting Virginia issues. For
example, Virginia law permits many local governments to provide
for special tax relief for personal property and for real estate
owned and occupied by persons age sixty-five or over. Other
legislation permits differentially lower taxes on real estate
devoted to agricultural, horticultural and forestry use. Both of
these legislative programs may have adverse effects on the
ability of local governments to raise adequate revenues. By
virtue of a 1991 amendment to the Constitution, the Virginia
legislature is authorized to divert certain funds from criminal
fines and forfeitures that had traditionally been allocated to
the State Literacy Fund which provides security for bonds of the
Virginia Public School Authority. Under this amendment, such
funds could be used for purposes of promoting law enforcement.
The legislature has enacted legislation implementing this provision.
In November 1992, the qualified voters of Virginia approved
an amendment to the Constitution, providing for the establishment
of a Revenue Stabilization Fund ("the Fund"), sometimes called a
"rainy day fund". Under this amendment, amending Article X,
section 8 of the Constitution, and legislation implementing its
provisions, the Virginia legislature may and, under certain
conditions, must set aside certain sums, not to exceed 10 percent
of the state's average annual revenues from state income and
sales taxes for the prior three years and pay such sums into the
Fund. Based on 1991-1992 revenues, such cap would be
approximately $478.0 million. The Virginia legislature must
place monies in the Fund in any fiscal year in which the state's
revenues from sales and income taxes grow at an above-average
rate, the mandatory contribution being one-half of the amount of
growth. Otherwise, any payments to the Fund are discretionary.
The purpose of the Fund is to provide a source of additional
revenues in years when revenues do not equal financial and budget
forecasts, provided that no monies can be withdrawn from the fund
unless the shortfall in the forecast is at least two percent of
the past year's sales and income tax receipts. Had the Fund been
in effect in 1992, the amount that could have been withdrawn
would have been approximately $97.0 million. Increases in state
revenues in the most recent full fiscal year have triggered the
requirement for mandatory payments into the Fund. For the
current fiscal year, which closes on July 1, 1995, such payments
will be $79.3 million. Estimated payments for fiscal year 1996
will be between $50.0 and $80.0 million. While such payments to the
Fund might encumber monies otherwise available to pay debt
service, the effect of these payments to the Fund and the repayment of
existing or future obligations of the State cannot be ascertained.
The application and interpretation of the amendments to the
Constitution of Virginia set forth herein could be the subject of
lawsuits in the Virginia courts. It is not possible to predict
the outcome of litigation or the ultimate scope and impact of
such provisions. Implementing the amendments to the Constitution
of Virginia, further legislation and regulations could impact
local property tax collections, excise taxes, other local taxes,
fees and charges, and the ability of State agencies, local
governments, commissions, authorities and districts to make
future payments on outstanding debt obligations. Other measures
affecting the taxing or spending authority of Virginia or its
political subdivisions may be approved or enacted in the future.
The effects of various constitutional and statutory
provisions upon the ability of the issuers of Virginia Issues to
pay interest and principal on their obligations remains unclear.
In the event of a default in the payment of principal or
interest on the State's general obligation bonds, legal remedies
available to a bondholder to enforce payment against the State
may be limited by the doctrine of sovereign immunity and the 11th
Amendment to the United States Constitution, which prevent suits
against the State without its consent. Virginia has consented to
suits in its own courts on its contractual obligations. However,
a court has no authority to enforce payment of any judgment
against the State by levy or execution against property of the
State as in the case of judgments against private persons. Any
such judgment can only be satisfied by a special appropriation by
the General Assembly. The Constitution of Virginia contains no
explicit self-implementing mechanism for the repayment of its
general obligation bonds in the event the General Assembly fails
to appropriate the necessary bonds.
The provisions of Section 15.1-227.61 of the Public Finance
Act, Chapter 5, Title 15.1, Code of Virginia, 1950, as amended,
in substance, direct the Governor of Virginia, upon satisfactory
proof of default of any unit in the payment of principal of or
interest on any general obligation bonds, immediately to order
the Comptroller of Virginia to withhold all further payment to
the unit of all funds, or any part thereof, appropriated and
payable by Virginia to the unit for any and all purposes until
such default is remedied. For as long as default continues, the
law directs the Governor to require the Comptroller to pay to the
holders of such bonds or the paying agent therefor all of the
withheld funds or as much as are necessary to cover, or to cover
insofar as possible, the default on such bonds. The Governor
shall, as soon as practicable, give notice of such default and of
the availability of funds with the paying agent or with the
Comptroller by publication one time in a daily newspaper of
general circulation in the City of Richmond and by mail to the
registered owners of such bonds. Although the provisions of
Section 15.1-227.61 have never been tested in a Virginia court,
the Attorney General of Virginia has opined that appropriated
funds can be withheld pursuant to its provisions. The effects of
the provisions of Section 15.1-227.61 on bonds which are not in
default, are unclear.
Although Virginia law currently does not authorize such
action, future legislation may enable a county, city or
municipality to file a petition for relief under the United
States Bankruptcy Code (the Bankruptcy Code) if it is insolvent
or unable to pay its debts. Bankruptcy proceedings by a county,
city or municipality could have adverse effects on the
bondholders, including (1) delay in the enforcement of their
remedies, (2) subordination of their claims to claims of those
supplying goods and services to the county, city or municipality
after the initiation of bankruptcy proceedings, and to the
administrative expenses of bankruptcy proceedings, or (3)
imposition without their consent of a reorganization plan
reducing or delaying payment of the bonds. The Bankruptcy Code
contains provisions intended to ensure that, in any
reorganization plan not accepted by at least a majority of a
class of creditors, such creditors will have the benefit of their
original claims or the "indubitable equivalent". The effect of
these and other provisions of the Bankruptcy Code cannot be
predicted and may be significantly affected by judicial interpretation.
Certain debt obligations in which the Fund invests may be
payable solely from the revenues of certain issuers, specific
institutions, or may be secured by specific properties, which are
subject to provisions of other Virginia laws that could adversely
affect the holders of such obligations. For example, the
revenues of Virginia health care institutions may be subject to
state laws. In addition, in regard to certain types of bonds,
there are unique risks. For example, a governmental unit may be
obligated to make payments which support debt service on bonds
issued by an electric authority, whether or not the project is
operating. In some instances, repayment of certain housing bonds
would be from amounts obtained upon sale of the property after
foreclosure. Payment of principal and interest on certificates
of participation are subject each year to whether the issuing
body makes an appropriation therefor. The issuing authority is
not obligated to make such appropriation. Also, in some
instances, an issuer could issue notes which, upon maturity,
would be paid off by the proceeds of an anticipated future issuance
of municipal securities. There is no assurance that the planned
issuance of the municipal securities to pay off the notes will occur.
With respect to Virginia Issues that are backed by a letter
of credit issued by a foreign or domestic bank, the ultimate
source of payment is the bank. Investment in foreign banks may
involve risks not present in domestic investments. These include
the fact that the foreign bank may be subject to different, and
in some cases less comprehensive, regulatory, accounting,
financial reporting and disclosure standards than are domestic banks.
When Virginia Issues are insured by a municipal bond
insurer, there are certain risks which the bond insurance policy
typically does not cover. For example, some insurance policies
do not insure against loss resulting from: (1) a pre-payment
premium; (2) an optional or mandatory redemption (other than
sinking fund redemptions); (3) an accelerated payment; (4) a
payment of the purchase price of Virginia Issues upon tender
thereof; and (5) a preference. Certain municipal bond insurers
may not insure against nonpayment
Special Risk Considerations, cont.
of principal of or interest on Virginia Issues resulting from the
insolvency, negligence or any other act or omission of a paying
agent for Virginia Issues. Also, the capitalization of the
various municipal bond insurers is not uniform. If an insurer of
Virginia Issues must make payments pursuant to its bond insurance
policy, such payments could be limited by, among other things,
such companies' capitalization and insurance regulatory
authorities.
With regard to Virginia Issues which are secured in whole or
in part pursuant to the terms of a master trust indenture, in
some instances, the bond trustee would have no special claim in a
bankruptcy proceeding to revenues of a Virginia Issue. Also,
certain judicial decisions have cast doubt upon the right of a
trustee in the event of the bankruptcy of an obligated issuer to
collect and retain amounts from certain governmental programs.
The trustee in bankruptcy may satisfy the claims of the following
parties prior to satisfying the claim of any bond owner: (1)
claims by persons supplying goods and services to the obligated
issuers after bankruptcy, (2) the administrative expenses of the
bankruptcy proceeding, (3) any secured creditor and (4) possibly
certain other parties. Federal bankruptcy law permits, under
certain circumstances, the adoption of a reorganization plan not
agreed to by the owners of the majority, in aggregate principal amount
of the bonds, even if such plan does not provide for payment in
full of the bonds.
The rights of the holders of the Virginia Issues and the
enforceability of the Virginia Issues and the financing documents
may be subject to (1) bankruptcy, insolvency, reorganization,
moratorium and other similar laws relating to or affecting
creditors' rights, in effect now or after the date of the
issuance of Virginia Issues, to the extent constitutionally
applicable, (2) principles of equity, and (3) the exercise of
judicial discretion.
There are risks in any investment program, and there is no
assurance that either Fund will achieve its investment objective.
Virginia Issues are subject to relative degrees of risk,
including credit risk, market volatility, tax law change and
fluctuation of the return of the investment of the Virginia
Issues proceeds. Credit risk relates to the issuer's, pledgor's,
contributor's, grantor's, credit enhancer's and/or guarantor's
ability to make timely payments of principal and interest and any
premium. For example, in revenue bond financings, the bonds may
be secured by moneys derived from the fees, rents and other
charges collected from the bond-financed project. Payment of
principal, interest and any premium on the bonds by the issuer of
Virginia Issues may be adversely affected if the collection of
fees, rents and charges from the project is diminished. Market
volatility relates to the changes in market price that occur as a
result of variations in the level of prevailing interest rates
and yield relationships between sectors in the tax-exempt
securities market and other market factors. Also, each Fund will
be affected by general changes in interest rates nationally which
will result in increases or decreases in the value of the
securities held by such Fund.
The ability of each Fund to achieve its investment
objectives is dependent on the continuing ability of the issuers
of Virginia Issues in which the Fund invests to meet their
obligations for the payment of principal, interest and premium
when due.
Except for each Fund's investment objective and certain
investment restrictions designated as fundamental in the
Prospectus and herein, the investment policies described herein
and in the Prospectus are not fundamental policies. The
Directors may change any non-fundamental investment policies
without shareholder approval.
The Virginia Economy
Virginia's economy is a mixture of manufacturing, agriculture,
tourism and the provision of services. Historically,
expenditures of the federal government have played a large role
in the State's economy because of its proximity to Washington and
the large defense establishment in the Hampton Roads area of the
State. In the 1980s, Virginia's economic growth outperformed the
United States as a whole in such indicators as employment,
personal income and population growth. With the recent
recession, the outlook has changed. The rate of population
growth has slowed, and state and local tax receipts have fallen
or are stagnant, reflecting a flatness in the economy.
Overbuilding in the commercial real estate sector, particularly
in Northern Virginia, has resulted in a decline in real estate
values, placing strains on the ability of local governments to
balance their budgets without raising taxes or reducing services.
Reductions in defense expenditures may require defense-dependent
industries to down-size or redirect work to the civilian economy.
While the State's basic economy is believed to be strong, it also
appears that, because of these factors, its economic recovery
will be generally slower than the Nation.
PORTFOLIO TRANSACTIONS
The Manager, pursuant to the Advisory Agreement dated July 20,
1990, supplemented by letter agreement dated July 26, 1990, and
subject to the general control of the Company's Board of
Directors, places all orders for the purchase and sale of Fund
securities. Purchases of Fund securities are made either
directly from the issuer or from dealers who deal in tax-exempt
securities. The Manager may sell Fund securities prior to
maturity if circumstances warrant and if it believes such
disposition is advisable. In connection with portfolio
transactions for the Company, the Manager seeks to obtain the
best available net price and most favorable execution for its
orders. The Manager has no agreement or commitment to place
transaction with any broker-dealer and no regular formula is used
to allocate orders to any broker-dealer. However, the Manager
may place security orders with brokers or dealers who furnish
research or other services to the Manager as long as there is no
sacrifice in obtaining the best overall terms available. Payment
for such services would be generated only through purchase of new
issue fixed income securities.
Such research and other services may include, for example:
advice concerning the value of securities, the advisability of
investing in, purchasing, or selling securities, and the
availability of securities or the purchasers or sellers of
securities; analyses and reports concerning issuers, industries,
securities, economic factors and trends, portfolio strategy, and
performance of accounts; and various functions incidental to
effecting securities transactions, such as clearance and
settlement. The Manager continuously reviews the performance of
the broker-dealers with whom it places orders for transactions.
The receipt of research from broker-dealers that execute
transactions on behalf of the Company may be useful to the
Manager in rendering investment management services to other
clients (including affiliates of the Manager), and conversely,
such research provided by broker-dealers who have executed
transaction orders on behalf of other clients may be useful to
the Manager in carrying out its obligations to the Company.
While such research is available to and may be used by the
Manager in providing investment advice to all its clients
(including affiliates of the Manager), not all of such research
may be used by the Manager for the benefit of the Company. Such
research and services will be in addition to and not in lieu of
research and services provided by the Manager, and the expenses
of the Manager will not necessarily be reduced by the receipt of
such supplemental research. See The Company's Manager.
On occasions when the Manager deems the purchase or sale of
a security to be in the best interest of the Company, as well as
the Manager's other clients, the Manager, to the extent permitted
by applicable laws and regulations, may aggregate such securities
to be sold or purchased for the Company with those to be sold or
purchased for other customers in order to obtain best execution
and lower brokerage commissions, if any. In such event,
allocation of the securities so purchased or sold, as well as the
expenses incurred in the transaction, will be made by the Manager
in the manner it considers to be most equitable and consistent
with its fiduciary obligations to all such customers, including
the Company. In some instances, this procedure may impact the
price and size of the position obtainable for the Company.
The tax-exempt security market is typically a "dealer"
market in which investment dealers buy and sell bonds for their
own accounts, rather than for customers, and although the price
may reflect a dealer's mark-up or mark-down, the Company pays no
brokerage commissions as such. In addition, some securities may
be purchased directly from issuers.
Portfolio Turnover Rates
The portfolio turnover rate is computed by dividing the dollar
amount of securities purchased or sold (whichever is smaller) by
the average value of securities owned during the year.
The rate of portfolio turnover will not be a limiting factor
when the Manager deems changes in the Virginia Bond Fund's
portfolio appropriate in view of its investment objective. For
example, securities may be sold in anticipation of a rise in
interest rates (market decline) or purchased in anticipation of a
decline in interest rates (market rise) and later sold. In
addition, a security may be sold and another security of
comparable quality may be purchased at approximately the same
time in order to take advantage of what the Fund believes to be a
temporary disparity in the normal yield relationship between the
two securities. These yield disparities may occur for reasons
not directly related to the investment quality of particular
issues or the general movement of interest rates, such as changes
in the overall demand for or supply of various types of tax-
exempt securities. Moreover, to optimize yields on the short-
term liquidity portion of the Fund, daily and weekly demand bonds
are utilized extensively. There are transactions in the Fund in
this type of security virtually daily. These transactions,
though short-term in nature, are included in the turnover rate.
Increased use of daily and weekly demand bonds may result in
higher portfolio turnover.
For the last two fiscal years the Virginia Bond Fund's
portfolio turnover rates were as follows:
1994.....92.17% 1995.....68.53%
FURTHER DESCRIPTION OF SHARES
The Company is authorized to issue shares in separate classes or
Funds. Ten Funds have been established, two of which are
described in this SAI. Under the Articles of Incorporation, the
Board of Directors is authorized to create new Funds in addition
to those already existing without shareholder approval. The
Company began offering shares of the Virginia Bond and Virginia
Money Market Funds in October 1990.
The assets of each Fund and all income, earnings, profits
and proceeds thereof, subject only to the rights of creditors,
are specifically allocated to such Fund. They constitute the
underlying assets of each Fund, are required to be segregated on
the books of account, and are to be charged with the expenses of
such Fund. Any general expenses of the Company not readily
identifiable as belonging to a particular Fund are allocated on
the basis of the Funds' relative net assets during the fiscal
year or in such other manner as the Board determines to be fair
and equitable. Each share of each Fund represents an equal
proportionate interest in that Fund with every other share and is
entitled to dividends and distributions out of the net income and
capital gains belonging to that Fund when declared by the Board.
On any matter submitted to the shareholders, the holder of
each Fund share is entitled to one vote per share (with
proportionate voting for fractional shares) regardless of the
relative net asset values of the Funds' shares. However, on
matters affecting an individual Fund a separate vote of the
shareholders of that Fund is required. Shareholders of a Fund
are not entitled to vote on any matter which does not affect that
Fund but which requires a separate vote of another Fund. Shares
do not have cumulative voting rights, which means that holders of
more than 50% of the shares voting for the election of Directors
can elect 100% of the Company's Board of Directors, and the
holders of less than 50% of the shares voting for the election of
Directors will not be able to elect any person as a Director.
Shareholders of a particular Fund might have the power to
elect all of the Directors of the Company because that Fund has a
majority of the total outstanding shares of the Company. When
issued, each Fund's shares are fully paid and nonassessable, have
no pre-emptive or subscription rights, and are fully
transferable. There are no conversion rights.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
Each Fund intends to qualify as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as
amended (the Code). Accordingly, each Fund will not be liable
for federal income taxes on its taxable net investment income and
net capital gains (capital gains in excess of capital losses)
that are distributed to shareholders, provided that each Fund
distributes at least 90% of its net investment income and net
short-term capital gain for the taxable year.
To qualify as a regulated investment company, a Fund must,
among other things, (1) derive in each taxable year at least 90%
of its gross income from dividends, interest, payments with
respect to securities loans, gains from the sale or other
disposition of stock, securities or foreign currencies, or other
income derived with respect to its business of investing in such
stock, securities or currencies (the 90% test); (2) derive in
each taxable year less than 30% of its gross income from the sale
or other disposition of stock or securities held less than three
months (the 30% test), and (3) satisfy certain diversification
requirements at the close of each quarter of the Fund's taxable
year. Furthermore, to pay tax-exempt interest income dividends,
at least 50% of the value of each Fund's total assets at the
close of each quarter of its taxable year must consist of
obligations the interest of which is exempt from federal income
tax. Each Fund intends to satisfy this requirement.
The Code imposes a nondeductible 4% excise tax on a
regulated investment company that fails to distribute during each
calendar year an amount at least equal to the sum of (1) 98% of
its taxable net investment income for the calendar year, (2) 98%
of its capital gain net income for the twelve month period ending
on October 31, and (3) any prior amounts not distributed. Each
Fund intends to make such distributions as are necessary to avoid
imposition of this excise tax.
For federal income tax purposes, debt securities purchased
by the Funds may be treated as having original issue discount.
Original issue discount represents interest income for federal
income tax purposes and can generally be defined as the excess of
the stated redemption price at maturity of a debt obligation over
the issue price. Original issue discount is treated for federal
income tax purposes as earned by the Funds, whether or not any
income is actually received, and therefore is subject to the
distribution requirements of the Code. However, original issue
discount with respect to tax-exempt obligations generally
will be excluded from the Funds' taxable income, although such
discount will be included in gross income for purposes of the 90%
test and the 30% test described previously. Original issue
discount with respect to tax-exempt securities is accrued and
added to the adjusted tax basis of such securities for purposes
of determining gain or loss upon sale or at maturity. Generally,
the amount of original issue discount is determined on the basis
of a constant yield to maturity which takes into account the
compounding of accrued interest. An investment in a stripped
bond or stripped coupon will result in original issue discount.
Debt securities may be purchased by the Funds at a market
discount. Market discount occurs when a security is purchased at
a price less than the original issue price adjusted for accrued
original issue discount, if any. The Funds intend to defer
recognition of accrued market discount until maturity or other
disposition of the bond. For securities purchased at a market
discount, the gain realized on disposition will be treated as
taxable ordinary income to the extent it does not exceed accrued
market discount on the bond.
The Funds may also purchase debt securities at a premium,
i.e., at a purchase price in excess of face amount. With respect
to tax-exempt securities, the premium must be amortized to the
maturity date but no deduction is allowed for the premium
amortization. The amortized bond premium will reduce the Funds'
adjusted tax basis in the securities. For taxable securities,
the premium may be amortized if the Funds so elect. The
amortized premium on taxable securities is first offset against
interest received on the securities and then allowed as a
deduction, and, for securities issued after September 27, 1985,
must be amortized under an economic accrual method.
Taxation of the Shareholders
Taxable distributions are generally included in a shareholder's
gross income for the taxable year in which they are received.
Dividends declared in October, November, or December and made
payable to shareholders of record in such a month will be deemed
to have been received on December 31, if a Fund pays the dividend
during the following January. It is expected that none of the
Funds' distributions will qualify for the corporate dividends-
received deduction.
To the extent that a Fund's dividends distributed to
shareholders are derived from interest income exempt from federal
income tax and are designated as "exempt-interest dividends" by a
Fund, they will be excludable from a shareholder's gross income
for federal income tax purposes. Shareholders who are recipients
of Social Security benefits should be aware that exempt-interest
dividends received from a Fund are includible in their "modified
adjusted gross income" for purposes of determining the amount of
such Social Security benefits, if any, that are required to be
included in their gross income.
A shareholder of the Virginia Bond Fund should be aware that
a redemption of shares (including any exchange into another USAA
Fund) is a taxable event and, accordingly, a capital gain or loss
may be recognized. If a shareholder receives an exempt-interest
dividend with respect to any share and such share has been held
for six months or less, any loss on the redemption or exchange
will be disallowed to the extent of such exempt-interest
dividend. Similarly, if a shareholder of the Fund receives a
distribution taxable as long-term capital gain with respect to
shares of the Fund and redeems or exchanges shares before he has
held them for more than six months, any loss on the redemption or
exchange (not otherwise disallowed as attributable to an exempt-
interest dividend) will be treated as long-term capital loss.
The Funds may invest in private activity bonds. Interest on
certain private activity bonds issued after August 7, 1986, is an
item of tax preference for purposes of the Federal Alternative
Minimum Tax (AMT), although the interest continues to be
excludable from gross income for other purposes. AMT is a
supplemental tax designed to ensure that taxpayers pay at least a
minimum amount of tax on their income, even if they make
substantial use of certain tax deductions and exclusions
(referred to as tax preference items). Interest from private
activity bonds is one of the tax preference items that is added
to income from other sources for the purposes of determining
whether a taxpayer is subject to the AMT and the amount of any
tax to be paid. For corporate investors, alternative minimum
taxable income is increased by 75% of the amount by which
adjusted current earnings (ACE) exceeds alternative minimum
taxable income before the ACE adjustment. For corporate
taxpayers, all tax-exempt interest is considered in calculating
the AMT as part of the ACE. Prospective investors should consult
their own tax advisers with respect to the possible application
of the AMT to their tax situation.
Opinions relating to the validity of tax-exempt securities
and the exemption of interest thereon from federal income tax are
rendered by recognized bond counsel to the issuers. Neither the
Manager's nor the Funds' counsel makes any review of proceedings
relating to the issuance of tax-exempt securities or the basis of
such opinions.
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. Accordingly,
the Funds can reduce their taxable income by the amount of
dividends that they distribute to their shareholders.
As a regulated investment company, each Fund may distribute
dividends (Virginia exempt-interest dividends) that are exempt
from the Virginia income tax to its shareholders if, at the close
of each quarter of its taxable year, at least 50% of the value of
its total assets consists of obligations, the interest on which
is exempt from taxation under the laws of the United States. The
Funds intend to qualify under the above requirement so that they
can distribute Virginia exempt-interest dividends. If a Fund
fails to so qualify, no part of its dividends will be exempt from
the Virginia income tax.
The portion of dividends constituting Virginia exempt-
interest dividends is that portion derived from obligations of
Virginia or its political subdivisions or instrumentalities which
pay interest excludable from Virginia income under the laws of
Virginia or derived from obligations of the United States which
pay interest excludable from Virginia income under the laws of
the United States. 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.
When taxable income of a regulated investment company is
commingled with exempt income, all income is presumed taxable in
Virginia unless the portion of income which is exempt from
Virginia income tax can be determined with reasonable certainty
and substantiated. The determination must be made for each
distribution to each shareholder. Accordingly, if the Funds
receive taxable income, the portion of income which is exempt from
Virginia income tax will be determined by the Funds for each distribution.
To the extent any portion of the dividends distributed to
the shareholders by the Funds are derived from taxable interest
for Virginia purposes or, as a general rule, net short-term
gains, such portion will be taxable to the shareholders as
ordinary income. The character of long-term capital gains
realized and distributed by the Bond Fund will flow through to
its shareholders regardless of how long the shareholders have
held their shares. Certain capital gains distributed to
shareholders derived from certain Virginia obligations issued
pursuant to special Virginia enabling legislation may be exempt
from Virginia income taxes. Generally, interest on indebtedness
incurred by shareholders to purchase or carry shares of the Funds
will not be deductible for Virginia income tax purposes.
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. No attempt is made to present a
detailed explanation of the Virginia income tax treatment of the
Funds or their shareholders, and this discussion is not intended
as a substitute for careful planning. Accordingly, potential
investors in the Funds should consult their tax advisers with
respect to the application of Virginia taxes to the receipt of
the Funds' dividends and as to their own Virginia tax situation.
DIRECTORS AND OFFICERS OF THE COMPANY
The Board of Directors of the Company consists of eight
Directors. Set forth below are the Directors and officers of the
Company, and their respective offices and principal occupations
during the last five years. Unless otherwise indicated, the
business address of each is 9800 Fredericksburg Rd., San Antonio, TX 78288.
Hansford T. Johnson 1, 2
Director and Chairman of the Board of Directors
Age: 59
Director, Vice Chairman and Deputy Attorney-in-Fact, United
Services Automobile Association (USAA) and President, Chief
Executive Officer, Director and Vice Chairman of the Board of
Directors of USAA Capital Corporation and of its various
subsidiaries and affiliates (9/93-present); Chief of Staff, USAA
(1/93-8/93); Executive Vice President, USAA (10/92-12/92);
Commander-in-Chief, CINCTRANS, Department of Defense -Pentagon
(9/89-9/92). Mr. Johnson currently serves as a Trustee and
Chairman of the Boards of Trustees of USAA Investment Trust and
USAA State Tax-Free Trust and as Director and Chairman of the
Boards of Directors of USAA Investment Management Company (IMCO),
USAA Mutual Fund, Inc., USAA Shareholder Account Services, USAA
Federal Savings Bank and USAA Real Estate Company.
Michael J.C. Roth 1, 2
Director, President and Vice Chairman of the Board of Directors
Age: 53
Chief Executive Officer, IMCO (10/93-present); President,
Director and Vice Chairman of the Board of Directors, IMCO (1/90-
present); Director, USAA Federal Savings Bank (12/83-8/91). Mr.
Roth currently serves as President, Trustee and Vice Chairman of
the Boards of Trustees of USAA Investment Trust and USAA State
Tax-Free Trust, as President, Director and Vice Chairman of the
Boards of Directors of USAA Mutual Fund, Inc. and USAA
Shareholder Account Services, as Director of USAA Life Insurance
Company and as Trustee and Vice Chairman of USAA Life Investment Trust.
John W. Saunders, Jr. 1, 2, 4
Director and Vice President
Age: 60
Senior Vice President, Investments, IMCO (10/85-present);
Director, BHC Financial, Inc. and BHC Securities, Inc. (1/87-
present). Mr. Saunders currently serves as a Trustee and Vice
President of USAA Investment Trust and USAA State Tax-Free Trust,
as a Director of IMCO, Director and Vice President of USAA Mutual
Fund, Inc., as Senior Vice President of USAA Shareholder Account
Services, and as Vice President of USAA Life Investment Trust.
C. Dale Briscoe 4, 5
7829 Timber Top Drive
Boerne, TX 78006
Director
Age: 74
Retired. Mr. Briscoe currently serves as a Trustee of USAA
Investment Trust and USAA State Tax-Free Trust and as a Director
of USAA Mutual Fund, Inc.
George E. Brown 3, 4, 5
5829 Northgap Drive
San Antonio, TX 78239
Director
Age: 77
Retired. Mr. Brown currently serves as a Trustee of USAA
Investment Trust and USAA State Tax-Free Trust and as a Director
of USAA Mutual Fund, Inc.
Howard L. Freeman, Jr. 2, 3, 5
2710 Hopeton
San Antonio, TX 78230
Director
Age: 60
Assistant General Manager for Finance, San Antonio City Public
Service Board (1976-present). Mr. Freeman currently serves as a
Trustee of USAA Investment Trust and USAA State Tax-Free Trust
and as a Director of USAA Mutual Fund, Inc.
Directors and Officers of the Company, cont.
Richard A. Zucker 3, 4, 5
407 Arch Bluff
San Antonio, TX 78216
Director
Age: 52
Vice President, Beldon Roofing and Remodeling (1985-present).
Mr. Zucker currently serves as a Trustee of USAA Investment Trust
and USAA State Tax-Free Trust and as a Director of USAA Mutual Fund, Inc.
Barbara B. Dreeben 3, 5
200 Patterson #1008
San Antonio, TX 78209
Director
Age: 50
President, Postal Addvantage (7/92-present); Consultant, Nancy
Harkins Stationer, (8/91-present); Merchandise Manager, Nancy
Harkins Stationer (7/82-8/91). Mrs. Dreeben currently serves as
a Trustee of USAA Investment Trust and USAA State Tax-Free Trust
and as a Director of USAA Mutual Fund, Inc.
Michael D. Wagner 1
Secretary
Age: 47
Vice President, Corporate Counsel, USAA (1982-present). Mr.
Wagner has held various positions in the legal department of USAA
since 1970 and currently serves as Vice President, Secretary and
Counsel, IMCO and USAA Shareholder Account Services; Secretary,
USAA Investment Trust, USAA Mutual Fund, Inc., and USAA State
Tax-Free Trust; and as Vice President, Corporate Counsel, for
various other USAA subsidiaries and affiliates.
Alex M. Ciccone 1
Assistant Secretary
Age: 45
Vice President, Compliance, IMCO (12/94-present); Vice President
and Chief Operating Officer, Commonwealth Shareholder Services
(6/94-11/94); Vice President, Compliance, IMCO (12/91-5/94); Vice
President, Compliance, Fund Management Co. (10/89-11/91); and
Vice President, Compliance, AIM Distributors, Inc. (4/82-11/91).
Mr. Ciccone currently serves as Assistant Secretary of USAA
Investment Trust, USAA State Tax-Free Trust and USAA Mutual Fund, Inc.
Sherron A. Kirk 1
Treasurer
Age: 50
Vice President, Controller, IMCO (10/92-present); Vice President,
Corporate Financial Analysis, USAA (9/92-10/92); Assistant Vice
President, Financial Plans and Support, USAA (8/91-9/92);
Assistant Vice President, Real Estate Accounting, USAA Real
Estate Company (5/90-7/91). Mrs. Kirk currently serves as
Treasurer of USAA Investment Trust, USAA State Tax-Free Trust,
and USAA Mutual Fund, Inc., and as Vice President, Controller of
USAA Shareholder Account Services.
Dean R. Pantzar 1
Assistant Treasurer
Age: 36
Director, Mutual Fund Accounting, IMCO (12/94-present); Senior
Manager, KPMG Peat Marwick LLP (7/88-12/94). Mr. Pantzar
currently serves as Assistant Treasurer of USAA Mutual Fund,
Inc., USAA State Tax-Free Trust, and USAA Investment Trust.
- -------
1 Indicates those Directors and officers who are employees of
the Manager or affiliated companies and are considered
"interested persons" under the 1940 Act.
2 Member of Executive Committee
3 Member of Audit Committee
4 Member of Pricing and Investment Committee
5 Member of Corporate Governance Committee
Between the meetings of the Board of Directors and while the
Board is not in session, the Executive Committee of the Board of
Directors has all the powers and may exercise all the duties of
the Board of Directors in the management of the business of the
Company which may be delegated to it by the Board. The Pricing
and Investment Committee of the Board of Directors acts upon
various investment-related issues and other matters which have been
delegated to it by the Board. The Audit Committee of the Board of
Directors reviews the financial statements and the auditor's reports
and undertakes certain studies and analyses as directed by the Board.
The Corporate Governance Committee of the Board of Directors
maintains oversight of the organization, performance, and
effectiveness of the Board and Independent Directors.
In addition to the previously listed Directors and/or
officers of the Company who also serve as Directors and/or
officers of the Manager, the following individuals are Directors
and/or executive officers of the Manager: Josue Robles, Jr.,
Senior Vice President, Chief Financial Officer/Controller, USAA;
William McCrae, Senior Vice President, General Counsel and
Secretary, USAA; Harry W. Miller, Senior Vice President,
Investments (Equity); and John J. Dallahan, Senior Vice
President, Investment Services. There are no family
relationships among the Directors, officers and managerial level
employees of the Company or its Manager.
The following table sets forth information describing the
compensation of the current Directors of the Company for their
services as Directors for the fiscal year ended March 31, 1995.
Name Aggregate Total Compensation
of Compensation from the USAA
Director from the Company Family of Funds (c)
- ----- ---------------- ------------------
C. Dale Briscoe $4,876 $18,500
George E. Brown (a) 4,876 18,500
Barbara B. Dreeben 4,876 18,500
Howard L. Freeman, Jr. 4,876 18,500
Hansford T. Johnson None (b) None (b)
Michael J.C. Roth None (b) None (b)
John W. Saunders, Jr. None (b) None (b)
Richard A. Zucker 4,876 18,500
- ----------------
(a) The USAA Family of Funds has accrued deferred compensation
for Mr. Brown in an amount (plus earnings thereon) of
$20,118. The compensation was deferred by Mr. Brown
pursuant to a non-qualified Deferred Compensation Plan,
under which deferred amounts accumulate interest quarterly
based on the annualized U.S. Treasury Bill rate in effect on
the last day of the quarter. Amounts deferred and
accumulated earnings thereon are not funded and are general
unsecured liabilities of the USAA Funds until paid. The
Deferred Compensation Plan was terminated in 1988 and no
compensation has been deferred by any Trustee/Director of
the USAA Family of Funds since the Plan was terminated.
(b) Hansford T. Johnson, Michael J.C. Roth, and John W.
Saunders, Jr. are affiliated with the Company's investment
adviser, IMCO, and, accordingly, receive no remuneration
from the Company or any other Fund of the USAA Family of Funds.
(c) At March 31, 1995, the USAA Family of Funds consisted of 4
registered investment companies offering 29 individual
funds. Each Director presently serves as a Trustee or
Director of each investment company in the USAA Family of
Funds. In addition, Michael J.C. Roth presently serves as a
Trustee of USAA Life Investment Trust, a registered
investment company advised by IMCO, consisting of five funds
offered to investors in a fixed and variable annuity
contract with USAA Life Insurance Company. Mr. Roth
receives no compensation as Trustee of USAA Life Investment Trust.
All of the above Directors are also Trustees/Directors of
the other funds for which IMCO serves as investment adviser. No
compensation is paid by any fund to any Trustee/Director who is a
director, officer, or employee of IMCO or its affiliates. No
pension or retirement benefits are accrued as part of fund
expenses. The Company reimburses certain expenses of the
Directors who are not affiliated with the investment adviser. As
of June 30, 1995, the officers and Directors of the Company and
their families as a group owned beneficially or of record less
than 1% of the outstanding shares of the Company.
The Company knows of no one person who, as of June 30, 1995,
held of record or owned beneficially 5% or more of either Fund's shares.
THE COMPANY'S MANAGER
As described in the Prospectus, USAA Investment Management
Company is the Manager and investment adviser, providing services
under the Advisory Agreement. The Manager, organized in May
1970, has served as investment adviser and underwriter for USAA
Tax Exempt Fund, Inc. from its inception.
In addition to managing the Company's assets, the Manager
advises and manages the investments for USAA and its affiliated
companies as well as those of USAA Mutual Fund, Inc., USAA
Investment Trust and USAA State Tax-Free Trust. As of the date
of this SAI, total assets under management by the Manager were
approximately $27 billion, of which approximately $15 billion
were in mutual fund investments.
Advisory Agreement
Under the Advisory Agreement, the Manager provides an investment
program, carries out the investment policy and manages the
portfolio assets for each Fund. The Manager is authorized,
subject to the control of the Board of Directors of the Company,
to determine the selection, amount and time to buy or sell
securities for each Fund. In addition to providing investment
services, the Manager pays for office space, facilities, business
equipment and accounting services (in addition to those provided
by the Custodian) for the Company. The Manager compensates all
personnel, officers and Directors of the Company if such persons
are also employees of the Manager or its affiliates. For these
services under the Advisory Agreement, the Company has agreed to
pay the Manager a fee computed as described under Management of
the Company in the Prospectus. Management fees are computed and
accrued daily and payable monthly.
Except for the services and facilities provided by the
Manager, the Funds pay all other expenses incurred in their
operations. Expenses for which the Funds are responsible include
taxes (if any), brokerage commissions on portfolio transactions
(if any), expenses of issuance and redemption of shares, charges
of transfer agents, custodians and dividend disbursing agents,
cost of preparing and distributing proxy material, costs of
printing and engraving stock certificates, auditing and legal
expenses, certain expenses of registering and qualifying shares
for sale, fees of Directors who are not interested persons (not
affiliated) of the Manager, costs of typesetting, printing and
mailing the Prospectus, SAI and periodic reports to existing
shareholders, and any other charges or fees not specifically
enumerated. The Manager pays the cost of printing and mailing copies
of the Prospectus, the SAI, and reports to prospective shareholders.
The Advisory Agreement will remain in effect until June 30,
1996 for each Fund and will continue in effect from year to year
thereafter for each Fund as long as it is approved at least
annually by a vote of the outstanding voting securities of such
Fund (as defined by the 1940 Act) or by the Board of Directors
(on behalf of such Fund) including a majority of the Directors
who are not interested persons of the Manager or (otherwise than
as Directors) of the Company, at a meeting called for the purpose
of voting on such approval. The Advisory Agreement may be
terminated at any time by either the Company or the Manager on 60
days' written notice. It will automatically terminate in the
event of its assignment (as defined in the 1940 Act).
Under the terms of the Advisory Agreement, the Manager is
required to reimburse each Fund in the event that the total
annual expenses, inclusive of the management fee, but exclusive
of the interest, taxes and brokerage fees and extraordinary
items, incurred by that Fund exceeds any applicable state expense
limitation. At the current time, the most restrictive expense
limitation is 2.5% of the first $30,000,000 of average net assets
(ANA), 2% of the next $70,000,000 ANA, and 1.5% of the remaining ANA.
From time to time the Manager may, without prior notice to
shareholders, waive all or any portion of fees or agree to
reimburse expenses incurred by a Fund. Any such waiver or
reimbursement may be terminated by the Manager at any time
without prior notice to shareholders. The Manager has
voluntarily agreed to limit each Fund's annual expenses to .50%
of its ANA until August 1, 1996 and will reimburse the Funds for
all expenses in excess of the limitations.
For the last three fiscal years, management fees were as follows:
1993 1994 1995
------ ------ ------
Virginia Bond Fund $613,802 $831,660 $794,044
Virginia Money Market Fund $268,255 $271,935 $330,961
Because the Funds' expenses exceeded the Manager's voluntary
expense limitation of .50% of average net assets, in 1993 the
Manager did not receive management fees of $73,254 from the
Virginia Bond Fund and $96,405 from the Virginia Money Market
Fund. For 1994 and 1995, the Manager did not receive management
fees of $83,779 and $58,402, respectively, from the Virginia
Money Market Fund.
Underwriter
The Company has an agreement with the Manager for exclusive
underwriting and distribution of the Funds' shares on a
continuing best efforts basis. This agreement provides that the
Manager will receive no fee or other compensation for such
distribution services.
Transfer Agent
USAA Shareholder Account Services performs transfer agent
services for the Company under a Transfer Agency Agreement.
Services include maintenance of shareholder account records,
handling of communications with shareholders, distribution of
Fund dividends and production of reports with respect to account
activity for shareholders and the Company. For its services
under the Transfer Agency Agreement, USAA Shareholder Account
Services is paid an annual fixed fee per account of $26.00 by
each Fund. This fee is subject to change at any time.
The fee to the Transfer Agent includes processing of all
transactions and correspondence. Fees are billed on a monthly
basis at the rate of one-twelfth of the annual fee. In addition,
the Funds pay all out-of-pocket expenses of the Transfer Agent
and other expenses which are incurred at the specific direction
of the Company.
GENERAL INFORMATION
Custodian
State Street Bank and Trust Company, P.O. Box 1713, Boston, MA
02105, is the Company's Custodian. The Custodian is responsible
for, among other things, safeguarding and controlling the
Company's cash and securities, handling the receipt and delivery
of securities and collecting interest on the Company's investments.
Counsel
Goodwin, Procter & Hoar, Exchange Place, Boston, MA 02109, will
review certain legal matters for the Company in connection with
the shares offered by the Prospectus.
Independent Auditors
KPMG Peat Marwick LLP, 112 East Pecan, Suite 2400, San Antonio,
TX 78205, is the Company's independent auditor. In this
capacity, the firm is responsible for auditing the annual
financial statements of the Funds and reporting thereon.
Financial Statements
The financial statements of the Funds and the Independent
Auditors' Report thereon for the fiscal year ended March 31,
1995, are included in the Annual Report to Shareholders of that
date and are incorporated herein by reference. A copy of the
Annual Report will be delivered free of charge with each SAI
requested from the Manager at the address set forth on page 1 of
this statement.
CALCULATION OF PERFORMANCE DATA
Information regarding total return and yield of each Fund is
provided under Performance Information in the Prospectus. See
Valuation of Securities herein for a discussion of the manner in
which each Fund's price per share is calculated.
Total Return
The Virginia Bond Fund may advertise performance in terms of
average annual total return for 1, 5 and 10 year periods, or for
such lesser period as the Fund has been in existence. Average
annual total return is computed by finding the average annual
compounded rates of return over the periods that would equate the
initial amount invested to the ending redeemable value, according
to the following formula:
P(1 + T)^n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical
$1,000 payment made at the beginning of the
1, 5 or 10 year periods at the end of the
year or period
Calculation of Performance Data, cont.
The calculation assumes all charges are deducted from the
initial $1,000 payment and assumes all dividends and
distributions by such Fund are reinvested at the price stated in
the Prospectus on the reinvestment dates during the period, and
includes all recurring fees that are charged to all shareholder
accounts.
The date of commencement of operations for the Virginia Bond
Fund was October 15, 1990. The Fund's average annual total
returns for the periods ended March 31, 1995 were:
1 year. . . . 6.61% Since inception. . . . 8.30%
Yield
The Virginia Bond Fund may advertise performance in terms of a
30-day yield quotation. The 30-day yield quotation is computed
by dividing the net investment income per share earned during the
period by the maximum offering price per share on the last day of
the period, according to the following formula:
YIELD = 2((((a-b)/(cd)+1^6)-1)
Where: a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursement)
c = the average daily number of shares outstanding
during the period that were entitled to receive dividends
d = the maximum offering price per share on the last
day of the period
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.
The Fund's 30-day yield for the period ended March 31, 1995 was 5.83%.
Yield - Virginia Money Market Fund
When the Virginia Money Market Fund quotes a current annualized
yield, it is based on a specified recent seven-calendar-day
period. It is computed by (1) determining the net change,
exclusive of capital changes, in the value of a hypothetical
preexisting account having a balance of one share at the
beginning of the period, (2) dividing the net change in account
value by the value of the account at the beginning of the base
period to obtain the base return, then (3) multiplying the base
period by 52.14 (365 divided by 7). The resulting yield figure
is carried to the nearest hundredth of one percent.
The calculation includes (1) the value of additional shares
purchased with dividends on the original share, and dividends
declared on both the original share and any such additional
shares, and (2) any fees charged to all shareholder accounts, in
proportion to the length of the base period and the Fund's
average account size.
The capital changes excluded from the calculation are
realized capital gains and losses from the sale of securities and
unrealized appreciation and depreciation. The Fund's effective
(compounded) yield will be computed by dividing the seven-day
annualized yield as defined above by 365, adding 1 to the
quotient, raising the sum to the 365th power, and subtracting 1
from the result.
Current and effective yields fluctuate daily and will vary
with factors such as interest rates and the quality, length of
maturities, and type of investments in the portfolio.
Yield For 7-day Period Ended 3/31/95 . . . . 3.60%
Effective Yield For 7-day Period Ended 3/31/95 . . . . 3.67%
Tax Equivalent Yield
The Virginia Money Market Fund may advertise performance in terms
of a tax equivalent yield based on the 7-day yield or effective
yield and the Virginia Bond Fund may advertise performance in
terms of a 30-day tax equivalent yield. The tax equivalent yield
is computed by dividing that portion of the yield of a Fund
(computed as described in the preceding paragraphs) which is tax-
exempt, by the complement of a tax rate of 36.75% (31% federal
plus 5.75% state, or other relevant rates) and adding the result
to that portion, if any, of the yield of such Fund that is not
tax-exempt. The complement, for example, of a tax rate of 36.75%
is 63.25%, that is [1.00 - .3675 = .6325].
Based on a tax rate of 36.75%, the tax equivalent yields for
the Virginia Bond and the Virginia Money Market Funds for the
period ended March 31, 1995 were 9.22% and 5.69%, respectively.
APPENDIX A - TAX-EXEMPT SECURITIES AND THEIR RATINGS
Tax-Exempt Securities
Tax-exempt securities generally include debt obligations issued
by states and their political subdivisions, and duly constituted
authorities and corporations, to obtain funds to construct,
repair or improve various public facilities such as airports,
bridges, highways, hospitals, housing, schools, streets, and
water and sewer works. Tax-exempt securities may also be issued
to refinance outstanding obligations as well as to obtain funds
for general operating expenses and for loans to other public
institutions and facilities.
The two principal classifications of tax-exempt securities
are "general obligations" and "revenue" or "special tax" bonds.
General obligation bonds are secured by the issuer's pledge of
its full faith, credit and taxing power for the payment of
principal and interest. Revenue or special tax bonds are payable
only from the revenues derived from a particular facility or
class of facilities or, in some cases, from the proceeds of a
special excise or other tax, but not from general tax revenues.
The Funds may also invest in tax-exempt private activity bonds,
which in most cases are revenue bonds and generally do not have
the pledge of the credit of the issuer. The payment of the
principal and interest on such industrial revenue bonds is
dependent solely on the ability of the user of the facilities
financed by the bonds to meet its financial obligations and the
pledge, if any, of real and personal property so financed as
security for such payment. There are, of course, many variations
in the terms of, and the security underlying tax-exempt
securities. Short-term obligations issued by states, cities,
municipalities or municipal agencies, include Tax Anticipation
Notes, Revenue Anticipation Notes, Bond Anticipation Notes,
Construction Loan Notes and Short-Term Discount Notes.
The yields of tax-exempt securities depend on, among other
things, general money market conditions, conditions of the Tax-
Exempt Bond market, the size of a particular offering, the
maturity of the obligation, and the rating of the issue. The
ratings of Moody's Investors Service, Inc. (Moody's), Standard &
Poor's Ratings Group (S&P), Fitch Investors Service, Inc.
(Fitch), Duff & Phelps Inc., Thompson BankWatch, Inc., and IBCA
Inc. represent their opinions of the quality of the securities
rated by them. It should be emphasized that such ratings are
general and are not absolute standards of quality. Consequently,
securities with the same maturity, coupon and rating may have
different yields, while securities of the same maturity and
coupon but with different ratings may have the same yield. It
will be the responsibility of the Manager to appraise
independently the fundamental quality of the tax-exempt
securities included in a Fund's portfolio.
Ratings
Excerpts from Moody's Bond (Tax-Exempt Securities) Ratings:
Aaa Bonds which are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment risk
and are generally referred to as "gilt edge." Interest
payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various
protective elements are likely to change, such changes as
can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa Bonds which are rated Aa are judged to be of high quality by
all standards. Together with the Aaa group they comprise
what are generally known as high grade bonds. They are
rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater
amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than in Aaa securities.
A Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade
obligations. Factors giving security to principal and
interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor
poorly secured. Interest payments and principal security
appear adequate for the present but certain protective
elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and in fact have
speculative characteristics as well.
Note: Those bonds in the Aa, A, and Baa groups which Moody's
believes possess the strongest investment attributes are
designated by the symbols Aa1, A1, and Baa1.
Appendix A, cont.
Excerpts of Moody's Ratings of Short-Term Loans (State and Tax-
Exempt Notes):
Moody's ratings for state and tax-exempt notes and other short-
term obligations are designated Moody's Investment Grade (MIG).
Symbols used will be as follows:
MIG-1 This designation denotes best quality. There is
present strong protection by established cash flows,
superior liquidity support or demonstrated broadbased
access to the market for refinancing.
MIG-2 This designation denotes high quality. Margins of
protection are ample although not so large as in the
preceding group.
Excerpts of Moody's Rating of Commercial Paper:
Prime-1 Issuers have a superior ability for repayment of senior
short-term debt obligations. Prime-1 repayment ability
will often be evidenced by many of the following characteristics:
Leading market positions in well-established industries.
High rates of return on funds employed.
Conservative capitalization structure with moderate
reliance on debt and ample asset protection.
Broad margins in earnings coverage of fixed financial
charges and high internal cash generation.
Well-established access to a range of financial markets
and assured sources of alternate liquidity.
Prime-2 Issuers have a strong ability for repayment of senior
short-term debt obligations. This will normally be
evidenced by many of the characteristics cited above
but to a lesser degree. Earnings trends and coverage
ratios, while sound, will be more subject to variation.
Capitalization characteristics, while still
appropriate, may be more affected by external
conditions. Ample alternate liquidity is maintained.
Excerpts from S&P's Bond Ratings:
AAA Debt rated AAA has the highest rating assigned by S&P.
Capacity to pay interest and repay principal is extremely strong.
AA Debt rated AA has a very strong capacity to pay interest and
repay principal and differs from the highest rated issues
only in small degree.
A Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the
adverse effects of changes in circumstances and economic
conditions than debt in higher rated categories.
BBB Debt rated BBB is regarded as having an adequate capacity to
pay interest and repay principal. Whereas it normally
exhibits adequate protection parameters, adverse economic
conditions or changing circumstances are more likely to lead
to a weakened capacity to pay interest and repay principal
for debt in this category than in higher rated categories.
Plus (+) or Minus (-): The ratings from AA to BBB may be
modified by the addition of a plus or minus sign to show relative
standing within the major rating categories.
Excerpts of S&P's Ratings of Tax-Exempt Notes:
SP-1 Strong capacity to pay principal and interest. Issues
determined to possess very strong characteristics are given
a plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest, with
some vulnerability to adverse financial and economic changes
over the term of the notes.
Excerpts of S&P's Rating of Commercial Paper:
A-1 This highest category indicates that the degree of safety
regarding timely payment is strong. Those issues determined
to possess extremely strong safety characteristics are
denoted with a plus (+) sign designation.
A-2 Capacity for timely payment on issues with this designation
is satisfactory. However, the relative degree of safety is
not as high as for issues designated A-1.
Excerpts of Fitch's Ratings of Bonds:
AAA Bonds considered to be investment grade and of the highest
credit quality. The obligor has an exceptionally strong
ability to pay interest and repay principal, which is
unlikely to be affected by reasonably foreseeable events.
AA Bonds considered to be investment grade and of very high
credit quality. The obligor's ability to pay interest and
repay principal is very strong, although not quite as strong
as bonds rated AAA. Because bonds rated in the AAA and AA
categories are not significantly vulnerable to foreseeable
future developments, short-term debt of these issuers is
generally rated F-1+.
A Bonds considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay
principal is considered to be strong, but may be more
vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB Bonds considered to be investment grade and of satisfactory
credit quality. The obligor's ability to pay interest and
repay principal is considered to be adequate. Adverse
changes in economic conditions and circumstances, however,
are more likely to have adverse impact on these bonds, and
therefore, impair timely payment.
Plus (+) and Minus (-): Plus and minus signs are used with a
rating symbol to indicate the relative position of a credit
within the rating category. Plus and minus signs, however, are
not used in the AAA category.
Excerpts of Fitch's Ratings to Commercial Paper, Certificates of
Deposit and Tax-Exempt Notes:
F-1+ Exceptionally strong credit quality. Issues assigned this
rating are regarded as having the strongest degree of
assurance for timely payment.
F-1 Very strong credit quality. Issues assigned this rating
reflect an assurance of timely payment only slightly less in
degree than issues rated F-1+.
F-2 Good credit quality. Issues assigned this rating have a
satisfactory degree of assurance for timely payments, but
the margin of safety is not as great as the F-1+ and F-1 ratings.
Excerpts from Duff & Phelps Long-Term Rating Scale:
AAA Highest credit quality. The risk factors are negligible,
being only slightly more than for risk-free U.S. Treasury debt.
AA High credit quality. Protection factors are strong. Risk
is modest but may vary slightly from time to time because of
economic conditions.
A Protection factors are average but adequate. However, risk
factors are more variable and greater in periods of economic stress.
BBB Below average protection factors but still considered
sufficient for prudent investment. Considerable variability
in risk during economic cycles.
Excerpts from Duff & Phelps Commercial Paper Rating Scale:
Duff 1+ Highest certainty of timely payment. Short-term
liquidity, including internal operating factors and/or
ready access to alternative sources of funds, is
outstanding, and safety is just below risk-free U.S.
Treasury short-term obligations.
Duff 1 Very high certainty of timely payment. Liquidity
factors are excellent and supported by good fundamental
protection factors. Risk factors are minor.
Duff 1- High certainty of timely payment. Liquidity factors
are strong and supported by good fundamental protection
factors. Risk factors are very small.
Duff 2 Good certainty of timely payment. Liquidity factors
and company fundamentals are sound. Although ongoing
funding needs may enlarge total financing requirements,
access to capital markets is good. Risk factors are small.
Appendix A, cont.
Thompson BankWatch, Inc.
TBW-1 The highest category; indicates a very high likelihood
that principal and interest will be paid on a timely basis.
TBW-2 The second highest category; while the degree of safety
regarding timely repayment of principal and interest is
strong, the relative degree of safety is not as high as
for issues rated TBW-1.
TBW-3 The lowest investment grade category; indicates that
while the obligation is more susceptible to adverse
developments (both internal and external) than
obligations with higher ratings, the capacity to
service principal and interest in a timely fashion is
considered adequate.
IBCA Inc.
A1 Obligations supported by the highest capacity for timely
repayment. Where issues possess a particularly strong
credit feature, a rating of A1+ is assigned.
A2 Obligations supported by a good capacity for timely repayment.
A3 Obligations supported by a satisfactory capacity for timely repayment.
B Obligations for which there is an uncertainty as to the
capacity to ensure timely repayment.
C Obligations for which there is a high risk of default or
which are currently in default.
APPENDIX B - COMPARISON OF PORTFOLIO PERFORMANCE
Occasionally, we may make comparisons in advertising and sales
literature between the Funds contained in this SAI and other
Funds in the USAA Family of Funds. These comparisons may include
such topics as risk and reward, investment objectives, investment
strategies, and performance.
Fund performance also may be compared to the performance of
broad groups of mutual funds with similar investment goals or
unmanaged indexes of comparable securities. Evaluations of Fund
performance made by independent sources may be used in
advertisements concerning the Fund, including reprints of, or
selections from, editorials or articles about the Fund. The Fund
or its performance may also be compared to products and services
not constituting securities subject to registration under the
Securities Act of 1933 such as, but not limited to, certificates
of deposit and money market accounts. Sources for performance
information and articles about the Fund may include the following:
AAII Journal, a monthly association magazine for members of the
American Association of Individual Investors.
Arizona Republic, a newspaper which may cover financial and
investment news.
Austin American-Statesman, a newspaper which may cover financial news.
Barron's, a Dow Jones and Company, Inc. business and financial
weekly that periodically reviews mutual fund performance data.
The Bond Buyer, a daily newspaper which covers bond market news.
Business Week, a national business weekly that periodically reports the
performance rankings and ratings of a variety of mutual funds.
Chicago Tribune, a newspaper which may cover financial news.
Consumer Reports, a monthly magazine which from time to time
reports on companies in the mutual fund industry.
Dallas Morning News, a newspaper which may cover financial news.
Denver Post, a newspaper which may quote financial news.
Financial Planning, a monthly magazine that periodically features
companies in the mutual fund industry.
Financial Services Week, a weekly newspaper which covers financial news.
Financial World, a monthly magazine which may periodically review
mutual fund companies.
Forbes, a national business publication that periodically reports
the performance of companies in the mutual fund industry.
Fortune, a national business publication that periodically rates
the performance of a variety of mutual funds.
Fund Action, a mutual fund news report.
Houston Chronicle, a newspaper which may cover financial news.
Houston Post, a newspaper which may cover financial news.
IBC/Donoghue's Moneyletter, a biweekly newsletter which covers
financial news and from time to time rates specific mutual funds.
IBC's Money Market Insight, a monthly money market industry
analysis prepared by IBC USA, Inc.
Income and Safety, a monthly newsletter that rates mutual funds.
InvesTech, a bimonthly investment newsletter.
Investment Advisor, a monthly publication directed primarily to
the advisor community; includes ranking of mutual funds using a
proprietary methodology.
Investment Company Institute, a national association of the
American Investment Company industry.
Investor's Business Daily, a newspaper which covers financial news.
Kiplinger's Personal Finance Magazine, a monthly investment
advisory publication that periodically features the performance
of a variety of securities.
Lipper Analytical Services, Inc.'s Fixed Income Fund Performance
Analysis, a monthly publication of industry-wide mutual fund
performance averages by type of fund.
Lipper Analytical Services, Inc.'s Mutual Fund Performance
Analysis, a weekly and quarterly publication of industry-wide
mutual fund performance averages by type of fund.
Los Angeles Times, a newspaper which may cover financial news.
Louis Rukeyser's Wall Street, a publication for investors.
Medical Economics, a monthly magazine providing information to
the medical profession.
Money, a monthly magazine that features the performance of both
specific funds and the mutual fund industry as a whole.
Money Fund Report, a weekly publication of the Donoghue
Organization, Inc., reporting on the performance of the nation's
money market funds, summarizing money market fund activity, and
including certain averages as performance benchmarks,
specifically: (1) Taxable Money Fund Averages: "100% U.S.
Treasury" and "First Tier" and (2) Tax-Free Money Fund Averages:
"Stockbroker and General Purpose" and "State Specific Stockbroker
and General Purpose".
Morningstar 5 Star Investor, a monthly newsletter by Morningstar,
Inc. which covers financial news and rates mutual funds.
Muni Bond Fund Report, a monthly newsletter which covers news on
the municipal bond market and features performance data for
municipal bond mutual funds.
MuniWeek, a weekly newspaper which covers news on the municipal bond market.
Mutual Fund Forecaster, a monthly newsletter that ranks mutual funds.
Mutual Fund Investing, a newsletter covering mutual funds.
Mutual Fund Performance Report, a monthly publication of
industry-wide mutual fund averages produced by Morningstar, Inc.
Mutual Funds Magazine, a monthly publication reporting on mutual
fund investing.
Appendix B, cont.
Mutual Fund Source Book, an annual publication produced by
Morningstar, Inc. which describes and rates mutual funds.
Mutual Fund Values, a biweekly guidebook to mutual funds produced
by Morningstar, Inc. (a data service which tracks open-end mutual funds).
Newsweek, a national business weekly.
New York Times, a newspaper which may cover financial news.
No Load Fund Investor, a newsletter covering companies in the
mutual fund industry.
Personal Investor, a monthly magazine which from time to time
features mutual fund companies and the mutual fund industry.
San Antonio Business Journal, a weekly newspaper that
periodically covers mutual fund companies as well as financial news.
San Antonio Express-News, a newspaper which may cover financial news.
San Francisco Chronicle, a newspaper which may cover financial news.
Smart Money, a monthly magazine featuring news and articles on
investing and mutual funds.
USA Today, a newspaper which may cover financial news.
U.S. News and World Report, a national business weekly that
periodically reports mutual fund performance data.
Wall Street Journal, a Dow Jones and Company, Inc. newspaper
which covers financial news.
Washington Post, a newspaper which may cover financial news.
Weisenberger Mutual Funds Investment Report, a monthly newsletter
that reports on both specific mutual fund companies and the
mutual fund industry as a whole.
Worth, a magazine which covers financial and investment subjects
including mutual funds.
Your Money, a monthly magazine directed towards the novice investor.
Among the organizations cited above, Lipper Analytical
Services, Inc.'s tracking results may be used. The Fund will be
compared to Lipper's appropriate fund category according to
objective and portfolio holdings. The Virginia Bond Fund will be
compared to funds in Lipper's Virginia tax-exempt bond funds
category, and the Virginia Money Market Fund to funds in Lipper's
Virginia short-term tax-exempt bond funds category. Footnotes in
advertisements and other sales literature will include the time
period applicable for any rankings used.
For comparative purposes, unmanaged indices of comparable
securities or economic data may be cited. Examples include the following:
- Shearson Lehman Hutton Bond Indices, indices of fixed-rate
debt issues rated investment grade or higher which can be
found in the Bond Market Report.
- Bond Buyer Indices, indices of debt of varying maturities
including revenue bonds, general obligation bonds, and U.S.
Treasury bonds which can be found in MuniWeek and The Bond Buyer.
Other sources for total return and other performance data
which may be used by the Fund or by those publications listed
previously are Morningstar, Inc., Schabaker Investment
Management, and Investment Company Data, Inc. These are services
that collect and compile data on mutual fund companies.
APPENDIX C - TAXABLE EQUIVALENT YIELD TABLE
COMBINED FEDERAL AND VIRGINIA STATE INCOME TAX RATES
TO MATCH A A FULLY TAXABLE INVESTMENT
DOUBLE WOULD HAVE TO PAY YOU:
TAX-FREE ASSUMING A MARGINAL ASSUMING A MARGINAL ASSUMING A MARGINAL
YIELD OF: TAX RATE OF 33.75% (a) TAX RATE OF 36.75% (b) TAX RATE OF 41.75% (c)
2.00% 3.02% 3.16% 3.43%
3.00% 4.53% 4.74% 5.15%
4.00% 6.04% 6.32% 6.87%
5.00% 7.55% 7.91% 8.58%
6.00% 9.06% 9.49% 10.30%
(a) FEDERAL RATE OF 28% + VIRGINIA STATE RATE OF 5.75%
(b) FEDERAL RATE OF 31% + VIRGINIA STATE RATE OF 5.75%
(c) FEDERAL RATE OF 36% + VIRGINIA STATE RATE OF 5.75%
THIS TABLE IS A HYPOTHETICAL ILLUSTRATION AND SHOULD NOT BE CONSIDERED AN
INDICATION OF FUND PERFORMANCE OF ANY OF THE USAA FAMILY OF FUNDS.
THE ASSUMED MARGINAL TAX RATES ARE NOT NECESSARILY THE HIGHEST
POSSIBLE MARGINAL TAX RATES, NOR ARE THEY THE LOWEST RATES.
THESE RATES WERE PICKED AS EXEMPLARY RATES THAT MANY TAXPAYERS
WOULD BE SUBJECT TO. THE TABLE DOES NOT TAKE INTO ACCOUNT THE
FACT THAT SOME TAXPAYERS MAY GET A DEDUCTION ON THEIR FEDERAL
RETURN FOR STATE TAXES PAID. THIS EFFECT WOULD NOT SIGNIFICANTLY
CHANGE THE TAX EQUIVALENT YIELDS DISPLAYED IN THE TABLE.
APPENDIX D - DOLLAR-COST AVERAGING
Dollar-cost averaging is a systematic investing method which can
be used by investors as a disciplined technique for investing. A
fixed amount of money is invested in a security (such as a stock
or mutual fund) on a regular basis over a period of time,
regardless of whether securities markets are moving up or down.
This practice reduces average share costs to the investor
who acquires more shares in periods of lower securities prices
and fewer shares in periods of higher prices.
While dollar-cost averaging does not assure a profit or
protect against loss in declining markets, this investment
strategy is an effective way to help calm the effect of
fluctuations in the financial markets. Systematic investing
involves continuous investment in securities regardless of
fluctuating price levels of such securities. Investors should
consider their financial ability to continue purchases through
periods of low and high price levels.
As the following chart illustrates, dollar-cost averaging
tends to keep the overall cost of shares lower. This example is
for illustration only, and different trends would result in
different average costs.
HOW DOLLAR-COST AVERAGING WORKS
$100 Invested Regularly for 5 Periods
Market Trend
---------------------------------------------------------------
Down Up Mixed
------------------ ------------------ -------------------
Share Shares Share Shares Share Shares
Investment Price Purchased Price Purchased Price Purchased
------------------ ------------------ -------------------
$100 10 10 6 16.67 10 10
100 9 11.1 7 14.29 9 11.1
100 8 12.5 7 14.29 8 12.5
100 8 12.5 9 11.1 9 11.1
100 6 16.67 10 10 10 10
--- -- ----- -- ----- -- -----
$500 ***41 62.77 ***39 66.35 ***46 54.7
*Avg. Cost: $7.97 *Avg. Cost: $7.54 *Avg. Cost: $9.14
----- ----- -----
**Avg. Price: $8.20 **Avg. Price: $7.80 **Avg. Price: $9.20
----- ----- -----
* Average Cost is the total amount invested divided by shares purchased.
** Average Price is the sum of the prices paid divided by number of purchases.
*** Cumulative total of share prices used to compute average prices.
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